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1963), affg. T.C. Memo. 1961-170, as the “seminal case” on the
subject.
In Annabelle Candy Co., a dispute arose between the two
stockholders of Annabelle Candy Company (Annabelle Candy), which
resulted in one stockholder’s selling his stock to the
corporation. Annabelle Candy Co. v. Commissioner, supra at 2-3.
The agreement provided that the stockholder would be paid
$115,000 over a period of time and included a covenant not to
compete. Id. at 3. The agreement made no allocation of any
portion of the total consideration to the covenant, and there
were no discussions prior to the signing of the agreement
concerning the allocation of a portion of the purchase price to
the covenant. Id. Subsequent to the signing of the agreement,
Annabelle Candy unilaterally allocated a portion of the purchase
price to the covenant not to compete without the consent of the
stockholder and amortized the allocated portion on its corporate
tax return. Id. at 4. The Court of Appeals for the Ninth
Circuit (Ninth Circuit) stated:
In the purchase agreement involved in the case before
us, there is no allocation of consideration to the
covenant not to compete. While this is pretty good
evidence that no such allocation was intended it is not
conclusive on the parties as would be the case if there
had been an express affirmance or disavowal in the
agreement. * * * It is true * * * that the covenant
not to compete played a very real part in the
negotiation of a final contract between the parties,
and was a valuable benefit to the petitioner. But if
the parties did not intend that a purchase price be
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