- 17 -
(1956). Similarly, amounts paid by a buyer for a covenant not to
compete result in ordinary income to the covenantor, since they
represent a substitute for ordinary income and may be amortized
by the buyer over the covenant's useful life. Throndson v.
Commissioner, supra at 1024; Ullman v. Commissioner, 264 F.2d
305, 307 (2d Cir. 1959), affg. 29 T.C. 129 (1957); sec. 1.167(a)-
3, Income Tax Regs.
The economic substance of a transaction, rather than the
form in which it is cast, is controlling for Federal income tax
purposes; thus, courts may pierce the form of a transaction and
tax the substance. Griffiths v. Commissioner, 308 U.S. 355, 356-
357 (1939); Gregory v. Helvering, 293 U.S. 465, 469 (1935). The
underlying philosophy of the "substance over form" doctrine is to
prevent taxpayers from attempting to subvert the taxing statutes
by relying upon mere legal formality. Major v. Commissioner, 76
T.C. 239, 246 (1981). This doctrine is applicable in cases such
as the one at bar, where the Commissioner is challenging an
express contractual allocation. See Schulz v. Commissioner, 294
F.2d 52, 56 (9th Cir. 1961), affg. 34 T.C. 235 (1960); O'Dell &
Co. v. Commissioner, 61 T.C. 461, 467 (1974).4 The burden of
4 This is not a case where the taxpayer is asserting that the substance of
the agreement it entered is at variance with its form. In such a case, courts
have either required strong proof that the substance of the agreement was
different than its form, or they have limited the type of evidence that a
taxpayer may offer when attacking the contractual allocation. E.g.,
Commissioner v. Danielson, 378 F.2d 771, 775 (3d Cir. 1967), vacating and
remanding 44 T.C. 549 (1965); Ullman v. Commissioner, 264 F.2d 305, 308 (2d
Cir. 1959), affg. 29 T.C. 129 (1957).
Page: Previous 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 NextLast modified: May 25, 2011