The accountant for Georges Software, Inc. Georges) has approached you for some tax advice about how to handle an item on the income tax return for the business. The business is an S corporation. The corporation is a calendar year end, cash basis taxpayer. The business recently redeemed 23% of the shares from a shareholder Robyn Harley (Harley). As part of the transaction Georges and Harley entered into a Covenant Not to Compete (CNC). The CNC is for a period of one year and is in relation to customer contracts and relationships. The accountant needs advice for the following:

1. Which code section of the Internal Revenue Code covers the deductibility of a CNC for Georges?

2. What is the normal period for deducting the costs of a CNC for federal income tax purposes?

3. Is it possible to deduct the costs in accordance with the term of the CNC, i.e. one year in this case?

research should consider the following (but it is not an exhaustive list):

support your conclusion using primary sources of tax law.

Prepare a tax research memo addressing the question that has been raised