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recognition of income on the $5 million received from BHC in 1991
due to the fact that BHC had filed suit against William Becker
and was seeking to recover that money. Mr. Lynch testified that
he knew the position was a weak one at the time the return was
filed, and that this was the reason a disclosure statement was
attached. The 1991 return and the attached disclosure statement
demonstrate an attempt to defer recognition of income; they do
not demonstrate mutual intent to allocate a portion of the
consideration to the covenant not to compete.
BHC also cites Peterson Mach. Tool, Inc. v. Commissioner, 79
T.C. 72, 81 (1982), Jorgl v. Commissioner, supra, and Ansan Tool
& Manufacturing Co. v. Commissioner, T.C. Memo. 1992-121, in
support of its assertion that “BHC meets the mutual intent test”.
However, Peterson and Jorgl are factually distinguishable, and
Ansan Tool applied a standard different from the standard
applicable in this case.
In Peterson, the contract explicitly provided that the lump-
sum purchase price was for both stock and a covenant not to
compete, and the contract expressly provided that “the covenants
are a material portion of the purchase price.” Peterson Mach.
Tool, Inc. v. Commissioner, supra at 77, 82-83. In Jorgl, the
parties’ closing agreement explicitly provided that $300,000 of
the $650,000 total purchase price was being paid for a covenant.
Jorgl v. Commissioner, supra. In both cases, the courts found
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