- 29 -
that Ralston would cause Jerry’s noncompete agreement with
Conquest to be modified in such a manner that his participation
in Mattel and other incidental matters would not be a violation
of the noncompete agreement. The explicit acknowledgment that
the noncompete agreement needed to be modified (rather than
abandoned or released) to remove restrictions on Mattel’s
competing with Conquest is probative that the noncompete
agreement survived. In fact, after Mattel’s ownership change,
Jerry was still restricted from competing with Conquest other
than through Mattel, and he continued to be restricted from
disclosing Conquest’s confidential information. We conclude that
the noncompete agreement survived and that the payments received
by Jerry continued to be taxed as ordinary income.
On the basis of the entire record, we conclude that the
allocation contained in the stock acquisition and noncompete
agreements was bargained for by the parties, that no party was
indifferent to the allocation,8 that the allocation reflects the
parties’ intent when the agreements were signed, and that the
allocation has sufficient “economic reality” to be respected for
tax purposes.
8 The sellers were represented by counsel during the
negotiation of the stock acquisition agreement.
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