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affg. 34 T.C. 235 (1960)). An allocation will generally be given
effect where “the covenants had independent economic significance
such that * * * [the Court] might conclude that they were a
separately bargained-for element of the agreement.” Peterson
Mach. Tool, Inc. v. Commissioner, supra at 81.
Application
The instant case involves two documents purporting to
establish a covenant not to compete: The purchase agreement and
the separate covenant document. Paragraph 16 of the purchase
agreement dated May 24, 1993, is labeled “COVENANT NOT TO
COMPETE”. The printed language of the paragraph states, in
pertinent part, that “seller shall not directly or indirectly
carry on a similar business”. A handwritten amendment “and
officers” has been added after “seller”. The parties to the
agreement are the Shahs, designated as “buyer”, and the Jorgl
Unitrust, designated as “seller”. The agreement was signed by
Mr. Shah and by an officer of Cupertino National Bank as sole
trustee for the Jorgl Unitrust. It was not signed by
petitioners.
Petitioners alone also signed a separate document entitled
“COVENANT NOT TO COMPETE” at the closing on July 30, 1993. This
document states that it is “between John Jorgl and Sharon Illi,
who were officer’s [sic] of Little Rascals Child Care Centers,
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