58 T.C. 1022">*1023 The Commissioner determined deficiencies in petitioners' income tax as follows:

The sole issue for decision is whether part of the purchase price paid by petitioner Glenn W. Lucas, in connection with the acquisition of an accounting practice, was attributable to a covenant not to compete in respect of which petitioners are entitled to depreciation deductions in the years in issue under section 167, I.R.C. 1954.

FINDINGS OF FACT

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

Petitioners Glenn W. Lucas, Jr., and Carlene Lucas are husband and wife. They filed joint Federal income tax returns for the calendar years 1965, 1966, and 1967 with the district director of internal revenue at San Francisco, Calif., and resided in1972 U.S. Tax Ct. LEXIS 53">*55 Woodland, Calif., at the time of the filing of their petition herein. Petitioners were on the accrual basis of accounting.

During 1964 and at all other times here relevant, Glenn W. Lucas, Jr. (hereinafter referred to as petitioner), was licensed as a certified public accountant by the State of California. For approximately 6 years prior to August 1964, petitioner had practiced in the general area of Woodland, Calif.

Sometime before August 22, 1964, petitioner entered into negotiations with Raymond J. Bell (Bell) for the purchase of Bell's accounting practice also located in Woodland. Bell, who was licensed by the State of California as a public accountant, had been practicing in Woodland for approximately 20 years. His practice consisted primarily 58 T.C. 1022">*1024 of the preparation of tax returns, the maintenance of bookkeeping records for small retail business, as well as a small amount of business management. The major part of the practice involved performing such accounting services on a continuing basis for clients with whom Bell had become familiar over a period of years. Woodland was a small community with a population of around 20,000 people, and the residents were aware 1972 U.S. Tax Ct. LEXIS 53">*56 of the accountants practicing in the area. Bell, who had lived there since 1934, was well known in the community both as an accountant and local leader. Most of his clients were located in the general vicinity of Woodland, and through his community activities Bell had become personally acquainted with most of the individual clients who made up the principal part of his practice.

As of August 1964, Bell had in his employ at least four other people, two of whom, Jack Richter (Richter), an accountant, and Mrs. Diva Anderson, a bookkeeper, had been associated with him for 10 and 14 years, respectively, and both of whom also had direct personal contact with Bell's clients.

During the 5 years preceding August 1964, Bell's accounting practice averaged about $ 60,000 per year in gross billings; and in the last of those years gross billings amounted to approximately $ 75,000. Bell's average personal net income from the accounting practice in these years was approximately $ 20,000 per year. Petitioner's own accounting practice in Woodland was similar to Bell's, but the gross billing revenues arising therefrom were only about half those of Bell's practice, or approximately $ 30,000 per year.

1972 U.S. Tax Ct. LEXIS 53">*57 Petitioner became aware of the availability of Bell's accounting practice through a third party. Bell had decided to sell the practice because he was tired and wished to lessen his workload. Initially, negotiations were conducted directly between petitioner and Bell. After two such meetings between them, Bell arrived at an overall figure of $ 40,000 for his accounting practice, and petitioner accepted this offer of sale without otherwise negotiating the price.

Sometime thereafter, petitioner met with Bell and Bell's attorney in the attorney's office to discuss the terms of a formal agreement for the sale of the accounting practice. Petitioner did not obtain legal counsel to represent him at the meeting because he thought the matters involved simple enough not to require representation.

Bell considered that part of the assests involved in the sale consisted of goodwill associated with his familiarity with the individual clients of his practice. He therefore felt a responsibility in connection with the proposed sale, to work with petitioner and to assist in the actual transfer of the clientele itself. Petitioner also hoped that after his 58 T.C. 1022">*1025 purchase of Bell's practice 1972 U.S. Tax Ct. LEXIS 53">*58 it would be possible to retain Bell's clients as his own, and in this respect anticipated that for several months after the sale of the accounting practice Bell would perform substantial services in connection with the transfer of the practice to petitioner. And petitioner thought that after this transition period Bell would perform more limited services consistent with Bell's desire to reduce his professional commitments.

Petitioner also considered that it was otherwise important to be protected in some manner from possible future competition by Bell after the proposed sale and purchase of the accounting practice, and had decided that he would not purchase the practice without such protection. Accordingly, during the course of the meeting, petitioner stated that he wanted a covenant not to compete on Bell's part written into the proposed contract of sale. Bell's attorney advised both parties that a person could not be legally deprived of his right to make a living, and that therefore such a covenant should not be made part of the contract of sale. It was pointed out to petitioner that he and Bell might not get along during the period of transition in which Bell was to assist in1972 U.S. Tax Ct. LEXIS 53">*59 the transfer of the accounting practice and its clients, and that Bell should otherwise still retain the right to earn a livelihood. Petitioner accepted the position taken by Bell and his attorney in this respect, and the parties agreed that the contract of sale would not include such a covenant not to compete.

Petitioner then suggested that the matter of his protection against possible competition from Bell be handled in another way, and requested that, in lieu of the covenant not to compete, a separate employment contract be entered into between Bell and himself at the same time as the contract of sale. Petitioner stated at the meeting that if he could deal directly with Bell's former clients over a period of 3 years without competition from Bell, such clients would become his own.

Although petitioner also understood from information given to him by attorneys in the past that such an employment contract could not run for more than 1 year or the courts would not enforce the contract as against public policy, petitioner nonetheless considered that he would be protected, by such an employment agreement in conjunction with the purchase price payment features of the sale, against possible1972 U.S. Tax Ct. LEXIS 53">*60 competition from Bell during a period longer than the 3 years petitioner thought necessary to acquire the allegiance of Bell's clients. In this respect, the payment schedule agreed to by petitioner and Bell for the $ 40,000 purchase price called for a downpayment of $ 3,500, a promissory note of $ 16,500 at 6-percent interest with payments to begin on a set date, and another promissory note of $ 20,000 with 58 T.C. 1022">*1026 no interest until the first payment was made thereon by petitioner which was not to occur until 5 years after the termination of Bell's employment with petitioner. Petitioner and Bell also agreed that should the gross billing fees of the accounting practice fall below an average of $ 75,000 per year for 1965 and 1966, there would be a credit against the principal due on the $ 20,000 note of one-half the deficit below $ 75,000. Petitioner considered that the provisions taken together effectively protected him against competition from Bell, and that if Bell entered into competition with him, petitioner could tie the matter up in litigation and still not be liable for interest on the $ 20,000 note for 5 years. In addition, petitioner thought that after the expiration1972 U.S. Tax Ct. LEXIS 53">*61 of the 5 years and at the time payments on the second note began, Bell, who was 51 years old in 1964, would be too old to compete.

Bell for his part did not consider these provisions to constitute a covenant not to compete which he and petitioner had agreed would not be part of the agreement of sale. Rather, Bell thought the provisions relating to the projected $ 75,000 gross billing revenues for 1965 and 1966, and the credit aspect of the $ 20,000 note in connection therewith, merely created a guarantee of income. As indicated hereinabove, Bell did not have any intention of competing with petitioner, and planned to facilitate the transfer of the accounting practice in any way that he could.

There was also some discussion at the meeting in Bell's attorney's office of "goodwill" associated with the accounting practice. Although Bell considered that there was "goodwill" involved in the sale, petitioner did not think any part of the assets of the accounting practice consisted of "goodwill," and petitioner therefore suggested that they each handle such matters as they chose. Accordingly, petitioner and Bell thereafter did not discuss an allocation of the $ 40,000 purchase price they1972 U.S. Tax Ct. LEXIS 53">*62 had agreed upon between the various assets which each considered part of the accounting practice.

Based on the agreements as to the terms of the sale thus reached by petitioner and Bell, Bell's attorney drafted a Contract of Sale of Accounting Practice (contract of sale) which petitioner and Bell executed on August 22, 1964. The contract of sale provided in part as follows:

CONTRACT OF SALE OF ACCOUNTING PRACTICE

* * * *

(2) Seller agrees to sell to Buyer, and Buyer agrees to buy from Seller the said accounting practice of Seller exclusive of accounts receivable and cash, and free of any payables and further to buy all of the library, fixtures and equipment of the Seller incident to or used in the Seller's said accounting practice under the terms and conditions hereinafter set forth. The effective date of the sale shall be October 1, 1964.

(3) The total principal purchase price, which Buyer agrees to pay Seller, and 58 T.C. 1022">*1027 Seller agrees to accept from Buyer for the said accounting practice, library, fixtures and equipment is $ 40,000.00.

The total principal purchase price shall be paid by Buyer to Seller as follows:

(a) A down payment on October 1, 1964, in the amount of $ 3,500.00.

1972 U.S. Tax Ct. LEXIS 53">*63 (b) Delivery of Buyer's duly executed Promissory Note to Seller in the principal amount of $ 16,500.00, bearing interest at the rate of 6% per annum on the declining balance, payable in five equal successive, annual installments commencing on May 1, 1965, and the first day of each May thereafter until paid in full. Interest is to be paid, due with installments of principal.

(c) Buyer's duly executed Promissory Note delivered to Seller in the principal amount of $ 20,000.00, bearing no interest until the first payment is made in cash by Buyer, which Note shall be due five years after the termination of Seller's employment by Buyer, or on May 1, 1974, whichever date shall occur sooner.

In the event that Buyer's average gross fees billed or billable during the calendar years 1965 and 1966, fall below $ 75,000.00 per year (average between two such years), then one-half of the deficiency shall be applied as a credit against principal on the said $ 20,000.00 Note specified above; provided, however, that to the extent that any such deficiency is attributable to actions of the Buyer or to loss of clients of the Buyer prior to October 1, 1964, then for the purposes of computing any deficiency, 1972 U.S. Tax Ct. LEXIS 53">*64 the average gross fees shall be increased by the amount paid by any of such clients during the last year in which they were clients.

In accordance with the understanding reached by petitioner and Bell during the meeting with Bell's attorney, the contract of sale did not include a covenant not to compete on Bell's part. Pursuant to paragraph 3(b) of the contract of sale, petitioner delivered to Bell a promissory note dated September 1, 1964, in the principal amount of $ 16,500 at 6-percent interest, with payments to be made in five equal annual installments commencing on May 1, 1965. Under paragraph 3(c), petitioner also delivered to Bell a promissory note in the amount of $ 20,000 dated October 1, 1964, which however was not due until 5 years after the termination of Bell's employment with petitioner or

May 1, 1974, whichever was earlier. In respect of the second note of $ 20,000, no interest was to accrue until the date the first payment was made thereon, as petitioner and Bell had agreed previously.

As they had also previously agreed and at the same time they entered into the contract of sale on August 22, 1964, petitioner and Bell executed an employment contract, which was postdated1972 U.S. Tax Ct. LEXIS 53">*65 to October 1, 1964, the effective date of the sale of the accounting practice. The terms of Bell's employment, one of which was an agreement on Bell's part not to compete with petitioner during the duration thereof, were set forth in the employment contract as follows:

EMPLOYMENT CONTRACT

This Contract of Employment is made this 1st day of October, 1964, by and between GLENN W. LUCAS, JR., a Certified Public Accountant, (hereinafter 58 T.C. 1022">*1028 referred to as Employer), and RAYMOND J. BELL, Public Accountant (hereinafter referred to as Employee).

(1) Employee has this date sold his practice of accounting at Woodland, California, to Employer.

(2) Employer agrees to employ Employee, and Employee agrees to serve Employer as accountant in Employer's office from the date of October 1, 1964, to December 31, 1965, and thereafter from year to year, so long as the parties may thereafter determine. For the purposes of complying with the provisions of the Labor Code relating to the length of terms of employment under contract, each additional term of employment after December 31, 1965, shall be considered to be a new contract.

(3) During the term of Employee's employment by Employer, Employee1972 U.S. Tax Ct. LEXIS 53">*66 agrees that he will not perform accounting services except as an employee of Employer and will not engage in any competition in the practice of accountancy for such term of employment in the County of Yolo, State of California.

(4) Employer shall pay Employee an hourly rate of $ 6.00 per hour which shall be paid to Employee at the regular pay periods established by Employer. In addition to the hourly rate of compensation, Employee shall receive a sum equal to 40% of the net profit of the Employer from the practice of accountancy after reducing such profit by the following:

(a) An hourly drawing of $ 6.00 per hour for time worked by Employer;

(b) The hourly rate paid to Employee; and

(c) Adjustment for expenses peculiarly applicable to the parties hereto and all other normal business expenses of Employer. Employee's additional compensation under this provision shall be paid to him at least once every year. For the purposes of computing such net profits a year shall be deemed to commence on January 1st and end December 31st.

(5) Employee shall be reimbursed for all of his expenses incurred in performing services for Employer.

Petitioner considered the contract of sale and the employment1972 U.S. Tax Ct. LEXIS 53">*67 contract as being integrated parts of the same transaction in which he purchased Bell's accounting practice and protected himself from possible future competition by Bell. Bell, on the other hand, considered the two contracts to be separate and independent of each other; and, he did not think that the provision in the contract of sale, which tied the $ 75,000 gross billings guarantee for 1965 and 1966 into payment of the $ 20,000 promissory note, incorporated a covenant not to compete into such contract when the parties specifically agreed there would be no such covenant. Accordingly, Bell reported the amounts received by him under the contract of sale from petitioner in 1965, 1966, and 1967, the years here in issue, as capital gain arising out of the sale of his accounting practice. Also, as far as Bell was concerned, after termination of the employment contract on December 31, 1965, there existed no written prohibition against his entering into competition with petitioner, although he was personally disinclined to do so as mentioned hereinabove. And petitioner never discussed with Bell his opinion that the two contracts constituted parts of the same overall transaction.

58 T.C. 1022">*1029 1972 U.S. Tax Ct. LEXIS 53">*68 Immediately after his purchase of Bell's accounting practice, petitioner entered the purchase on his books and records and allocated the $ 40,000 purchase price as follows:

As mentioned hereinabove, petitioner and Bell neither negotiated nor agreed upon an allocation of the $ 40,000 purchase price among the assets involved in the sale; and the contract of sale itself did not provide for such an allocation. Rather, petitioner made the above allocation on his own and "picked the figures out of the air" in doing so. He did not discuss with Bell the allocation of $ 20,000 of the purchase price to a so-called noncompetition agreement. The "Books," to which petitioner allocated $ 10,000 of the purchase price, were the files and general ledgers of clients of the accounting practice. Petitioner depreciated this item over a 5-year period. These client files and general ledgers would have been worthless without the continuing business of Bell's clients after the sale of accounting practice.

Pursuant to the contract of sale and employment contract, on October 1, 1964, petitioner acquired Bell's1972 U.S. Tax Ct. LEXIS 53">*69 accounting practice and Bell commenced to work as petitioner's employee. Petitioner's accounting practice was consolidated with Bell's former practice as a consequence of petitioner's purchase, and it was therefore necessary to lease larger quarters for the combined operation. The new firm was named "Glenn W. Lucas, Certified Public Accountant," and although Bell's name did not appear in the firm name, he was listed in the office directory to facilitate Bell's old clients in identifying the firm as in part Bell's former practice. Bell aided petitioner in several ways in preserving the continuity of allegiance to the new firm of Bell's old clients. He informed his former clients by letter that petitioner had acquired the practice, and otherwise introduced petitioner to these clients. Moreover, petitioner's and Bell's offices in the new quarters were adjacent, and petitioner called on Bell for such introductions and other assistance with clients. In addition, Richter (who eventually became petitioner's partner) and Mrs. Anderson, both of whom had had direct personal contact with clients as Bell's employees, continued to work for petitioner, and thereby further contributed to the1972 U.S. Tax Ct. LEXIS 53">*70 continuity of the practice after petitioner acquired it.

In these several ways, petitioner was able to retain a majority of Bell's former clients as his own. Moreover, the gross billing revenues, attributable to Bell's former practice, were more than $ 75,000 in 1965 58 T.C. 1022">*1030 and 1966, and therefore the guarantee-of-income provision of the contract of sale, described hereinabove, never became operative.

Bell remained in petitioner's employ from October 1, 1964, until the early part of 1971. In December 1965, shortly before the termination of Bell's employment contract with petitioner on December 31, 1965, petitioner and Bell negotiated terms for Bell's continued employment after the expiration of the employmment contract. By an exchange of letters, petitioner and Bell agreed that beginning on January 1, 1966, Bell would receive 50 percent of the rate charged to clients for various accounting services performed by him. The letters further disclosed that this new employment agreement could be terminated by either party thereto upon 30 days' notice. Unlike the original employment contract postdated October 1, 1964, the new agreement contained no provision which prohibited Bell1972 U.S. Tax Ct. LEXIS 53">*71 from entering into competition with petitioner. During the years in which Bell was employed by petitioner, both under the employment contract and the subsequent agreement reached in December 1965, petitioner paid Bell compensation in the following approximate amounts:

Petitioner deducted these amounts on his Federal income tax returns as salaries paid to Bell; Bell for his part included the amounts of such compensation on his tax returns.

By July 1968, when the transition of the accounting practice from Bell to petitioner had been achieved with some success, Bell began to lessen his accounting work and became involved in running for local office as a supervisor. At this time, he suggested to petitioner that he would like to have monthly payments made in respect of both the balance on petitioner's note of $ 16,500 and the $ 20,000 deferred-payment note, and that he wished to receive interest currently on the second note as well. As noted above, petitioner had originally considered it necessary to be protected against competition from Bell for only 3 years, in which time petitioner thought1972 U.S. Tax Ct. LEXIS 53">*72 he could sufficiently become acquainted with Bell's former clients and earn their trust and allegiance. Petitioner, therefore, did not think it any longer necessary to defer payment on the $ 20,000 note as a means of enforcing Bell's personal commitment not to compete, and he agreed to consolidate the total outstanding balance on the two promissory notes, which was then $ 23,300. Accordingly, petitioner delivered to Bell a promissory note dated July 2, 1968, in the principal amount of $ 23,300 at 6-percent interest, to be discharged in 120 monthly payments.

In May 1971, Bell terminated his employment with petitioner, after 58 T.C. 1022">*1031 the two men reached an impasse in the negotiation of a new employment contract at that time. Thereafter, he once again entered into an accounting practice of his own in Woodland. At the time of the trial herein, Bell did not know whether the new practice would be successful, and only one or two of his former clients, who had become petitioner's clients after the sale of Bell's old firm in 1964, followed Bell into the new practice.

On his 1964, 1965, 1966, and 1967 joint Federal income tax returns, petitioner claimed depreciation deductions in the 1972 U.S. Tax Ct. LEXIS 53">*73 aggregate amount of $ 20,000 in respect of "Competition Costs" associated with the purchase of Bell's accounting practice, as follows:

The amounts claimed as deductions in these years were the same as the payments which petitioner made to Bell under the contract of sale in those years, and which Bell reported as capital gains on his own tax returns during the years in issue. In his deficiency notice, the Commissioner disallowed the deductions claimed in 1965, 1966, and 1967, on the ground that such amounts represent "a partial payment of a principal sum due for the purchase of a capital asset."

OPINION

The contract of sale, pursuant to which petitioner purchased Bell's accounting practice in 1964, contained no provision for a covenant not to compete on Bell's part in accordance with the specific agreement reached by the parties to the agreement that such a covenant would not be part of the contract. The petitioners, however, argue that such a covenant in reality existed by virtue of the interrelation of Bell's employment contract and the contract of sale, and that $ 20,000 of the purchase1972 U.S. Tax Ct. LEXIS 53">*74 price of the accounting practice was allocable thereto. The petitioners therefore contend that they are entitled under section 167, I.R.C. 1954, to the depreciation deductions claimed on the 1965, 1966, and 1967 tax returns in respect of the purported covenant not to compete. The Commissioner, on the other hand, maintains that petitioners have not adduced sufficient proof to thus contradict the terms of the contract of sale by installing therein a covenant not to compete where no such covenant existed in the agreement itself, and that in any case the amount paid under the 58 T.C. 1022">*1032 contract of sale for the intangible assets of the accounting practice was attributable to nondepreciable goodwill.

Where a taxpayer has entered into a written agreement, such as the contract of sale here, that provides for the specific terms of a transaction the tax consequences of which are in issue, we have applied the rule that "strong proof" must be adduced by the taxpayer if he seeks to establish a position at variance with the language of the agreement to which he was a party. J. Leonard Schmitz, 51 T.C. 306">51 T.C. 306, 51 T.C. 306">315-318, affirmed sub nomine Throndson v. Commissioner, 457 F.2d 10221972 U.S. Tax Ct. LEXIS 53">*75 (C.A. 9). See Balthrope v. Commissioner, 356 F.2d 28, 31-33 (C.A. 5), affirming a Memorandum Opinion of this Court; Montesi v. Commissioner, 340 F.2d 97, 100 (C.A. 6), affirming 40 T.C. 511">40 T.C. 511, 40 T.C. 511">518; Barran v. Commissioner, 334 F.2d 58, 63-64 (C.A. 5), affirming on this issue 39 T.C. 515">39 T.C. 515; Ullman v. Commissioner, 264 F.2d 305, 308 (C.A. 2), affirming 29 T.C. 129">29 T.C. 129; Edmond E. Maseeh, 52 T.C. 18">52 T.C. 18, 52 T.C. 18">22. Cf. Meyer Mittleman, 56 T.C. 171">56 T.C. 171, 56 T.C. 171">175. The present case arises in the Ninth Circuit which previously has also explicitly approved this so-called "strong proof" rule. Schulz v. Commissioner, 294 F.2d 52, 55 (C.A. 9), affirming 34 T.C. 235">34 T.C. 235. Cf. J. Leonard Schmitz, 51 T.C. 306">51 T.C. 306, 51 T.C. 306">316-318, affirmed sub nomine Throndson v. Commissioner, 457 F.2d 1022 (C.A.9). ¹

1972 U.S. Tax Ct. LEXIS 53">*76 In a situation where the pertinent contract specifically provides for a covenant not to compete and a taxpayer seeks to deny the bona fide existence of the covenant as a part of his agreement, the "strong proof" doctrine requires a determination of whether the covenant in issue was in fact intended as a part of the contract, and also whether it had an independent economic significance in the agreement such that 58 T.C. 1022">*1033 we might conclude it was a separately bargained-for element thereof. See Schulz v. Commissioner, 294 F.2d 52, 55 (C.A. 9), affirming 34 T.C. 235">34 T.C. 235; Henry P. Wager, 52 T.C. 416">52 T.C. 416, 52 T.C. 416">419; Edmond E. Maseeh, 52 T.C. 18">52 T.C. 22. See General Insurance Agency, Inc. v. Commissioner, 401 F.2d 324, 329-330 (C.A. 4), affirming a Memorandum Opinion of this Court; Fulton Container Co. v. United States, 355 F.2d 319, 325 (C.A. 9). Cf. Balthrope v. Commissioner, 356 F.2d 28, 32-34 (C.A. 5), affirming a Memorandum Opinion of this Court; John T. Dodson, 52 T.C. 544">52 T.C. 544, 52 T.C. 544">555-556;1972 U.S. Tax Ct. LEXIS 53">*77 Benjamin Levinson, 45 T.C. 380">45 T.C. 380, 45 T.C. 380">389-390. In the present case, petitioners seek rather to import such a covenant into the contract of sale when no specific provision was made in this respect. It is similarly necessary to determine here whether the parties to the agreement, in fact, intended such a covenant to be an element of their contract and also meant to allocate part of the purchase price thereto, and further whether such covenant, if so intended, had an identifiable economic existence in the contract of sale. See Wilson Athletic G. Mfg. Co. v. Commissioner, 222 F.2d 355, 357 (C.A. 7), reversing and remanding a Memorandum Opinion of this Court; General Insurance Agency, Inc. v. Commissioner, 401 F.2d 324, 329-330 (C.A. 4); Delsea Drive-In Theatres, Inc. v. Commissioner, 379 F.2d 316, 317 (C.A. 3), affirming per curiam a Memorandum Opinion of this Court; Fulton Container Co. v. United States, 355 F.2d 319, 325-326 (C. A. 9). We think that petitioners have failed to establish by either "strong proof" or 1972 U.S. Tax Ct. LEXIS 53">*78 otherwise that a covenant not to compete was intended as a bargained-for element of the contract of sale, or that any amount of the purchase price was meant to relate thereto. Indeed, the record makes plain that the parties to the contract of sale in fact intended that such a covenant not be incorporated in the agreement.

At the time the contract of sale was negotiated, petitioner, admittedly on advice from Bell's attorney that a covenant prohibiting competition by Bell would not be an appropriate provision of the contract of sale, specifically agreed such contract should not itself include the covenant argued for here. Bell, for his part, never considered a covenant not to compete to be any part of the sale of the accounting practice. It is noted in this respect that Bell had no intention of competing with petitioner, and that petitioner knew Bell was selling his practice in order to withdraw from the rigors of the competitive world and not embrace them. Petitioner, moreover, anticipated that Bell would assist with the transfer of his former clients' allegiance to petitioner after the sale, and otherwise aid in preserving the continuity of the accounting practice. To be sure, 1972 U.S. Tax Ct. LEXIS 53">*79 Bell's personal acquaintance with his clients may have made him in other circumstances a 58 T.C. 1022">*1034 competitive force in Woodland with which to be reckoned. But the circumstances here surrounding the sale of the accounting practice indicate not only that Bell never contemplated such competition but also that petitioner was aware of Bell's intention to ultimately decrease his workload and to assist petitioner rather than compete with him.

As we view the record, what petitioner purchased, in addition to the tangible assests of the accounting practice, was the considerable goodwill which Bell had built up over the years. The practice consisted primarily of providing accounting services on a continuing basis for various clients who had dealt recurrently with the Bell practice for some time. See Karan v. Commissioner, 319 F.2d 303, 305-306 (C.A. 7), affirming a Memorandum Opinion of this Court; Masquelette's Estate v. Commissioner, 239 F.2d 322, 325-326 (C.A. 5), reversing and remanding a Memorandum Opinion of this Court; Hoyt Butler, 46 T.C. 280">46 T.C. 280, 46 T.C. 280">284-287; Malcolm J. Watson, 35 T.C. 203">35 T.C. 203, 35 T.C. 203">213-215;1972 U.S. Tax Ct. LEXIS 53">*80 Richard S. Wyler, 14 T.C. 1251">14 T.C. 1251, 14 T.C. 1251">1259-1261. Cf. Commissioner v. Seaboard Finance Co., 367 F.2d 646, 649-650 (C.A. 9), affirming a Memorandum Opinion of this Court; Edward A. Kenney, 37 T.C. 1161">37 T.C. 1161, 37 T.C. 1161">1170-1172. Such clients had an obvious allegiance to the practice, and Bell's active assistance, his name listed as it was in the firm directory, together with Richter and Mrs. Anderson's presence, insured a transfer of such allegiance, and the goodwill associated therewith, to petitioner after the purchase of the practice. See Charles W. Miller, 56 T.C. 636">56 T.C. 636, 56 T.C. 636">649-651; Malcolm J. Watson, 35 T.C. 203">35 T.C. 213-214. Petitioner, in fact, purchased client books and ledgers, the sole use and value of which depended on such continuity of the goodwill relationships. And such goodwill was itself not depreciable. (A)-3 Sec. 1.167 (a)-3, Income Tax Regs. See Balthrope v. Commissioner, 356 F.2d 28, 31 (C.A. 5), affirming a Memorandum Opinion of this Court; J. Leonard Schmitz, 51 T.C. 306">51 T.C. 306, 51 T.C. 306">313,1972 U.S. Tax Ct. LEXIS 53">*81 affirmed sub nomine Throndson v. Commissioner, 457 F.2d 1022 (C.A. 9).

Because he was nevertheless still interested in protecting himself against possible future competition from Bell, petitioner decided to insulate himself from such competition in another manner through the device of the employment contract. It is certainly true that the contract of sale and the employment contract, executed simultaneously, were related transactions. But while we view them as related or collateral and not as mutually distinct one from the other, it does not necessarily follow that the two agreements were inextricably integrated or bound up with each other or that the provisions of each contract were not peculiar thereto. Edward A. Kenney, 37 T.C. 1161">37 T.C. 1169. Both the contract of sale and the employment contract provided the terms of different, albeit related transactions. Equally important, 58 T.C. 1022">*1035 each provided its own consideration in respect of its specific terms. And under the employment contract petitioner paid Bell compensation in the amount of $ 14,000 in 1965, the effective year of the restriction on competition included1972 U.S. Tax Ct. LEXIS 53">*82 in such agreement, and proceeded to deduct this amount on his Federal income tax return for 1965 wholly apart from the deduction in that year here in issue. Whatever protection petitioner acquired against possible competition from Bell, therefore, was pursuant to the terms of the employment contract and not the contract of sale which related solely to the purchase of the accounting practice. Edward A. Kenney, 37 T.C. 1161">37 T.C. 1169-1170. See also Roy W. Johnson, 53 T.C. 414">53 T.C. 414, 53 T.C. 414">426; Winchell Co., 51 T.C. 657">51 T.C. 657, 51 T.C. 657">660-662. And such protection, as was acquired, was not attributable in any part to the $ 40,000 purchase price of the accounting practice, but to the compensation which petitioner paid Bell under the employment contract and the subsequent employment agreement of December 1965, and which he claimed as deductions independently of the amounts in issue, on his tax returns.

In the circumstances, it seems clear that the parties to the contract of sale never mutually intended a covenant not to compete of the type for which petitioners contend, or meant to allocate part of the purchase price thereto. 1972 U.S. Tax Ct. LEXIS 53">*83 While petitioner desired protection from competition for his own reasons, and may have considered that he acquired it, the source of such protection was certainly not the contract of sale or attributable in any part to the $ 40,000 purchase price. Petitioner merely proceeded unilaterally to allocate $ 20,000 of the purchase price to the purported covenant after the agreement was executed, and by his own admission "picked the figure * * * out of the air" in doing so. He never discussed with Bell either this allocation, or his opinion that the contract of sale and the employment agreement were somehow integrated parts of the same transaction, and Bell considered the two agreements to be distinct and independent of each other. Surely, this is not a situation where it can be said the parties to the contract of sale bargained over a covenant not to compete and worked out an allocation of part of the purchase price thereto. Cf. Delsea Drive-In Theatres, Inc. v. Commissioner, 379 F.2d 316, 317 (C.A. 3), affirming a Memorandum Opinion of this Court.

It is also to be noted that petitioner accepted Bell's offer to sell the accounting practice for an 1972 U.S. Tax Ct. LEXIS 53">*84 overall price of $ 40,000 prior to any mention of a covenant not to compete. While it is true that an agreement between the parties to a contract, such as the one in issue, may not have sufficiently "crystallized" so that an allocation of part of the purchase price to a covenant not to compete can be effective even if made after the total purchase price has been agreed to (Grant T. Rudie, Jr., 49 T.C. 131">49 T.C. 131, 49 T.C. 131">139; 58 T.C. 1022">*1036 Edmond E. Maseeh, 52 T.C. 18">52 T.C. 21-24), no such allocation was ever made here mutually by petitioner and Bell as a bargained-for element of their contract. One of the reasons "strong proof" is required in cases of this nature is to foster a basis of justifiable reliance on the terms of a written agreement, worked out by the parties thereto, not only as far as the Commissioner is concerned but also in respect of the parties themselves. See Schulz v. Commissioner, 294 F.2d 52, 55 (C.A. 9), affirming 34 T.C. 235">34 T.C. 235. Bell proceeded to treat the amounts received by him as capital gain, as the terms of the contract of sale would suggest. Cf. Hamlin's Trust v. Commissioner, 209 F.2d 761, 763-7651972 U.S. Tax Ct. LEXIS 53">*85 (C.A. 10), affirming 19 T.C. 718">19 T.C. 718; Benjamin Levinson, 45 T.C. 380">45 T.C. 380, 45 T.C. 380">387, 45 T.C. 380">391. Petitioner was aware that Bell considered there was goodwill associated with the sale, and suggested to Bell that they each handle the transaction independently. To allow a taxpayer's uncommunicated interpretation of his contract in contradiction of its explicit terms, and his de facto allocation of a portion of the purchase price to a purported covenant that was not a part thereof, to prevail in such circumstances could have the effect of unduly embroiling the other party to the agreement as well in litigation with the Commissioner whose sole interest is in protecting the revenues.

Petitioners, nonetheless, argue that the interrelation of the contract of sale and the employment contract, by which they seek to import a covenant not to compete into the contract of sale, is manifest by virtue of the provision of the contract of sale that guaranteed an average of $ 75,000 in gross billings for 1965 and 1966, and allowed for a credit of one-half the deficit in such billings below $ 75,000 against the deferred-payment promissory note of $ 20,000 which was1972 U.S. Tax Ct. LEXIS 53">*86 due at the earliest 5 years after the termination of Bell's employment or May 1, 1974. But it is difficult to see how the alleged connection gives rise to a covenant of the magnitude petitioners argue for here. The employment contract, which did include a restriction on competition, ran for only 1 year, until December 31, 1965, after which date there was no written commitment prohibiting Bell from competing. Moreover, the guarantee of income related to only 1965 and 1966. Petitioner nevertheless considered the purported insulation from competition, achieved by the contract of sale and employment contract, effective for at least 5 years, because if Bell had not honored the employment contract and had proceeded to compete, petitioner could have tied the matter up in the courts without having to pay interest on the $ 20,000 note. Be this as it may and even granting the repose which these considerations may have given petitioner, as far as Bell was concerned, he could have honored his employment commitments, entered into competition after 1966, and thereby violated neither the terms of the contract of sale nor 58 T.C. 1022">*1037 the employment contract, or jeopardized the $ 75,000 gross 1972 U.S. Tax Ct. LEXIS 53">*87 billing revenue guarantee. Moreover, petitioners have nowhere suggested how they determined an ascertainable useful life for the purported covenant. They did not for instance depreciate the alleged covenant in a manner which reflected even petitioner's own understanding of the agreements, based on some interrelation of the contract of sale and employment contract. Rather they claimed depreciation deductions over a 4-year and not the 5-year period which petitioner supposedly considered the scope of his protection, and merely claimed deductions in this respect for the amounts he paid to Bell in the years in issue under the contract of sale, without any apparent relation to the value of the purported covenant itself. In any case, the $ 20,000 deferred-payment promissory note, which petitioners insist represented consideration for the alleged covenant, could have become due any time from 5 or 6 years to 10 years after the sale of the accounting practice, and such due date, whenever it occurred, would bear no relation to petitioner's protection from competition under the employment contract.

Petitioners have also suggested that any reasonable man, concerned with his economic future, 1972 U.S. Tax Ct. LEXIS 53">*88 would not only expect a covenant not to compete from Bell, but also would pay $ 20,000 therefor. Cf. Balthrope v. Commissioner, 356 F.2d 28, 31 (C.A. 5), affirming a Memorandum Opinion of this Court; Schulz v. Commissioner, 294 F.2d 52, 55 (C.A. 9), affirming 34 T.C. 235">34 T.C. 235; Edmond E. Maseeh, 52 T.C. 18">52 T.C. 23. In the present circumstances and given Bell's apparent inclination to retreat from the active life, we cannot agree that such is necessarily the case here. Bell in fact remained in petitioner's employ, cutting back on his workload year by year as he intended, until 1971 at which time he again opened an accounting practice of his own only because he and petitioner could not come to terms on a new employment contract. It is perhaps a close question. But we are satisfied that the contract of sale and employment agreement reflected what were the mutual intentions of the parties thereto as they themselves then perceived the economic nature of the transactions when they entered into the contracts. In any case, this aspect of the so-called "economic reality" 1972 U.S. Tax Ct. LEXIS 53">*89 test, which the petitioners seize upon, is merely a means of testing the validity of a covenant once the intention of the parties to include such a covenant in their contract has been determined. See General Insurance Agency, Inc. v. Commissioner, 401 F. 2d at 329-330; Schulz v. Commissioner, 294 F.2d 52, 55 (C.A. 9), affirming 34 T.C. 235">34 T.C. 235. Here, it is apparent on the face of the record that the parties in fact intended no such covenant.

It has also been suggested that petitioner was at a legal disadvantage 58 T.C. 1022">*1038 when he entered into the contract of sale inasmuch as he merely followed the advice given to him by Bell's attorney. Petitioner did not obtain legal counsel on his own behalf because he thought the matter simple enough not to require representation. He was a certified public accountant of some experience. His failure to inform himself adequately as to the tax consequences relating to the purchase of the accounting practice, or to secure competent legal advice, if these matters were otherwise relevant, cannot be a source of complaint here when it is clear that he understood1972 U.S. Tax Ct. LEXIS 53">*90 the terms of the contract of sale and explicitly agreed that such agreement would not include a covenant not to compete. Balthrope v. Commissioner, 356 F.2d 28, 34 (C.A. 5), affirming a Memorandum Opinion of this Court; Hamlin's Trust v. Commissioner, 209 F.2d 761, 765 (C.A. 10), affirming 19 T.C. 718">19 T.C. 718; Edmond E. Maseeh, 52 T.C. 18">52 T.C. 23-24.

Because we have decided that petitioner and Bell did not intend a covenant not to compete to be part of the contract of sale or to allocate any part of the purchase price thereto, we find it unnecessary to consider the possible relation between such alleged covenant and the goodwill which was part of the sale. See Balthrope v. Commissioner, 356 F.2d 28, 31 (C.A. 5); Barran v. Commissioner, 334 F.2d 58, 63 (C.A. 5), affirming on this issue 39 T.C. 515">39 T.C. 515; Schulz v. Commissioner, 294 F.2d 52, 55-56 (C.A. 9), affirming 34 T.C. 235">34 T.C. 235.

Decision will be entered for the1972 U.S. Tax Ct. LEXIS 53">*91 respondent.