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It is well settled that if, in an agreement of the
kind which we have here, the covenant not to compete
can be segregated in order to be assured that a
separate item has actually been dealt with, then so
much as is paid for the covenant not to compete is
ordinary income and not income from the sale of a
capital asset. * * *
See also General Ins. Agency, Inc. v. Commissioner, 401 F.2d 324,
329-330 (4th Cir. 1968), affg. T.C. Memo. 1967-143.
It is necessary, therefore, to determine what portion of the
$2,050,000 sale price must be allocated to the covenant not to
compete. Petitioner bears the burden of proof. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933); Peterson Mach.
Tool, Inc. v. Commissioner, 79 T.C. 72, 81 (1982), affd. without
published opinion 54 AFTR 2d 84-5407, 84-2 USTC par. 9885 (10th
Cir. 1984).
Petitioner urges us to uphold the allocation in the purchase
agreement of $820,000. Petitioner relies upon case law
indicating that an allocation in a purchase agreement to a
covenant not to compete will be respected for Federal income tax
purposes if it was the intent of the parties to make such an
allocation and the covenant possessed independent economic
significance. See, e.g., Major v. Commissioner, 76 T.C. 239, 246
(1981).
We decline to place reliance upon the allocation contained
in the purchase agreement. The cases upholding the contracting
parties' allocation of a specific amount to a covenant not to
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