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they illustrate the parties’ likely awareness of the importance
of a noncompete agreement. We think the evidence clearly rebuts
respondent’s contention that the Noncompete Agreement was a mere
“afterthought”, prompted entirely by tax considerations. Rather,
we think the evidence shows that there were substantial business
reasons for a noncompete agreement from Wagner, and that it would
have been highly unlikely, and imprudent, for petitioner not to
seek one.
Did the Covenant Not To Compete Reflect Economic Reality?
The requirement that the covenant reflect economic reality
or have economic substance has been articulated as follows:
“[T]he covenant must have some independent basis in fact or some
arguable relationship with business reality such that reasonable
men, genuinely concerned with their economic future, might
bargain for such an agreement.” Schulz v. Commissioner, 294 F.2d
52, 55 (9th Cir. 1961), affg. 34 T.C. 235 (1960). Courts
consider a number of factors in determining whether a covenant
has economic substance, including the following: (a) The
seller's (i.e., covenantor's) ability to compete; (b) the
seller's intent to compete; (c) the seller's economic resources;
(d) the potential damage to the buyer posed by the seller's
competition; (e) the seller's business expertise in the industry;
(f) the seller's contacts and relationships with customers,
suppliers, and other business contacts; (g) the buyer's interest
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