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those agreements is unenforceable due to mistake, undue
influence, fraud, duress, or other similar ground. In fact,
petitioners have stipulated that both agreements are enforceable
contracts. In these circumstances, petitioners are bound by the
tax consequences flowing from the apportionment of the purchase
price in the agreements.
The Court of Appeals for the Fourth Circuit has not adopted
the rule in Danielson.6 Gen. Ins. Agency, Inc. v. Commissioner,
401 F.2d 324 (4th Cir. 1968). In Gen. Ins. Agency, the Court of
Appeals analyzed a transaction involving a sale of an insurance
agency and a covenant not to compete. Id. at 327. The court
held that
the determination of whether a part of the purchase
price represents payment for a noncapital item, i.e., a
covenant not to compete, depends upon whether the
parties to the agreement intended to allocate a portion
of the purchase price to such covenant at the time they
executed their formal sales agreement. It is necessary
also to establish that the covenant “have 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.” [Id. at 330; fn. refs.
omitted (quoting Schulz v. Commissioner, 294 F.2d 52,
55 (9th Cir. 1961)).]
A determination of the intent of the parties to an agreement
and the economic substance of a transaction is a question of
6 We have also declined to adopt that rule, e.g., Coleman v.
Commissioner, 87 T.C. 178, 202 n.17 (1986), and apply it only
when a case is appealable to a court that has adopted the rule,
Meredith Corp. & Subs. v. Commissioner, 102 T.C. 406, 439-440
(1994).
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