International Multifoods Corporation and Affiliated Companies - Page 34

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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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