Howard Pontiac-GMC, Inc. - Page 12

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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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