Federal Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent, 385 F.2d 127 (3d Cir. 1967)

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US Court of Appeals for the Third Circuit - 385 F.2d 127 (3d Cir. 1967) Argued April 20, 1967. Decided Sept. 27, 1967

Martin D. Cohen, Cohen, Rosenbaum & Scher, Newark, N.J., for petitioner.

Stephen H. Paley, Dept. of Justice, Tax Division, Washington, D.C. (Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, David O. Walter, Attys., Dept. of Justice, Washington, D.C., on the brief), for respondent.

Before SMITH and FREEDMAN, Circuit Judges, and WORTENDYKE, District judge.



The taxpayer, a wholesale gasoline and retail fuel oil distributor, sold its fuel oil business to Sinclair Refining Company under a contract which allocated a substantial amount of the purchase price to taxpayer's five year covenant not to compete. The Commissioner and the Tax Court accepted this allocation and taxed yearly payments made pursuant thereto as ordinary income. If the allocation is accepted this is admittedly the appropriate tax treatment. Taxpayer, however, challenges the allocation on the ground that it does not accord with the economic reality of the transaction. It urges that the allocation to the covenant was in fact for good will and should be taxed as long term capital gain.

In Commissioner of Internal Revenue v. Danielson, 378 F.2d 771, 775 (3rd Cir. 1967), this Court, sitting en banc, adopted the following rule: '(A) party can challenge the tax consequences of his agreement as construed by 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 unenforceability because of mistake, undue influence, fraud, duress, etc.' No such proof has been offered or adduced in the instant case.

The decision of the Tax Court will be affirmed.