                        T.C. Memo. 2006-264



                      UNITED STATES TAX COURT



      R. WILLIAM BECKER AND MARY ANN BECKER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

   BECKER HOLDING CORPORATION AND SUBSIDIARIES, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 13725-02, 6400-03.   Filed December 13, 2006.



     Scott M. Dayan, Stanley H. Eleff, William P. Ewing, Michael

K. Green, and Ellen Wasserstrom, for petitioners in docket No.

13725-02.

     Jerald David August and James P. Dawson, for petitioner in

docket No. 6400-03.

     Andrew M. Tiktin and Sergio Garcia-Pages, for respondent.
                                - 2 -

              MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined a deficiency in

petitioners R. William Becker and Mary Ann Becker’s Federal

income tax of $615,681 for their 1996 taxable year.1    Respondent

determined the following deficiencies in petitioner Becker

Holding Corporation’s Federal income tax:

               Tax Year Ended            Deficiency

               September 30, 1993        $1,566,852
               September 30, 1994            86,973
               September 30, 1995           245,644

After concessions,2 the sole issue for decision is what portion,

if any, of the consideration paid by Becker Holding Corporation

(BHC) to R. William Becker (William Becker) in redemption of

William Becker’s stock in BHC should be allocated to a covenant

not to compete.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.   At the time the petitions

were filed, William and Mary Ann Becker resided in Vero Beach,



     1
         Amounts are rounded to the nearest dollar.
     2
        In a Stipulation of Settled Issues, filed Jan. 9, 2006,
in docket No. 6400-03, petitioner Becker Holding Corporation and
Subsidiaries (BHC) and respondent agreed to various adjustments
to BHC’s Federal income tax liability for the tax years ended
Sept. 30, 1993, 1994, and 1995.
                               - 3 -

Florida, and BHC was a Florida corporation with its principal

place of business located in Ft. Pierce, Florida.

     Richard E. Becker (Mr. Becker) and the Becker family have

been engaged in various aspects of the Florida citrus industry

since at least the 1950s.   On December 28, 1983, BHC was

incorporated by Mr. Becker for purposes of estate planning and

the continuation of the family business.

     Mr. Becker was the father of William Becker, Barbara Hurley,

and Jo Ann Becker.   William Becker was well known in the citrus

industry.   He was appointed by the Governor of Florida to two

consecutive 3-year terms on the Florida Citrus Commission and was

elected chairman of the commission for 5 consecutive years.3

     As of February 22, 1991, Mr. Becker was BHC’s chairman of

the board, William Becker was BHC’s chief operating officer and

ran its day-to-day operations, and Barbara Hurley and Jo Ann

Becker had limited involvement in BHC.   As of February 22, 1991,

BHC’s stock was owned as follows:




     3
        The Florida Citrus Commission consists of 12 members
appointed by the Governor of Florida, meets on a monthly basis,
and oversees and guides the activities of the Department of
Citrus. The Department of Citrus carries out the Florida Citrus
Commission policy and acts as the commission’s staff by
conducting a wide variety of programs involving marketing
research and regulation.
                                 - 4 -



                          Class A         Class B
                           voting        nonvoting
                         preferred       preferred       Nonvoting
    Shareholder             stock          stock       common stock
Richard E. Becker            3              -0-             -0-
Richard E. Becker
  Revocable Trust          860              -0-             -0-
Richard E. Becker
  Living Trust             -0-            4,500             -0-
Lillian M. Becker1
  Living Trust             -0-            3,281             -0-
William Becker2              1              256           1,000
Barbara Hurley             1/2               36             500
Jo Ann Becker              1/2               36             500
  Total                    865            8,109           2,000
     1
         Lillian M. Becker was the wife of Mr. Becker.
     2
        William Becker had only a life estate in his single share
of Class A voting preferred stock.

     Family disputes regarding the management and control of BHC

ultimately resulted in the termination of William Becker’s

employment with BHC on February 22, 1991.    Over the next 3 weeks,

negotiations took place between William Becker, Mr. Becker,

Richard Neill (Mr. Neill) as attorney for BHC, and Daniel Dempsey

(Mr. Dempsey) as BHC’s chief financial officer, for the

redemption of William Becker’s stock in BHC.4     Mr. Neill drafted

an agreement and encouraged William Becker to obtain independent

     4
        Mr. Dempsey acted as an intermediary between Mr. Becker
and William Becker but did not advise anyone as to the terms or
contents of the agreements.
                               - 5 -

legal representation.   On March 14, 1991, William Becker hired an

attorney, Frank J. Reif (Mr. Reif).    Mr. Reif read the agreement

drafted by Mr. Neill, did not suggest any changes, and advised

William Becker to sign the document.

     On March 15, 1991, BHC and William Becker entered into an

agreement (redemption agreement), which stated in part:

     NOW, THEREFORE, in consideration of the mutual promises
     and covenants hereinafter set forth, it is agreed by
     and between R. WILLIAM BECKER as Seller and BECKER
     HOLDING CORPORATION as Buyer as follows:

               1. PRICE: Seller will sell and Buyer will
          purchase Seller’s entire common stock[5] of BECKER
          HOLDING CORPORATION consisting of 1,000 shares of
          $1.00 par at and for a purchase price of Twenty-
          three Million Nine Hundred Fifty-Three Thousand
          Nine Hundred Thirty-four Dollars ($23,953,934.00),
          together with interest at the rate of 10% per
          annum on the unpaid balance, the same to be
          payable: * * *

               2. CLOSING AND TERMS: The closing of this
          transaction shall occur on April 1, 1991, at which
          time Buyer will pay to Seller the down payment of
          $5,000,000 and will execute and deliver a
          promissory note for the balance of the purchase
          price payable as set forth above. The promissory
          note shall be secured by a pledge of the Seller’s
          common stock.

               3. TERMINATION: Seller’s employment with
          Buyer was terminated as of February 22, 1991, and
          Seller’s authority to act on behalf of the
          corporation terminated as of that date. Seller
          shall be entitled to salary accruing to February
          22, 1991. Seller has vacated his personal office
          at Buyer’s headquarters and represents and


     5
        William Becker also owned shares of preferred stock which
were included in the sale. There is no dispute that all BHC
stock he owned, or had a beneficial interest in, was redeemed.
                                   - 6 -

          warrants that he has removed therefrom his
          personal effects only and all files, documents,
          data, and any information whatever pertaining to
          the business of the Buyer will remain the property
          of the Buyer and will remain on the Buyer’s
          premises.

                    *       *      *       *   *   *   *

                6. COMPETITION: The Seller, R. William
          Becker, will be free to engage in any and all
          aspects of the citrus industry, including the
          growing, picking, and packing of citrus fruit,
          except that, for a period of three (3) years from
          closing, Seller shall not directly or indirectly
          engage in the processing or sale of citrus
          concentrate or fresh juices; provided further,
          Seller covenants and agrees that he will not
          solicit the company’s existing customers or in any
          way interfere with the Company’s presently-
          existing business relationships, nor will he
          provide to any person, firm or corporation any
          information concerning the present business of
          BECKER HOLDING CORPORATION that is not public
          knowledge, including without limitation, the terms
          of said Company’s agreement with Coca-Cola Company
          or its subsidiaries, the Company’s customer lists,
          the Company’s marketing strategy, the Company’s
          financial data, or other internal marketing or
          production information of BECKER HOLDING
          CORPORATION. The Seller will not in any way take
          any action that would lead to impairment of the
          Buyer’s currently-existing banking relationships.
          * * *

     At the closing on April 1, 1991, BHC paid William Becker $5

million as a downpayment.       BHC also executed a promissory note

for $18,953,934, payable to William Becker, requiring annual

payments of $5 million per year, including interest, on the first

day of April each year up to and including April 1, 1996.       The

promissory note stated in part that “This note is issued pursuant

to that certain Agreement dated March 15, 1991, by and between
                              - 7 -

[BHC] and [William Becker] with respect to the redemption of the

[William Becker]’s stock by [BHC].”   The promissory note also

contained the following provision:

          The terms and conditions of the Redemption
     Agreement are hereby incorporated into this Note. The
     Maker shall have the right of offset against amounts
     due and the right to defer or suspend payments due
     under this Note based on any breach by the Holder of
     the covenants contained in Section 6 of the Redemption
     Agreement.

     The transaction was further evidenced by a pledge and escrow

agreement which stated in part:

          WHEREAS, BECKER HOLDING CORPORATION, by Agreement
     dated March 15, 1991, has agreed to purchase from R.
     WILLIAM BECKER at and for a purchase price of
     $23,953,934.00 all of the Corporation’s common and
     preferred stock owned by him; and

          WHEREAS, a portion of the purchase price is
     represented by a promissory note, (hereafter “NOTE”)
     and the parties desire to secure payment of the same,

          NOW, THEREFORE, in consideration of the payments,
     covenants and promises set forth in the aforesaid
     Agreement, and other good and valuable consideration,
     it is agreed by and between BECKER HOLDING CORPORATION
     * * * and R. WILLIAM BECKER * * * as follows:

               1. The covenants, promises and agreements
          set forth in the Stock Purchase Agreement of March
          15, 1991, and in particular Paragraphs 6, 7, and 8
          thereof, shall survive the closing and continue
          binding upon the parties.



     As with the redemption agreement, Mr. Neill also drafted
                               - 8 -

the promissory note and the pledge and escrow agreement.6    Mr.

Reif suggested several changes to the promissory note and the

pledge and escrow agreement, but none of the changes were made

and the documents were executed as originally drafted by Mr.

Neill.

     No formal appraisals determining the value of BHC or its

stock were made prior to the signing of the purchase documents.

Mr. Becker and William Becker fixed the price themselves.    There

was no discussion at the time of the sale about allocating any

portion of the consideration to the covenant not to compete.

     In the fall of 1991, William Becker’s accountant, Richard

Lynch (Mr. Lynch), informed William Becker that BHC missed tax

advantage opportunities by not allocating any portion of the

consideration to the covenant not to compete.   Mr. Lynch

suggested that William Becker meet with Mr. Dempsey (BHC’s chief

financial officer) to discuss the possible allocation of a

portion of the purchase price to the covenant not to compete in

exchange for additional consideration or a shorter noncompete

period.   In February 1992, William Becker and Mr. Lynch met with

BHC, Mr. Dempsey, and an accountant for BHC to discuss redrafting

the purchase documents.   However, the discussions terminated, and

no agreement was reached.


     6
        We refer to the redemption agreement, the promissory
note, and the pledge and escrow agreement collectively as the
“purchase documents”.
                                - 9 -

     BHC refused to pay to William Becker the $5 million

installment due April 1, 1992, because of its claim that William

Becker had materially breached the covenant not to compete.    On

March 19, 1992, BHC filed a complaint against William Becker in

the United States District Court for the Southern District of

Florida alleging, among other things, breach of contract.   On

April 13, 1992, William Becker filed a counterclaim for the

accelerated payment of amounts owed to him under the purchase

documents.   On March 7, 1994, the Federal District Court found

the covenant not to compete to be valid but also found that there

was no material breach and held for William Becker on his

counterclaim.   Becker Holding Corp. v. Becker, No. 92-14057-CIV-

JCP (S.D. Fla. 1994).   BHC appealed the decision and, on March

27, 1996, the Court of Appeals for the Eleventh Circuit (Eleventh

Circuit) affirmed the District Court’s judgment in favor of

William Becker, reversing and remanding to adjust the damage

award for prejudgment interest.    Becker Holding Corp. v. Becker,

78 F.3d 514 (11th Cir. 1996).   On May 22, 1996, BHC paid

$27,200,784 to William Becker in satisfaction of the entire

judgment.

     Mr. Lynch prepared William and Mary Ann Becker’s Federal

income tax return for 1991.   Due to the litigation then pending

in the Federal District Court, in which BHC sought to recover the

$5 million paid to William Becker in 1991, William Becker wanted
                              - 10 -

to delay the recognition of income on that payment.     Mr. Lynch

suggested treating the payment as an “option contract”, and thus

delay recognition of income on the payment.   William and Mary Ann

Becker timely filed a Federal income tax return for 1991, did not

report the $5 million payment as taxable income, and attached a

“disclosure statement” explaining Mr. Lynch’s “option contract”

theory.   In 1994, William and Mary Ann Becker were audited,

respondent rejected their treatment of the $5 million payment,

and they paid their Federal income tax deficiency in full.

     On its Federal consolidated corporate income tax return for

the taxable year ended September 30, 1991, BHC claimed an

amortization deduction of $1,061,833 based on a reported basis of

$6,371,000 for the covenant not to compete.   Neither BHC’s tax

return for the taxable year ended September 30, 1991, nor William

and Mary Ann Becker’s tax return for 1991 is at issue in this

case.

     On their Federal income tax return for 1996, William and

Mary Ann Becker treated the payment received from BHC on May 22,

1996, as capital gain attributable to the sale of William

Becker’s stock in BHC.   On June 4, 2002, respondent issued a

notice of deficiency determining a deficiency of $615,681 for

1996.   The deficiency was the result of respondent’s

determination that William Becker must recognize $5,307,600 of

the payment received from BHC as ordinary income attributable to
                               - 11 -

the covenant not to compete.   William and Mary Ann Becker filed a

petition with this Court on August 26, 2002, seeking a

redetermination of the deficiency.

     On its Federal consolidated corporate income tax return for

the taxable year ended September 30, 1996, BHC claimed an

amortization deduction of $5,307,600 attributable to the covenant

not to compete.   As a result of this and other deductions, BHC

generated a net operating loss in 1996 and filed a Form 1139,

Corporation Application for a Tentative Refund, to carry back

that loss to its taxable years ended September 30, 1993,

September 30, 1994, and September 30, 1995.   On January 30, 2003,

respondent issued a notice of deficiency disallowing, inter alia,

BHC’s amortization deduction taken in 1996.   Respondent

determined deficiencies in BHC’s Federal income tax of

$1,566,852, $86,973, and $245,644, respectively, for BHC’s

taxable years ended September 30, 1993, September 30, 1994, and

September 30, 1995.   BHC filed a petition with this Court on

April 29, 2003, seeking a redetermination of the deficiencies.

                               OPINION

     William Becker and BHC have divergent views regarding the

characterization of the transaction under review and its tax

consequences.   William Becker contends that the total

consideration paid under the purchase documents is attributable

to his corporate stock in BHC, a capital asset, resulting in
                              - 12 -

long-term capital gain.   See secs. 1221, 1222, 1223.7   If this

characterization were carried over to BHC’s income tax return,

BHC would have, for the tax years involved, no amortization

deduction because it would not be acquiring an amortizable asset.

     BHC contends that it purchased not only the corporate stock,

but also a covenant not to compete, and that at least $5,307,600

of the consideration paid in 1996 should be allocated to the

covenant, resulting in an amortization deduction for that year.8

If this characterization of the transaction were carried over to

William Becker’s individual income tax return for 1996, he would

have to include the portion of the consideration received

attributable to the covenant not to compete as ordinary income.

See Sonnleitner v. Commissioner, 598 F.2d 464, 466 (5th Cir.

1979), affg. T.C. Memo. 1976-249; Montesi v. Commissioner, 340

F.2d 97, 100 (6th Cir. 1965), affg. 40 T.C. 511 (1963); Jorgl v.

Commissioner, T.C. Memo. 2000-10, affd. per curiam without

published opinion 264 F.3d 1145 (11th Cir. 2001).


     7
          Unless otherwise indicated, all section references are
to the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
     8
        See sec. 1.167(a)-3, Income Tax Regs. Sec. 197,
requiring amortization of a covenant not to compete ratably over
the 15-year period beginning with the month in which the
intangible was acquired is applicable, if an appropriate election
is made, for acquisitions after July 25, 1991. See Omnibus
Budget Reconciliation Act of 1993, Pub. L. 103-66, sec.
13261(g)(2) and (3), 107 Stat. 540, as amended by the Small
Business Job Protection Act of 1996, Pub. L. 104-188, sec.
1703(1), 110 Stat. 1875.
                                - 13 -

     Respondent asserted protective deficiencies against both

William Becker and BHC, alternatively disagreeing with each

party’s characterization of the transaction, in order to avoid

being “whipsawed” by alternative versions of the same

transaction.    After consolidation of the cases for a

determination of the issue, respondent has agreed with the

characterization of the transaction proposed by William Becker,

reserving the right to reverse his position should the Court hold

for BHC.

I.   Relevant Caselaw

     Courts have used a variety of rules to analyze transactions

of the type at issue in this case, including the strong proof

rule, the mutual intent test, and the Danielson rule.     See, e.g.,

Better Beverages, Inc. v. United States, 619 F.2d 424, 430 (5th

Cir. 1980); Commissioner v. Danielson, 378 F.2d 771, 773 (3d Cir.

1967); Ullman v. Commissioner, 264 F.2d 305 (2d Cir. 1959), affg.

29 T.C. 129 (1957).     The instant case would be appealable to the

Court of Appeals for the Eleventh Circuit, barring a stipulation

otherwise.     The Tax Court will generally defer to the rule

adopted by the Court of Appeals for the circuit to which appeal

would normally lie, if that Court of Appeals has ruled with

respect to the identical issue.     See Golsen v. Commissioner, 54

T.C. 742, 756-757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).

The Court of Appeals for the Eleventh Circuit has held that any
                               - 14 -

case decided by Court of Appeals for the Fifth Circuit (Fifth

Circuit) prior to October 1, 1981, will be binding precedent upon

it.    See Bonner v. City of Prichard, 661 F.2d 1206, 1207 (11th

Cir. 1981).    Therefore, we review the caselaw in both the Fifth

Circuit and Eleventh Circuit in making our determinations herein.

       A.   The Strong Proof Rule and the Mutual Intent Test

       When first considering tax allocations in cases involving

covenants not to compete, the Fifth Circuit adopted the “strong

proof” rule set out in Ullman v. Commissioner, supra at 308, to

wit:

       when the parties to a transaction * * * have
       specifically set out the covenants in the contract and
       have there given them an assigned value, strong proof
       must be adduced by them in order to overcome the
       declaration. * * *

See, e.g., Sonnleitner v. Commissioner, 598 F.2d 464, 467 (5th

Cir. 1979), affg. T.C. Memo. 1976-249; Dixie Fin. Co. v.

Commissioner, 474 F.2d 501, 505 (5th Cir. 1973), affg. Stewart v.

Commissioner, T.C. Memo. 1971-114; Balthrope v. Commissioner, 356

F.2d 28, 31 (5th Cir. 1966), affg. T.C. Memo. 1964-31; Barran v.

Commissioner, 334 F.2d 58, 63 (5th Cir. 1964), affg. in part and

revg. in part 39 T.C. 515 (1962).

       However, in 1980, the Fifth Circuit departed from the

“strong proof” rule.    In Better Beverages, Inc. v. United States,

supra at 425, the Fifth Circuit adopted a mutual intent test,

citing Annabelle Candy Co. v. Commissioner, 314 F.2d 1 (9th Cir.
                                 - 15 -

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
                                  - 16 -

     allocated to this important and valuable covenant, that
     intention must be respected. * * *

                      *     *         *   *       *     *    *

     Did the parties, not preliminarily, but when they
     signed the agreement, intend to allocate a portion of
     the purchase price to the covenant not to compete?

Id. at 7-8 (emphasis added).

     In Better Beverages, Inc. v. United States, supra at 425,

Better Beverages purchased the assets of a soft drink business

located in Victoria, Texas.      A letter of intent signed by the

parties fixed a purchase price of $400,000 for all of the assets

of the selling company, except real estate and office equipment.

Id. at 426.    The letter of intent made no mention of a covenant

not to compete and did not allocate, for income tax purposes, the

$400,000 among the various assets.         Id.     Approximately 3 weeks

after the letter of intent was signed, the parties consummated

the transaction by use of a bill of sale whose terms were

consistent with the letter of intent except, inter alia, it

included a covenant not to compete for 10 years.             Id. at 427.

The purchase price remained the same and remained unallocated

among the various assets.       Id.

     Better Beverages thereafter unilaterally allocated $244,547

to the covenant not to compete and amortized that amount on its

tax returns.    Id.   The seller of the soft drink business made no

allocation to the covenant not to compete, treating its gain as

gain from the sale of capital assets.            Id.   The Internal Revenue
                              - 17 -

Service asserted protective deficiencies against both parties.

Id. at 426.

     The Federal District Court granted summary judgment in favor

of the seller of the business treating the gain as gain from the

sale of capital assets and rejected Better Beverages’ unilateral

allocation in the absence of any evidence that both parties

agreed to the allocation.   Id. at 426-427.   The Fifth Circuit

affirmed the District Court, stating:

     our rejection of Better Beverages’ unilateral
     assertions of value as an inadequate indicator of
     actual cost basis is wholly consistent with the trend
     among other courts, in cases like this one, to require
     the buyer to prove that the parties mutually intended
     at the time of the sale that some portion of the lump
     sum consideration be allocated to the seller’s covenant
     not to compete. * * * the most efficacious method
     and, ordinarily, the only truly reliable and
     practicable way for a purchaser to satisfy his burden
     in a case like this one is by proof of the parties’
     specific agreement, expressed or implied, to allocate
     some portion of the lump sum purchase price to the
     covenant * * *. Better Beverages cannot travel this
     smooth road, however. * * * Better Beverages conceded
     not only that no agreement had ever been reached
     regarding allocation of some portion of the price to
     the covenant, but also that such a price or allocation
     apparently never had been discussed by the parties.

     The ultimate inquiry is * * * what, if any, portion of
     the lump sum price actually was exchanged for the
     covenant * * *.

Id. at 430-431 (emphasis added).

     The Eleventh Circuit has never explicitly addressed the

mutual intent test set forth in Annabelle Candy Co. and adopted

by the Fifth Circuit in Better Beverages, Inc.    However, because
                              - 18 -

Better Beverages, Inc. was decided before October 1, 1991, it is

binding precedent in the Eleventh Circuit.    See Bonner v. City of

Prichard, 661 F.2d at 1207.   Additionally, the Tax Court applied

the mutual intent test in Jorgl, which was affirmed by the

Eleventh Circuit in an unpublished per curiam opinion.    See Jorgl

v. Commissioner, T.C. Memo. 2000-10.     In Jorgl, we stated that we

would not apply the strong proof rule or the Danielson rule, see

infra, when a contract failed to make an allocation of purchase

price to a covenant not to compete or did so in an ambiguous

manner.   Jorgl v. Commissioner, supra.    Instead, we stated that

the taxpayer must establish, by a preponderance of evidence, that

respondent’s deficiency determination is erroneous, with the

threshold inquiry being “whether the parties mutually intended

that an allocation of the purchase price be made to the covenant

at issue”, citing Better Beverages Inc. v. United States, supra

at 430.   Id.   If such mutual intent is found,

     courts then proceed to evaluate whether an allocation
     comports with “economic reality”. * * * An allocation
     will generally be given effect where “the covenants had
     independent economic significance such that * * * [the
     Court] might conclude that they were a separately
     bargained-for element of the agreement.”

Jorgl v. Commissioner, supra (quoting Peterson Mach. Tool, Inc.

v. Commissioner, 79 T.C. 72, 81 (1982), affd. 54 AFTR 2d 84-5407,

84-2 USTC par. 9885 (10th Cir. 1984)).
                                  - 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 parties
                              - 20 -

     to the agreement would be admissible to alter that
     construction or to show its unenforceability because of
     mistake, undue influence, fraud, duress, etc.

Id. at 775.

     Prior to October 1, 1991, the Fifth Circuit adopted the

Danielson rule in Spector v. Commissioner, 641 F.2d 376 (5th Cir.

1981), revg. 71 T.C. 1017 (1979).    See Bonner v. City of

Prichard, supra at 1207.   The Eleventh Circuit has also

explicitly adopted the Danielson rule.    Bradley v. United States,

730 F.2d 718, 720 (11th Cir. 1984) (affirming a District Court

holding that payments received were interest income pursuant to a

sale rather than an option to purchase because the contract

called for interest payments); see also Thomas v. Commissioner,

67 Fed. Appx. 582 (11th Cir. 2003) (affirming, inter alia, that

the taxpayers were bound by the allocation to the covenant not to

compete contained in a stock purchase agreement), affg. T.C.

Memo. 2002-108; Plante v. Commissioner, 168 F.3d 1279 (11th Cir.

1999) (affirming that the taxpayer was not entitled to a bad debt

deduction and associated carryover losses because stock purchase

agreement was unambiguous that advances were capital

contributions and not debt), affg. T.C. Memo. 1997-386.

     C.   Positions of the Parties

     William Becker and respondent contend that the Danielson

rule controls.   They argue that, because the purchase documents

unambiguously allocate the entire consideration paid in the
                               - 21 -

transaction to the stock sold, the transaction should result in

capital gain to William Becker with nothing allocable to the

covenant not to compete.

      BHC contends that the Danielson rule does not apply because

the purchase documents are ambiguous as to an allocation of the

consideration between the stock and the covenant not to compete.

BHC argues that the mutual intent test set forth in Better

Beverages controls.   BHC argues that, because the parties

mutually intended to allocate a portion of the consideration to

the covenant not to compete, the Court should make an independent

determination of the economic value of the covenant.

      William Becker and respondent counter that, even if the

Danielson rule does not apply, none of the consideration is

allocable to the covenant not to compete because there was no

mutual intent to make such an allocation.

      Regardless of whether we apply the Danielson rule or the

mutual intent test set forth in Better Beverages, the result is

the same.   For the reasons discussed below, we find that none of

the consideration paid by BHC to William Becker is allocable to

the covenant not to compete.

II.   Analysis Under the Danielson Rule

      Under the Danielson rule, William Becker and BHC will be

bound to the unambiguous allocations in the purchase documents,

absent a showing of mistake, undue influence, fraud, duress, etc.
                             - 22 -

Commissioner v. Danielson, supra at 777-779.   BHC does not argue

that the purchase documents are unenforceable due to mistake,

undue influence, fraud, duress, etc.   Instead, BHC argues that

the Danielson rule does not apply because the purchase documents

are ambiguous as to an allocation of the consideration between

the stock and the covenant not to compete.   Contrary to BHC’s

argument, the purchase documents repeatedly reflect the

unambiguous allocation of the entire $23.9 million of

consideration to William Becker’s stock.

     The Redemption Agreement clearly allocates the entire $23.9

million of consideration to William Becker’s stock, stating:

          1. PRICE: Seller will sell and Buyer will
     purchase Seller’s entire common stock of BECKER HOLDING
     CORPORATION consisting of 1,000 shares of $1.00 par at
     and for a purchase price of Twenty-three Million Nine
     Hundred Fifty-Three Thousand Nine Hundred Thirty-four
     Dollars ($23,953,934.00), together with interest at the
     rate of 10% per annum on the unpaid balance * * *
     [Emphasis added.]

Likewise, the pledge and escrow agreement provides:

     WHEREAS, BECKER HOLDING CORPORATION, by agreement dated
     March 13, 1991, has agreed to purchase from R. WILLIAM
     BECKER at and for a purchase price of $23,953,934.00
     all of the Corporation’s common and preferred stock
     owned by him. [Emphasis added.]

While the promissory note does not explicitly state that 100

percent of the consideration is being paid for William Becker’s

stock, as do the other purchase documents, it does provide that

“This note is issued pursuant to that certain Agreement dated

March 15, 1991, by and between [BHC] and [William Becker] with
                               - 23 -

respect to the redemption of [William Becker]’s stock by [BHC].”

This provision indicates that the promissory note was given for

William Becker’s stock, not for the covenant not to compete.

     In an attempt to overcome the clear language of the purchase

documents, BHC raises several arguments, none of which are

persuasive.   First, BHC argues that “No specific amount was

mutually allocated to the covenant”.    BHC is correct in asserting

that the purchase documents do not explicitly state that zero

dollars are being allocated to the covenant not to compete.

However, the purchase documents repeatedly reflect the express

allocation of the entire $23.9 million of consideration to

William Becker’s stock.    As a matter of simple arithmetic, no

portion of the consideration is left over to allocate to the

covenant not to compete.

     Second, BHC argues that the “in consideration” clauses in

the redemption agreement and in the pledge and escrow agreement

are “determinative of the issue of ambiguity”.    BHC cites

Patterson v. Commissioner, 810 F.2d 562 (6th Cir. 1987), affg.

T.C. Memo. 1985-53, in support of its position.    In Patterson,

the Court of Appeals for the Sixth Circuit (Sixth Circuit)

declined to apply the Danielson rule because the sales agreement

did not contain an unambiguous allocation with respect to the

purchase price.   The Sixth Circuit noted the following language

in the sales agreement:    “As consideration for part of the
                               - 24 -

purchase price

* * * Patterson agrees, simultaneously with the execution of this

Agreement, to enter into a Covenant Not to Compete in the form

attached hereto”.   Id. at 567 (emphasis added).   As the above-

emphasized language indicates, the “in consideration” clause in

Patterson expressly tied the covenant not to compete to part of

the purchase price at issue.   See id.

     In contrast, the purchase documents in this case do not tie

part of the consideration to the covenant not to compete.    The

redemption agreement provides that “in consideration of the

mutual promises and covenants hereinafter set forth, it is agreed

by and between R. WILLIAM BECKER as Seller and BECKER HOLDING

CORPORATION as Buyer as follows”.   This clause does not tie a

portion of the consideration to the covenant not to compete, and

it does not create an ambiguity in the purchase documents.

Instead, it simply indicates that each of the numbered paragraphs

of the redemption agreement is a part of the overall transaction,

including paragraph one setting forth the purchase price and

paragraph six containing the covenant not to compete.   The pledge

and escrow agreement provides that “in consideration of the

payments, covenants and promises set forth in the aforesaid

Agreement * * * it is agreed by and between BECKER HOLDING

CORPORATION * * * and R. WILLIAM BECKER * * * as follows”.    Like

the “in consideration” clause in the redemption agreement, this
                               - 25 -

clause does not tie a portion of the purchase price to the

covenant not to compete, and it does not create an ambiguity in

the purchase documents.

     Third, BHC argues that, because the redemption agreement

fails to mention William Becker’s preferred stock, the purchase

documents are ambiguous.    The redemption agreement refers only to

William Becker’s common stock and not to his preferred stock.

However, it is undisputed that the parties to the transaction

intended the purchase documents to cover all of William Becker’s

stock, not just the common stock, and in fact all of his stock

was redeemed.   Additionally, the pledge and escrow agreement

supports the intention of the parties by referring to both

William Becker’s common stock and his preferred stock.   The

failure of the redemption agreement to include explicitly William

Becker’s preferred stock does not render ambiguous the explicit

allocation of the entire $23.9 million of consideration to his

stock, both common and preferred.

     Finally, BHC argues that the parties’ failure to obtain a

formal valuation of William Becker’s stock evinces ambiguity.

BHC’s argument is without merit.    BHC and William Becker clearly

agreed that BHC would purchase William Becker’s stock for $23.9

million, which indicates that the parties themselves valued the

stock at $23.9 million.    The absence of a third-party appraiser

does not render the purchase documents ambiguous.
                                 - 26 -

     We conclude that the purchase documents unambiguously

allocated 100 percent of the consideration to William Becker’s

stock in BHC.

III. Analysis Under the Mutual Intent Test

     The threshold question under the mutual intent test is

whether, at the time the purchase documents were executed, BHC

and William Becker mutually intended to allocate a portion of the

consideration to the covenant not to compete.9    Better Beverages,

Inc. v. United States, 619 F.2d 424, 429-430 (5th Cir. 1980);

Jorgl v. Commissioner, T.C. Memo. 2000-10.    BHC argues that the

“parties mutually intended to allocate consideration to the

covenant.”    To the contrary,   William Becker, Mr. Neill, and Mr.

Dempsey all testified that, prior to the execution of the

purchase documents, there were no discussions regarding the

allocation of a portion of the consideration to the covenant not

to compete.    Likewise, during his deposition, Mr. Becker

testified that “nor was there ever any discussion about

allocation.    You keep using that word allocation, that was never

a thought in my mind or was never a consideration in the whole


     9
        Because we find that there was no mutual intent to
allocate a portion of the consideration to the covenant not to
compete, as discussed infra, we need not determine whether the
covenant had independent economic significance, was separately
bargained for, or what its economic value was at the time the
purchase documents were executed. See Better Beverages, Inc. v.
United States, 619 F.2d 424, 430-431 (5th Cir. 1980); Jorgl v.
Commissioner, T.C. Memo. 2000-10, affd. per curiam without
published opinion 264 F.3d 1145 (11th Cir. 2001).
                                - 27 -

deal.     It was an afterthought from an accountant’s standpoint.”10

The testimony of those involved with the transaction, coupled

with the purchase documents’ explicit allocation of 100 percent

of the consideration to William Becker’s stock, as described

supra, clearly demonstrates that there was no mutual intent to

allocate a portion of the consideration to the covenant not to

compete.

     Despite the testimony and the clear language of the purchase

documents, BHC raises several arguments to support its contention

that the parties mutually intended to allocate a portion of the

consideration to the covenant not to compete, none of which are

persuasive.     First, BHC argues that the importance of the

covenant to BHC is evidence of the parties’ mutual intent.     The

record is replete with facts establishing the importance of the

covenant not to compete to BHC and William Becker’s knowledge of

its importance to BHC.     However, the importance of the covenant

not to compete does not demonstrate mutual intent to allocate a

portion of the consideration to the covenant.     As stated by the

Court of Appeals for the Ninth Circuit in Annabelle Candy Co. v.

Commissioner, 314 F.2d at 7:

     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


     10
        Pursuant to Rule 81(a), Mr. Becker’s deposition to
perpetuate testimony was taken on Mar. 4 and 5, 2004. Mr. Becker
died on Mar. 29, 2005.
                               - 28 -

       benefit to the petitioner. But if the parties did not
       intend that a purchase price be allocated to this
       important and valuable covenant, that intention must be
       respected. * * *

       Second, BHC argues that the promissory note represented an

economic allocation of a portion of the consideration to the

covenant not to compete.    This is not an accurate interpretation

of the promissory note.    The promissory note contained an offset

provision whereby, if William Becker violated the covenants

contained in the redemption agreement, BHC could offset the

amount owed to William Becker by the actual damages caused to

BHC.    This does not reflect the mutual intent of the parties to

allocate a portion of the consideration paid to the covenant not

to compete.

       Third, BHC argues that the discussions held from the fall of

1991 through February 1992 demonstrate the parties’ mutual

intent.    During those discussions, the parties contemplated

allocating a portion of the consideration to the covenant not to

compete in exchange for additional consideration.    These

discussions took place at least 6 months after the transaction

and do not reflect the mutual intent of the parties at the time

the purchase documents were executed.

       Fourth, BHC argues that the disclosure statement attached to

William Becker’s 1991 Federal income tax return demonstrates the

parties’ mutual intent.    At the suggestion of Mr. Lynch, William

Becker took a position on that return in an attempt to avoid
                                - 29 -

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
                               - 30 -

that the parties mutually intended to allocate a portion of the

purchase price to the covenants.     Peterson Mach. Tool, Inc. v.

Commissioner, supra at 83-84; Jorgl v. Commissioner, supra.

Unlike Peterson and Jorgl, the purchase documents in this case do

not explicitly allocate a portion of the consideration to the

covenant not to compete, but instead explicitly allocate 100

percent of the consideration to William Becker’s stock.       Peterson

and Jorgl do not support BHC’s contention that the parties

mutually intended to allocate a portion of the consideration to

the covenant not to compete.

     In Ansan Tool, the Tax Court utilized a test that is not

applicable in the Eleventh Circuit, stating:     “The Seventh

Circuit, to which an appeal in this case would lie, looks to all

the evidence pertinent to the covenant to determine if it has

independent value and, if it does, to determine how much the

covenant is worth.”    Ansan Tool & Manufacturing Co. v.

Commissioner, supra.    The Tax Court then determined that, because

the covenant not to compete had independent economic value, a

portion of the purchase price was allocable to it.      Id.   Under

the mutual intent test, the question is not whether the covenant

not to compete had independent economic value, but whether “the

parties mutually intended at the time of the sale that some

portion of the lump sum consideration be allocated to the

seller’s covenant not to compete”.      Better Beverages, Inc. v.
                                - 31 -

United States, supra at 430.     Because the Court did not apply the

standard applicable in this case, Ansan Tool has no bearing on

our determination.

      Unlike the cases cited by BHC, we find the facts in this

case to be substantially similar to the facts in Annabelle Candy

Co. v. Commissioner, supra:     (1) The transaction involved a stock

sale and the agreement included a covenant not to compete; (2)

there were no discussions about allocation of the price to the

covenant prior to or at the time the agreement was signed; (3)

the agreement did not allocate any portion of the price to the

covenant; and (4) after the agreement was signed, one party made

a unilateral allocation of a portion of the price to the

covenant.    Annabelle Candy Co. v. Commissioner, 314 F.2d at 2-4.

Similar to the holding in that case and for all of the above-

stated reasons, we find that there was no mutual intent to

allocate a portion of the consideration to the covenant not to

compete.

IV.   Conclusion

      The purchase documents explicitly and unambiguously allocate

the entire $23.9 million of consideration to William Becker’s

stock.     See Commissioner v. Danielson, 378 F.2d 771, 779 (3d Cir.

1967).     At the time the purchase documents were executed, there

was no mutual intent to allocate a portion of the consideration

to the covenant not to compete.    See Better Beverages, Inc. v.
                             - 32 -

United States, supra at 430-431.   Therefore, we conclude that 100

percent of the consideration paid by BHC to William Becker is

allocable to the purchase of William Becker’s stock, and none of

the consideration is allocable to the covenant not to compete.

     In reaching our holdings, we have considered all arguments

and contentions made, and, to the extent not mentioned, we

conclude that they are moot, irrelevant, or without merit.

     To reflect the foregoing and the concessions of the parties

in docket No. 6400-03,

                                          Decision will be

                                    entered for petitioners in

                                    docket No. 13725-02, and

                                    decision will be entered under

                                    Rule 155 in docket No. 6400-

                                    03.
