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contained both a consulting services component and a covenant not
to compete. While the covenant not to compete did not have a
separately stated consideration, it did represent an additional
commitment on Silbernagel's part, supplemental to the consulting
commitment, and it was an added value for the consideration FAMC
was to pay Silbernagel monthly. (Silbernagel had previously been
paid $8,000 per month for a covenant not to compete with WESAV for
a period of 18 months following WESAV's purchase of VALC's mobile
home mortgage servicing business.6) We believe the $15,000 monthly
fee paid to Silbernagel constitutes reasonable compensation for
both the consulting services component and the covenant not to
compete in the agreement between Silbernagel and FAMC.7
Consequently, we hold that: (1) FAMC is entitled to deduct all of
the payments made to Silbernagel pursuant to the consulting and
noncompetition agreement entered between those parties;8 (2) there
6 Although the agreement with WESAV also required
Silbernagel to assist in effecting a smooth transfer of the
business, we find that the payments under the agreement were
primarily designed to compensate him for his covenant not to
compete with WESAV for a period of 18 months following the sale.
7 In determining that the $15,000 monthly fee was
reasonable, we recognize that there were subsequent reductions of
the monthly payment to $10,000 in February 1990, and to $5,000 in
May 1991. Those reductions were the result of arm's-length
negotiations precipitated by the decline in FAMC's loan servicing
business and the company's resulting financial difficulties.
8 Respondent suggests on brief that the payments under
the consulting and noncompetition agreement between Silbernagel
and FAMC were limited to the lesser of $300,000 per year or 25
percent of FAMC's after-tax profits, and therefore, FAMC's
deduction should likewise be limited to this amount. Moore
testified at trial, however, that the monthly payments to
(continued...)
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