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a contractual allocation to a covenant not to compete.
See, e.g., Schulz v. Commissioner, 294 F.2d 52, 56
(9th Cir. 1961), affg. 34 T.C. 235 (1960); Landry v.
Commissioner, 86 T.C. 1284, 1307 (1986). The economic
reality of a transaction, rather than the form in which
it is cast, governs for Federal income tax purposes.
Hamlin's Trust v. Commissioner, supra at 764; Landry v.
Commissioner, supra. In order for a contractual allocation
to be upheld, it must be shown to have some independent
basis in fact or some arguable relationship with business
reality such that reasonable men, genuinely concerned with
their economic future, might bargain for such an agreement.
Schulz v. Commissioner, supra. In this case, respondent
determined that the realities of the transaction are
different from the form in which the seller and petitioner
clothed the transaction. Id. Respondent determined that
the payments purportedly for the seller's covenant not to
compete were "inseparable from the total purchase price"
and disallowed the deduction.
We find that petitioners have not met their burden
of proving that the covenant not to compete had economic
reality. See Rule 142(a). In view of the seller's age
and health problems, and the other facts and circumstances
of this case, we are not persuaded that petitioners have
proven that the covenant had any independent basis in fact
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