United States Court of Appeals
                           FOR THE EIGHTH CIRCUIT
                                    ___________

                               Nos. 02-1697/02-1843
                                   ___________

Cortland F. Langdon; Jean M.         *
Langdon; Bemidji Distributing Co.,   *
Inc.,                                *
                                     *
          Appellants,                *
                                     * Appeals from a decision of the
    v.                               * United States Tax Court.
                                     *
Commissioner of Internal Revenue,    *      [UNPUBLISHED]
                                     *
          Appellee.                  *
                                ___________

                              Submitted: December 12, 2002

                                   Filed: February 14, 2003
                                    ___________

Before WOLLMAN, LAY, and MAGILL, Circuit Judges.
                          ___________

PER CURIAM.
                                           I.

       Cortland Langdon owned and operated Bemidji Distributing Company, Inc.
(BDC). BDC is a wholesale beer distributorship. By 1990, BDC had grown to be the
largest wholesale beer distributor in northern Minnesota. Later that year, Langdon
began exploring the idea of selling BDC. He obtained Pohle Partners, a consulting
firm that specializes in the sale of beer distributorships, to value BDC and help broker
the sale. Pohle Partners valued BDC’s tangible assets at $765,000 and its intangible
assets, such as goodwill, franchise rights, and customer lists, at $1.2 million.

       In 1992, Langdon sold BDC to Bravo Beverage, Ltd. for $2,017,461. The
parties allocated the purchase price to be:

•     $200,000 for a two-year consulting agreement;
•     $1,000,000 for a five-year covenant not to compete;
•     $817,461 for BDC’s operating assets and accounts receivable.

The parties did not allocate any value of the purchase price to BDC’s intangible
assets.

       On February 4, 1999, the Commissioner of Internal Revenue determined that
Langdon and BDC had a deficiency in their income taxes for the 1992 tax year.
Langdon and BDC challenged the Commissioner’s determination and filed an action
in the United States Tax Court.1 The tax court ruled that Langdon’s covenant not to
compete with Bravo was not worth $1 million. The bulk of the $1 million covenant,
according to the tax court, acted as a disguised payment for BDC’s intangible assets.
The tax court thus reduced the value of the covenant to $334,000. The remaining
$666,000 constituted value for BDC’s intangible assets. This meant that BDC and
Langdon needed to pay additional income taxes. Langdon and BDC appeal.

     We now must decide whether the tax court properly reduced the value of
Langdon’s covenant not to compete. We affirm.




      1
      The two cases were consolidated for trial and for this appeal. The Honorable
Carolyn Miller Parr presided during the trial.

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                                           II.

       When one corporation buys the assets of another, the parties may agree to
allocate the purchase price among the assets being acquired. The Internal Revenue
Service, however, is not bound by the parties’ allocation agreement. 26 U.S.C.
§ 1060(a). The Commissioner can review the allocation agreement and set new
values if the allocation is not appropriate. 

the parties’ allocation agreement, two different standards
apply. The tax court will give deference to the parties when they have competing tax
interests. If, on the other hand, the parties do not have adverse tax interests, the tax
court will strictly scrutinize the allocation agreement. Lorvic Holdings, Inc. v.
Commissioner, No. 3408-97, 15611-97, 

(U.S. Tax Ct. August 4,
1998). Courts use a higher standard in such cases because competing tax interests
deter allocations which lack economic reality. 

whether the parties have correctly valued a covenant not to
compete, courts must look to see if the allocation is grounded in economic reality.
See Patterson v. Commissioner, 

, 571 (6th Cir. 1987). This means that
the value of the covenant must be such that a reasonable person might bargain for it.
Schultz v. Commissioner, 

, 55 (9th Cir. 1961). Courts have consistently
applied a nine-factor test to evaluate whether a covenant not to compete lacks
economic reality. The nine factors are:

      [1] The seller’s (i.e., the covenantor’s) ability to compete; [2] the seller’s
      intent to compete; [3] the seller’s economic resources; [4] the potential
      damage to the buyer posed by the seller’s competition; [5] the seller’s
      business expertise in the industry; [6] the seller’s contacts and
      relationships with customers, suppliers, and others in the business; [7]
      the buyer’s interest in eliminating competition; [8] the duration and



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      geographic scope of the covenant, [9] and the seller’s intention to
      remain in the same geographic area.

Lorvic Holdings, 

.

       In the present case, we find that the tax court did not error by reducing the
value of the covenant not to compete. The tax court correctly applied strict scrutiny
to the transaction because the parties did not have competing tax interests. Both
parties stood to benefit by allocating $1 million to the covenant. Langdon would only
pay income taxes on the amount of the covenant while Bravo could amortize the
covenant over its useful life. See O’Dell & Co. v. Commissioner, 

, 466
(1974) (noting that a covenant not to compete may be amortized over its useful life).
The tax court thus appropriately viewed this allocation with strict scrutiny.

       The tax court also correctly found that it was unreasonable for the parties not
to allocate money for BDC’s intangible assets. BDC was an established and
profitable wholesale beer distribution business. Bravo stepped into BDC’s shoes at
the time of the sale and acquired BDC’s customer lists and exclusive brand and
distribution rights. In fact, Pohle Partners listed these intangible assets in the sales
materials for BDC. It is thus reasonable to conclude that Langdon and BDC
transferred goodwill and going concern to Bravo. The parties appear to have
disguised these intangible assets in the price of the covenant so as to avoid paying
additional taxes.

      Accordingly, the tax court appropriately concluded the covenant was not worth
$1 million. We agree with the tax court’s nine-factor analysis. We find it
unreasonable to think that Bravo would lose $1 million if Langdon were to compete
against it. As noted above, Bravo acquired the leading beer distribution company in
northern Minnesota. It gained BDC’s employees, products, customer lists, and
goodwill. While it is true that Langdon could have started a new beer distribution


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company or bought an existing distribution business, it is highly unlikely that he
would go through such efforts to compete against Bravo–especially since he had a
$200,000 consulting agreement with the company.

       We thus adopt the tax court’s revised valuation of the covenant. The tax court
found that the covenant should be priced at $334,000. We are not at liberty to change
this valuation absent clear error. The tax court’s valuation will be upheld so long as
“it is within the range of figures that properly can be deduced from the evidence.”
Hamm v. Commissioner, 

, 939-40 (8th Cir. 1963); see also Silverman
v. Commissioner, 

, 933 (2d Cir. 1976). BDC and Langdon have not
convinced us that the tax court’s calculation was incorrect.

       BDC and Langdon claim that International Multifoods Corp. v. Commissioner,

(1997) and Buffalo Tools & Die Manufacturing Co. v. Commissioner,

(1980) preclude the tax court from changing the value of Langdon’s
covenant not to compete. Those cases, however, are distinguishable from the present
case. In those cases, the courts upheld the value of the covenant because the parties’
tax interests were adverse. Here, as noted, Langdon and Bravo did not have
competing tax interests. Thus, their allocation gets strict scrutiny and will be upheld
only if they can prove the covenant is grounded in economic reality. The parties have
not produced any evidence showing the covenant is worth $1 million.

      The United States Tax Court is AFFIRMED.

      A true copy.

             Attest:

                CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.



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