John T. Jorgl and Sharon Illi - Page 12




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          also alleges that the covenant has significant economic value, is           
          supported by consideration, and is enforceable under California             
          covenant law.                                                               
               We conclude that a portion of the consideration paid can               
          properly be allocated to the promise made by petitioners.  The              
          intentions of the parties involved in the transaction and the               
          economic reality of petitioners’ agreement support such an                  
          allocation.  Hence, petitioners must be deemed to have earned               
          income by agreeing not to compete and to have anticipatorily                
          assigned such income to the trust.  They therefore are required             
          to recognize taxable income, to the extent of the value of the              
          covenant, in connection with the sale of Little Rascals.                    
          Deficiency Issue                                                            
               General Rules                                                          
               As a general rule, section 61 defines gross income as “all             
          income from whatever source derived”.  Case law then specifies              
          that consideration paid for a covenant not to compete is included           
          within this broad definition.  See, e.g., Sonnleitner v.                    
          Commissioner, 598 F.2d 464, 466 (5th Cir. 1979), affg. T.C. Memo.           
          1976-249; Montesi v. Commissioner, 340 F.2d 97, 100 (6th Cir.               
          1965), affg. 40 T.C. 511 (1963).  A charitable remainder                    
          unitrust, however, is not subject to income tax by reason of                
          section 664(c) unless it has unrelated business income, which is            
          not the case here.                                                          






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