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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.

There is no question that the agreement before us is the product of knowledgeable negotiations on behalf of petitioner and Mrs. Hunt and as such represents a true meeting of the minds. See Glenn W. Lucas, Jr., 58 T.C. 1022, and National Service Industries, Inc. v. United States (N.D. Ga., 32 A.F.T.R. 2d 73–5863, 73-2 U.S.T.C. par. 9703). Consequently, it remains only to examine those factors which tend to reveal the true economic import of the covenant before us.

Generally speaking, the countervailing tax interests of the parties to a noncompetition covenant act to deter schemes without economic substance. Shulz v. Commissioner, 294 F. 2d at 55; Ullman v. Commissioner, 264 F. 2d 305, 307 (C.A. 2); Benjamin Levinson, 45 T.C. 380, 389; 67 Yale L. J. 1261, 1261–1262 (1958). And although the parties' tax awareness is not a necessary condition for attributing tax validity to their agreement (Hamlin's Trust v. Commissioner, 209 F. 2d 761, 765 (C.A. 10), affirming 19 T.C. 718), where, as here, the parties did consider their respective and adverse tax positions, it is evidence that the product of their bargaining mirrors the reality of their economic interests.

With regard to the noncompetition clause of the agreement before us, the record persuades us that in entering into such an arrangement petitioner acted in the manner of a party genuinely concerned with its economic future. There was unequivocal expert testimony at trial that one in the circumstances of Mrs. Hunt could have effectively competed with respect to Butler-Hunt's prior customers, rendering a covenant not to compete crucial to the prospective purchaser of such an agency. In light of Mrs. Hunt's then recent widowhood and her social contacts among Butler-Hunt's clients, O'Dell had ample cause to fear that a competing agency might pay for her assistance in attracting petitioner's newly acquired clients. Moreover, the evidence shows that Mrs. Hunt was knowledgeable, albeit not experienced, in insurance matters; she had the prospect of assistance from her late husband's associates in establishing a business; she enjoyed the friendship of potential clients as well as of executives of two insurance companies with which she might place her business; she was healthy; and she intended to maintain her residence in the same area. In prior decisions courts have deemed the covenantor's competitive possible intent and prospects to be probative of the economic substance of a covenant not to compete, and we are not inclined to rule that petitioner acted unreasonably in providing against such a contingency under these circumstances. See General Insurance Agency, Inc. v. Commissioner, 401 F. 2d 324, 329 (C.A. 4), affirming a Memorandum Opinion of this

Court (inability to compete); Schulz v. Commissioner, 294 F. 2d 52, 54 (C.A. 9) (no desire or ability to compete); Benjamin Levinson, 45 T.C. 380, 390 (desire to compete, adequate health); Rich Hill Insurance Agency, Inc., 58 T.C. 610, 618 (moved from area, no intention. to compete); J. Leonard Schmitz, 51 T.C. 306, 320, affirmed on other grounds sub nom. Throndson v. Commissioner, 457 F. 2d 1022 (C.A. 9) (lived outside business area); Balthrope v. Commissioner, 356 F. 2d 28, 33 (C.A. 5) (poor health, useful knowledge of business); Harry A. Kinney, 58 T.C. 1038, 1043-1044 (ability to compete without desire to do so, poor health). Furthermore, the terms of the covenant were genuinely but realistically restrictive, extending over an 8-county area for a period of 4 years, the time during which Mrs. Hunt's competition would have been most damaging. Compare Schulz v. Commissioner, 294 F.2d 52, 54 (C.A. 9).

Respondent has argued that the covenant not to compete was superfluous and consequently without economic substance inasmuch as under applicable California law a contract for the sale of a business includes an implied covenant that the vendor will not thereafter directly solicit the customers of the business thereby depriving the purchaser of the fruits of his bargain. Brown v. Superior Court, 34 Cal. Rptr. 559, 212 P. 2d 878, 881; Harrison v. Cook, 213 Cal. App. 2d 527, 29 Cal. Rptr. 269, 271 (2d Dist. Ct. App.); Bergum v. Weber, 136 Cal. App. 2d 389, 288 P. 2d 623, 625 (2d Dist. Ct. App.). He argues in this regard that Mrs. Hunt's ability to compete existed only with respect to past customers the solicitation of whom was barred by California law in any circumstances. However, the covenant itself was not thus limited, and since the vendor of the Butler-Hunt agency was the estate of Mrs. Hunt's deceased husband, not Mrs. Hunt in her individual capacity, there appears to be serious question under California law whether any covenant not to compete would be implied as against her. Cf. California Linoleum & Shades Supplies v. Schultz, 105 Cal. App. 471, 287 Pac. 980 (2d Dist. Ct. App.) (president of vendor corporation who signed agreement not personally bound). Accordingly, the covenant arising by operation of California law did not deprive the express covenant of Mrs. Hunt of economic reality since it was arguably "desirable to define precisely" the rights of the parties "rather than to guess what a court may decide" in the particular circumstances (see Harvey Radio Laboratories, Inc. v. Commissioner, 470 F. 2d 118, 119 (C.A. 1)), and "reasonable men, genuinely concerned with their economic future" (Schulz v. Commissioner, 294 F. 2d at 55) might well prefer to have their rights protected under the compulsion of an explicit convenant rather than to take a chance upon the uncertain coercive power of a possibly inapplicable implied contract.

George L. Rogers, for the petitioners.

Earl Goldhammer and O. Richard Skopil, for the respondent. STERRETT, Judge: The Commissioner determined deficiencies in petitioners' Federal income tax as follows:

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5140-71

1, 876. 00

5141-71

2, 589.00

5142-71

2, 397. 00

5143-71

1, 387. 00

5144-71

3, 317. 00

5145-71

4, 946. 00

5154-71

2, 353. 00

5218-71

21, 382. 00

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Peter W. Melitz and Virginia W. Melitz..
Lyle G. Shelton ----.

Joseph B. La Monica and Arva L. La Monica_
Byron D. Williams and Frances T. Williams.
John C. Davenport and Ina C. Davenport_.
Richard W. Daby and Gladys M. Daby..
Site-Pak Development Corp..

Milton A. Miner and Kathleen N. Miner.......
DeWayne H. Wohlleb and Marilyn A. Wohlleb

These deficiencies were determined by the respondent for the calendar year 1967, except for Site-Pak Development Corp.,2 for which the deficiency determined was for the fiscal year ending March 31, 1968. Certain issues have either been conceded or were not raised by the petitioners. The issues presented for determination are:

(1) Whether a $250,000 payment made in 1967 pursuant to a land sale contract was prepaid interest for which the Analand partnership, in which the petitioners are partners, is entitled to an interest deduction under section 163 (a) for the taxable year in which paid.

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(2) Whether citrus trees are tangible personal property within the meaning of section 179 and therefore eligible for an additional first-year depreciation allowance.

2 Site-Pak Development Corp. is a corporation which is the successor in interest to Whitesides, Williams & Coult, Inc., pursuant to a reorganization under sec. 368(a) (1) (C). Whitesides, Williams & Coult, Inc., actually filed the income tax return for the fiscal year ending Mar. 31, 1968, before the reorganization took place.

3 We note that with respect to petitioners Milton A. Miner and Kathleen N. Miner a claimed medical expense deduction was disallowed in the deficiency notice to the extent of $1,056. With respect to petitioners DeWayne H. Wohlleb and Marilyn A. Wohlleb, a claimed investment expense deduction was disallowed in the deficiency notice to the extent of $3,000 since the respondent determined this payment was incurred in the acquisition of property and thus was a capital expenditure. We do not know whether these petitioners have conceded these respective points; however since no mention of them was made in their respective petitions, other than to place in controversy the entire deficiency, and since no evidence was presented at the hearing, we conclude that respondent's determination on these points must be sustained. Rule 142, Tax Court Rules of Practice and Procedure. All Code references herein are to the Internal Revenue Code of 1954, as amended and as applicable to the taxable year involved, unless otherwise indicated.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.

All the petitioners, except DeWayne H. and Marilyn A. Wohlleb, filed their Federal income tax returns for the calendar year 1967 or the fiscal year ending March 31, 1968, in the case of Site-Pak Development Corp. (formerly Whitesides, Williams & Coult, Inc., in 1968), with the district director of internal revenue at Los Angeles, Calif. DeWayne H. and Marilyn A. Wohlleb filed their Federal income tax return for the calendar year 1967 with the Internal Revenue Service Center, at Ogden, Utah. At the time of the filing of the petitions herein, the petitioners' legal residences, or in the case of SitePak Development Corp. (hereinafter Site-Pak), the principal place of business, were as follows:

Kenneth D. and Rhetta S. LaCroix____
Kenneth L. and Florence H. Lorenz__

Orville W. and Martha L. Bottorff_
Robert L. and Nancy T. Duey__

Robert E. and Margaret C. Washbon___.
John H. and Lois L. Ryan----

Charles H. and Billie N. Ransom__
Charles W. and Nancy H. Plows‒‒‒‒‒
Peter W. and Virginia W. Melitz_----
Lyle G. Shelton_-_-_

Joseph B. and Arva L. LaMonico_--
Byron D. and Frances T. Williams-
John C. and Ina C. Davenport---
Richard W. and Gladys M. Daby-
Site-Pak Development Corp‒‒‒‒
Milton A. and Kathleen N. Miner_

DeWayne H. and Marilyn A. Wohlleb_-----

Anaheim, Calif.
Riverside, Calif.
Newport Beach, Calif.
Do.

Do.

Long Beach, Calif.
Anaheim, Calif.

Do.

Encino, Calif.
Laguana, Calif.
Tustin, Calif.

Newport Beach, Calif.
Garden Grove, Calif.
Sacramento, Calif.
Brea, Calif.

Los Angeles, Calif.
Sacramento, Calif.

In all cases, the spouses are petitioners herein solely by reason of having filed a joint return.

In 1967 Whitesides, Williams & Coult, Inc. (now Site-Pak and hereinafter referred to as Whitesides, Inc., for the years prior to its reorganization), provided investment counseling and estate-planning services to its clients. As part of its services, Whitesides, Inc., sought out economically sound investments which would serve as tax shelters. Whitesides, Inc., normally arranged from five to seven of such real estate projects a year.

Prepaid Interest

Casualty Insurance Co. of California (hereinafter Casualty) was in the insurance business. In 1967 Casualty was the owner of an office

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building located at 1477 South Manchester Avenue, Anaheim, Calif. (hereinafter the Manchester property), which it occupied and used in its business.

The Manchester property was encumbered by a deed of trust executed on February 23, 1967, which secured a promissory note of the same date. The deed of trust named Casualty as trustor and California Federal Savings & Loan Association (hereinafter California Federal) as beneficiary. The promissory note was payable in installments of $6,560 a month, and the approximate balance of the Loan on December 14, 1967, was $990,000.

Under the terms of the deed of trust and the promissory note, if Casualty prepaid any amount of principal over 20 percent of the original amount of the loan, it would be subject to a prepayment penalty of 6 months' interest. Also if Casualty sold or transferred the property without California Federal's consent, the entire unpaid principal balance, interest, and prepayment charges would become immediately dues and payable.

In 1967 Casualty was experiencing difficulties arising from inadequate cash flow, inadequate reserves as required by the insurance commissioner of the State of California, and other financial problems. As a result, Casualty decided to sell the Manchester property. During 1967, Whitesides, Inc., was made aware of Casualty's desire to sell the Manchester property and, after investigation, Whitesides, Inc., believed that a purchase of this property would be the sort of investment package for which its clients, the petitioners herein, and a few others, were looking.

After extensive negotiations, Casualty and Whitesides, Inc., agreed upon the terms of sale. The form of the sale was a land sales contract. On October 17, 1967, escrow instructions to Stewart Title Co. of Orange County (hereinafter Stewart) were executed on behalf of Casualty and Whitesides, Inc. Such escrow provided, among others, the following terms and conditions:

I will hand you $250,000, representing prepaid interest only *** to apply on the total purchase price per contract of sale of $1,300,000 * * *

This escrow is contingent upon the approval of the Insurance Commissioner of the State of California approval of the contract to be delivered herein and is further contingent upon delivery to escrow of a lease satisfactory to the principals herein * * *

Purchaser herein will execute a note secured by Deed of Trust in the amount of $1,300,000 * * *

The sums deposited herein by purchaser, in the amount of the total $250,000, is to represent prepaid interest only *** [Emphasis supplied.] These escrow instructions were amended to show that verbal approval was received by the insurance commissioner pursuant to the original escrow instructions. On October 17, 1967, Whitesides, Inc., deposited

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