Custom Chrome, Inc. and Subsidiaries - Page 18

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               As set forth in our findings of fact, the evidence                     
          establishes the appropriateness and need for the 3-year covenant            
          not to compete between petitioner and Cruze.  In light of Cruze’s           
          extensive experience and contacts in the motorcycle parts                   
          industry, petitioner's business would have been significantly and           
          adversely affected if Cruze had attempted to compete with                   
          petitioner.  Further, JC Investors would not have consummated the           
          purchase of the stock in petitioner if Cruze had not agreed to              
          the covenant not to compete.                                                
               We conclude that the covenant not to compete between                   
          petitioner and Cruze had economic reality and that the agreement            
          is to be respected for Federal income tax purposes.                         
               Petitioner's expert valued Cruze's covenant not to compete             
          at $5 million.  Respondent's expert valued the covenant at $2.3             
          million using a discounted cash flow analysis of his estimate of            
          losses petitioner might suffer if Cruze established a business in           
          competition with petitioner.                                                
               Based on our review of the expert witness reports and based            
          on our findings of fact that establish Cruze’s importance to the            
          business of petitioner and his experience and connections in the            
          motorcycle parts industry, we conclude that no discount should be           
          applied to the covenant not to compete and that the full $5                 
          million represents payment to Cruze for his covenant not to                 
          compete against petitioner.                                                 

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Last modified: May 25, 2011