Charles B. and Teresa A. Thompson, et al. - Page 15

                                       - 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  Next

Last modified: May 25, 2011