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v. Commissioner, 29 T.C. 1193, 1202 (1958), affd. 271 F.2d 267
(5th Cir. 1959). A covenant not to compete must have
"economic reality"; i.e., some independent basis in fact or some
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.
Respondent, in the notice of deficiency, determined that the
covenant not to compete had a fair market value of $125,000.
Petitioner argues that by placing a value on the covenant not to
compete respondent has, in effect, conceded the existence of
economic reality. In fact, respondent formally concedes, in the
reply brief, that the covenant was amortizable and had economic
reality; thus the only issue for us to decide is the fair market
value of the covenant not to compete.
Value of the Covenant Not to Compete
Neither party called an expert witness to opine on the value
of the covenant not to compete.
a. Petitioner's Arguments
Petitioner argues that the covenant was worth well in excess
of the $490,000 paid to Mr. Markley. Petitioner calculates the
value of the covenant as follows:
The total amount of gross profit less variable costs as
projected by Mr. Howard was approximately $1,996,000
per year. * * * Any reduction in this amount will
result in a dollar for dollar reduction in the
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