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The evidence, although not extensive, is credible and
persuasive and establishes that the $1.199 million was paid to
Panzica, Battistella, and Navarra as consideration for services
rendered in prior years and not for covenants not to compete.
The $1.199 million was paid in 1990, not deferred until later
years after the employees terminated their employment with
petitioner and was based on a longstanding understanding between
Cruze, on the one hand, and Panzica, Battistella, and Navarra, on
the other, that Panzica, Battistella, and Navarra would be
compensated with additional compensation for services rendered if
Cruze’s stock in petitioner was sold.
The bonus and noncompetition agreements did not specifically
allocate any of the $1.199 million to the covenants not to
compete. See Annabelle Candy Co. v. Commissioner, 314 F.2d 1, 7
(9th Cir. 1962), affg. per curiam T.C. Memo. 1961-170; Major v.
Commissioner, 76 T.C. 239, 250 (1981); Rich Hill Ins. Agency,
Inc. v. Commissioner, 58 T.C. 610, 617 (1972).
It also appears that because Panzica, Battistella, and
Navarra did not sell any stock in petitioner in connection with
entering into the bonus and noncompetition agreements, under
California law, the noncompetition clauses were unenforceable.
See Cal. Bus. & Prof. Code secs. 16600, 16601 (West 1997); Metro
Traffic Control Inc. v. Shadow Traffic Network, 27 Cal. Rptr. 2d
573 (Ct. App. 1994).
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