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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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