52 T.C. 367">*368 Respondent determined deficiencies in income tax of the petitioners for the year 1960 as follows:

The 1969 U.S. Tax Ct. LEXIS 118">*119 sole issue for decision is whether, under the facts presented herein, a corporation operating a motor hotel may amortize a covenant not to compete which was given by the vendor to the purchasers of all the stock of the corporation and assigned to the corporation with the consent of the vendor.

FINDINGS OF FACT

The stipulation of facts and the exhibits attached thereto are incorporated by reference.

Douglas J. Lemery and Marguerite H. Lemery are husband and wife. They resided in Victoria, British Columbia, Canada, at the time of filing their petition herein. They filed a joint Federal income tax return on the cash basis for the calendar year 1960.

Raymond J. Lemery and Myrtle Lemery resided in Seattle, Wash., at the time of filing their petition herein. They filed a joint Federal income tax return on the cash basis for the calendar year 1960.

The returns of all petitioners herein were filed with the district director of internal revenue at Tacoma, Wash.

Douglas J. Lemery and Raymond J. Lemery are brothers. Douglas is a resident and citizen of Canada. Raymond came into the United States in 1954 and became a naturalized citizen in 1960.

In 1958 Raymond J. Lemery was an officer, director, 1969 U.S. Tax Ct. LEXIS 118">*120 and stockholder of Doric Co., a corporation engaged in the business of owning and managing motor hotels. Douglas J. Lemery and Floyd Clodfelter were also stockholders of Doric.

In March 1958 Raymond, on behalf of Doric, negotiated with Kenneth Kraemer, one of the owners of Palms Motor Hotel, for purchase of the hotel. Negotiations for the purchase of Palms Motor Hotel by Doric were terminated in March 1958.

The Palms Motor Hotel is located at 3801 North Interstate Avenue, Portland, Oreg. It is on or near the principal highway between Portland and Seattle and is about 3 miles from downtown Portland and 7 miles from the northern city limits. It was constructed in 1957 and contains 50 units, a restaurant and a cocktail lounge known as the Bamboo Room. Prior to April 28, 1958, it was owned and operated by Kenneth Kraemer and Harry Herzog, as equal partners. The restaurant was leased for a minimum rental of $ 325 per month. The hotel was subject to two mortgages executed by Kraemer and Herzog to the Benjamin Franklin Federal Savings & Loan Association of 52 T.C. 367">*369 Portland dated April 25, 1957, and September 11, 1957, respectively, to secure notes in the amounts of $ 175,000 and $ 25,000 payable 1969 U.S. Tax Ct. LEXIS 118">*121 in monthly installments of $ 1,477 and $ 211, including interest at 6 percent per month, respectively beginning April 25, 1958.

Thomas E. Mugleston, a Canadian citizen, formed two Oregon corporations on April 22, 1958, known as Palms Motel, Inc., and Palms Lounge, Inc. In July 1958 he formed another corporation, Windsor Laundry, Inc.

On April 28, 1958, Palms Motel, Inc., acquired the Palms Motor Hotel from Kraemer and Herzog for a total purchase price of $ 525,000, payable as follows: $ 85,000 in cash upon execution of the purchase agreement; $ 15,000 by assumption of the sales commission owed by the sellers; $ 200,000 by assumption of the two mortgages to the Benjamin Franklin Savings & Loan Association mentioned above; and a note in the amount of $ 225,000 payable to Kraemer and Herzog in monthly installments of $ 4,351.50, including interest at 6 percent per annum, beginning August 1, 1958, plus $ 2,250 representing interest from April 28 to July 1, 1958, to be paid with the first installment on August 1, 1958.

On the same date, April 28, 1958, Palms Lounge, Inc., acquired from Kraemer and Herzog the name, business, furniture, fixtures, and supplies of the cocktail lounge business 1969 U.S. Tax Ct. LEXIS 118">*122 located in the Palms Motor Hotel, known as the Bamboo Room, for $ 25,000, payable in monthly installments of $ 483.50, including interest at 6 percent per annum, beginning August 1, 1958, plus $ 250 representing interest from April 28 to July 1, 1958, to be paid with the first installment on August 1, 1958.

On August 19, 1958, Palms Motel, Inc., also acquired from the owners, John B. King and Priscilla King, a 35-unit motel situated at 3800 North Interstate Avenue, directly across Interstate Avenue from the Palms Motor Hotel, which became a part of the Palms Motor Hotel. The total purchase price therefor was $ 240,000, payable as follows: $ 10,000 in cash upon execution of the purchase agreement; the assumption of a $ 12,000 real estate agent's commission payable to Western Motel & Investments, Seattle, Wash., in 10 semiannual installments of $ 1,200 each together with interest at the rate of 6 percent per annum, beginning February 1, 1959; the assumption of a $ 95,000 mortgage to be obtained and in fact obtained by the sellers on September 10, 1958, payable to Securities-Intermountain, Inc., in monthly installments of $ 801.80, including interest at 6 percent per annum, beginning 1969 U.S. Tax Ct. LEXIS 118">*123 November 10, 1958; $ 100,000 payable in monthly installments of $ 1,933.30, with interest at 6 percent per annum, commencing October 1, 1958; $ 20,000 payable on or before December 31, 1958; and $ 3,000 payable on or before June 30, 1959.

52 T.C. 367">*370 On August 23, 1958, Raymond J. Lemery, acting for himself, Douglas J. Lemery, and Floyd R. Clodfelter, as equal owners, entered into a contract with Mugleston for the purchase of all the stock of Palms Motel, Inc., Palms Lounge, Inc., and Windsor Laundry, Inc.

The contract provided, in part:

Now Therefore This Agreement Witnesseth as Follows:

1. The Vendor agrees to sell and the Purchaser agrees to buy all of the shares of the Companies, free and clear of all encumbrances, save as hereinafter set forth, at a price of ONE MILLION, ONE HUNDRED and Thirty-One Thousand ($ 1,131,000.00) Dollars, less an amount equal to the total amount of the outstanding balances of the mortgages and contracts on the assets of the Companies as at the date hereof.

2. Upon execution of this agreement, the Purchaser shall pay to the Vendor, the sum of Ten Thousand ($ 10,000.00) Dollars; and on or before the 15th day of December, A.D. 1958, a further sum of Thirty Thousand ($ 1969 U.S. Tax Ct. LEXIS 118">*124 30,000.00) Dollars, shall be paid by the Purchaser, to the Vendor. The balance of the purchase price shall be paid by the payment to the Vendor of all of the net profits of each of the Companies, within Fifteen (15) days, after the end of each 6 months period, during the term of this agreement. "Net Profit" for the purpose of this agreement is defined as follows:

All of the gross income of each of the Companies, less the ordinary and proper expenses of running the business operations thereof, less a management fee of Five (5%) percent of the said gross income of PALMS MOTEL INC., less the Principal and Interest paid by the Companies, on the mortgages and contracts under Paragraph 3 hereof and less the income tax payable by the said Companies, with respect to the said business operations, but there shall be no provision for depreciation of any of the assets of the Company; Provided That there shall be a maximum allowable, as expenses for Palms Motel Inc., of Forty-Five ($ 45,000.00) Dollars [sic] per 6 month period and that the expenses of Palms Lounge Inc., be such that the minimum net of the operation, to be applied on the "Net Profit" is $ 12,500.00 for each 6 months period and the 1969 U.S. Tax Ct. LEXIS 118">*125 Vendor does hereby covenant that the ordinary and proper expenses of running the business operations of Palms Motel Inc., are not presently exceeding the sum of $ 90,000.00 per annum and that Palms Lounge Inc., is presently returning an amount in excess of the sum of $ 25,000.00 per annum. The Vendor further warrants that in computing the "Net Profit" of the Palms Lounge Inc., that no rent is being charged to the operation by Palms Motel Inc. The Vendor further warrants that Palms Motel Inc., is leasing the restaurant at $ 325.00 per month minimum, which sum is being used to compute expected "Net Profit". Provided Further That in the event that there is a basic wage scale increase of any group of employees of the Companies, other than the officers of the Companies, a further amount of up to the sum of $ 2,500.00 but not more, shall be allowed for expenses each 6 months period, if the said increase in wage scale shall cause the wage expense to be increased, and in any event, the increase allowable shall not be greater than the expense added by such wage scale increase. Interest shall be payable on the balance of the monies from time to time owing on the purchase price herein at the 1969 U.S. Tax Ct. LEXIS 118">*126 rate of Six (6%) percent per annum. Each payment shall be applied first to the interest then due, with the balance applied to principal. Purchaser will furnish Vendor, quarterly, within 20 days after the end of each quarter, a detailed financial statement for each of the three corporations whose shares 52 T.C. 367">*371 are involved in this agreement and Vendor may, at his own expense, at any reasonable time, examine and audit the books and records of said corporation in person or though a representative.

3. The Purchaser covenants to cause the Companies to pay all the monthly payments due on the mortgages and contracts referred to in paragraph One (1) hereof. The minimum amount per year that the Companies shall pay, shall be Eighty-Five Thousand ($ 85,000.00) Dollars on the said payments and in the event that the "Net Profit" is not sufficient to cover the payments necessary to keep the mortgages and contracts valid and in good standing, the Vendor agrees to loan the Companies sufficient, at the end of the fiscal year, to pay any excess over the said sum of Eighty-Five Thousand ($ 85,000.00) Dollars per annum. The Purchaser agrees to cause the Companies to repay the said loans with interest at the 1969 U.S. Tax Ct. LEXIS 118">*127 rate of Six (6%) percent per annum immediately after the shares have been fully paid for under the terms of this agreement.

* * * *

12. The Vendor hereby covenants that he will not for a period of Five (5) years after the date hereof, carry on or engage or be interested, directly or indirectly in any other business competing or interfering with the business of the Companies or any of them, nor shall he suffer, connive, permit or allow his name to be used in connection with any such business within Ten (10) miles of any of the City Limits of the City of Portland in the State of Oregon, in the United States of America. The Vendor further agrees that Two Hundred Thousand ($ 200,000.00) Dollars of the purchase price of the shares being sold herein, shall apply to this covenant.

13. The Purchaser covenants and agrees to carry on the business of the Companies and each of them in a proper businesslike and legal manner, so as not to imperil any of the licenses or the goodwill of the Companies or any of them.

Mugleston's address for purposes of any notice to be given the vendor is shown in the contract as "T. E. Mugleston, 12620-118 Avenue, Edmonton, Alberta, Canada."

The stock of the three corporations 1969 U.S. Tax Ct. LEXIS 118">*128 was placed in escrow in Mugleston's name until such time as the stock was paid for in accordance with the contract.

The following is a schedule of the mortgages and obligations, the outstanding balances thereof as of September 1, 1958, and the monthly payments thereon, assumed by the purchasers of the stock of Palms Motel, Inc., and Palms Lounge, Inc., and to be considered in determining "net profit" under paragraph 2 of the purchase agreement dated August 23, 1958:

52 T.C. 367">*372 On September 10, 1958, Raymond assigned a "covenant not to compete" 1969 U.S. Tax Ct. LEXIS 118">*129 to Palms Motel, Inc., in "consideration" of the corporation assuming and agreeing to pay Mugleston the sum of $ 200,000 in accordance with the terms of the contract of August 23, 1958. Mugleston consented to the assignment and Palms Motel, Inc., accepted it and agreed to make the payment.

Palms Motel, Inc., filed a corporation income tax return for the fiscal year ended March 31, 1959, wherein it reported total income of $ 167,542.26, deductions of $ 223,143.07, and loss of $ 55,600.75. The deductions included $ 28,886.22 for amortization of agreement not to compete.

Palms Motel, Inc., and its shareholders filed an election on April 24, 1959, to have the income or loss of the corporation taxed to its individual shareholders as a subchapter S corporation under section 1372(a) of the Internal Revenue Code of 1954. The corporation filed small business corporation returns, Form 1120-S, for the fiscal years ended March 31, 1960, 1961, 1962, and 1963, wherein it reported total income, deductions, and losses, as follows:

The 1969 U.S. Tax Ct. LEXIS 118">*130 deductions in each of said years included $ 40,000 for amortization of agreement not to compete. The returns for the fiscal year ended in 1960 allocated the loss for that year to the shareholders as follows: $ 12,969.74 to F. R. Clodfelter (667 shares); $ 12,950.29 to R. J. Lemery (666 shares); and $ 12,969.74 to D. J. Lemery (667 shares).

The petitioners on their returns for 1960 claimed deductions for their respective shares of the loss reported by Palms Motel, Inc., for its fiscal year ended in 1960.

The buyers made the initial payment of $ 10,000 and the further payment of $ 30,000 as called for in the contract of August 23, 1958. Palms Motel, Inc., made no payments to Mugleston during the fiscal year ended March 31, 1960, on the balance of the purchase price. In 1958-60 the stockholders loaned more than $ 100,000 to Palms Motel, Inc.

The Doric Co. managed the Palms Motor Hotel for a fee of 5 percent of gross revenue.

In or about August 1963, two foreclosure proceedings were instituted in the Oregon Circuit Court for Multnomah County -- one by John B. 52 T.C. 367">*373 and Priscilla King against Palms Motel, Inc., Palms Lounge, Inc., and Thomas E. Mugleston, and the other by Harry A. and Bertha Herzog 1969 U.S. Tax Ct. LEXIS 118">*131 and Kenneth and Esther N. Kraemer against Palms Motel, Inc., for failure of the defendants to make the payments due on the mortgages and the obligations owing to the respective plaintiffs from whom the various properties comprising the Palms Motor Hotel were purchased. Receivers were appointed in both proceedings. Subsequently, pursuant to a Judgment, Order and Decree of the Circuit Court, the property referred to as 3800 North Interstate Avenue (the 35-unit motel) was sold by the sheriff of Multnomah County, subject to the outstanding mortgage, to John B. and Priscilla King and said sale was confirmed by the Circuit Court on November 21, 1963.

In the Herzog and Kraemer proceeding, an interlocutory decree of foreclosure was entered by the court on August 7, 1963, and a final decree of foreclosure was entered on February 14, 1964, declaring the plaintiffs to be the owners and entitled to the immediate possession of the property described in the complaint. ¹

Neither the "covenant not to compete," which is set 1969 U.S. Tax Ct. LEXIS 118">*132 forth in the stock purchase agreement dated August 23, 1958, nor the amount allocated thereto was separately bargained for or had any basis in fact or arguable relationship with business reality.

OPINION

Section 1374 of subchapter S of the Internal Revenue Code of 1954 provides that a shareholder of an electing small business corporation shall be allowed a deduction from gross income for his taxable year in which the taxable year of the corporation ends, in an amount equal to his portion of the corporation's net operating loss.

The petitioners, Raymond and Douglas Lemery, as shareholders of Palms Motel, Inc., an electing small business corporation engaged in the business of operating a motor hotel, each claimed a deduction on his return for the taxable year 1960, for his respective share of the net operating loss reported by Palms Motel, Inc., for its fiscal year ended March 31, 1960. The respondent determined that the deduction claimed by the corporation for amortization of a covenant not to compete was not allowable and increased the taxable income of each of the petitioners by the share of the disallowed amortization deduction 52 T.C. 367">*374 allocated to him. In the statement attached to the 1969 U.S. Tax Ct. LEXIS 118">*133 notice of deficiency, the adjustment was explained as follows:

It is determined that the claimed deduction in the amount of $ 40,000 for amortization of a covenant not to compete is disallowed because you failed to establish --

(A) That any value attaches to the covenant

(B) The fact of liability

(C) That it is an ordinary and necessary expense, reasonable in amount.

The only question to be determined is whether a covenant not to compete which was given by the vendor to the purchasers of all the stock of Palms Motel, Inc., and two other corporations and assigned by the purchasers to Palms Motel, Inc., was amortizable.

On August 23, 1958, Raymond J. Lemery, acting for himself, Douglas J. Lemery, and Floyd R. Clodfelter, acquired from Thomas E. Mugleston, a citizen and resident of Canada, all the outstanding stock of three Oregon corporations known as Palms Motel, Inc., Palms Lounge, Inc., and Windsor Laundry, Inc. The total purchase price for the stock of all three corporations was $ 1,131,000, of which the purchaser paid $ 40,000 in cash ($ 10,000 on execution of the purchase agreement and $ 30,000 on December 15, 1958) and assumed certain mortgages and other obligations owed by Palms 1969 U.S. Tax Ct. LEXIS 118">*134 Motel, Inc., and Palms Lounge, Inc., the outstanding balances of which aggregated $ 646,664.83, payable in monthly installments, including interest, aggregating $ 9,458.10. The balance of the purchase price amounting to $ 444,335.17 was to be paid by the purchaser from the "net profit" of the three corporations computed at the end of each 6-month period. "Net Profit" was defined to mean all of the gross income of the companies, less ordinary and proper expenses, a management fee, principal and interest on the mortgages and other obligations of the corporations, and income taxes payable by the companies, but without provision for depreciation of the assets.

The stock purchase agreement contained a covenant that, for a period of 5 years, the vendor would not compete with the business of any of the companies within 10 miles of the city limits of Portland and provided that $ 200,000 of the purchase price of the shares being sold should apply to this covenant. On September 10, 1958, Raymond assigned the "covenant not to compete" to Palms Motel, Inc., in consideration of the corporation assuming and agreeing to pay Mugleston the sum of $ 200,000 in accordance with the terms of the contract 1969 U.S. Tax Ct. LEXIS 118">*135 of August 23, 1958.

A covenant not to compete with the buyer of a business usually presents conflicting interests, taxwise, as between buyer and seller, in negotiating the price. The vendor, who is selling a capital asset, usually prefers a low price as the amount so allocated is taxable to him as ordinary income rather than capital gain. The buyer prefers to allocate 52 T.C. 367">*375 a high price to the covenant as a basis for amortization deductions. Balthrope v. Commissioner, 356 F.2d 28 (C.A. 5, 1966), affirming a Memorandum Opinion of this Court.

The courts may look beyond the form of the contract to see whether the apparent agreement has substance. Annabelle Candy Co. v. Commissioner, 314 F.2d 1 (C.A. 9, 1962), affirming a Memorandum Opinion of this Court; United Finance & Thrift Corporation of Tulsa, 31 T.C. 278">31 T.C. 278 (1958), affd. 282 F.2d 919">282 F.2d 919 (C.A. 4, 1960); Schulz v. Commissioner, 294 F.2d 52 (C.A. 9, 1961), affirming 34 T.C. 235">34 T.C. 235 (1960).

In the Schulz case, the buyers and the seller were petitioners with opposing interests. The buyers were aware that the seller had no intention of competing. The Tax Court found that the covenant asked for by the buying partners from the selling member of 1969 U.S. Tax Ct. LEXIS 118">*136 a partnership was not, in the circumstances there present, important, meaningful, or valuable, and represented capital gain to the selling partner and unamortizable, nondeductible, capital expenditures to the buyers. In affirming, the United States Court of Appeals commented "We think that the covenant must 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." 294 F. 2d at 55.

Respondent's principal contention is that the "covenant not to compete" is not amortizable for the reason that it did not result from true arm's-length bargaining between the buyer and the seller and that it lacked any independent basis or arguable relationship with business reality which would cause either the buyer or the seller to bargain for it, since the seller maintained a direct financial interest in the business during the life of the covenant. Petitioners contend that the inclusion of the amount in the stock purchase agreement was negotiated for between the buyer and seller, and that the possibility of competition from Mugleston was real.

Before considering whether 1969 U.S. Tax Ct. LEXIS 118">*137 the covenant not to compete was actually bargained for or bore any arguable relationship with business reality, it should be pointed out that, although a factor to be considered, the fact that the contract assigned a specific amount as the value of the covenant is not controlling. In Wilson Athletic Goods Mfg. Co. v. Commissioner, 222 F.2d 355 (C.A. 7, 1955), reversing a Memorandum Opinion of this Court on other grounds, the U.S. Court of Appeals for the Seventh Circuit stated:

But in tax matters we are not bound by the strict terms of the agreement; we must examine the circumstances to determine the actualities and may sustain or disregard the effect of a written provision, or of an omission of a provision, if to do so best serves the purposes of the tax statute. Higgins v. Smith, 308 U.S. 473">308 U.S. 473 * * *

52 T.C. 367">*376 The Court further stated: "Consequently, it is immaterial whether the contract did or did not define a specified amount as the value of the covenant." ² In addition, any significance that might have attached to the statement of the value of the covenant in the contract was considerably weakened, if not eliminated in the present case, by reason of the fact that no allocation was made 1969 U.S. Tax Ct. LEXIS 118">*138 of either the $ 1,131,000 purchase price or the $ 200,000 assigned to the covenant, as between the three companies whose stock was being purchased.

The only evidence relating to negotiations for the covenant not to compete is the uncorroborated testimony of Raymond Lemery that it was actually negotiated for. His explanation of why the covenant was included in the stock purchase agreement does not support his statement. He testified he had previously sold a chain saw business in Canada in connection with which the buyer had required a covenant not to compete and he thought this was a good thing and "demanded" such a covenant in the stock purchase agreement. He was unable to recall any remarks made by Mugleston concerning this "demand". Neither Mugleston nor Floyd Clodfelter, who accompanied Raymond on his visit with Mugleston, was called as a witness by petitioners although they had sought and been granted a continuance from an earlier trial setting on the ground that Mugleston's testimony was of major importance and he was not available at that time. Their failure to 1969 U.S. Tax Ct. LEXIS 118">*139 obtain Mugleston's testimony raises the inference that his testimony would not have supported petitioners' contentions. O. H. Kruse Grain & Milling v. Commissioner, 279 F.2d 123 (C.A. 9, 1960), affirming a Memorandum Opinion of this Court. Moreover, since Mugleston had held the stock of the three companies for less than 6 months, it was immaterial to him, taxwise, whether his profit from the sale be considered as consideration for a covenant not to compete or short-term capital gain. Thus, there was absent any genuine concern for tax consequences which would have caused him to "bargain" for the amount ascribed to the covenant not to compete. Raymond's testimony as to how the stated purchase price of $ 1,131,000 and the $ 200,000 assigned to the covenant were arrived at was so uncertain and inconclusive as to suggest that the $ 200,000 figure was in fact "carved out" after the total purchase price had been agreed upon. See George H. Payne, 22 T.C. 526">22 T.C. 526 (1954). Cf. Howard Construction, Inc., 43 T.C. 343">43 T.C. 343 (1964).

We find and hold that neither the "covenant not to compete," which is set forth in the stock purchase agreement dated August 23, 1958, nor the amount allocated thereto was 1969 U.S. Tax Ct. LEXIS 118">*140 separately bargained for.

It is also evident that the covenant not to compete had no basis in fact or arguable relationship with business reality. Of the total purchase 52 T.C. 367">*377 price of $ 1,131,000, petitioners paid only $ 40,000 in cash and assumed the payment of certain mortgages and other obligations, the outstanding balances of which aggregated $ 646,664.83, payable in monthly installments aggregating $ 9,458.10. The balance of the purchase price amounting to $ 444,335.17 was to be paid to Mugleston from the "net profit" of the companies, after payment of expenses, a management fee, principal and interest on the mortgages and other obligations, and income taxes of the companies. Raymond estimated it would be about 5 years before any substantial payments could be made to Mugleston on the balance of the purchase price owing to him. Also, in paragraph 3 of the contract, Mugleston agreed to loan money to the companies if needed to keep the mortgages and other obligations in good standing and if the earnings were not sufficient to carry them. Since the recovery of the remainder of his investment and the realization of any of his profit on the sale of his stock depended upon the earnings 1969 U.S. Tax Ct. LEXIS 118">*141 of the motel, cocktail lounge, and laundry, it obviously would not have been to his advantage for Mugleston to have competed with the businesses of the companies in any way which might have reduced their profits until he had received full payment of the $ 444,335.17 owed to him.

Not only was there no basis in fact for the covenant or arguable relationship with business reality, but there is no competent evidence that Mugleston had any intention of competing. He was a citizen and resident of Canada and apparently owned no other business in Oregon. The covenant not to compete was clearly without value. For the same reasons discussed above, payment of the amount assigned to it was not a "necessary" expense.

Respondent also contends that the covenant had no basis to amortize for the reason that payment of the $ 444,335.17 to Mugleston depended upon the companies having a "net profit" after payment of expenses and the other indebtednesses; that other than the initial cash payments of $ 40,000, no further payments were shown to have been made to Mugleston; that the companies never did in fact show a "net profit"; and, in view of the foreclosure proceedings in 1963 which resulted in the 1969 U.S. Tax Ct. LEXIS 118">*142 reacquisition of the respective motel properties by Herzog and Kraemer and by the Kings, that there is no possibility of any further payments to Mugleston. It is respondent's position that the obligation was contingent and indefinite and, therefore, not part of the cost basis for amortization purposes, citing Inter-City Television Film Corp., 43 T.C. 270">43 T.C. 270, 43 T.C. 270">287 (1964); Albany Car Wheel Co., 40 T.C. 831">40 T.C. 831, affd. 333 F.2d 653 (C.A. 2, 1964); Lloyd H. Redford, 28 T.C. 773">28 T.C. 773 (1957); and other cases.

Petitioners agree that a contingent liability is not part of the basis for amortization but contend that here, although payment of the 52 T.C. 367">*378 obligation was contingent on the "net profit" earned by the business, the liability created by the purchase agreement was not contingent, and that the cost of the property includes the amount of such liability even though no payments were made to discharge it, citing Crane v. Commissioner, 331 U.S. 1">331 U.S. 1 (1947); Oxford Paper Co. v. United States, 86 F. Supp 366 (S.D.N.Y. 1949); and Consolidated Coke Co. v. Commissioner, 70 F.2d 446 (C.A. 3, 1934), affirming 25 B.T.A. 345">25 B.T.A. 345.

The difficulty with petitioners' contention is that although the stock purchase agreement states 1969 U.S. Tax Ct. LEXIS 118">*143 the overall purchase price to be $ 1,131,000, of which $ 646,664.83 represented mortgages and other indebtedness which the corporations themselves were obligated to pay and $ 40,000 was paid by the petitioners in cash, the remaining $ 444,335.17 which included the $ 200,000 assigned to the covenant was to be paid only out of "net profit" of the companies. There was no provision that this balance or any portion thereof was to be paid by petitioners if the companies did not show a "net profit." Under these circumstances we think the obligation, as well as the payment, was contingent. We have considered the authorities cited by the parties but deem any discussion thereof to be unnecessary.

For the various reasons discussed above we hold that the covenant not to compete was not amortizable and accordingly sustain respondent's determination.

Decisions will be entered for the respondent.