T.C. Memo. 2000-10
UNITED STATES TAX COURT
JOHN T. JORGL AND SHARON ILLI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11508-98. Filed January 11, 2000.
Ps, husband and wife, operated a child care business of
which P husband was the sole shareholder. P subsequently
established a charitable remainder unitrust and contributed
all of his shares in the child care business to the trust.
The trust later sold the business and received all proceeds
of the sale. The purchase agreement between the trust and
the buyers contained a covenant not to compete, and Ps
signed a separate document entitled “COVENANT NOT TO
COMPETE” at the time of sale. Ps reported no income as a
result of this transaction, and R determined a deficiency
for taxes attributable to the portion of the sale price
allocated to a covenant not to compete.
Held: Execution of a noncompetition agreement resulted
in taxable income to Ps to the extent of the purchase price
attributable thereto. Although the trust received all
proceeds of the sale, Ps were the true earners of the
income. Commissioner v. Sunnen, 333 U.S. 591, 604 (1948)
and Lucas v. Earl, 281 U.S. 111, 114-115 (1930), applied.
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