- 19 - B. The Danielson Rule In Commissioner v. Danielson, 378 F.2d 771, 773 (3d Cir. 1967), Thrift Investment Corporation (Thrift) offered to buy all the common stock owned by individual stockholders, including Danielson, for $374 per share. In the agreement of sale, Thrift allocated $152 per share to a covenant not to compete and $222 per share to the contract for the sale of stock. Id. On each payment check, Thrift printed a notation that the payment represented a payment for both the stock and the covenant not to compete. Id. On their tax returns, Danielson and the other stockholders reported the payments received as income from the sale of a capital asset. Id. The Court of Appeals for the Third Circuit held: a taxpayer who enters into a transaction of this type to sell his shares and executes a covenant not to compete for a consideration specifically allocated to the covenant may not, absent a showing of fraud, undue influence and the like on the part of the other party, challenge the allocation for tax purposes. We so conclude even though the evidence, as here, would support finding that the explicit allocation had no independent basis in fact or arguable relationship with business reality. * * * Id. at 777 (emphasis added). The Danielson rule, as adopted by the Third Circuit, is: a party can challenge the tax consequences of his agreement as construed by the Commissioner only by adducing proof which in an action between the partiesPage: Previous 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Next
Last modified: May 25, 2011