8
not substantially justified once respondent received the August
22, 1994, valuation report of its expert, which estimated that
Grecco's stock in petitioner was worth $188,600 as of June 30,
1988. Petitioner argues that it is entitled to recover costs
from that time.3
Respondent argues that petitioner intended that the purchase
price ($513,400) provided in petitioner's stock purchase
agreement was payment solely for Grecco's stock. Respondent
points out that petitioner was obligated to pay Grecco that
amount even if Grecco had not agreed not to compete and even if
the fair market value of the stock was less than that amount.
Respondent maintains that the fact that petitioner and respondent
agreed to the fair market value for the stock did not alter the
fact that the allocation of any value to the covenant not to
compete lacked economic reality. Respondent argues that the
amount allocated to the covenant not to compete did not result
from arm's-length negotiations. Respondent points out that
Grecco and petitioner did not have adverse tax interests with
respect to the allocation of $383,400 to the covenant.
3 Generally, the position of the United States in the
judicial proceeding is the position taken in the Commissioner's
answer to the petition. Sec. 7430(c)(7)(A); Huffman v.
Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part,
revg. in part on other grounds and remanding T.C. Memo. 1991-144.
Respondent filed the answer on Dec. 6, 1993. Petitioner does not
contend that it is entitled to an award for litigation costs
incurred before Aug. 22, 1994.
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