O'Dell & Co. v. Comm'r of Internal Revenue, Docket No. 6353-72.

CourtUnited States Tax Court
Citation61 T.C. 461
Docket NumberDocket No. 6353-72.
Decision Date16 January 1974


William E. Viney, for the petitioner.

Robert E. Casey, for the respondent.

T. Corp. purchased an insurance agency and brokerage business from the estate of its deceased owner and thereafter, in accordance with a prior agreement, entered into a contract with the decedent's widow by which she covenanted not to compete with petitioner and agreed also to perform consultation services as required. Held, in the circumstances of this case, the covenant not to compete had independent economic significance, and the payments in respect thereof furnished the basis for deductions by T under sec. 167(a)(1), I.R.C. 1954.

The Commissioner determined deficiencies in petitioner's income tax as follows:

                ¦Year  ¦Deficiency   ¦
                ¦      ¦             ¦
                ¦1966  ¦$962.86      ¦
                ¦1967  ¦3,172.55     ¦
                ¦1968  ¦3,094.40     ¦
                ¦1969  ¦3,101.96     ¦

The sole issue for decision is whether the amounts paid by petitioner O'Dell & Co. pursuant to a dual covenant to perform services and not to compete which was executed in connection with the acquisition of an insurance agency and brokerage business, were properly attributable to such covenant thereby entitling petitioner to deductions therefor in the years in issue.


The parties have filed a stipulation of facts which, together with its accompanying exhibits, is incorporated herein by this reference.

Petitioner O'Dell & Co., a California corporation, maintained its principal office in San Marino, Calif., at the time of filing its petition herein. It timely filed Federal corporate income tax returns for the taxable years 1966, 1967, 1968, and 1969 with the district director internal revenue at Los Angeles, Calif.

Petitioner was at all times relevant herein engaged in a general insurance agency and brokerage business. Richard W. O'Dell (O'Dell) was its president, chief executive officer, and major stockholder. O'Dell first entered the insurance agency and brokerage business in the early 1930's; since 1946 he has conducted his own business, initially as an individual and subsequently as president of petitioner.

Until his death in May 1966, Clarence O. Hunt had, for a number of years, owned and operated the Butler-Hunt Agency (Butler-Hunt), also a general insurance and brokerage business. Butler-Hunt, like petitioner, dealt primarily in commercial and industrial insurance, and relied upon a comparatively small number of large clients for the bulk of its business. For the 3 years ending prior to Hunt's death, Butler-Hunt's average gross annual commission was $55,751.80. At the time of Hunt's death the company employed no salesmen and had an office staff of two.

The Estate of Clarence O. Hunt was probated in the Superior Court of the State of California, for the County of Los Angeles. Mildred B. Hunt, the decedent's widow and sole beneficiary under his will, was appointed executrix. Because Mrs. Hunt was not licensed to conduct an insurance agency and brokerage business, she applied for and was issued an estate certificate of convenience by the insurance commissioner of the State of California enabling her as executrix to operate Butler-Hunt during the period prior to probate sale. Subsequent to her husband's death, Mrs. Hunt received several offers from men willing to manage the business in her behalf, but she decided instead to sell the business. Nonetheless she was confident that, had its sale proved unfeasible, she could have continued the business herself. Despite having no working experience in the insurance business, Mrs. Hunt was personally acquainted with the executives of many of her husband's clients, and she believed that after 25 years of marriage to an insurance broker she had learned enough to enable her to pass the State insurance licensing examination without a great deal of additional preparation. Moreover, she knew most of the executives at both of the insurance companies which Butler-Hunt represented, Centennial Insurance Co. and Firemen's Fund Insurance Co., having maintained friendships at Fireman's extending back in some cases to the days when her husband had worked there before their marriage.

In accordance with her decision to sell Butler-hunt, Mrs. Hunt gave public notice of the intended probate sale and requested bids therefor. The official ‘Inventory and Appraisement’ of Clarence Hunt's estate, which was filed with the probate court, placed the value of Butler-Hunt at $25,000 plus $3,107.50 for its furniture and an additional $100 for its sundry assets. No appreciable goodwill was associated with the location of Butler-Hunt's office inasmuch as it handled very little walk-in business. Upon learning of the proposed sale, O'Dell met with Mrs. Hunt in order to express his company's interest in acquiring Butler-Hunt and to obtain a compilation of Butler-Hunt's basic customers and annual income. There was no discussion at that time respecting the form petitioner's bid would take. O'Dell was fully aware in California to act as an insurance agent, broker, or solicitor.

Mrs. Hunt received 11 bids, including petitioner's, for the purchase of Butler-Hunt. The bids offered terms of purchase substantially as follows:

                ¦   ¦Bidder       ¦Terms                                                      ¦
                ¦   ¦             ¦$3,107.50 for furniture plus (a) $60,000 cash, or (b)      ¦
                ¦   ¦Charles, Ryan¦$64,800 payable monthly for 3 years, or (c) $72,000 payable¦
                ¦1. ¦& Rivers     ¦monthly for 6 years, or (d) $25,000 payable yearly for 5   ¦
                ¦   ¦             ¦years plus employment of Mrs. Hunt for 10 years at $600 per¦
                ¦   ¦             ¦month.                                                     ¦
                ¦   ¦Allen, Bailey¦-,107.50 cash plus $50,000 payable yearly for 10 years with¦
                ¦2. ¦& Zweyer     ¦interest at 6 percent.                                     ¦
                ¦   ¦Associates.  ¦                                                           ¦
                ¦   ¦A.T. Barnebey¦$4,000 for furniture plus 40 percent of gross commission   ¦
                ¦3. ¦Agency, Inc  ¦earnings from prior accounts for 5 years payable $10,000   ¦
                ¦   ¦             ¦down plus a minimum of $800 monthly for 5 years.           ¦
                ¦   ¦Bernard      ¦Two times gross annual premium on contingency basis payable¦
                ¦4. ¦Howard       ¦$5,000 down plus 50-percent gross earnings per month for 40¦
                ¦   ¦Insurance    ¦years.                                                     ¦
                ¦   ¦Services.    ¦                                                           ¦
                ¦   ¦             ¦$20,000 for the business, $5,000 for trade name, and $5,750¦
                ¦5. ¦O'Dell & Co  ¦for furniture plus $1,650 monthly for 3 years in           ¦
                ¦   ¦             ¦consideration of a covenant with Mrs. Hunt for her ervices ¦
                ¦   ¦             ¦and not to compete.                                        ¦
                ¦6. ¦Brander & Co ¦$30,000 cash.                                              ¦
                ¦   ¦             ¦50-percent gross commissions from prior accounts for 3     ¦
                ¦   ¦             ¦years payable monthly, such amounts to constitute payment  ¦
                ¦   ¦Bulger,      ¦for all records, etc., of the business as well as for a “No¦
                ¦7. ¦Cameron &    ¦Compete” agreement. Of the aggregate amount, $10,000 was to¦
                ¦   ¦Vander-Velde.¦be considered as payment for “good will.” A total of       ¦
                ¦   ¦             ¦$13,107.50 (consisting of the $10,000 “good will” plus     ¦
                ¦   ¦             ¦$3,107.50 for furniture, etc.) to be payable immediately.  ¦
                ¦   ¦Osterloh &   ¦$1,500 for furniture plus 50 percent of first year         ¦
                ¦8. ¦Durham       ¦commissions from existing clients plus 20 percent for 10   ¦
                ¦   ¦             ¦years.                                                     ¦
                ¦   ¦Lewitt,      ¦$25,500 cash for the entire business plus 50-percent gross ¦
                ¦9. ¦Firestone &  ¦renewal commissions of existing accounts for 3 years less  ¦
                ¦   ¦Wilk         ¦$8,500 per year payable to Mrs. Hunt in consideration for a¦
                ¦   ¦             ¦covenant not to compete.                                   ¦
                ¦   ¦Peter H.     ¦$25,000 for business, $3,107.50 for furniture plus a       ¦
                ¦10.¦Vance Co     ¦percentage of gross commissions for 3 years, subject to    ¦
                ¦   ¦             ¦Mrs. Hunt entering into covenant not to compete.           ¦
                ¦   ¦             ¦(a) $25,000 cash for business, $2,000 for furniture payable¦
                ¦   ¦Charter      ¦$500 monthly, or (b) $12,000 cash for business, $2,000 for ¦
                ¦11.¦Insurance    ¦furniture payable $500 monthly, plus $36,000 payable $1,000¦
                ¦   ¦Agency       ¦monthly to Mrs. Hunt in consideration of consulting        ¦
                ¦   ¦             ¦contract.                                                  ¦

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