- 17 -
Although nominally phrased in terms of the parol
evidence rule, respondent's objection is based on the
application of the court's holding in Commissioner v.
Danielson, 378 F.2d 771 (3d Cir. 1967), vacating and
remanding 44 T.C. 549 (1965). In that case, the taxpayers
executed covenants not to compete and a purchase agreement
in connection with their sale of stock. The documents
specifically allocated a portion of the total consideration
to the covenants not to compete. Nevertheless, on their
tax returns, the taxpayers reported the entire amount
received from the buyer as proceeds from the sale of stock.
The taxpayers argued that the allocation of the buyer's
consideration in the covenants not to compete and the
purchase agreement had no basis in fact or economic reality
and that taxation should be based on the substance of the
transaction. In response to the taxpayers' argument, the
Court of Appeals adopted the following rule:
a party can challenge the tax consequences of his
agreement as construed by the Commissioner only
by adducing proof which in an action between the
parties to the agreement would be admissible to
alter that construction or to show its
unenforceability because of mistake, undue
influence, fraud, duress, etc. * * *
Id. at 775. This Court has not adopted the rule enun-
ciated by the Court of Appeals for the Third Circuit in
Page: Previous 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 NextLast modified: May 25, 2011