                         T.C. Memo. 1997-120



                       UNITED STATES TAX COURT



   PHILLIP M. WELCH AND DOROTHY ELLEN WELCH, Petitioners
      v. COMMISSIONER OF INTERNAL REVENUE, Respondent


       Docket No. 26800-92.            Filed March 10, 1997.


       Joseph Granberry Shannonhouse IV, for petitioners.

       Edith Moates, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION

       WHALEN, Judge:     Respondent determined the following

tax deficiencies, additions, and penalties with respect to

petitioners' joint 1989 income tax and Mr. Welch's separate

1990 income tax:

                               Additions to Tax and Penalties
Year        Deficiency        Sec. 6651(a)(1)     Sec. 6662(a)

1989         $11,196              $3,832             $2,239
1990          13,588               6,407              2,718
                            - 2 -



     All section references are to the Internal Revenue

Code of 1986 as amended and in effect during the years in

issue.   All Rule references are to the Tax Court Rules of

Practice and Procedure.   References to petitioner are to

Phillip M. Welch.

     After concessions, the issues for decision are:

(1) Whether petitioners are entitled to deduct payments

made pursuant to an agreement between petitioner and

Mr. A.C. Rahill, under which Mr. Rahill transferred his

accounting practice to petitioner, on the theory that the

payments represent the amortized cost of a covenant not to

compete or a client list; and (2) whether petitioner is

liable for the accuracy-related penalty determined by

respondent pursuant to section 6662(a).


                      FINDINGS OF FACT

     At the time petitioners filed the instant petition,

they resided in Oklahoma City, Oklahoma.    Petitioners were

husband and wife during 1989 and filed a joint Federal

income tax return for that year.    They separated during

1990, and petitioner filed a separate return for that year.

Petitioners used the cash receipts and disbursements method

of accounting to report income and expenses on both

returns.
                             - 3 -

     Petitioner has practiced accounting since 1974 and has

been licensed as a certified public accountant since 1982.

After graduating from college, petitioner was employed by

Mr. A.C. Rahill, a public accountant, from 1974 through

1981.   From 1982 through 1987, petitioner was employed by

an oil company, and he performed bookkeeping services for

other clients.    In 1987, petitioner entered into the

agreement with Mr. A.C. Rahill that is in issue in this

case, and he began his own accounting practice.    During the

years in issue, he engaged in his own accounting practice.

     Prior to 1987, Mr. A.C. Rahill practiced public

accounting in the Oklahoma City area.    Mr. Rahill’s

clients consisted of individuals and closely held

corporations.    He had been retained by some clients to

provide accounting services for as long as 20 years.

     Shortly before the subject agreement was executed, the

Criminal Investigation Division of the Internal Revenue

Service seized the records of 55 of Mr. Rahill's clients.

In general, the records that were seized included copies of

Federal income tax returns, ledgers and journals, profit

and loss statements, records of inventory, records of

accounts payable and receivable, computer storage media and

printouts, and papers used in the preparation of various

tax returns.    Shortly after Mr. Rahill's death, in October
                               - 4 -

or November of 1987, the Criminal Investigation Division

returned the seized records to petitioner.

     Sometime before Mr. Rahill agreed to transfer his

accounting practice to petitioner, it was discovered that

he had an abdominal aortic aneurysm.        Mr. Rahill disclosed

his condition to petitioner.      The agreement describes

Mr. Rahill's medical condition as follows:


          8. Contingency and Effective Date. Rahill
     has disclosed, and Welch [petitioner] is aware,
     of severe and life threatening health problems
     which are imminent. * * *


     On October 30, 1987, shortly before Mr. Rahill

underwent surgery to correct the aneurysm, his physician,

Scott K. Lucas, M.D., wrote the following letter to

Mr. Rahill's attorney, Dennis Roberts:


     Dear Mr. Roberts:

     This letter is in response to your request regarding
     Mr. A.C. Rahill's condition and prognosis. As you know
     he has been diagnosed with a six centimeter in diameter
     abdominal aortic aneurysm. The aneurysm itself is
     asymptomatic thus far, but it is of such a large size
     that operative repair is indicated to prevent the life
     threatening condition of rupture of the aneurysm. The
     size of the aneurysm makes its presence a life threaten-
     ing condition and elective operation is scheduled for
     later next week. The operation will entail removing the
     aneurysm and replacing a segment of the abdominal aorta
     with a Dacron graft. The risk is approximately in the
     five percent range with approximately one percent risk
     of mortality. Mr. Rahill's risk is somewhat higher than
     normal regarding infection because of the previously
     placed colostomy and his recent infection of the
     epididymis.

     As we discussed, I think that stress is to be avoided
     prior to the operation because of possible elevations in
                               - 5 -
     blood pressure causing leakage or rupture of the aneurysm.
     His recovery time will entail approximately ten days to
     two weeks in the hospital and approximately six weeks
     further recovery at home.

     I hope that this letter answers your questions.

     Please feel free to contact me if you desire further
     information.

     Sincerely,


     Scott K. Lucas, M.D.
     SKL:bp


The surgery described by Dr. Lucas took place several days

later.   Mr. Rahill died during the operation.         Mr. Rahill

was 65 years of age at the time of his death.

     Before September 18, 1987, an accountant who was

working for Mr. Rahill resigned to take a different job.

Mr. Rahill approached petitioner and proposed that they

share office space.     Mr. Rahill suggested that petitioner

continue to practice accounting under his own name but

help manage Mr. Rahill's accounting business.          Petitioner

and Mr. Rahill did not reach agreement on this proposal.

     On September 18, 1987, Mr. Rahill and petitioner

entered into the subject agreement under which petitioner

agreed to assume Mr. Rahill's accounting practice.

Petitioner also agreed to pay 25 percent of the gross

revenues earned from the 206 clients listed on a schedule

attached to the agreement for a 48-month period.            The
                            - 6 -

agreement was drafted by Mr. Rahill's attorney, Mr. Dennis

Roberts.   The agreement provides as follows:


     2. Transfer of Accounts. As of the effective
     date of the Agreement, Welch agrees to assume the
     accounting practice of Rahill. The parties agree
     that this practice is represented by the clients
     contained in the list attached hereto as
     "Schedule A". Welch agrees to pay Rahill one
     hundred percent (100%) of the average annual
     gross revenues earned from the clients set out in
     Schedule A. The average annual gross revenues
     being determined by actual revenues for a forty-
     eight (48) month period, beginning with the
     effective date of the agreement. The amount paid
     under this Agreement will be in consideration for
     Rahill's cooperation and "Covenant Not to
     Compete". Future payments will be 25% of the
     monthly receipts, payable on the tenth of each
     month for a period of four years. The final
     payment will be due on the tenth day of the
     forty-ninth month following the effective date of
     the agreement. This final payment will equal one
     hundred percent (100%) of gross revenues earned,
     whether billed and collected or not, less the sum
     of all payments previously made, during the
     forty-eight (48) month period of this Agreement.
          For the purposes of payments required by
     this Paragraph, the term "Clients" shall also
     include any new business entities or enterprises
     entered into by present clients listed on
     Schedule A, but only if such new business or
     enterprise is owned by fifty-one percent (51%) or
     more, or is controlled by the present clients or
     client’s spouse or children. Also, if any client
     listed on Schedule A ceases to be a client during
     the term of this agreement, and later becomes a
     client again, such client's billing shall be
     included for purposes of computing the payments
     due under this Paragraph.
          Rahill shall transfer all his client files,
     work papers, and other like items necessary for
     an accounting firm to handle its clients, to
     Welch. Such assignment shall not include any
     accounts receivable billed or unbilled, and
     also not included in the assignment are any
     liabilities existing or contingent of Rahill.
                            - 7 -


As provided above, Mr. Rahill was to transfer all of his

client records and work papers to petitioner, and

petitioner assumed no liabilities and received no rights

to any of Mr. Rahill's accounts receivable.

     There is attached to the agreement a list of the 206

clients who made up Mr. Rahill's accounting practice.     The

agreement calls for Mr. Rahill to refrain from soliciting

the business of or otherwise performing services for any

of the listed clients for a period of 4 years, unless

expressly requested by petitioner.   The agreement provides

as follows:

     4. Covenant Not to Compete Rahill agrees that,
     from and after the date of this Agreement for a
     period of four (4) years, he will not (unless
     acting upon a request of Welch), directly or
     indirectly, solicit business from the existing
     clients listed on Schedule A or perform directly
     or indirectly any service for any of the existing
     clients listed on Schedule A of a nature which
     could have been rendered by Welch.


The agreement makes no provision for the abatement or

termination of the payments to Mr. Rahill or his assigns

in the event of Mr. Rahill's death or disability.   The

agreement contains Mr. Rahill's representation and warranty

that the payments received under the agreement are for his

covenant not to compete and that the payments would be

reported for Federal income tax purposes as "ordinary

income."   The agreement states as follows:
                           - 8 -


          Rahill agrees that the payments to be
          received under paragraph (2) of this
          Agreement are payments for his Covenant
          Not to Compete and agrees that he will
          report the payments for the Covenant
          Not to Compete as “ordinary income” for
          the purposes of federal income tax
          reporting.


     The agreement and the rights prescribed thereunder

were expressly made nonassignable by petitioner.     However,

the agreement provided that Mr. Rahill contemplated

assignment of his rights under the agreement and that

petitioner approved of the assignment.     After entering into

the agreement, Mr. Rahill assigned his right to receive the

payments under the agreement to the A.C. Rahill Irrevocable

Family Trust (family trust).   The record does not reveal

the terms of the family trust.     Petitioner made all of his

payments under the agreement to the family trust.

Petitioner prepared the family trust's income tax returns.

     Petitioner paid the following amounts to Mr. Rahill's

family trust under the agreement:


               Tax Year    Amount Paid

                1987             $7,607
                1988             40,680
                1989             39,519
                1990             41,900
                1991             31,519

                  Total        161,225
                            - 9 -

     The agreement requires Mr. Rahill to assist petitioner

in the transfer of the client accounts.    The agreement

provides as follows:


     3. Assistance in Transfer of Accounts Rahill
     does hereby agree to assist Welch [petitioner]
     as reasonably needed subsequent to the effective
     date of this Agreement in order to assure an
     orderly and efficient transfer of accounts to
     Welch. Rahill will use his best efforts to
     facilitate the transfer to prevent loss to Welch.
          In return for the above consideration,
     Rahill will be committed to spend 40 hours
     maximum, to aid in the orderly transfer of
     accounts to Welch. Any time required over and
     above the forty (40) hours per month Welch will
     pay Rahill at a mutually agreed rate per hour.


     The agreement did not require petitioner to retain any

of the persons employed by Mr. Rahill.    At the time of the

agreement, Mr. Rahill employed Ms. Mary Ann Martin and

Ms. Cathy Rahill, who is Mr. Rahill's daughter.    After

entering into the agreement, petitioner hired both of these

persons and two additional employees:    Ms. Janet Ramsey, an

accountant, and Mrs. Dorothy Ellen Welch, petitioner’s wife

at the time, who performed bookkeeping tasks.    It appears

from the record that all of these employees worked for

petitioner during both of the years in issue.

     After the agreement was executed, petitioner leased

Mr. Rahill's office at 2809 Northwest Expressway directly

from the landlord.   After moving, petitioner remodeled
                                - 10 -

Mr. Rahill's former offices and expanded them by

approximately 500 square feet.

     In a separate agreement, petitioner leased all of the

equipment and furniture that Mr. Rahill had used in his

practice, including a large computer, a small computer,

desks, and various and sundry other office equipment.

The lease required petitioner to pay $500 per month to

Mr. Rahill for a term of 4 years.

     At the end of each of the 5 years following the

agreement, the number of listed clients who no longer

retained petitioner, the percentage that that number

represents of 206, and the revenues received from the

remaining clients expressed as a percentage of the gross

receipts realized by Mr. Rahill in the year prior to the

sale, $267,664.20, are as follows:




                                                Revenue from
                                              Remaining Listed
                                                Clients as a
                                                 Percent of
                                               Gross Receipts
             Number of Listed    Percentage      in the Year
 Period        Clients Lost         Lost        Prior to Sale

9/87--8/88        65              31.55            51.9
9/88--8/89        21              10.19            59.6
9/89--8/90        10               4.85            61.4
9/90--8/91         7               3.40            68.0
9/91--8/92         2                .97

                 105              50.96
                           - 11 -

During the years listed above, petitioner did not provide

services to the listed clients that were materially

different from the services Mr. Rahill had provided, and

petitioner did not raise his fees.

     On the Schedule C for petitioner's accounting

business that is attached to petitioners' joint 1989

Federal income tax return, petitioners deducted $39,519

labeled “COVENANT NOT TO COMPETE”.   Similarly, on the

Schedule C for petitioner's accounting practice that is

attached to his separate return for 1990, petitioner

deducted $41,900 labeled “COVENANT NOT TO COMPETE”.

     Respondent issued a notice of deficiency to

petitioners pertaining to their joint 1989 tax return and

issued a notice of deficiency to petitioner for his 1990

tax return.   In each notice, respondent disallowed the

deduction labeled “COVENANT NOT TO COMPETE”.   The notice

of deficiency issued to petitioners for 1989 explains

respondent's determination as follows:



     The $39,519 deducted for amortization of a
     covenant not to compete is not allowed because
     any value of the covenant not to compete,
     included in your contract of purchase with A.C.
     Rahill dated September 18, 1987, is inseparable
     from the total purchase price. Accordingly,
     your 1989 taxable income is increased $39,519.
                           - 12 -

Except for the amount of the deduction, respondent's

explanation in the 1990 notice of deficiency is identical

to that quoted above.

                           OPINION

     Petitioner agreed to "assume" the seller's accounting

practice, which was composed of 206 enumerated clients, and

to pay the seller 25 percent of the monthly receipts from

those clients during a 48-month period.   In a separate

agreement, petitioner leased the seller's office equipment

for a term of 4 years and agreed to pay $500 per month.

Petitioner also took over the seller's office by leasing

it directly from the landlord, and he hired the seller's

employees.

     Petitioners claim to be entitled to deduct the monthly

payments that petitioner made to the seller during 1989 and

1990 in the amounts of $39,519 and $41,900, respectively.

Petitioners claim that the deductions are proper under

section 167(a)(1) on the ground that they represent the

amortized cost either of the seller's covenant not to

compete contained in the agreement or, alternatively, the

amortized cost of the seller's client list.   Petitioners'

preferred theory is that the subject payments were made in

consideration of the covenant not to compete, the useful

life of which is established by the term of the agreement,

48 months.   Petitioners argue in the alternative that the
                            - 13 -

payments are entirely allocable to the seller's client list

and that the client list has a useful life in petitioner's

business of 4 or 5 years.   Petitioners introduced expert

testimony in support of their position that the useful life

of the client list is 4 or 5 years.

     Respondent's position is that the covenant not to

compete lacked economic reality in view of the seller's age

and "imminent, severe and life threatening health problems"

that led to his death "on the operating table within 90

days of the agreement."   As to petitioners' position that

the payments are deductible as the amortized cost of the

seller's client list, respondent introduced the testimony

of an expert witness to establish that no more than 90

percent of petitioner's payments to the seller are

allocable to the client list and that the useful life of

the client list was no less than 15 years.

     Generally, section 167(a) allows as a depreciation

deduction a reasonable allowance for the exhaustion, wear

and tear of property used in a trade or business or held

for the production of income.   Section 1.167(a)-3, Income

Tax Regs., extends the depreciation deduction to intangible

assets which are used in the trade or business for only a

limited period of time, the length of which can be

determined with reasonable accuracy.   The above regulation

states as follows:
                             - 14 -


     Intangibles. If an intangible asset is known from
     experience or other factors to be of use in the
     business or in the production of income for only
     a limited period, the length of which can be
     estimated with reasonable accuracy, such an
     intangible asset may be the subject of a
     depreciation allowance. Examples are patents and
     copyrights. An intangible asset, the useful life
     of which is not limited, is not subject to the
     allowance for depreciation. No allowance will be
     permitted merely because, in the unsupported
     opinion of the taxpayer, the intangible asset has
     a limited useful life. No deduction for
     depreciation is allowable with respect to
     goodwill * * *


Thus, generally, if an intangible asset is shown to have an

ascertainable value and a limited useful life which can be

determined with reasonable accuracy, the depreciation

allowance may be utilized.    The "significant question for

purposes of depreciation is * * * whether the asset is

capable of being valued and whether that value diminishes

over time."   Newark Morning Ledger Co. v. United States,

507 U.S. 546, 566 (1993).    Covenants not to compete and

client lists may constitute amortizable intangible assets.

See id.; Balthrope v. Commissioner, 356 F.2d 28, 31 (5th

Cir. 1966); O'Dell & Co. v. Commissioner, 61 T.C. 461, 466

(1974); Wager v. Commissioner, 52 T.C. 416, 419 (1969);

Levinson v. Commissioner, 45 T.C. 380, 389 (1966).     In

passing, we note that for intangibles acquired after

August 10, 1993, section 197 allows a taxpayer to amortize

the adjusted basis of the intangibles ratably over a 15-
                            - 15 -

year period.   Revenue Reconciliation Act of 1993, Pub. L.

103-66, sec. 13261(a), 107 Stat. 312, 533.


Covenant Not To Compete

     In this case, the seller was 65 years of age at the

time he entered into the subject agreement with petitioner.

He was not only suffering from the abdominal aortic

aneurysm that led to his death, but he also had other

health problems, including a colostomy and an infection of

the epididymis.   The seller's actions are consistent with

the actions of a person who intended to permanently retire

due to age and health problems.      Nothing in the record

suggests otherwise.   In fact, the agreement makes express

reference to the fact that the seller had "severe and life

threatening health problems which are imminent", it fails

to provide that petitioner's payments would cease in the

event of the seller's death or inability to practice

accounting, and it makes reference to the fact that the

seller planned to assign the payments to a family trust.

     Petitioners attempt to minimize the severity of the

seller's health problems.    They argue that the surgery to

correct the seller's aortic aneurysm "was elective and not

mandatory" and they point out that a letter written by the

seller's physician states that the risk of death from the

operation was 1 percent.    However, we are not persuaded by
                           - 16 -

petitioners' argument on this point, and we note that they

did not call the seller's physician as a witness in this

case.

     Petitioners also argue as follows:


     Further, where the tax positions of the parties
     to a contractual transaction are antithetical,
     courts have been loath to look behind the
     contract. Hamlin's Trust v. Comm., 54-1 U.S.T.C.
     ¶9215, 209 F.2d 761 (10th Cir. 1954). This is
     due in no small measure to the fact that the
     presumed tax consequences likely effect (sic) the
     economic bargain between the parties. In Joan C.
     Clesceri v. United States, 79-2 U.S.T.C. ¶9738
     (U.S.D.C. No. Dist. Ill. 1979), an allocation to
     a covenant not to complete (sic) in an agreement
     for the sale of a refuse business was held to be
     binding for tax purposes even when the selling
     party was aware he was terminally ill when the
     contract was entered into.


The cases cited by petitioners are not applicable to this

case.   In both of those cases, the taxpayers, rather than

the Commissioner, sought to vary the terms of an agreement.

In each case, the taxpayer reported the proceeds of the

sale of stock or the sale of business assets as allocable

entirely to the stock or to the assets, contrary to an

agreement with the buyer under which a portion of the

proceeds was allocated to a covenant not to compete.

Hamlin's Trust v. Commissioner, 209 F.2d 761, 762-763

(10th Cir. 1954), affg. 19 T.C. 718 (1953); Clesceri v.

United States, 45 AFTR 2d 80-634, 79-2 USTC par. 9738 (N.D.

Ill. 1979).   In each case, the court held the taxpayer to
                           - 17 -

the agreement on the ground that the taxpayer had failed

to introduce sufficient justification to be relieved of its

terms.   In Hamlin's Trust v. Commissioner, supra at 765,

the court states as follows:


     While acting at arm's length and understandingly,
     the taxpayers agreed without condition or quali-
     fication that the money received should be on the
     basis of $150 per share for the stock and $50 per
     share for the agreement not to compete. Having
     thus agreed, the taxpayers are not at liberty to
     say that such was not the substance and reality
     of the transaction. [Citations omitted.]


In Clesceri v. United States, 45 AFTR 2d 80-634, at 80-638,

79-2 USTC par. 9738, at 88,739, the court stated as

follows:


          In summary, we hold that, where the parties
     to a sales agreement have assigned a value to a
     covenant, strong proof must be adduced for either
     of them to overcome or modify the allocation. We
     further hold that evidence indicating that the
     covenant lacks economic reality is not "strong
     proof" justifying disregarding the parties'
     allocation. * * *


For other cases in which the taxpayers sought to vary

the terms of a contractual allocation, see generally

Commissioner v. Danielson, 378 F.2d 771 (3d Cir. 1967),

vacating 44 T.C. 549 (1965); Ullman v. Commissioner, 264

F.2d 305 (2d Cir. 1959), affg. 29 T.C. 129 (1957).

     Contrary to the implication of petitioners' argument,

neither the Commissioner nor this Court is bound to accept
                              - 18 -

a contractual allocation to a covenant not to compete.

See, e.g., Schulz v. Commissioner, 294 F.2d 52, 56

(9th Cir. 1961), affg. 34 T.C. 235 (1960); Landry v.

Commissioner, 86 T.C. 1284, 1307 (1986).      The economic

reality of a transaction, rather than the form in which

it is cast, governs for Federal income tax purposes.

Hamlin's Trust v. Commissioner, supra at 764; Landry v.

Commissioner, supra.   In order for a contractual allocation

to be upheld, it must be shown to have some independent

basis in fact or some arguable relationship with business

reality such that reasonable men, genuinely concerned with

their economic future, might bargain for such an agreement.

Schulz v. Commissioner, supra.       In this case, respondent

determined that the realities of the transaction are

different from the form in which the seller and petitioner

clothed the transaction.      Id.   Respondent determined that

the payments purportedly for the seller's covenant not to

compete were "inseparable from the total purchase price"

and disallowed the deduction.

     We find that petitioners have not met their burden

of proving that the covenant not to compete had economic

reality.   See Rule 142(a).    In view of the seller's age

and health problems, and the other facts and circumstances

of this case, we are not persuaded that petitioners have

proven that the covenant had any independent basis in fact
                           - 19 -

or arguable relationship with business reality such that

reasonable persons, genuinely concerned with their economic

futures, might bargain for it.   See Schulz v. Commissioner,

supra at 55; O'Dell & Co. v. Commissioner, 61 T.C. 461, 468

(1974); Rich Hill Ins. Agency, Inc. v. Commissioner, 58

T.C. 610, 619 (1972); McKinney v. Commissioner, T.C. Memo.

1978-448.


Client List

     Petitioners' alternative argument is that the entire

amount paid to the seller, $161,225, must be allocated to

the client list acquired under the agreement.   They

further argue that the client list had a useful life in

petitioner's business of 4 or 5 years.   Petitioners

submitted the expert report and testimony of Dr. James

Alexander in support of their argument that the useful

life of the client list was 4 or 5 years.   We note that

Dr. Alexander was not asked to place a value on the client

list.   Rather, petitioners argue that no part of the amount

paid can be allocated to goodwill or the going concern

value of the business with the result that the value of

the client list must equal the amount paid by petitioner.

     Dr. Alexander based his opinion that the useful life

of the client list was 4 to 5 years on the cumulative

effect of four actuarial factors that could be expected to
                           - 20 -

cause a client to leave petitioner for another accountant.

The factors used by Dr. Alexander are:    Death, relocation,

retirement, and client turnover.    Dr. Alexander concluded

that the average death rate was 5.3 percent, the average

relocation or migration rate was 5.4 percent, the average

retirement rate was 7.5 percent, and the average turnover

rate was 5.0 percent.   He concluded that the sum of these

percentages, 23.2 percent, would be the rate at which

petitioner could expect to lose clients from the list,

resulting in a useful life of 4 to 5 years.    We review

Dr. Alexander's computation of each of these factors below.

     Death Rate:   Dr. Alexander grouped 164 of the 206

listed clients into groups in accordance with their life

expectancy.   He determined the life expectancy of the

clients using the actuarial tables in IRS Publication 575.

He used only actuarial rates for males.    He grouped the

clients into 5-year "cohorts"; i.e., clients with a life

expectancy of 0 to 5 years, 5 to 10 years, 10 to 15 years,

15 to 20 years, etc.

     Dr. Alexander divided the number of individuals in

each cohort by the life expectancy of that cohort to arrive

at an expected annual number of deaths for that cohort.

He then added the annual deaths for each cohort to arrive

at an expected annual number of deaths among the listed

clients of 8.512 deaths per year.    Based thereon,
                                   - 21 -

Dr. Alexander concluded that the death rate for the

persons on the client list was 5.32 percent.                 It appears

that Dr. Alexander reached this result by dividing the

expected annual client deaths per year, 8.512, by 160

rather than by 164.         Dr. Alexander's computation is as

follows:



                          Expected Mortality
Cohort      45    40      35      30   25    20     15     10     5      0
  (life expectancy)

Clients       2      11   23      23    9     7     59     21     9      0

Deaths       .04    .26   .61    .71   .33   .31   3.37   1.68   1.2   .00

Annual deaths                                                          8.512

Death rate                                                             5.32


     Relocation Rate:           Dr. Alexander computed a relocation

factor based upon unpublished data from the Internal

Revenue Service entitled "Yearly County to County Migration

Flows" that shows the number of "out migrants" from

Oklahoma County for the 10-year period, 1980 to 1990.                    He

found that the average number of persons leaving Oklahoma

County during that period was 5.35 percent of the average

population.        He rounded this percentage to 5.4 percent.

     One assumption underlying Dr. Alexander's analysis is

that all of the listed clients are located in Oklahoma

County.      We cannot verify that assumption from the record
                             - 22 -

in this case.    Another assumption is that any client who

moves out of Oklahoma County will seek another accountant.

That assumption ignores the fact that the Oklahoma City

metropolitan area spans several counties and that a number

of other counties are in relatively close proximity to

Oklahoma County.     Contrary to Dr. Alexander's assumption,

it is not apparent that a client who moves to a nearby

county or even to another State will necessarily change

accountants.

       Retirement:   Dr. Alexander also considered the effect

of retirement on the useful life of the subject client

list.    He analyzed data provided by petitioner showing the

fees paid by, and the age of, each client.     He noted "a

dramatic drop-off in fee income per client beginning at age

70."    Dr. Alexander concluded that this decrease is due to

"the client's having moved into the retirement phase * * *

and thereby requiring less fee-based accounting services."

His report states as follows:     "Based on our calculations,

we estimate * * * a loss of approximately 7.5 percent in

fee income per year due to retirement."     Dr. Alexander did

not include his calculations in his report.

       We agree with Dr. Alexander that his chart of the

average fee versus age distribution of clients on the

subject list suggests that the fees paid by clients who

are older than 70 years of age are substantially less than
                            - 23 -

those paid by younger clients, especially those between

the ages of 55 and 70.    We might also agree that this

correlation should be taken into account in valuing the

subject list.   However, we are not sure what this

correlation has to do with the useful life of the list.

As suggested by Dr. Alexander, a client who retires still

has a need for an accountant; it is just not as great a

need.   In fact, the chart of average fee versus age

distribution in Dr. Alexander's report shows that fees

were paid by clients in the three oldest age groups, 70

to 75 years, 75 to 80 years, and 80 to 85 years.

     Client Turnover:    Dr. Alexander states that "Despite

an accountant's best efforts to maintain client relation-

ships, and often due to factors completely outside the

accountant-client relationship, a certain number of

clients can be expected to drift away to other firms".

Dr. Alexander considered the effect of this client turnover

on the useful life of the client list.    He based his

analysis on the opinion of Mr. Albert S. Williams in his

manual, "On Your Own! How to Start Your Own CPA Firm".

According to Dr. Alexander, Mr. Williams "writes,

'Typically, the number of terminating clients ranges

between 5 to 10 percent of a given practice' (p. 35)."

Dr. Alexander chose 5 percent as a client turnover rate.

Dr. Alexander did not explain why the use of this annual
                            - 24 -

client turnover factor does not overlap the effect of

death, retirement, and relocation.

     Respondent introduced the expert report and testimony

of Mr. Paul Meade.    In summary, Mr. Meade concluded that

the amount paid by petitioner for the seller's accounting

practice should be allocated as follows:

            Going concern             $16,000
            Goodwill                     --
            Client list               145,225
            Non-compete covenant         --

              Total                   161,225


As depicted above, Mr. Meade concluded that approximately

10 percent of the amount paid by petitioner, $16,000, must

be allocated to going-concern value and the remainder,

$145,225, must be allocated to the client list.    Mr. Meade

also concluded that the useful life of the client list in

petitioner's accounting business is at least 15 years.

     Mr. Meade used an income analysis in order to compute

the useful life of the subject client list in petitioner's

business.    Based upon published industry figures, he

concluded that a business like the seller's accounting

business would realize "operating income" before the

owner's salary in the amount of 40 percent of gross

receipts.    In view of the fact that the subject agreement

calls for petitioner to pay 25 percent of the gross

receipts to the seller for 48 months, Mr. Meade concluded
                           - 25 -

that petitioner would receive 15 percent of the gross

receipts of the business for the first 4 years and 40

percent of the gross receipts thereafter.   He computed the

present value of the amount to be realized by petitioner

using a discount rate of 12 percent.

     Mr. Meade's analysis assumes that petitioner could

expect to lose clients listed on the seller's client list

ratably over the useful life of the client list and further

assumes that petitioner's gross sales would be reduced pro

rata.   For example, if the useful life of the client list

were assumed to be 5 years, then Mr. Meade assumed that

petitioner would lose 20 percent of the clients and suffer

a reduction of gross revenues of 20 percent in the first

year, 40 percent in the second year, 60 percent in the

third year, 80 percent in the fourth year, and 100 percent

in the fifth year.

     Mr. Meade made three computations of the present value

of the net amount to be realized by petitioner.   The

computations assumed that the useful lives of the client

list were 5 years, 10 years, and 15 years, respectively.

An expanded version of Mr. Meade's computations (in which

all columns other than the loss factor and discount factor

are expressed in dollars) is as follows:
                                                            - 26 -

5 Years          Gross Sales Loss Factor                    Operating Income Paid to Seller Net to Buyer Discount        Present Value    Present Value
                 267,000.00   20%          Adjusted Sales       40%                25%             15%         Factor    Paid to Seller   Net to Buyer

  Year     1     267,000.00     0.800       213,600.00        85,440.00         53,400.00       32,040.00     0.892857    47,678.56        28,607.14
           2     267,000.00     0.600       160,200.00        64,080.00         40,050.00       24,030.00     0.797194    31,927.62        19,156.57
           3     267,000.00     0.400       106,800.00        42,720.00         26,700.00       16,020.00     0.711780    19,004.53        11,402.72
           4     267,000.00     0.200       53,400.00         21,360.00         13,350.00       8,010.00      0.635518    8,484.17          5,090.50
           5     267,000.00     0.000          --                --                 --             --         0.567427       --                --

                                           534,000.00        213,600.00        133,500.00      80,100.00                 107,094.88         64,256.93


10 Years         Gross Sales Loss Factor                    Operating Income Paid to Seller Net to Buyer Discount        Present Value     Present Value
                 267,000.00   10%          Adjusted Sales       40%                25%          15% 40%        Factor    Paid to Seller    Net to Buyer

  Year     1     267,000.00     0.900       240,300.00        96,120.00         60,075.00       36,045.00     0.892857    53,638.38         32,183.03
            2    267,000.00     0.800       213,600.00        85,440.00         53,400.00       32,040.00     0.797194    42,570.16         25,542.10
            3    267,000.00     0.700       186,900.00        74,760.00         46,725.00       28,035.00     0.711780    33,257.92         19,954.75
            4    267,000.00     0.600       160,200.00        64,080.00         40,050.00       24,030.00     0.635518    25,452.50         15 271.50
            5    267,000.00     0.500       133,500.00        53,400.00             --          53,400.00     0.567427        --            30,300.60
            6    267,000.00     0.400       106,800.00        42,720.00             --          42,720.00     0.506631        --            21.643.28
            7    267,000.00     0.300        80,100.00        32,040.00             --          32,040.00     0.452349        --            14,493.26
            8    267,000.00     0.200        53,400.00        21,360.00             --          21,360.00     0.403883        --             8,626.94
            9    267,000.00     0.100        26,700.00        10,680.00             --          10,680.00     0.360610        --             3,851.31
           10    267,000.00      --            (--)              --                (--)           (--)        0.321973        --                --

                                           1,201,500.00      480,600.00        200,250.00      280,350.00                154,918.96         171,866.77


15 Years         Gross Sales Loss Factor                    Operating Income Paid to Seller Net to Buyer Discount        Present Value     Present Value
                 267,000.00   6.70%        Adjusted Sales       40%                25%          15% 40%        Factor    Paid to Seller    Net to Buyer

  Year     1    267,000.00      0.933       249,111.00        99,644.40         62,277.75       37,366.65     0.892857    55,605.13         33,363.08
            2    267,000.00     0.866       231,222.00        92,488.80         57,805.50       34,683.30     0.797194    46,082.20         27,649.31
            3    267,000.00     0.799       213,333.00        85,333.20         53,333.25       31,999.95     0.711780    37,961.54         22,776.93
            4    267,000.00     0.732       195,444.00        78,177.60         48,861.00       29,316.60     0.635518    31,052.04         18 631.23
            5    267,000.00     0.665       177,555.00        71,022.00             --          71,022.00     0.567427        --            40,299.79
            6    267,000.00     0.598       159,666.00        63,866.40             --          63,866.40     0.506631        --            32.356.71
            7    267,000.00     0.531       141,777.00        56,710.80             --          56,710.80     0.452349        --            25,653.09
            8    267,000.00     0.464       123,888.00        49,555.20             --          49,555.20     0.403883        --            20,014.51
            9    267,000.00     0.397       105,999.00        42,399.60             --          42,399.60     0.360610        --            15,289.72
           10    267,000.00     0.330       88,110.00         35,244.00             --          35,244.00     0.321973        --            11,347.62
           11    267,000.00     0.263       70,221.00         28,088.40             --          28,088.40     0.287476        --             8,074.74
           12    267,000.00     0.961       52,332.00         20,932.80             --          20,932.80     0.256675        --             5,372.93
           13    267,000.00     0.129       34,443.00         13,777.20             --          13,777.20     0.229174        --             3,157.38
           14    267,000.00     0.062       16,554.00         6,621.60              --          6,621.60      0.204620        --             1,354.91
           15    267,000.00      --             --               --                 --             --         0.182696        --                --

                                           1,859,655.00      743,862.00        222,277.50     521,584.50                 170,700.91         265,341.95


Set out below is a summary of Mr. Meade's three cash-flow

analyses which show, on a present value basis, the total

operating income to be derived from the seller's clients,

the portion of the operating income that would be paid to

the seller, and the net amount to be derived by petitioner:

                  Total Operating Income                         Amount Paid to Seller                          Net to Buyer

 5 years                      $171,351.81                                   $107,094.88                            $64,256.93
10 years                       326,785.73                                    154,918.96                            171,866.77
15 years                       436,042.86                                    170,700.91                            265,341.95
                           - 27 -

     Based upon the above computations, Mr. Meade concludes

that the useful life of the client list in petitioner's

business must be at least 15 years in order to permit

petitioner to realize an amount, $265,341.95, that

approximates the gross sales of the business in 1986, the

year prior to the subject transaction, in the amount of

$267,000.   Mr. Meade described this amount during his

testimony as "the historical economic value of the prac-

tice".   Thus, Mr. Meade equates the gross receipts from the

subject accounting business for 1 year with the "economic

value" of the business to the owner.   It is not evident to

us why a hypothetical buyer would enter into the trans-

action only if the buyer netted approximately $267,000.


Allocation Between Client List and Going Concern

     In UFE, Inc. v. Commissioner, 92 T.C. 1314, 1323

(1989), we described going-concern value as follows:


     Going-concern value is an intangible,
     nonamortizable capital asset that is often
     considered to be part of goodwill. Goodwill
     has been defined as the "expectancy of both
     continuous excess earning capacity and also of
     competitive advantage or continued patronage."
     Wilmot Fleming Engineering Co. v. Commissioner,
     65 T.C. 847, 861 (1976). (Emphasis added.) On
     the other hand, going-concern value has also
     been described as related less to the business
     reputation and the strength of customer loyalty,
     than to the operating relationship of assets
     and personnel inherent in an ongoing business.
     Going-concern value has been defined as "the
                             - 28 -

     additional element of value which attaches to
     property by reason of its existence as an
     integral part of a going concern." VGS Corp. v.
     Commissioner, 68 T.C. 563, 591 (1977); Conestoga
     Transportation Co. v. Commissioner, 17 T.C. 506,
     514 (1951). Going-concern value is manifested in
     the business' ability to resume business activity
     without interruption and to continue generating
     sales after an acquisition. Computing & Software
     Inc. v. Commissioner, 64 T.C. 223, 235 (1975).
     While courts have blurred these distinctions
     between goodwill and going-concern value, they
     are different conceptually. See United States v.
     Cornish, 348 F.2d 175, 184 (9th Cir. 1965);
     Computing & Software Inc. v. Commissioner, supra
     at 234-235; Winn-Dixie Montgomery, Inc. v. United
     States, 444 F.2d 677, 685 (5th Cir. 1971).


See also VGS Corp. v. Commissioner, 68 T.C. 563, 591-592

(1977).

     In this case, the effect of petitioner's agreement

with the seller was that petitioner stepped into the

seller's shoes.   He not only acquired the seller's clients,

but he also took over the seller's office equipment, his

office, and his employees.    While the subject agreement

dealt solely with the seller's clients and did not

expressly concern the seller's office equipment, office,

and employees, the seller made it possible for petitioner

to acquire the seller's ongoing business.    The business

continued uninterrupted.   Thus, in this transaction, we

believe, there was an element of going-concern value.

UFE, Inc. v. Commissioner, supra; VGS Corp. v. Commis-

sioner, supra.    This was particularly important to
                           - 29 -

petitioner, who had worked for the seller for approximately

7 years and had become familiar with the seller's business

during that period.

     Based upon the above, we find that petitioners have

failed to rebut the conclusions of respondent's expert,

Mr. Meade, who allocated approximately 10 percent of the

purchase price to going-concern value and the remainder to

the client list.   Accordingly, we find that, of the amount

that petitioner paid to the seller, $161,225, approximately

10 percent or $16,000 should be allocated to going-concern

value and the remainder, $145,225, should be allocated to

the client list.


Useful Life of the Client List

     We find that petitioner's expert, Dr. Alexander, has

understated the useful life of the subject client list.

Similarly, we find that respondent's expert, Mr. Meade, has

overstated the useful life of the client list.   We may choose

to accept the opinion of one expert in its entirety, Buffalo

Tool & Die Mfg. Co. v. Commissioner, 74 T.C. 441, 452 (1980),

or we may be selective in the use of any portion of such an

opinion, see Parker v. Commissioner, 86 T.C. 547, 562 (1986);

Estate of Bennett v. Commissioner, T.C. Memo. 1989-681, affd.

without published opinion 935 F.2d 1285 (4th Cir. 1991).

Based upon all of the facts and circumstances of this case
                             - 30 -

and taking into account the analyses of both experts, we find

that the useful life of the subject client list in

petitioner's business is 7 years.

Accuracy-Related Penalties

     Respondent determined that petitioners are liable for

the accuracy-related penalty under section 6662(a) for 1989

in the amount of $2,239 and that petitioner is liable for

the penalty for 1990 in the amount of $2,718.    Respondent

determined that the underpayment of tax for both years was

due to negligence or disregard of rules or regulations, a

substantial understatement of income tax, or "a substantial

valuation overstatement."    Petitioners bear the burden of

proving that respondent's determination is wrong and that

they are not liable for the accuracy-related penalty.    Rule

142(a); Bixby v. Commissioner, 58 T.C. 757, 791-792 (1972).

     Petitioners make the following argument that the

penalty should not apply:


          Clearly, Welch relied upon his own
     expertise as well as the expertise of the
     [seller's] attorney, [who was] experienced
     income tax matters [and] who prepared the
     Agreement. (Tr. 26) And, in view of the
     authorities described herein it is clear that
     there is substantial authority for the position
     taken with respect to reporting deductions for
     the amounts paid by Welch under the Agreement
     and therefore [there was] no substantial under-
     statement (Section 6662(d)(2)(B)) and clearly no
     negligence or disregard of rules and regulations.
                           - 31 -

     Generally, if a taxpayer proves good faith and

reasonable reliance upon the advice of a competent and

experienced accountant or attorney in the preparation of

his or her return, the addition to tax for negligence is

inapplicable.   Weis v. Commissioner, 94 T.C. 473, 487

(1990); Conlorez Corp. v. Commissioner, 51 T.C. 467, 475

(1968).   In order to prove such reliance, the taxpayer must

establish that the return preparer was supplied with all

necessary information and the incorrect return was the

result of the preparer's mistakes.    Weis v. Commissioner,

supra.

     In this case, there is no evidence that petitioner

received advice from the seller's attorney concerning the

deductions claimed on the subject returns or anything else.

The fact that the subject agreement was prepared by the

seller's attorney and that he may have been a tax attorney

does not establish that petitioners relied upon any advice

from the seller's attorney in claiming the deductions at

issue in this case.

     Similarly, we reject petitioners' claim that they

relied upon petitioner's expertise.   Petitioners deducted

the subject payments to the seller's assignee on the theory

that the payments were attributable to the seller's

covenant not to compete.   Respondent determined that

petitioners are liable for the penalty on the ground that
                            - 32 -

the covenant not to compete had no basis in reality.     As

described above, we sustained respondent's determination

as a matter of fact.   Petitioners do not explain what

"expertise" petitioner supplied.     Moreover, petitioner

testified that he did not have experience working with

covenants not to compete.   Furthermore, contrary to

petitioners' assertion that there is "substantial

authority" for the subject deductions, there is no

authority of any kind to claim amortization deductions

with respect to a covenant not to compete that lacks

economic reality.

     Based on the foregoing, we sustain respondent's

determinations pertaining to the section 6662 penalty.

     To reflect the foregoing,



                                   Decision will be entered

                            under Rule 155.
