dissenting: I respectfully dissent, for two reasons. First, I do not believe the record in this case justifies ignoring for tax purposes the specific terms of the agreement here involved even under the so-called strong-proof standard used by the majority. In Ullman v. Commissioner, 264 F. 2d 305, frequently relied upon by this Court and the majority here, it was stated:
when the parties to a transaction such as this one have specifically set out tbe covenants in the contract and have there given them an assigned value, strong proof must be adduced by them in order to overcome that declaration.
Such is the situation here.
In support of its conclusion that the degree of proof required to overcome the specific declarations of the parties has been provided by Throndson in this case, the majority relies primarily on evidence indicating that Throndson personally was not aware of the covenant not to compete and did not bargain therefor, that it was unlikely, for various reasons, that Throndson would set up a competitive practice in San Eafael, that Schmitz’ attorney implied to Throndson’s attorney that the reason for the covenant not to compete was to assist Schmitz in financing the transaction, and that neither Throndson nor his attorney understood the tax implications of the covenant not to compete. On the other hand, it seems clear that both of the parties to the agreement were represented by counsel, who presumably acted within their authority in agreeing on the terms of the contract, and that both attorneys knew that a covenant not to compete was included in the agreement and the value that was being allocated to it. The fact that Throndson personally did not bargain for the covenant not to compete is immaterial if his attorney was acting within his authority in doing so.
While there may have been goodwill attached to the San Eafael practice, that goodwill presumably had been established by both of the partners but it would be of little value to Schmitz unless Throndson specifically agreed not to set up a competing practice. It is evident that Throndson had some idea of the value of a noncompetitive agreement when he offered to sell the San Eafael business to Schmitz for $90,000 but was only willing to pay Schmitz $50,000 for the San Eafael practice because Schmitz was going to continue in practice in San Eafael in any event. It further appears evident that in all probability Schmitz finally agreed to pay $70,000 for the San Eafael practice only because of the protection, combined with the tax advantage, that it gave him. The covenant can hardly be said to be lacking in economic or business reality.
It seems to me that the real reason for the conclusion of the majority is to avoid what it considers to be the lopsided tax consequences of allocating the entire $36,000 to the covenant not to compete. However, the conclusion it reaches gives a lopsided tax advantage to the party who failed to protect his interest in arm’s-length bargaining, to the tax disadvantage of the party who did protect himself and possibly paid a part of the purchase price for the tax advantage. The Commissioner is a stakeholder here and as between the parties I would require much stronger proof than has been presented here to permit either party to disavow the covenant not to compete and the value assigned thereto, which the attorneys admittedly agreed upon. To do otherwise seems to me to sap all the strength out of the strong-proof rule and in doing so to produce an unreasonable and inequitable result.
My second reason for disagreeing with the majority opinion is that I see no reason for the Court in this case to specifically accept or reject the degree-of-proof standard enunciated bj the Court of Appeals for the Third Circuit in reversing this Court in Commissioner v. Danielson, 378 F. 2d 771. The instant case arose in the Ninth Circuit, and the Court of Appeals for that circuit appears to apply the strong-proof rule of the Ullman case in deciding issues such as we have here, Schulz v. Commissioner, 294 F. 2d 52, just as this Court has done in the past. It would be no departure from the precedents of either this Court or the Court of Appeals for the Ninth Circuit, to which this case most likely will go if appealed, to use the strong-proof standard; so I see no reason why this Court should not decide this case on the basis of the strong-proof rule and wait until we must decide a case arising in the Third Circuit before we take issue with the Court of Appeals for that circuit on the proper standard to be used in such cases.
Moreover, in Commissioner v. Danielson, supra at 775, the Court of Appeals stated:
a party can challenge the tax consequences of his agreement as construed try the Commissioner only by adducing proof which in an action between the parties to the agreement would be admissible to alter that construction or to show its unenforeeability because of mistake, undue influence, fraud, duress, etc. * * * [Emphasis supplied.]
Here the Commissioner has taken no position as to the proper construction of the agreement between the parties; he simply takes the position that it should be applied consistently with respect to both parties. Only the sellers were before the Court in Danielson. We cannot be certain what standard the Court of Appeals for the Third Circuit would use where the dispute is between the parties.
For the above reasons I do not believe it is necessary for this Court to specifically reject the standard announced by the Third Circuit in Danielson in deciding this case, and I would not do so.
Tietjens and Tannenwald, JJagree with this dissent.