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Regardless of who received the income attributable to the
covenant not to compete, the true earner of that income is liable
for the tax on it and cannot escape that tax by assigning the
income to another taxpayer. See Lucas v. Earl, 281 U.S. 111
(1930). In the instant case, Mr. Johnston in his individual
capacity, not Don Johnston, Inc., agreed to refrain from
competing in the new car automobile business. Consequently, Mr.
Johnston in his individual capacity must recognize the income
attributable to that promise. See Chiappetti v. Commissioner,
T.C. Memo. 1996-183.
The parties stipulated that the $396,181 payment by Matthew
B. West, Inc., included $290,000 allocated to the noncompetition
agreement with Mr. Johnston. The presidents of both Don
Johnston, Inc., and Matthew B. West, Inc., signed a letter on the
same day that the payment was made indicating that the purchase
had been completed satisfactorily between both parties. Mr.
Johnston initialed a “Recap of Bill of Sale” reflecting the
allocation of $290,000 to the “Covenant NonCompetition
Agreement”. Accordingly, we find that Mr. Johnston may not
challenge the tax consequences of the agreement, which he
voluntarily and knowingly made. We hold that Mr. Johnston must
include the $290,000 in his 1995 income.
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