Major v. Comm'r of Internal Revenue
| Decision Date | 17 February 1981 |
| Docket Number | Docket Nos. 9780-75,9945-75. |
| Citation | 76 T.C. 239 |
| Parties | HUGH MAJOR and CHARLOTTE MAJOR, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENTSPECIALIZED TRANSPORTATION, INC., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Buyer purchased the stock of T from seller. The contract of sale contained a covenant not to compete; however, the entire purchase price was allocated to the T stock and no part was allocated to the covenant. Strong proof doctrine applied. Held, the Seventh Circuit's substance over form analysis, which concentrates on the intention of the parties and economic reality, is not inconsistent with the strong proof standard preferred by this Court. Wilson Athletic G. Mfg. Co. v. Commissioner, 222 F.2d 355 (7th Cir. 1955); G C Services Corp. v. Commissioner, 73 T.C. 406 (1979); Lucas v. Commissioner, 58 T.C. 1022 (1972). Held, further, buyer has failed to carry its burden of showing by strong proof or otherwise that the written agreement did not reflect the intentions of the parties or economic reality. John A. Farrell and J. Thomas Long, for the petitioners in docket No. 9780-75.
Michael N. Newmark and John P. Barrie, for the petitioner in docket No. 9945-75.
William J. Falk, for the respondent.FORRESTER , Judge:
In these consolidated cases respondent has determined deficiencies in petitioners' Federal income taxes as follows:
+-----------------------------------------------------------+
¦Petitioner ¦Year ending ¦Deficiency ¦
+-------------------------------+-------------+-------------¦
¦ ¦ ¦ ¦
+-------------------------------+-------------+-------------¦
¦Hugh Major and Charlotte Major ¦Dec. 31, 1972¦1 $28,803.37¦
+-------------------------------+-------------+-------------¦
¦Specialized Transportation, Inc¦May 31, 1972 ¦6,292.25 ¦
+-------------------------------+-------------+-------------¦
¦ ¦May 31, 1973 ¦30,572.23 ¦
+-----------------------------------------------------------+
Concessions having been made, the only issue remaining for decision is whether any portion of the sale price of all of the corporate stock of Thunderbird Motor Freight Lines, Inc., must be allocated to a covenant not to compete.
Some of the facts have been stipulated and are so found.
Petitioners Hugh Major and Charlotte Major (hereinafter sometimes referred to as the Majors) are husband and wife who, at the time the petition herein was filed, resided in East Alton, Ill. They timely filed their joint Federal income tax return for 1972 with the Internal Revenue Service Center at Kansas City, Mo.
Petitioner Specialized Transportation, Inc. (hereinafter Specialized), is an Illinois corporation with its principal place of business in Madison County, Ill. It timely filed its corporate Federal income tax returns for its taxable years ending May 31, 1972, and May 31, 1973, with the Internal Revenue Service Center at Kansas City, Mo.
Petitioner Hugh Major began a motor transport freight (trucking) business in 1955. In 1961, petitioner Charlotte Major formed Workwell, Inc., for the primary purpose of owning and leasing truck tractors to her husband's business. In 1966, the Majors incorporated Hugh Major's business into Thunderbird Motor Freight Lines, Inc. (hereinafter Thunderbird), an Indiana corporation with its principal place of business, on February 9, 1972, in Crawfordsville, Ind.
In late 1971, Jerry Dean Todd (hereinafter Todd), representing Specialized, contacted William D. Wright (hereinafter Wright), executive vice president of Thunderbird, about the possibility of acquiring Thunderbird from the Majors. Wright arranged a meeting between Todd and Hugh Major which took place in January 1972. At that meeting, Todd offered the Majors $800,000 for all of the stock in Thunderbird, to be paid over a 5-year period. Since Todd was primarily interested only in Thunderbird's operating authority, books, records, and goodwill, it was proposed that prior to a sale of the stock, the Majors would redeem out of Thunderbird all other assets, such as truck trailers. The parties agreed to these primary terms of sale; however, negotiations continued regarding only the fine points to be included in the contract of sale. Both parties were represented by counsel at all subsequent negotiations. One of these items was a covenant not to compete for 5 years, which Todd requested be made a part of the contract. He testified that he would not have paid $800,000 for Thunderbird absent the Majors' covenant not to compete. The Majors agreed to such a covenant without hesitation since neither had any intention of competing in interstate trucking. For this reason, they did not request that any additional money or other concessions be paid in exchange for the covenant. In fact, the $800,000 purchase price agreed to at the initial meeting between Todd and the Majors never varied and was not considered as a subject open for negotiations after that time. There were never any appraisals of Thunderbird or its assets made prior to or during the negotiations leading up to its sale. 2
On February 9, 1972, the parties entered into a contract for the sale of Thunderbird. It provided in pertinent part:
CONTRACT FOR SALE OF CAPITAL STOCK OF THUNDERBIRD MOTOR FREIGHT LINES, INC.
WHEREAS , Sellers are the holders and owners of all the issued and outstanding shares of the common stock of the Corporation, which Corporation holds certain operating authority issued it by the Interstate Commerce Commission in Docket No. MC-125708 and subs thereunder, * * * and
WHEREAS , Sellers wish to sell all of said shares of stock to Buyer and Buyer desires to purchase the same from Sellers, on the terms and conditions hereinafter set forth; and
WHEREAS , both Sellers and Buyer mutually recognize and agree that at the time of the effective date of this contract the only assets of the Corporation are said operating rights, the good will of the Corporation and its corporate books and records, and that no other property or property rights such as, but not limited to, furniture, fixtures, motor vehicle equipment, cash, choses in action or accounts receivable, will at said time be or considered to be an asset of the Corporation; * * * *ss
NOW, THEREFORE , for good and valuable considerations, receipt and sufficiency of which are hereby jointly and severally acknowledged, the parties promise, warrant and agree as follows: *ss 3. The parties mutually agree that the sale price of said shares of stock is Eight Hundred Thousand ($800,000.00) Dollars, * * * *ss
(1) Five Thousand ($5,000.00) Dollars cash shall be paid to Sellers at the time of execution of this agreement * * *
(2) On the effective date, which effective date shall be March 1, 1972, Two Hundred Thirty-five Thousand ($235,000.00) Dollars shall be paid to Sellers and Ten Thousand ($10,000.00) Dollars shall be paid to the Escrow Agent, hereinafter named.
(3) The Five Hundred Fifty Thousand ($550,000.00) Dollar balance of the purchase price shall be paid to the Escrow Agent, hereinafter named, as follows: Commencing forty-five (45) days after the effective date hereof, Buyer shall make fifty-nine (59) consecutive monthly installments in the principal amount of Nine Thousand Two Hundred ($9,200.00) Dollars each, together with interest at the rate of six percent (6%) per annum on the unpaid balance of the purchase price due at the time such installments are paid; and one month next following the last of fifty-nine (59) installments Buyer shall pay the principal amount of Seven Thousand Two Hundred ($7,200.00) Dollars, together with interest at the rate of six percent (6%) per annum on the unpaid balance of the purchase price due at such time. Interest throughout said installments to be computed on the basis of the unpaid principal sum remaining after each principal payment throughout the term of said monthly payments. All such payments shall be made separately as to principal and interest. *ss
8. It is mutually understood and agreed that as of the effective date of this contract the only assets held or possessed by the Corporation are its said Interstate Commerce Commission operating authority, its good will, and its corporate books. *ss
12. It mutually is promised and agreed that, until all payments of the purchase price have been paid in full, the name of Thunderbird Motor Freight Lines, Inc. shall not be changed. Sellers promise Buyer that during the same period of time they will not engage in the business of transportation by motor vehicle in interstate commerce, nor will they finance or help any third person or corporation who would compete, directly or indirectly, with the operations of Thunderbird Motor Freight Lines, Inc. *ss
IN WITNESS WHEREOF , the parties have hereunto set their hands and seals, at the time and place first hereinabove written.
+---------------------------------------+
¦(S) ¦Hugh Major (Seal) ¦
+------+--------------------------------¦
¦ ¦HUGH MAJOR ¦
+------+--------------------------------¦
¦(S) ¦Charlotte Major (Seal) ¦
+------+--------------------------------¦
¦ ¦CHARLOTTE MAJOR ¦
+------+--------------------------------¦
¦ ¦SPECIALIZED TRANSPORTATION, INC.¦...To continue reading
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