- 14 -
As we have observed, there are no adverse tax interests between
the parties here.8 We strictly scrutinize an allocation if it
does not have adverse tax consequences for the parties; adverse
tax interests deter allocations which lack economic reality.
Wilkof v. Commissioner, 636 F.2d 1139 (6th Cir. 1981), affg. per
curiam T.C. Memo. 1978-496; see also Lorvic Holdings, Inc. v.
Commissioner, T.C. Memo. 1998-281 (and cases cited therein).
In Buffalo Tool & Die Manufacturing Co. v. Commissioner, 74
T.C. 441, 446-448 (1980), we noted that where the Commissioner
challenges a contractual allocation (as in the cases at hand),
two tests are applied by the courts. In Buffalo Tool & Die
Manufacturing Co., we stated:
[Those tests are] whether (a) the contractual
allocation has "some independent basis in fact or some
arguable relationship with business reality such that
reasonable [persons], genuinely concerned with their
economic future, might bargain for such agreement," in
which event, the allocation will generally be upheld
(Schulz v. Commissioner, 294 F.2d at 55), or (b) the
allocation by the buyer and the seller of a lump-sum
purchase price is unrealistic, which neither the
respondent nor this Court is bound to accept (Rodman v.
Commissioner, 542 F.2d 845 (2d Cir. 1976), affg. on
8Prior to repeal of the preferential tax rate for capital
gain in the Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514,
100 Stat. 2085, the grantor of a covenant not to compete had an
incentive to minimize the amount paid for such a covenant because
payments received in exchange therefor constituted ordinary
income to the grantor, while the amount realized from the sale of
other business assets might qualify for the preferential tax rate
applied to net capital gain. See Schulz v. Commissioner, 294
F.2d 52, 55 (9th Cir. 1961), affg. 34 T.C. 235 (1960).
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