- 16 -
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),
Page: Previous 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 NextLast modified: May 25, 2011