- 9 -
to compete that Meyer entered into with petitioner and with
International had substantial economic reality, although, as
explained below, a portion of the amount allocated thereto by
Meyer, MCB, petitioner, and International, we regard as
excessive, and we treat as a nondeductible capital expenditure.
Petitioners' and respondent's expert witnesses valued the
covenant not to compete at $2,300,000 and at $26,800,
respectively.
The offer and counteroffers that were made during
negotiations for purchase of the assets of MCB suggest that the
$1,290,000 cash payment made at closing purportedly relating to
and for the covenant not to compete did not, in substance,
constitute payment for the covenant not to compete. Rather, this
$1,290,000 cash payment was made at closing along with the stated
$300,000 cash portion of the purchase price. Together, these two
cash payments are closely associated with the terms of
International's original counteroffer under which it was proposed
that International would make at closing a $1.5 million cash
payment for the assets of MCB. Also, under that original
counteroffer, only $750,000 was to be allocated to the covenant
not to compete. Only after tax advice was obtained by
International were the terms of the counteroffer modified to
reflect a much higher stated amount to be allocated to the
covenant not to compete.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 Next
Last modified: May 25, 2011