- 15 -
T.C. Memo. 1978-496; Haber v. Commissioner, 52 T.C. 255, 266
(1969), affd. per curiam 422 F.2d 198 (5th Cir. 1970); Roschuni
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
arguable 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. We shall first decide, therefore, if the noncompete
agreements had "economic reality".
Economic Reality
Courts apply numerous factors in evaluating a covenant not
to compete. These include: (a) The grantor's (i.e.,
covenantor's) having the business expertise to compete; (b) the
grantor's intent to compete; (c) the grantor's economic
resources; (d) the potential damage to the buyer posed by the
grantor's competition; (e) the grantor's contacts and
relationships with customers, suppliers, and other business
contacts; (f) the duration and geographic scope of the covenant;
(g) enforceability of the covenant not to compete under State
law; (h) the age and health of the grantor; (i) whether payments
for the covenant not to compete are pro rata to the grantor's
stock ownership in the company being sold; (j) whether the
payments under the covenant not to compete cease upon breach of
Page: Previous 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 NextLast modified: May 25, 2011