                       T.C. Memo. 1997-62



                     UNITED STATES TAX COURT



               VENA MARILYN WOFFORD, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3387-95.                    Filed February 4, 1997.



     G. Tomas Rhodus, for petitioner.

     W. Mark Scott, for respondent.



                       MEMORANDUM OPINION


     GOLDBERG, Special Trial Judge:     The case was heard pursuant

to section 7443A(b)(3) of the Code and Rules 180, 181, and 182.1




1
     Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                   2

       Respondent determined deficiencies in, additions to, and a

penalty on petitioner's Federal income taxes as follows:

                                 Additions to Tax         Penalty
                            Sec.        Sec.       Sec.    Sec.
Year        Deficiency   6651(a)(1) 6653(a)(1)    6654(a) 6662(a)

1988          $3,088        $408       $160        ---       N/A
1989           5,760       1,393        N/A        ---      $1,152
1990           7,721       1,930        N/A        $10       ---
1991           6,880       1,720        N/A        397       ---

       After concessions,2 the issues for decision are:   (1)

Whether petitioner is entitled to amortization deductions with

respect to certain intangible assets acquired in connection with

her business of being a Safeguard distributor; and (2) whether

petitioner is allowed to carry forward net operating losses

sustained in taxable years 1988, 1989, and 1990.

       Some of the facts have been stipulated and are so found.

The stipulation of facts and the exhibits received into evidence

are incorporated herein by this reference.    Petitioner resided in

Dallas, Texas, at the time her petition was filed.

       Petitioner began working in the printing business in 1968 in

the Dallas-Fort Worth area of Texas.    She was employed in the

early 1970's as a salesperson and sales manager for a company


2
     Petitioner concedes she is liable for the additions to tax
under sec. 6651(a)(1) for each taxable year in issue, and under
sec. 6654(a) for the taxable years 1990 and 1991. Respondent
concedes the addition to tax under sec. 6653(a)(1) for 1988 and
the penalty under sec. 6662(a) for 1989. Petitioner concedes she
is liable for self-employment tax on her taxable income as
finally redetermined, and agrees to all of the arithmetical
adjustments set forth in the notice of deficiency to the amount
of taxable income as finally redetermined.
                                 3

engaged in the business of producing and selling printed checks

and accounting-related forms designed for small businesses.      At

that time, petitioner became familiar with the products of

Safeguard Business Systems, Inc. (Safeguard), a competitor of the

company for which petitioner worked.

     Safeguard is engaged in producing and selling business forms

to small business owners.   Safeguard's products and sales are

oriented toward smaller businesses, those with 50 or fewer

employees, with a primary focus on businesses employing 20 or

fewer persons.   Similar forms, although perhaps not of comparable

quality, are available at office supply stores.    The Safeguard

name receives substantial recognition in the industry.

     Safeguard has approximately 900,000 customers serviced by a

sales network of approximately 850 people in North America.

Safeguard does not operate any retail outlets.    Safeguard

operates through a limited number of distributors.    Therefore, in

order to solicit sales of Safeguard products, a distributor

generally must buy the right to receive commissions on sales to a

base of customers (referred to as a base or a list) within a

defined geographical territory from a current or former

distributor (referred to as a buy-sell).

     In 1986, petitioner was recruited by and accepted employment

with Safeguard as a branch sales manager.    In this capacity,

petitioner gave sales support to distributors operating in parts

of Texas, Oklahoma, and Colorado.    Petitioner did not have
                                 4

contact with customers and did not solicit sales of Safeguard

products.   By the end of 1987, petitioner was aware that a few

distributors had given up their distributorships and that their

customer bases had not been purchased.   Petitioner was interested

in becoming a distributor, and she communicated her interest to

her supervisor.

     Petitioner was laid off from the branch sales manager

position effective January 31, 1988.   As of February 1, 1988, she

began acting as a Safeguard distributor with respect to three

existing customer lists in the Dallas area.    Petitioner acquired

the rights associated with two of these customer lists effective

February 1, 1988.   Petitioner did not immediately acquire the

rights to the third customer list but instead she solicited sales

under a temporary "babysitting" agreement.    Petitioner was to

receive standard commission payments less amounts payable as

"territory payback".   A territory payback (also referred to as

territory repayments) represents amounts due to the former

distributor for the right to receive commissions on sales to

customers on the former distributor's list.    Petitioner acquired

the right to the commissions related to the third list effective

December 1, 1988.

     The Regional Distributor Agreement (the agreement) between

Safeguard and petitioner bears an effective date of February 1,

1988, but the terms were not finalized and the agreement was not

signed until December 1988.   Petitioner had the right to solicit
                                  5

sales of certain products and services and to receive commissions

from Safeguard on all such sales credited to her.      Safeguard was

responsible for billing customers and received payments directly

from customers.   Petitioner was authorized to represent Safeguard

only within a limited geographic area.      The agreement had an

initial term of 5 years.

     Petitioner had the right to terminate the agreement for any

reason upon 60 days' notice.   Safeguard had the right to

terminate the agreement with 60 days' notice under limited

circumstances including, but not limited to, failure by

petitioner to meet certain annual commission quotas, or

petitioner's material failure to perform any of the other terms

or conditions of the agreement.       Petitioner's annual quotas were

set at actual earnings for the first 2 years and left to be

negotiated for the remaining 3 years of petitioner's initial 5-

year term.

     The agreement provided that for a period of 2 years

following its termination, petitioner is prohibited from

soliciting, selling, or attempting to sell to any Safeguard

customer or persons contacted by petitioner for the purpose of

their becoming a Safeguard customer within her assigned

territory.

     The agreement further provided:

     We will withhold each month from payments due you under this
     Agreement a sum equal to the fixed monthly amounts specified
     in the "Territory Payback Schedule" which is attached hereto
                                 6

     as a rider. We will continue to make these monthly
     withholdings until we have withheld the total sum of
     $588,019.52. This amount is for the protected right to earn
     future commissions on sales of Systems to the customers
     listed in Attachment B [the customer lists] under this
     Agreement. It represents the price that the transferor of
     such rights has set, * * *.

     No Territory Payback Schedule was executed or attached to

the agreement.   A proposed payment schedule requiring payment

over a 10-year period was sent to petitioner in December 1988,

but she rejected it, desiring a longer payback period.     No

interest rate was ever stated in connection with petitioner's

payment obligation.

     If the agreement was terminated for any reason before

petitioner had paid the full amount remaining with respect to the

customer account rights assigned to her (the customer bases),

petitioner had no further liability for additional payments.

However, petitioner's right to future commissions with respect to

sales to customers on the lists was subject to reduction

depending on the nature of the termination, and any commissions

payable were to be reduced by any amounts remaining due as

territory repayments.

     If the commissions earned by a distributor were not

sufficient to cover the territory repayments due in that month,

as a matter of practice, Safeguard nevertheless would pay the

former distributor the amount of the payments due.   Safeguard

considered any such amounts to be an advance to the current

distributor and would deduct such amounts in the future.
                                 7

     Phillip J. Rigney (Mr. Rigney) signed the agreement on

behalf of Safeguard.   According to Mr. Rigney, Safeguard was

acting as an agent on behalf of the former distributors in the

sale of their rights to their customer bases.   For over 10 years,

Mr. Rigney's position with Safeguard was that of sales manager,

which involved direct responsibility for and support of a group

of sales distributors.   Mr. Rigney found in his experience that

the purchase price of a customer list generally is the product of

the sales generated from the customer base over the previous 12

months multiplied by a factor ranging from 1 to 2.   Mr. Rigney's

recollection was that there were several negative factors

associated with the lists as to which petitioner acquired the

commission rights, including the poor economy in Texas in 1988

and the lack of consistent servicing of the customers on the

lists.   A factor of 1 was used in determining the price charged

to petitioner.   In Mr. Rigney's opinion, petitioner was a strong

negotiator, and he believed that this is why the Agreement was

not finalized until December 1988.

     Petitioner received commission statements on or about the

fifteenth of each month for the prior month's sales.   Petitioner

operated her business on the cash basis.   Safeguard withheld

territory repayments of $18,238.42 in 1988 from petitioner's

monthly commission statement.   The amounts withheld in 1988 were

not fixed monthly sums but varied.   Petitioner's monthly

commission statements for 1989 reflect a total amount of
                                  8

$16,424.58 withheld as territory repayments in the following

amounts:

     Month           Base 5H5         Base 513    Base 5W1


     December 1988 $1,074.58              --        -0-
     January 1989     1,950.00            --        -0-
     February 1989    2,200.00            --        -0-
     March 1989           0.00            --         --
     April 1989           0.00            --         --
     May 1989         1,400.00*           --        -0-
     June 1989        1,400.00*           --        -0-
     July 1989        1,400.00*          -0-         --
     August 1989      1,400.00*          -0-        -0-
     September 1989       --          $1,500.00      --
     October 1989         --           1,500.00      --
     November 1989       --            1,200.00      --
        Totals      $10,824.58        $4,200.00     -0-

     * Created a deficit commission balance that was carried
     forward into subsequent month(s).

Petitioner received commission payments from the aggregate due on

the bases; therefore, a deficit commission balance for one base

was offset against net commissions payable from the other bases.

Territory repayments of $16,800 and $19,000 were withheld from

petitioner's monthly commission statements in 1990 and 1991,

respectively.   Petitioner presently has approximately $36,000 a

year withheld from her commissions as territory repayments.    At

this rate, she is scheduled to complete the territory repayments

approximately 17 years from 1988.

     Mr. Rigney estimated that generally the turnover rate of a

customer base, that is the number of years after which no repeat

business is generated from a base, ranged from 5 to 11 years

after a buy-sell is completed.    From her experience as a branch
                                  9

sales manager, petitioner believed the typical turnover rate to

be 5 to 10 years.   Petitioner determined the useful life of the

customer lists she had acquired in 1988 by determining how many

customers contained thereon remained active as of the end of

1992.   She found that 85 to 95 percent of the customers were no

longer purchasing from her at that time, and, from this, she

estimated the useful life of the bases to be 7 years.

     Petitioner acted as a Safeguard distributor from February 1,

1988, and throughout the years in issue, carrying on this

business under the name of Prestonwood Business Forms.    Other

than the salary which petitioner received from Safeguard for the

month of January 1988, petitioner's only other source of gross

income was derived from rental real estate property that she

operated at a loss during the taxable years in issue.    At the

time of trial, petitioner continued to be engaged in business as

a Safeguard distributor.

     Petitioner claimed deductions for amortization related to

the customer lists based on a cost basis of $588,020 and a useful

life of 7 years.    Petitioner filed her income tax returns for the

taxable years 1988, 1989, 1990, and 1991 in 1993.   On Schedule C,

Profit or Loss from Business or Profession, of her Federal income

tax return filed for the taxable year 1988, petitioner claimed

amortization deductions in the amount of $77,003.   Petitioner

claimed amortization deductions in the amount of $84,003 on

Schedule C of her return filed for 1989.   Petitioner seeks
                                10

additional amortization deductions for 1990 and 1991 in the

amount of $84,003 each.   Petitioner also claims a net operating

loss carryover of $98,050 from prior years in tax year 1990, and

an NOL carryover of $142,031 in 1991.

     In the notice of deficiency, respondent disallowed $63,571

and $68,978 of petitioner's claimed amortization deductions for

1988 and 1989, respectively.   Respondent determined that

petitioner's liability was not fixed for the "Territory Payback

Agreement", and, therefore, petitioner was not entitled to

related amortization deductions.     Respondent prepared substitute

returns for petitioner for the taxable years 1990 and 1991.

Respondent allowed petitioner Schedule C expenses of $16,800 and

$17,400 in lieu of amortization deductions for 1990 and 1991,

respectively, because petitioner had failed to establish that her

liability was fixed for the territory payback.

     Respondent's determinations are presumed to be correct, and

petitioner bears the burden of proving that they are erroneous.

Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).

     Under section 167(a) a taxpayer may deduct as depreciation a

reasonable allowance for the exhaustion and wear and tear of

property used in a trade or business or held for the production

of income.   An intangible asset may be the subject of an

allowance for depreciation (or amortization) if such asset is

known from experience or other factors to be of use in business

or in the production of income for a limited period of time which
                                   11

can be estimated with reasonable accuracy.      Sec. 1.167(a)-3,

Income Tax Regs.      No deduction for depreciation is allowable with

respect to an intangible asset, the useful life of which is not

limited.    Id.    Under the regulation, "No allowance will be

permitted merely because, in the unsupported opinion of the

taxpayer, the intangible asset has a limited useful life.        No

deduction for depreciation is allowable with respect to good

will."   Id.     However, an intangible asset with an ascertainable

value and a limited useful life, the duration of which can be

ascertained with reasonable accuracy, is depreciable under

section 167, notwithstanding the fact that its value is related

to the expectancy of continued patronage.      Newark Morning Ledger

Co. v. United States, 507 U.S. 546, 570 (1993).

     Petitioner contends that she acquired the customer lists and

that her basis in those lists was equal to the purchase price set

forth in the agreement.      Thus, petitioner argues that her basis

includes the total amount due as territory repayments.

     Respondent makes two counterarguments.      Respondent argues

that petitioner's obligation to make territory repayments was too

contingent and cannot be included in computing petitioner's basis

in her distributorship.      Thus, respondent contends that

petitioner has not established a basis in excess of actual cash

payments.      Respondent also argues that petitioner did not

actually acquire the customer lists, but instead acquired

franchise rights as defined in section 1253.      Respondent contends
                                 12

that petitioner has not established that her right to the

commissions from the customers contained on the lists had an

ascertained value separate and distinct from other intangible

rights she acquired.

     For purposes of depreciation and amortization, a taxpayer's

basis in purchased property is the cost, including any valid

liabilities incurred in acquiring the property.      Crane v.

Commissioner, 331 U.S. 1 (1947).      Ordinarily, recourse

liabilities are included in basis because the taxpayer has a

fixed, unconditional obligation to pay, with interest, a specific

sum of money.   Waddell v. Commissioner, 86 T.C. 848, 898 (1986),

affd. 841 F.2d 264 (9th Cir. 1988).     A borrower does not incur

the same personal obligation to pay under a nonrecourse

liability.   However, a nonrecourse obligation will be included in

a taxpayer's cost basis if it is a true debt.      Id.   An obligation

that is contingent will not be recognized for the purposes of

determining cost basis.   Id.   The principle that an obligation or

liability that is contingent will not be recognized for the

purposes of determining cost basis predates cases involving tax

sheltered investments and applies with equal force in cases not

involving tax shelters.   See, e.g., Lemery v. Commissioner, 52

T.C. 367, 377-378 (1969), affd. on another issue 451 F.2d 173

(9th Cir. 1971).   A debt will be recognized for tax purposes if

it appears likely, based on the facts and circumstances at the

outset of the transaction--including reasonable revenue
                                13

projections based on objective criteria and the value of the

security at the time the lender has a right to proceed against

the security for payment--that the obligation will be paid.

Waddell v. Commissioner, supra at 904.

     The territory repayments due under the agreement were

payable only out of petitioner's commissions.    Petitioner was not

otherwise required to make payments if she did not earn

sufficient commissions.   Thus, the obligation was nonrecourse as

to her.   The monthly withholdings were not set at any amount at

the inception of the transaction, the relevant period in our

analysis.   Waddell v. Commissioner, supra.   It is true that the

obligation was set at a fixed amount; however, we do not believe

this makes the obligation any less contingent.   See Graf v.

Commissioner, 80 T.C. 944, 949 n.6 (1983).    Petitioner's

obligation was still conditioned on her success in earning

commissions.

     Petitioner argues, nonetheless, that her obligation was

"real".   Both petitioner and Mr. Rigney testified that they

viewed petitioner's obligation as real.   Further, petitioner

places great weight on the value of the lists, which she argues

served as collateral securing her obligation to Safeguard.

Petitioner argues that she was building equity in her interest in

the lists, and that she had an incentive to fulfill her repayment

obligation to avoid foreclosure.
                                  14

     Respondent counters that petitioner and Safeguard failed to

follow customary business practices, indicating that the

obligation was not a true debt.    In this regard, respondent

points out that at the time the agreement was entered into

neither petitioner nor Safeguard required a final payment date, a

written repayment schedule, a minimum repayment amount based on a

dollar amount or percentage of income, or a specified interest

factor.

     We agree with respondent that these factors were clearly

present and tend to indicate that the obligation was not bona

fide.   While we believe the testimony of the witnesses to be

credible, the subjective intent of the debtor to repay and the

subjective expectation of the lender to be repaid are not

controlling.   Graf v. Commissioner, supra at 952 (citing Denver &

R.G.W. R.R. v. United States, 205 Ct. Cl. 597, 603, 505 F.2d

1266, 1267 (1974)).   "It is mere conjecture that a taxpayer will

make payments when he is not so obligated."    Id.

     In addition, it is not clear when Safeguard's right to

foreclose on the "collateral" would be triggered.    Safeguard's

right to terminate the agreement, and thereafter transfer the

lists, was not absolute.   After termination of the agreement,

Safeguard clearly had the right to transfer the lists in a manner

consistent with its own best interests.    However, there is no

evidence in the record from which we can determine what the value

might be at any such time.   We cannot determine from the record
                                  15

that the fair market value of the rights acquired by petitioner

and claimed by her as a cost basis was equal to $588,019.52, the

total amount which was to be withheld from her commissions

according to the agreement.     Moreover, the withholdings were

contingent on her success in earning commissions.     She has failed

to establish that any amount approximating the $588,019.52 was

likely to be paid.

     Further, the material facts in this case are virtually

identical to the facts present in Wakefield v. Commissioner, T.C.

Memo. 1995-318.     In that case, the taxpayers as Safeguard

distributors claimed deductions for amortization with respect to

certain customer lists acquired in connection with their

distributorships.     The taxpayers did not make any cash payments

when they signed their distributorship agreements.     Safeguard was

to withhold 30 percent of the taxpayers' commissions on the sale

of Safeguard products to be applied against the purchase price of

customer lists.     The taxpayers were not liable for any payments

once they ceased to be Safeguard distributors.     The Court found

that the taxpayers' obligations were nonrecourse and contingent

on their success in earning commissions.     Id.   In addition, the

Court found that the taxpayers had not established that the fair

market value of the lists was equal to their stated purchase

price, nor had they established that payment of the obligations

was likely.   Id.    Therefore, the Court concluded that the
                                16

taxpayers could not include the amount of the obligations in

computing the cost bases of the lists.

     Petitioner's attempt to distinguish Wakefield v.

Commissioner, supra, is not persuasive.    Petitioner contends that

it is significant the payments therein were based on a percentage

of sales, whereas her payments were to be a fixed monthly sum.

The crucial factor, however, is the same in both cases:   an

obligation would only arise if commissions were earned.

     We find that petitioner's liability under the agreement was

contingent, and, therefore, no amount of the obligation may be

included in computing her cost basis.    Thus, petitioner has not

established that the cost basis of her interest in the customer

lists exceeded her cash payments.    In her notice of deficiency,

respondent allowed petitioner deductions for the amount of the

cash payments in the taxable years in issue.3   Therefore, we need

not address respondent's argument that petitioner acquired

franchise rights.

     Based on the disallowance of a portion of petitioner's

amortization deductions for tax year 1988 and 1989, and the

disallowance of such deductions in 1990 and 1991, respondent

determined that petitioner did not sustain net operating losses

in any of the years in issue.   Thus, as a result of our decision



3
     Respondent determined that petitioner made payments of
$15,024.58 in 1989. We find that petitioner made payments of
$16,424.58.
                               17

on the amortization issue, it is not necessary to decide if

petitioner is entitled to carry forward the losses she claimed

from her Safeguard distributorship.


                                           Decision will be entered

                                      under Rule 155.
