- 13 -
1202 (1958), affd. 271 F.2d 267 (5th Cir. 1959); Baird v.
Commissioner, 25 T.C. 387, 393 (1955); McDonald v. Commissioner,
28 B.T.A. 64, 66 (1933); see O'Dell & Co. v. Commissioner, supra
at 468. A covenant not to compete must have "economic reality",
i.e., some independent basis in fact or some arguable
relationship with business reality so that reasonable persons
might bargain for such an agreement. Patterson v. Commissioner,
810 F.2d 562, 571 (6th Cir. 1987); affg. T.C. Memo. 1985-53;
Schulz v. Commissioner, 294 F.2d 52, 55 (9th Cir. 1961), affg. 34
T.C. 235 (1960); O'Dell & Co. v. Commissioner, supra at 467-468.
b. Petitioner's and Grecco's Lack of Adversarial Tax
Interests
Respondent points out that petitioner had an incentive to
allocate a large amount to the covenant not to compete because
petitioner could amortize that amount over the 3-year life of
the covenant. Respondent also points out that Grecco had no
incentive to minimize the amount allocated to the covenant
because the tax rates for ordinary income and capital gains were
generally the same during the years at issue. Before Congress
repealed capital gains tax preferences, the grantor of a covenant
not to compete had an incentive to allocate less to the covenant
and more to stock because the payment he or she received for the
covenant was ordinary income, while the amount realized from the
sale of stock might be taxed as capital gains. See Schulz v.
Commissioner, supra at 55, and Landry v. Commissioner, 86 T.C.
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