18 T.C. 77">*77 The respondent determined a deficiency in income tax for the year 1946 in the amount of $ 628.75. The sole issue is whether petitioners are entitled to depreciate $ 15,000, or any portion thereof, which represented the purchase price paid for the intangible assets of a dry cleaning business.

18 T.C. 77">*78 FINDINGS OF FACT.

Harold J. Burke (hereinafter referred to as petitioner) and Dorothy M. Burke1952 U.S. Tax Ct. LEXIS 223">*224 are husband and wife residing in Davenport, Iowa. A joint income tax return was filed for the calendar year 1946 with the collector of internal revenue for the district of Iowa.

On January 9, 1946, petitioner agreed to purchase a dry cleaning business known as Killey Cleaners & Furriers (hereinafter referred to as Killey Cleaners) located in Davenport, Iowa, from L. W. Killey and his wife, Edna Killey. Pertinent provisions of the contract are as follows:

2. The purchase price of said business shall be the sum of Twenty-five Thousand ($ 25,000.00) Dollars, payable in the following manner: One Thousand ($ 1,000.00) Dollars on the execution of this agreement, the receipt whereof being hereby acknowledged by vendors, and the balance of Twenty-four Thousand ($ 24,000.00) Dollars to be paid in cash upon delivery of bill of sale by vendors to vendee and the placing of vendee in possession of the business and the property to be sold, said consideration shall be fully paid on or before January 31, 1946.

3. It is agreed by and between the parties hereto that vendors are to sell to vendee all of the stock, merchandise, fixtures, customers lists, trade name, formulae, good will, and all personal1952 U.S. Tax Ct. LEXIS 223">*225 property, tangible and intangible, now used by vendors in connection with the operation of the business of Killey Cleaners & Furriers whether said items of property are particularly enumerated or not. It is specifically understood that there is not included in this sale any accounts receivable or bank accounts of the said business.

4. It is further agreed by and between parties hereto that as part of the consideration for the sale herein provided for vendors shall not engage in the cleaning, storage or fur business in Davenport, Iowa, Bettendorf, Iowa, Rock Island, Illinois, Moline, Illinois or East Moline, Illinois, for a period of five (5) years from and after the date of this agreement.

5. It is further agreed by and between parties hereto that simultaneously with the delivery of a bill of [sic] sale to the property to be sold under the terms of this agreement, vendors shall execute and deliver to vendee a lease for the premises on which the plant of vendors is located at 936 West Fourth Street, Davenport, Iowa, which lease shall provide for a monthly rent of Two Hundred ($ 200.00) Dollars, payable in advance, and which lease shall run for a period of five (5) years from and1952 U.S. Tax Ct. LEXIS 223">*226 after the date vendee is placed in possession of the premises last above described and which lease shall contain an option giving vendee the right to purchase the real estate and improvements in the building located at 936 West Fourth Street, Davenport, Iowa, at any time during the life of said lease for the sum of Twenty-five Thousand ($ 25,000.00) Dollars, said lease to be in the form and to contain the provisions commonly used in leases of business properties in Scott County, Iowa. Said lease shall provide in part that vendee shall during the term of said lease keep said leased premises in a clean and sanitary condition, and shall do nothing therein which will increase the insurance rates thereon. Said lease shall also provide that vendor shall keep said premises in a good state of repair, but that vendee shall do any re-decorating therein at his own expense.

On March 7, 1946, the parties to the sale amended the contract of January 9, 1946, to provide that $ 10,000 of the purchase price of $ 25,000 18 T.C. 77">*79 was in payment for the tangible assets of the business and that "the purchase price for the intangible assets including Good Will" was $ 15,000.

Davenport, Iowa, has a population1952 U.S. Tax Ct. LEXIS 223">*227 of about 80,000 people, and Killey Cleaners is located approximately eight or nine blocks from the general business district of the town. Petitioner, who has been in the dry cleaning business for about twenty years, spent about two months investigating Killey Cleaners prior to purchasing the business. During that time, he spot checked the area and found out that the people of the town preferred to send their best garments to Killey Cleaners for dry cleaning.

In order to make the purchase, petitioner borrowed $ 15,000 from the Davenport Bank and Trust Company. Killey helped petitioner to get this loan from the bank.

Petitioner continued operating the business under its former name with the addition of his own name as owner. At the time of the purchase, petitioner acquired a customer list containing between thirty and fifty names. This was a list of charge customers, and there was no customers' list of cash customers other than packets of sales slips which were arranged chronologically according to the dates of transactions.

There were no secret formulae transferred to petitioner with the sale. Most dry cleaning products have directions for their use on the containers.

Petitioner1952 U.S. Tax Ct. LEXIS 223">*228 exercised his option to purchase the property at 936 West Fourth Street at which Killey Cleaners was located. At the time of the hearing, he owned the property. At the time of the sale of the business, Killey was in very poor health and had been advised by his physicians to retire from the dry cleaning business. About three years later, Killey again went into the dry cleaning business at some point outside the area covered by the covenant not to compete. The agreement not to compete was placed in the initial draft of the contract by petitioner or his attorney. It was important to petitioner that such covenant be contained in the contract.

In their joint return for 1946, petitioner and his wife claimed a deduction of $ 2,750 explaining such deduction as follows:

Respondent disallowed the deduction.

By the payment of $ 15,000, petitioner acquired a capital asset representing the intangible assets of Killey1952 U.S. Tax Ct. LEXIS 223">*229 Cleaners, and no portion of said $ 15,000 is depreciable over the life of the covenant not to compete contained in the contract of sale.

18 T.C. 77">*80 OPINION.

The sole issue is whether the $ 15,000, or any portion thereof, representing the purchase price paid for intangible assets upon the acquisition of a dry cleaning business is depreciable over the 5-year period of the covenant not to compete. Applicable provisions of the Internal Revenue Code and regulations promulgated thereunder are set forth in the margin. ¹1952 U.S. Tax Ct. LEXIS 223">*230 Petitioner maintains that the $ 15,000 paid for intangible assets represented the value of the covenant not to compete, and that he is entitled to depreciate that amount over the 5-year life of the covenant or, in the alternative, that some portion of the $ 15,000 is applicable to said covenant under the Cohan rule ² and that this portion may be depreciated over such period. Respondent maintains that no deduction is allowable with respect to this $ 15,000.

This Court has held that where a covenant not to compete accompanies the transfer of good will in the sale of a going concern, and such covenant is essentially to assure the purchaser the beneficial enjoyment of the good will he has acquired, the covenant is nonseverable and may not be depreciated. Aaron Michaels12 T.C. 17 (1949). Such a result has been reached even in instances where the contract has placed a value upon the covenant not to compete. Toledo Blade Co., 11 T.C. 1079 (1948), affd. (C. A. 6, 1950) 180 F.2d 357, certiorari denied 340 U.S. 811">340 U.S. 811 (1950).

We feel that the situation in the present case is similar to that in the above-cited cases. Petitioner here acquired a going business which had a value over and above the value of the tangible assets making up the business. Petitioner desired to protect himself and the business he purchased by obtaining from the vendor a covenant1952 U.S. Tax Ct. LEXIS 223">*231 not to compete. While it is true that any value attributable to customers' lists and formulae was negligible, we feel that the business did have good will connected with it. Petitioner himself recognized this as was evidenced by his testimony that he spot checked among inhabitants of the town 18 T.C. 77">*81 and found that they took their best garments to Killey Cleaners for dry cleaning.

While it is true petitioner testified that the main reason he did not change the name of the business was the expense involved in changing the name, and that he did associate his name as owner with the name of the cleaning establishment, it nevertheless is a fact that petitioner continued to operate under the same trade name as the vendor. Another factor which must be borne in mind is that, at the time of the purchase, the vendor had been advised by his physicians to retire from the dry cleaning business because of his health and he, therefore, placed little value on giving a covenant not to compete. Although, subsequently, he again entered into the dry cleaning business and at that later date petitioner was protected by such covenant, such a fact is immaterial in a situation such as this where we are1952 U.S. Tax Ct. LEXIS 223">*232 dealing with the transaction as of the date at which it occurred.

We, therefore, feel that any value applicable to the covenant not to compete is nonseverable from the entire transaction which consisted of acquisition by petitioner of a capital asset together with a covenant which protected his beneficial enjoyment of that asset. Cases cited by the petitioner in which depreciation has been allowed for a covenant not to compete have been distinguished in prior cases, and we shall not again go into them at this time. See Rodney B. Horton, 13 T.C. 143 (1949); and Tax Consequences of a Covenant Not to Compete, 27 Taxes 891 (1949).

Decision will be entered for the respondent.