John T. Jorgl and Sharon Illi - Page 16




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          Commissioner, supra at 81.  The threshold inquiry is whether the            
          parties mutually intended that an allocation of purchase price be           
          made to the covenant at issue.  See, e.g., Patterson v.                     
          Commissioner, 810 F.2d 562, 570-571 (6th Cir. 1987), affg. T.C.             
          Memo. 1985-53; Better Beverages, Inc. v. United States, 619 F.2d            
          424, 430 (5th Cir. 1980); Peterson Mach. Tool, Inc. v.                      
          Commissioner, supra at 81, 83.  Such mutual intent will typically           
          be deemed to exist where “the parties considered the covenant as            
          a valuable part of the entire consideration for the agreement.”             
          Illinois Cereal Mills, Inc. v. Commissioner, T.C. Memo. 1983-469,           
          affd. 789 F.2d 1234 (7th Cir. 1986).  Relevant factors for                  
          ascertaining intent include both the language of the contract               
          itself and the circumstances surrounding its negotiation.  See,             
          e.g., Patterson v. Commissioner, supra at 570; Peterson Mach.               
          Tool, Inc. v. Commissioner, supra at 83-84.                                 
               If such mutual intent is found, courts then proceed to                 
          evaluate whether an allocation comports with “economic reality”.            
          See, e.g., Patterson v. Commissioner, supra at 571; Peterson                
          Mach. Tool, Inc. v. Commissioner, supra at 84.  Economic reality            
          is defined as “‘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.’”  Patterson v. Commissioner, supra at 571               
          (quoting Schulz v. Commissioner, 294 F.2d 52, 55 (9th Cir. 1961),           






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