                        T.C. Memo. 2008-102



                      UNITED STATES TAX COURT



  ROBERT L. SOLOMON AND DONNA J. SOLOMON, ET AL.,1 Petitioners
        v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos.   20293-05, 20294-05,   Filed April 16, 2008.
                   20295-05.



     Albert L. Grasso, Carri A. Conlon, and Joseph A. Zarlengo,

for petitioners.

     Kathleen Schlenzig, for respondent.




     1
       Cases of the following petitioners are consolidated
herewith: Solomon Colors, Inc., docket No. 20294-05; and Richard
R. Solomon and Gina G. Solomon, docket No. 20295-05.
                                  - 2 -

                MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:    In these consolidated cases, petitioners

petitioned the Court to redetermine the following Federal income

tax deficiencies determined by respondent:

               Petitioner             Year           Deficiency

         Robert L. Solomon and
           Donna J. Solomon           2000            $158,368

         Richard R. Solomon and
           Gina G. Solomon            2000              44,031
                                      1
         Solomon Colors, Inc.             200103       418,935
     1
       We use the shorthand “200103” to refer to the taxable
     year of Solomon Colors, Inc., ended on March 31, 2001.

With respect to Robert L. Solomon and Donna J. Solomon

(collectively RDS) and Richard R. Solomon and Gina G. Solomon

(collectively RGS), the deficiencies resulted from respondent’s

determination that Solomon Colors, Inc. (Solomon Colors or the

corporation), had distributed undivided partial interests in a

customer list (customer list) to Robert Solomon and Richard

Solomon when it sold its Mather ore division to Prince

Manufacturing Co. (Prince) in August 2000.         RDS and RGS

(collectively the four Solomons) reported that Robert Solomon and

Richard Solomon had each sold a “Customer List/Goodwill” directly

to Prince.     Neither RDS nor RGS reported receiving interests in

the customer list as a distribution from Solomon Colors.          With

respect to Solomon Colors, the deficiency resulted from
                                - 3 -

respondent’s determination that Solomon Colors had realized

long-term capital gain under section 311(b) on its distribution

of interests in the customer list to Robert Solomon and Richard

Solomon.   Solomon Colors did not report any such distributions to

its shareholders.

     After concessions and our dismissal for lack of jurisdiction

of the portion of these cases requesting redetermination of

overpayments determined by respondent as to the four Solomons for

2001, we decide whether to sustain petitioners’ reporting

positions as to the subject matter at hand.    We shall not.

Unless otherwise noted, section references are to the Internal

Revenue Code in effect for the years in issue, and Rule

references are to the Tax Court Rules of Practice and Procedure.

                           FINDINGS OF FACT

1.   Preface

     Some facts were stipulated and are so found.    When the

petitions were filed, each of the four Solomons resided in

Springfield, Illinois, and Solomon Colors had its principal place

of business in that city as well.

     Richard Solomon is the son of Robert Solomon.    RDS and RGS

are each husband and wife, and each couple filed a joint 2000

Federal income tax return.    Solomon Colors filed its 2000

Federal corporate income tax return on the basis of a fiscal year

ended on March 31, 2001.
                                 - 4 -

2.   Solomon Colors

     Until 2000, Solomon Colors was in the business of

pulverizing and selling Mather ore, a red iron oxide mined in the

Upper Peninsula of Michigan.     Solomon Colors transported natural

crude ore from upper Michigan to Springfield, Illinois, and then

dried, processed, and sold the product as an iron oxide to the

foundry, fertilizer, and cement industries for use as a pigment.

Solomon Colors processed the natural crude ore into fine ore

using a machine known as a Raymond mill.

     The business of Solomon Colors was originally conducted

through a partnership, beginning in 1927.     In 1982, Robert

Solomon, Richard Solomon, and Robert Solomon’s mother, Florence

Solomon, were the only partners of that partnership.     In 1982,

those three individuals liquidated the partnership and caused its

assets to be transferred to the contemporaneously formed Solomon

Colors in exchange for all of its common stock.     As part of this

transaction, Solomon Colors assumed all of the partnership’s

liabilities.   The transferred assets did not include any

intangible asset.     When Florence Solomon died, her shares in

Solomon Colors were divided among the four Solomons.     Each of the

four Solomons was a director of Solomon Colors from 2000 through

2002.   Robert Solomon was Solomon Colors’ president and

treasurer, Richard Solomon was Solomon Colors’ vice president,
                               - 5 -

and Gina Solomon was Solomons Colors’ secretary.2   Neither Robert

Solomon nor Richard Solomon ever had an employment agreement with

Solomon Colors.   An employee stock ownership plan (ESOP) owned

approximately 35 to 40 percent of the stock of the corporation in

2000.3

     Robert Solomon and Richard Solomon were responsible for

managing the customer relationships with the purchasers of the

corporation’s Mather ore.   Robert Solomon began developing

personal relationships with those customers in 1955, and Richard

Solomon began developing such relationships in 1979.   Other

employees ground and packaged the materials and prepared

paperwork, but no one other than Robert Solomon or Richard

Solomon regularly spoke with customers about the unique

characteristics, grinding, packaging, or shipping of the iron

oxide.

3.   Mather Ore Division

     In 2000, the Mather ore division represented 7 percent of

the sales of Solomon Colors.   At that time, Prince was the only

other processor of Mather ore in the United States and Canada.4


      2
       At the time of trial, Robert Solomon was the CEO of
Solomon Colors and Richard Solomon was its president.
      3
       At the time of trial, the ESOP owned approximately 52
percent of the stock.
      4
       Alternatives to Mather ore were more expensive for
customers to purchase.
                                  - 6 -

Solomon Colors and Prince had some mutual customers, and the

Mather ore produced by Solomon Colors originated from the same

source and was essentially the same as that produced by Prince.

Solomon Colors received a higher price for its product than did

Prince.

     Around 2000, the supplier of natural iron oxide ore that

serviced both Solomon Colors and Prince had exhausted its

stockpiles of mine mineral.    Solomon Colors had to replace mine

mineral with pond finds if it wanted to continue its Mather ore

business.   Solomon Colors determined that it would have to

replace the Raymond mill with a different type of mill in order

to process the pond finds.    Solomon Colors determined that

retooling the manufacturing process would cost $1.5 million.

4.   Offer To Purchase Business

     In May 2000, a salesman of Prince asked Richard Solomon

whether Solomon Colors would sell its Mather ore business.

Richard Solomon replied that he was interested and would have to

discuss the matter with his father.       When Richard Solomon and his

father discussed selling the Mather ore business, Richard Solomon

convinced his father to sell the Mather ore division and use the

$1.5 million required to retool the manufacturing process on a

new plant in California.

     While Prince and Solomon Colors were negotiating the sale of

the Mather ore division, the vice president and general manager
                               - 7 -

of Prince was Charles Davis.   Richard Solomon, Robert Solomon,

and Charles Davis discussed the sale of the division over the

course of approximately 1 month.   The initial discussions did not

address the price and terms of the sale, any noncompete

agreements for any of the family members, or a customer list.

5.   Term Sheet

     On June 22, 2000, Charles Davis outlined the terms and

conditions of the proposed sale in a term sheet.   The term sheet

identified the parties to the sale as Prince and Solomon Colors.

In a meeting that day, Robert Solomon and Charles Davis modified

the term sheet to identify the subject of the sale as “The Prince

Manufacturing Company’s purchase of the Mather ore division of

SGS Solomon Colors”.   The modified term sheet identified a

purchase price of $1.5 million and an agreement term of 5 years.

The term sheet stated that Solomon Colors would transfer to

Prince a Raymond mill with ancillary equipment and spare parts.

The term sheet stated that Solomon Colors would purchase its

color division’s Mather ore requirements at a reduced price from

Prince during the 5-year term of the agreement.    The term sheet

required Solomon Colors to stop production of all Mather products

and to stop resale of straight Mather-based products to certain

customers for the 5-year term of the agreement plus an additional

5 years.
                               - 8 -

     On June 23, 2000, Robert Solomon sent to Solomon Colors’

outside counsel, Robert Walbaum, a facsimile to which the term

sheet as modified was attached.   The cover sheet included in this

facsimile indicated that a customer list would be transferred as

part of the transaction.

6.   Negotiations and Initial Drafts

     The first draft agreement (draft agreement) was prepared by

Robert Walbaum and transmitted to Prince’s outside counsel, John

Stevenson, Jr. (John Stevenson), on June 30, 2000.    The draft

agreement identified the parties to the agreement as Solomon

Colors and Prince and was titled “Agreement for Sale and Purchase

of Raymond Mill”.   The draft agreement did not mention the

transfer of any customer list to Prince.   In the draft agreement,

Robert Walbaum attributed the entire $1.5 million purchase price

to the Raymond mill, although the equipment was worth only

$100,000 at that time, because he was concerned that Solomon

Colors’ sale of its Mather ore division would violate antitrust

laws.

     On July 6, 2000, during an early morning teleconference

among Robert Walbaum, Richard Solomon, and John Boxman (Solomon

Colors’ controller), Richard Solomon notified Robert Walbaum that

Prince wanted to subject each of the four Solomons to covenants

not to compete and to have each of the four Solomons sign the

sale agreement in his or her individual capacity.    Later that
                               - 9 -

day, Richard Solomon and Robert Walbaum spoke with Charles Davis

and the representatives of Prince; namely, John Stevenson and his

colleague, Delbert Mitchell.   The Prince representatives

indicated that Prince wanted to enter into covenants not to

compete with each of the four Solomons.    The participants in the

call agreed that John Stevenson would revise the draft agreement

to include the covenants not to compete and that John Stevenson

would also prepare a supply agreement and a bill of sale.

Pursuant to a teleconference later that day among the same five

participants, Robert Walbaum wrote:    “we will need to consider

whether or not we can allocate income to the individuals for

signing the non-compete which will be tax advantageous to do.      If

we can do so, then does the allocation need to be spelled out in

the agreement.”

     Also on July 6, 2000, John Boxman sent a copy of the draft

agreement to Thomas Bayer, Solomon Colors’ independent accountant

and the preparer of its tax returns.    Thomas Bayer then sent an

e-mail to Charles Bachman, counsel for the ESOP plan

administrator, in which Thomas Bayer notified Charles Bachman

that Solomon Colors was considering a sale of a product line and

that the buyer was requesting some of the shareholders to sign

noncompete agreements for which the buyer would compensate the

shareholders.   Thomas Bayer stated:
                             - 10 -

     My question is this: Would this be a questionable
     transaction in terms of the ESOP participants
     perceiving this as trying to shelter the gain on this
     sale from the Company and from the ESOP? What is our
     risk here? I haven’t completed my research, but I
     think we could take as much as 30% of the purchase
     price and allocate it to these non-competes with the
     shareholders personally.

     In a memorandum written on July 7, 2000, Thomas Bayer

stated:

     Solomon was currently in the process of reengineering
     their [sic] process. At this point in time, the only
     property available to purchase is their [sic] customer
     list, because their [sic] process is worthless given
     the raw materials are not available.[5] * * *

     With the above facts in mind, it is arguable that truly
     the only thing Prince is buying is “market share”, with
     a guarantee that Solomon will not compete with them
     [sic] as an entity, and, the shareholders will not
     compete with them [sic] personally. The reason we
     provide this scenario is because the 2 cases which
     discuss the issues [sic] of personal goodwill involve a
     distributor of ice cream products and an accounting
     firm. Both of these entities rely heavily on the
     “salesmanship” and personal relationships created by
     their employees on an individual basis. When we look
     at Solomon, a manufacturer of products, our fact
     pattern changes drastically and as a practical matter,
     the “goodwill” that is created is arguably more at the
     entity level, notsomuch at the individual
     shareholder/employee level. However, the above fact
     pattern demonstrates that at this point in time, the
     only thing that Prince is really buying is the customer
     relationship, because of the drastic changes we
     described.




     5
       Thomas Bayer uses the plural possessive pronoun “their” to
refer to the assets and operations of the single corporation
Solomon Colors. He also later on in this quotation refers to
Price as “them”.
                               - 11 -

7.   Initial Allocation of Purchase Price

     An initial allocation of purchase price among Solomon Colors

and each of the four Solomons was structured by Robert Solomon in

consultation with Thomas Bayer and John Boxman.      That allocation

was not negotiated with Prince.     That allocation was as follows:

                       Payee            Allocation

                  Solomon Colors         $880,000
                  Robert Solomon          425,000
                  Richard Solomon         145,000
                  Donna Solomon            25,000
                  Gina Solomon             25,000
                    Total               1,500,000

The undated document upon which the allocation appears includes

the following handwritten comments: “Rich’s Salary- be careful”,

“pay dividend”, and “shred all drafts”.

     Subsequently, on July 17, 2000, Thomas Bayer sent an e-mail

to John Boxman and an officer of Solomon Colors, stating that the

purchase price for the customer list should be allocated evenly

between Solomon Colors and Robert Solomon at $550,000 each (not

including imputed interest).   Thomas Bayer explained that

allocating any part of the purchase price for the customer list

to Richard Solomon would undermine Solomon Colors’ position in

the event of an income tax audit.    Mr. Bayer stated:

     Our argument being that this product line is Bob
     Solomon’s and the value for that line is with him. We
     can justify reducing his salary because he has less
     worth to the business without this product line.
     Additionally, he is President of the Company and close
     to retirement so we can say that he is taking out of
                              - 12 -

     the business what he needs, and, his salary when
     combined with the customer list sale was more than he
     needed- so we reduced his salary.

     There is some subjectivity to this, but, we think we
     have come up with a reasonable allocation which will
     allow for tax savings and tax deferral.

                *    *    *    *    *       *   *

     Secondly, also remember that Bob should enter into a
     contractual agreement with the Company whereby if the
     IRS were successful in calling this a dividend, we
     would treat this as a bonus to Bob and then declare
     another bonus to him to allow him to pay the tax on his
     personal return.

     At some point between July 11 and 20, 2000, Robert Walbaum

prepared drafts of a covenant not to compete, a supply agreement,

and a side agreement for the transaction.

8.   Robert Solomon’s Reduction in Salary

     On July 17, 2000, John Boxman prepared a series of schedules

reflecting cashflow data and amortization schedules.   On July 18,

2000, John Boxman forwarded an e-mail to Richard Solomon to which

was attached the following message written by John Boxman to

Charles Bachman:

     The monies that Bob Solomon receives will not affect
     the Company’s financial position because he will forego
     salary during the five year period equaling
     approximately $575,000.

     That means that $175,000 would effectively go outside
     of the Company.

     To summarize, the Company will end up with $1,325,000
     from this Transaction. This money is going to be used
     to open a manufacturing plant in California.
                               - 13 -

     On July 19, 2000, Thomas Bayer represented to Charles

Bachman that Robert Solomon would take a reduction in salary

approximately equivalent to the amount of the sale proceeds

allocated to Robert Solomon.   Thomas Bayer stated that Solomon

Colors would have a more positive cashflow if the proceeds from

the sale were diverted to Robert Solomon.   He further explained

his rationale as follows:

     So under our scenario that we have laid out here, if
     his salary is reduced by $500k over the next 5 years,
     that is 500k of positive cash flow for the Company.
     Alternatively, if we assume that the Company receives
     that $500k for the customer list, they have to pay
     taxes on that entire amount this year (even though they
     will be paid for it on installments) at a combined
     state and federal rate of around 40% - so net of taxes,
     they will have cash flow of $300k. Initially, they
     would have negative cash flow because they have to pay
     taxes on the $500k before they receive the money. So
     the Company actually gets a $200K benefit from doing it
     this way.

On July 20, 2000, Charles Bachman wrote the following handwritten

notes pursuant to a teleconference with John Boxman and other

participants:

     They are doing some creative tax planning by diverting
     some of the proceeds to the shareholders. The [sic]
     project that this will have a positive affect [sic] on
     the financial statements of the Company which will
     increase the value of Solomon Company stock.

The following table shows the annual salary and bonus for Robert

Solomon approved by the board of directors for each of Solomon

Colors’ fiscal years ended in 1996 through 2004:
                                - 14 -

     Fiscal Year         Salary               Bonus         Total

          1996           $71,212            $96,400       $169,608
          1997            76,500            128,485        206,982
          1998            88,000             59,720        149,718
          1999            88,000             77,755        167,754
          2000            88,000             83,500        173,500
          2001           155,000             19,300        176,301
          2002           155,000             16,280        173,282
          2003           155,000             16,500        173,503
          2004           155,000                -0-        155,000

Solomon Colors paid the following wages and nonemployee

compensation to Robert Solomon during the 2000 through 2005

calendar years:6

     Calendar Year      Wages            Nonemployee Compensation

          2000         $238,500                  $1,800
          2001          174,300                   1,800
          2002          171,280                     -0-
          2003          184,989                     -0-
          2004          301,968                     -0-
          2005          310,626                   1,800

9.   Agreement

     On August 4, 2000, the board of directors of Solomon Colors

consented in writing to a sale of the Mather ore business to

Prince for $100,000, payable upon execution of the sale.       That

sale occurred on or about August 7, 2000.      Also on August 7,

2000, Solomon Colors, Prince, and each of the four Solomons

entered into an Agreement for the Purchase and Sale of Covenant


      6
       We note that the annual salary and bonus for Robert
Solomon approved by the board do not appear to coincide with the
amounts paid to Robert Solomon during the 2000 through 2005
calendar years. The record does not permit us to explain the
discrepancy.
                               - 15 -

Not to Compete (agreement).    The terms of the agreement stated

that Solomon Colors and the individual signatories would not

compete with Prince in the Mather ore business and that Solomon

Colors would sell to Prince its natural iron oxide ore customer

list all in exchange for Prince’s payment of $1.4 million.

Paragraph 1, Non-compete Covenant, of the agreement stated:

     On September 15, 2000, Solomon shall deliver to Prince
     Solomon’s list of Mather ore natural iron oxide
     customers with the exception of cementious color
     customers. Solomon shall keep such list confidential
     and not disclose such list to any other person
     throughout the terms [sic] of this Agreement.

Paragraph 2 of the agreement, Consideration for Covenant, stated:

     the consideration shall be allocated between and shall
     be payable to the Solomon Parties in the proportions,
     at the addresses upon the dates and otherwise in
     accordance with the schedules set forth in Exhibit “A”.

Exhibit A, labeled “Prince sale Payment Schedule” (payment

schedule), allocated the $1.4 million purchase price as follows:

                              Covenant Not        Customer
         Payee                 To Compete           List

     Solomon Colors             $150,000          $550,000
     Robert Solomon               25,000           500,000
     Richard Solomon              25,000           140,000
     Donna Solomon                 5,000             -0-
     Gina Solomon                  5,000             -0-
       Total                     210,000         1,190,000

Fifty thousand dollars of the $1.4 million was stated in the

exhibit to be paid upon execution of the agreement (as well as

the $100,000 for the Raymond mill), and the $1.35 million balance

was stated to be payable in quarterly installments over a 5-year
                               - 16 -

period beginning on October 1, 2000, and ending on April 1, 2005.

The quarterly installments equaled $150,000 on each July 1 and

$50,000 on each October 1, January 1, and April 1.    The $1.4

million was stated in the exhibit to be inclusive of interest

calculated at a rate of 9 percent per annum.

      Paragraph 3 of the agreement, titled “Bargained for

Provisions”, stated as follows:    “The parties hereto hereby

expressly acknowledge that the restrictions imposed by this

Agreement have been fully bargained for.”    Paragraph 4 stated

that “The Solomon parties acknowledge that the breach of the

terms of this Agreement by any of the Solomon Parties may render

irreparable harm to Prince.”    The obligations of Prince under the

agreement were guaranteed by its holding company, Philipp

Brothers Chemicals, Inc.

10.   Side Agreement

      Also on August 7, 2000, Prince and Solomon Colors entered

into a side agreement (side agreement) which incorporated the

agreement by reference.    The side agreement identified the

parties as Solomon Colors and each of the four Solomons, but had

signature blocks for only Solomon Colors and Prince and did not

require any action or inaction on the part of any of the four

Solomons.   Robert Solomon signed the side agreement in his

capacity as president of Solomon Colors.    None of the four

Solomons signed the agreement in his or her personal capacity.
                              - 17 -

      The side agreement included material provisions of the

transaction, including:   (1) Purchase and Sale of the Raymond

mill; (2) Transition Period; and (3) Miscellaneous provisions.

Section 2 of the side agreement, titled “Transition Period”,

states:

      During the period between the date hereof and August
      14, 2000, Solomon and Prince shall work together to
      form a plan for smooth transition of production and to
      ensure an adequate supply of inventory is available for
      all Mather markets. On August 14, 2000, Solomon shall
      notify its customers for Mather ore natural iron oxide
      with the exception of cementious color customers that
      it is exiting the business effective September 15,
      2000, and refer such customers to Prince.

11.   Transition between the Businesses

      On August 14, 2000, Robert Solomon, in his capacity as

president of Solomon Colors, sent out letters notifying all

customers of Solomon Colors’ Mather ore business that Prince

would be taking over the milling of hematite iron ore.   Richard

Solomon, at the expense of Solomon Colors, later traveled to

Atlanta, Georgia, to meet with customers concerned about the

transition.   Prince acquired all of Solomon Colors’ former

customers.

12.   Customer List

      A list of Mather ore customers was drafted on the stationery

of Solomon Colors for the purpose of handing the list over to

Prince after the sale of the Mather ore division to Prince.

Before the sale, the names of the Solomon Colors customers were
                               - 18 -

not written on such a list.    The list included the names and

locations of 24 customers.    Some of the listed customers became

affiliated with Solomon Colors after the date of its

incorporation.   Of these customers, some were important in terms

of the volume of the business; in 2000, approximately 40 percent

of the business of Solomon Colors’ Mather ore division was

attributable to these customers.

13.   Income Tax Returns

      Solomon Colors’ Federal income tax return for its taxable

year ended in 2001 reported income of $562,301 from the

installment sale of the Mather ore business.    That income was

inclusive of proceeds for the sale of the Raymond mill and

proceeds attributable to the noncompete agreement.

      RDS’s 2000 Federal income tax return reported $10,147 of

interest income and $44,853 long-term capital gain with respect

to “Customer List/Goodwill”.    RDS also reported $5,000 of

ordinary income that Robert Solomon received for his covenant not

to compete and $1,000 of ordinary income that Donna Solomon

received for her covenant not to compete.

      RGS’s 2000 Federal income tax return reported $2,704 of

interest income and $20,296 long-term capital gain with respect

to “Customer List/Goodwill”.    RGS reported $5,000 of ordinary

income that Richard Solomon received for his covenant not to
                              - 19 -

compete and $1,000 of ordinary income that Gina Solomon received

for her covenant not to compete.

                              OPINION7

     Respondent determined that Solomon Colors distributed

partial interests in its customer list to Robert Solomon and

Richard Solomon simultaneously with its execution of the

agreement and, hence, Robert Solomon and Richard Solomon realized

dividend income to the extent of the distributed property’s fair

market value.8   Under section 301(c)(1), a distribution of

property from a corporation to a shareholder is generally taxed

as a dividend to the extent of the corporation’s current or

accumulated earnings and profits.   As support for this

determination, respondent observes that the agreement lists

Solomon Colors as the seller of the customer list but that Robert

Solomon and Richard Solomon were entitled to receive proceeds in

connection with the sale.



     7
       The Court’s online database of opinions includes all of
the Court’s division and memorandum opinions filed after Sept.
24, 1995. Where our opinion expressed herein includes a citation
to an opinion included in that database, we have provided a
hyperlink to that case.
     8
       Respondent states in brief that petitioners could have
structured the transaction as a sale by Solomon Colors of the
entire customer list and a subsequent distribution to the
shareholders of a portion of the cash proceeds, which would have
been taxable to the shareholders under sec. 301. Respondent does
not further address this hypothetical scenario, and neither do
we.
                              - 20 -

     Petitioners argue that Solomon Colors did not distribute any

interest in its customer list to its shareholders.    Petitioners

assert that a portion of the asset labeled “Customer List” in the

agreement represented the customer relationships and goodwill

belonging personally to Robert Solomon and Richard Solomon and

that it was their portion that was sold directly to Prince by

Robert Solomon and Richard Solomon.    Petitioners assert that

Prince was primarily interested not in the purchase of the

customer list but in purchasing the assurances of Robert Solomon

and Richard Solomon that they would maintain the customer base of

Solomon Colors’ Mather ore division immediately after Prince

acquired the division.   Petitioners assert that Prince already

knew most if not all of the names on Solomon Colors’ customer

list and that the list was therefore of little to no value to

Prince.   Petitioners assert that neither Robert Solomon nor

Richard Solomon ever transferred customer names or personal

goodwill to Solomon Colors.

     We find on the basis of the credible evidence in the record

that Solomon Colors received $550,000 in exchange for the

customer list and $150,000 for the company’s covenant not to

compete with Prince, both as stated in the payment schedule.     We

also find that, contrary to the allocation in the payment

schedule, neither Robert Solomon nor Richard Solomon received

anything for the sale of the customer list but received their
                              - 21 -

total allocated proceeds of $525,000 and $165,000, respectively,

in exchange for their covenants not to compete with Prince.    We

make both of these findings on the basis of the record at hand

and without regard to which party bears the burden of proof.

     We begin our analysis with our review of the agreement and

the side agreement.   First, the agreement references a customer

list owned by Solomon Colors alone.    The agreement states that

Solomon Colors shall deliver its customer list to Prince and that

Solomon Colors shall not disclose the names on the list

throughout the term of the agreement.    The agreement makes no

specific reference to any customer list belonging to Robert

Solomon or Richard Solomon, nor does it preclude any disclosure

of the names on the list by those individuals in their personal

capacities independent of their obligations as officers of

Solomon Colors.   The agreement does state, however, that neither

Solomon Colors nor any of the four Solomons shall compete with

Prince in the Mather ore business.9    Second, the side agreement

states that Solomon Colors and Prince shall work together after

the sale of the Mather ore division to form a plan for the smooth

transition of production and that Solomon Colors shall refer its

customers of the division to Prince.    The side agreement requires


     9
       Neither party asserts that the covenants not to compete
are worthless because they are unenforceable under applicable
State law. We, like the parties, accept that the agreements are
enforceable.
                              - 22 -

nothing of either Robert Solomon or Richard Solomon in their

personal capacities independent of their duties as officers of

Solomon Colors.   We conclude from the agreement and the side

agreement that, contrary to respondent’s determination, neither

Richard Solomon nor Robert Solomon sold any portion of Solomon

Colors’ customer list (or any customer list for that matter) to

Prince as part of the relevant sale and that the proceeds of the

sale allocable to Robert Solomon and Richard Solomon actually

correspond to the only consideration contractually given by each;

i.e., their respective covenants not to compete.   We conclude

similarly that the proceeds of the sale allocable to Solomon

Colors correspond to the consideration contractually given by the

company; i.e., the company’s covenant not to compete and its

customer list.

     We find further support for our conclusions in other key

facts of this case.   After Prince acquired the Mather ore

division from Solomon Colors, Prince was left as the sole

business in the industry.   Prince thus did not need the goodwill

of Solomon Colors or any of its key employees to succeed; in

fact, after the acquisition Prince continued to do business under

its own name, not under the name of Solomon Colors.   See Wilson

Athletic Goods Manufacturing Co. v. Commissioner, 222 F.2d 355

(7th Cir. 1955), revg. T.C. Memo. 1954-163.   After the

acquisition, however, Prince did need the promises of Solomon
                                   - 23 -

Colors and each of the four Solomons that they would not compete

with Prince in the Mather ore industry for a desired period of

time.        Prince was therefore required to compensate those persons

for their promises not to compete with Prince in the Mather ore

industry.        Indeed, it was the representatives of Prince who first

indicated and insisted that Prince would require a noncompete

agreement from Solomon Colors and each of the four Solomons as a

condition to the sale.       The noncompete agreement was

professionally prepared and its provisions, in accordance with

its terms, were fully bargained for.        The agreement acknowledged

that the breach of its terms by any of the four Solomons may

render “irreparable harm” to Prince.        For its part, Prince

assured the performance of its obligations through the guaranty

of its holding company.       Thus, we find that the noncompete

agreement was of substantial value to Prince.

     By contrast, Prince never required that any of the purchase

price be allocated to the customer list; given that Prince was

the sole supplier of Mather ore following the sale and at that

time directly knew the names of all of Solomon Colors’ customers,

the customer list was of little, if any, value to Prince.10        The

mere fact that exhibit A to the agreement states that Robert


        10
       Respondent does not challenge the taxability of the
$550,000 allocated by petitioners as Solomon Colors’ share of the
proceeds from the sale of the customer list. Accordingly,
neither do we.
                               - 24 -

Solomon and Richard Solomon were compensated for their sale of

the customer list does not mean that we have to respect that

statement.11   See Garcia v. Commissioner, 80 T.C. 491, 498 (1983)

(citing Commissioner v. Court Holding Co., 324 U.S. 331 (1945)).

Under the facts herein, we decline to respect that statement

because we conclude it is inaccurate.   Neither Robert Solomon nor

Richard Solomon possessed an interest in the customer list worth

the value which was ascribed to it in the agreement.12

     11
       Prince, for its part, was likely indifferent to the
allocation of the consideration as between the covenant not to
compete and goodwill because sec. 197 would mandate a writeoff of
no faster than 15 years in any event. See Frontier Chevrolet Co.
v. Commissioner, 116 T.C. 289 (2001), affd. 329 F.3d 1131 (9th
Cir. 2003).
     12
       In addition to the foregoing, we note that the initial
draft of the sales agreement, i.e., the draft agreement, was
prepared by the outside counsel for Solomon Colors and made no
mention of a customer list or any covenant not to compete. It
was in reply to the draft agreement that Prince first insisted
that the agreement include the covenants of each of the four
Solomons not to compete with Prince in the relevant industry and
that those covenants be given by each of the four Solomons in an
individual capacity rather than in his or her capacity as an
officer or employee of Solomon Colors. Solomon Colors then
responded that the four Solomons should personally receive some
of the purchase price in exchange for their covenants not to
compete. Shortly thereafter, Thomas Bayer, the independent
accountant of Solomon Colors, hypothesized that Prince was simply
buying Solomon Colors’ “market share” and the guaranties of the
corporation and of each of the four Solomons not to compete with
Prince in the industry underlying that share. Bayer also noted
that Solomon Colors owned a customer list in its own right and
suggested that any “goodwill” related to the sale was that of the
corporation rather than any or all of the four Solomons. Lastly,
when the agreement was finalized, it conformed to Prince’s desire
that Prince purchase the Mather ore division of Solomon Colors
from Solomon Colors and that Prince receive from the corporation
                                                   (continued...)
                               - 25 -

     Petitioners argue as to Robert Solomon and Richard Solomon

that the proceeds allocated to the customer list actually

compensated them for agreeing to maintain Solomon Colors’

customer base following the sale.   We disagree.   This requirement

to maintain the customer base was set forth in the side

agreement, and neither of those individuals signed this agreement

in his personal capacity.13   Moreover, Prince, following the

sale, was the only business operating in the Mather ore industry.

Thus, the former customers of Solomon Colors, most if not all of

whom were known to Prince at the time of the sale, had to become

customers of Prince if they wanted to continue as customers in

that industry.   The credible evidence at hand establishes to our

satisfaction that Prince was not primarily interested in

purchasing the personal assurances of Robert Solomon and Richard

Solomon that they would maintain the customer base of Solomon

Colors’ Mather ore division, as petitioners assert.   The evidence

establishes, and we find as a fact, that Prince was interested in

eliminating Solomon Colors from the relevant industry and




     12
      (...continued)
and each of the four Solomons covenants not to compete with
Prince in the relevant industry. Although the agreement did
refer to a customer list owned by Solomon Colors, that list, as
discussed herein, was of little to no value to Prince.
     13
       The agreement, on the other hand, makes no mention of
“customer relationships”.
                                - 26 -

assuring itself that neither Robert Solomon nor Richard Solomon

could reenter the industry through a different form.

     Petitioners rely on Martin Ice Cream Co. v. Commissioner,

110 T.C. 189 (1998), to support their assertion that Robert

Solomon and Richard Solomon sold their personal goodwill to

Prince as part of the agreement.    There, the founder of

Häagen-Dazs asked Arnold Strassberg (Strassberg) to use his ice

cream marketing expertise and relationships with supermarket

owners and managers to introduce Häagen-Dazs ice cream products

into supermarkets because Häagen-Dazs had made only minimal

inroads into supermarkets with its new range of “super-premium”

ice cream products.   Strassberg was the controlling shareholder

of Martin Ice Cream Co., an ice cream distributing company.     The

founder of Häagen-Dazs ultimately purchased the company’s

intangibles 14 years later, at which time he viewed Strassberg as

“a high-profit, well-respected ice cream distributor * * *[with]

various relationships personal to [him].”    We held that the

goodwill attributable to Strassberg’s business relationships

belonged to Strassberg in his individual capacity and was not an

asset of Martin Ice Cream Co.     We found that the success of the

ice cream distribution venture depended entirely upon Strassberg

and that the company’s value in the market was attributable to

Strassberg’s personal services and relationships.
                               - 27 -

     The Martin Ice Cream case is distinguishable from this case.

First, the record does not persuade us, nor do we find as a fact,

that the value of Solomon Colors in the market was attributable

to the quality of service and customer relationships developed by

Robert Solomon or Richard Solomon.      Rather, the record reflects

our finding that Solomon Colors, as a business of processing,

manufacturing, and sale, rather than one of personal services,

did not depend entirely on the goodwill of its employees for its

success.    See Schilbach v. Commissioner, T.C. Memo. 1991-556; cf.

Longo v. Commissioner, T.C. Memo. 1968-217.     Second, unlike the

founder of Häagen-Dazs in Martin Ice Cream, who signed an

agreement with Strassberg in his personal capacity, Robert

Solomon and Richard Solomon were not named as the sellers of any

asset but were included in the sale in their individual

capacities solely to guarantee that they would not compete with

Prince.    Third, the fact that Prince required noncompete

agreements, but not employment or consulting agreements, of

Robert Solomon and Richard Solomon makes it unlikely that Prince

was purchasing the personal goodwill of these individuals.

     We hold that the $500,000 and $140,000 that petitioners

allocated to Robert Solomon’s and Richard Solomon’s sale of a

customer list is actually attributable to their covenants not to

compete.    All arguments for a contrary holding have been
                               - 28 -

considered, and we reject those arguments not discussed herein as

irrelevant or without merit.   Accordingly,


                                         Decisions will be entered

                                    under Rule 155.
