- 14 -
Lucas v. Earl, supra at 114-115; Palmer v. Commissioner, supra at
692. Thus, if a portion of the consideration paid for Little
Rascals is properly allocable to petitioners’ promise, they will
be deemed to have assigned to the trust income they earned by
agreeing not to compete.
In determining whether such a “tax-enforceable” allocation
to a covenant has been or should be made, courts have articulated
various standards for evaluating sales agreements. See Lazisky
v. Commissioner, 72 T.C. 495, 500-502 (1979), affd. sub nom.
Magnolia Surf, Inc. v. Commissioner, 636 F.2d 11 (1st Cir. 1980).
When a written contract specifies the portion of the purchase
price to be allocated to a covenant not to compete and one of the
parties seeks to deviate therefrom, two tests frequently adhered
to in deciding whether such deviation is warranted are the strong
proof rule and the so-called Danielson rule. See, e.g.,
Commissioner v. Danielson, 378 F.2d 771, 775 (3d Cir. 1967),
vacating and remanding 44 T.C. 549 (1965); Elrod v. Commissioner,
87 T.C. 1046, 1065-1066 (1986); Smith v. Commissioner, 82 T.C.
705, 712-714 (1984); Lazisky v. Commissioner, supra at 500-502.
Under the strong proof rule, a taxpayer attempting to
challenge a contractual allocation must adduce “strong proof”,
meaning more than a preponderance of the evidence, that the terms
of the written instrument do not reflect the actual intentions of
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