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In deciding the issues presented here, we are guided by the
following principles. Simply because a particular taxpayer pays
or allocates a specific amount to a covenant not to compete is
not controlling for Federal income tax purposes. Lemery v.
Commissioner, 52 T.C. 367, 375 (1969), affd. per curiam 451 F.2d
173 (9th Cir. 1971). We strictly scrutinize an allocation if it
does not have adverse tax consequences for the parties; adverse
tax interests deter allocations which lack economic reality.
Wilkof v. Commissioner, 636 F.2d 1139 (6th Cir. 1981), affg. per
curiam T.C. Memo. 1978-496; O'Dell & Co. v. Commissioner, supra
at 468; 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. per curiam 271 F.2d 267 (5th Cir.
1959); Estate of McDonald v. Commissioner, 28 B.T.A. 64, 66
(1933). Further, we may go beyond the formalities delineated by
the parties to ascertain if the form reflects the substance of
those dealings. Yandell v. United States, 315 F.2d 141, 142 (9th
Cir. 1963); Annabelle Candy Co. v. Commissioner, 314 F.2d 1, 5
(9th Cir. 1962), affg. per curiam T.C. Memo. 1961-170.
In order for the form in which the parties have cast their
transaction to be respected for Federal income tax purposes, the
covenant not to compete and the secrecy agreement must have some
independent basis or an arguable correlation to business reality
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