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will use our best judgment, based upon the record, sketchy as it
may be.
An allocation to a covenant not to compete lacks
economic reality where there is no showing that the
seller would experience a loss comparable to the amount
supposedly paid for the covenant such that it would
bargain for substitute compensation in that amount or
that the buyer would lose such an amount were the
seller to compete against it. [Buckley v.
Commissioner, T.C. Memo. 1994-470 (citing Forward
Communications Corp. v. United States, 221 Ct. Cl. 582,
608 F.2d 485, 493-494 (1979).]
Income projected to be earned over the next 5 years, without
discounts or increases (or taking into account optional or one-
time items), is $1,075,000 ($215,000 x 5). This is perhaps the
maximum amount Bravo could lose, if Mr. Langdon competed and
drove it completely out of business. Mr. Langdon's potential
loss of income, of course, is considerably more: $1,075,000 plus
his $90,000 salary per annum for 5 years, minus the $200,000
consulting contract, or $1,325,000, if he took all the corporate
earnings as dividends.
Both scenarios are highly unlikely. We believe that, if he
competed, Mr. Langdon would not take away more than one-third of
BDC's business, because he would be unable to sell his former
products, and BDC would retain some customers through their brand
loyalty. We are also mindful that, while Bravo might not survive
without the covenant not to compete, neither would it survive
without employees, distributors, or customers. Therefore, we
find that the covenant not to compete has a fair market value of
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