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First, it appears that at least some portion of the purchase
price was attributable to the 8-year covenant. Mr. Kucklick
posed a significant competitive threat to HII and its future
profitability given his age, his experience in the metal forming
and cutting industry, his knowledge, and his customer contacts.
For these reasons, and to protect his investment in HII, Mr. Hess
insisted upon a broad and relatively lengthy covenant not to
compete. Although the parties did not specifically allocate any
amount of the purchase price to the 8-year covenant, it is clear
that this covenant was a key component of the agreement and
represented valuable consideration coming from Mr. Kucklick. Mr.
Hess testified with respect to the $3.95 million purchase price:
“I considered the price basically a package deal for all the
services past, for the stock, for the noncompete, for the
employment, continuing employment and his willingness to train
people at Hess Engineering during that time.” He testified that
the entire purchase price of $3.95 million was allocated to the
redemption of Mr. Kucklick’s shares to provide favorable tax
treatment to Mr. Kucklick.31
31Respondent suggests that petitioners must present strong
proof that the redemption agreement does not accurately reflect
the agreement of the parties that nothing should be allocated to
the 8-year covenant. Generally, taxpayers cannot ignore the
unambiguous terms of a binding agreement, and they must present
“strong proof” that an allocation of consideration in an
agreement is other than that specified. Meredith Corp. & Subs.
v. Commissioner, 102 T.C. 406, 438 (1994); Steel v. Commissioner,
(continued...)
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