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Consequently, we need not reach the parties’ contentions
here regarding the enforceability of a covenant against
petitioners. In unusual circumstances, such as those present in
this case, seeking even an unenforceable agreement made in good
faith may be consistent with prudent business practice. This is
particularly true where, as here, the issue of enforceability is
debatable and arguments exist to support both sides.
Furthermore, since the Shahs apparently assumed that petitioners
were bound by their signatures, it is also reasonable to believe
that the Shahs in fact bargained and paid for petitioners’
promise. We therefore conclude that petitioners have failed to
carry their burden of establishing that an allocation of any
value to their covenant not to compete would be devoid of
economic reality.
Amount of Allocation
Where, as here, an allocation of some value has been found
to comport with economic reality in a general sense, the final
question necessary to resolve a deficiency issue asks what
specific amount of the consideration paid should be allocated to
the subject agreement. We note that the amount allocated to a
covenant by a taxpayer is not always controlling for tax
purposes. See Lemery v. Commissioner, 52 T.C. 367, 375 (1969),
affd. 451 F.2d 173 (9th Cir. 1971).
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