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In order to value the covenant, using the methodology
adopted by petitioner, we would need to calculate the potential
lost business from competition by Mr. Markley and then, as
respondent correctly points out, lower that number to reflect the
probability of Mr. Markley competing. Mr. Howard testified to
the potential for lost sales. Mr. Howard's testimony was
consistent with Mr. Ray's testimony on this issue. We realize
that Mr. Ray was not testifying specifically about Mr. Markley's
covenant; however, it adds to Mr. Howard's credibility that his
response was in line with industry norms in the Oklahoma City
area. We note, however, that lost sales in the first year would
have to reflect the business reality that whatever form of
competition Mr. Markley might engage in, it would take some time
to implement. Using the lower end of the range, 20 percent, and
factoring a time lag in the first year, the potential for lost
business is approximately $300,000 the first year and $400,000
for each of the following 2 years.
The analysis does not stop at this point. The potential
annual lost business needs to be reduced to reflect the
probability of competition taking place during each of the 3
years of the covenant. See International Multifoods Corp. v.
Commissioner, 108 T.C. 25, 47-48 (1997). In evaluating the
probability of competition, we take into account that the
covenant was restricted to the sale of new Jeep-Eagle
automobiles, which required a franchise from Chrysler. The value
ascribed to the covenant must be further reduced to reflect its
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