UNITED STATES DISTRICT COURT FOR THE 

DISTRICT OF NEW HAMPSHIRE

Irwin Muskat and Margery Muskat

v. Civil No. 06-cv-30-JD

Opinion No. 2007 DNH 091

United States of America

O R D E R

Irwin and Margery Muskat brought suit seeking a refund of

taxes paid in 1998 on proceeds from the sale of their business,

Jac Pac Foods, Ltd., to Manchester Acquisition Corporation

("MAC"), a subsidiary of Corporate Brand Foods America, Inc. The

Muskats contend that they mistakenly characterized $1,000,000

paid to them by MAC in the course of the transaction as ordinary

income when it was instead a payment for Irwin Muskat's goodwill,

which should have been taxed as a long-term capital gain. As a

result, they argue, they overpaid their income taxes in 1998 by

$203,434. The United States disagrees and moves for summary

judgment.

Standard of Review

Summary judgment is appropriate when “the pleadings,

depositions, answers to interrogatories, and admissions on file,

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together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party

is entitled to a judgment as a matter of law.” Fed. R. Civ. P.

56(c). The party seeking summary judgment must first demonstrate

the absence of a genuine issue of material fact in the record. 

See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). A party

opposing a properly supported motion for summary judgment must

present competent evidence of record that shows a genuine issue

for trial. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

256 (1986). All reasonable inferences and all credibility issues

are resolved in favor of the nonmoving party. See id. at 255. 

Background

Jac Pac Foods, Ltd. was a meat processing, marketing, and

distributing business in Manchester, New Hampshire, founded by

Irwin Muskat's grandfather in 1933. By 1998, Irwin was the

president and chief executive officer of Jac Pac and owned 37% of

the stock in the company. On March 31, 1998, MAC and Jac Pac

entered an Asset Purchase Agreement ("APA"), in which they agreed

to the terms of the sale of Jac Pac to MAC. The APA required

Irwin to sign employment, noncompetition, and subscription

agreements, which he did on May 7, 1998, when the transfer of Jac

Pac to MAC occurred.

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 The APA included "Exhibit B, Purchase Price Allocation,

Tax Purposes." Under Exhibit B, payment for the noncompetition

agreement was $3,995,599 and payment for goodwill was

$15,908,511. Under the noncompetition agreement, the $3,995,599

was to be paid to Irwin in separate amounts of $1,000,000 upon

signing, $955,599 in annual installments for three years, and

$2,000,000 in 120 monthly installments. As agreed, MAC paid

Irwin $1,000,000 on May 7, 1998, when he signed the

noncompetition agreement. 

The Muskats then included the $1,000,000 as ordinary income

on their tax return for 1998. In 2002, they filed an amended

return declaring the $1,000,000 as a long-term capital gain. 

They contend that they have overpaid their income tax by $203,434

because of erroneously including the $1,000,000 in ordinary

income.

Discussion

The United States moves for summary judgment on the ground

that the allocation for tax purposes in Exhibit B to the APA

establishes that the $1,000,000 payment was made under the

noncompetition agreement, making that amount taxable as ordinary

income. The United States relies on 26 U.S.C. § 1060, which

provides allocation rules for certain asset acquisitions. The

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Muskats argue that the $1,000,000 was paid in exchange for

Irwin's goodwill, not as compensation for the noncompetition

agreement, and therefore, should have been taxed as a long-term

capital gain. The Muskats contend that § 1060 does not apply to

them or to the noncompetition agreement because they are not

parties to the APA.

"If in connection with an applicable asset acquisition, the

transferee and transferor agree in writing as to the allocation

of any consideration, . . . such agreement shall be binding on

both the transferee and transferor unless the Secretary

determines that such allocation . . . is not appropriate." §

1060(a). An applicable asset acquisition is "any transfer

(whether directly or indirectly) (1) of assets which constitute a

trade or business, and (2) with respect to which the transferee's

basis in such assets is determined wholly by reference to the

consideration paid for such assets." § 1060(c). Under the

pertinent regulation in effect at the time of the sale of Jac

Pac, the transferor was the seller of the assets and the

transferee was the purchaser of the assets. 26 C.F.R. § 1.1060-

IT(a) (1998). In determining whether assets being sold

constitute a trade or business for purposes of § 1.1060-IT, all

of the circumstances are to be considered including "[r]elated

transactions, including . . . covenants not to compete,

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employment contracts, . . . or other similar agreements between

the purchaser and seller (or managers, directors, owners, or

employees of the seller) in connection with the transfer." §

1.1060-IT(b)(2).

There appears to be no dispute the sale of Jac Pac to MAC

constituted an applicable asset acquisition within the meaning of

§ 1060. The APA establishes that Jac Pac was the "Seller" and

MAC was "the Purchaser." APA § 2.2. The APA identifies Irwin

Muskat as "the president and chief executive officer of Seller." 

Id. Irwin Muskat signed the APA on behalf of Jac Pac. 

The APA allocated the purchase price into categories for tax

purposes. APA § 1.6, Exhibit B. MAC's obligations under the APA

were contingent upon certain listed conditions precedent,

including that Irwin Muskat would sign and deliver a

noncompetition agreement that was mutually satisfactory to him

and to MAC. APA § 6.1(o). The noncompetition agreement was

signed and delivered as promised and provided for payment to

Irwin of $1,000,000 on the date of signing and other amounts in

installments for a total of $3,955,599. The agreed allocation

listed $3,955,599 as allocated to "Non-Compete." 

The parties disagree as to whether § 1060 applies to the

Muskats. The United States asserts that because Irwin Muskat's

noncompetition agreement was part of the transaction of selling

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Jac Pac, § 1060 applies to him and to that agreement. The

Muskats contend that as non-parties to the APA, they are not

bound by the allocation in Exhibit B.

On its face, § 1060 applies to determine the transferee's

basis and the transferor's gain or loss in an applicable asset

acquisition. § 1060(a). The Muskats were neither the transferor

nor the transferee in the asset acquisition transaction governed

by the APA. Although the noncompetition agreement was part of

that transaction, Jac Pac was the transferor under the terms of

the APA. The APA and Exhibit B are binding as to the allocation

of the transferred assets for tax purposes pertaining to Jac Pac

and MAC. Because the Muskats were not the transferors for

purposes of the APA, however, § 1060 does not apply to them.

The United States moved for summary judgment based on the

application of § 1060. Although other issues are suggested, such

as whether extrinsic evidence may be used to show the parties'

intent in entering the noncompetition agreement, only the

application of § 1060 is addressed in this order. Whether or not

payments made to Irwin Muskat under the noncompetition agreement

can be allocated to another purpose remains in dispute.

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Conclusion

For the foregoing reasons, the defendant's motion for

summary judgment (document no. 12) is denied.

SO ORDERED.

____________________________

Joseph A. DiClerico, Jr.

United States District Judge

July 25, 2007

cc: James E. Higgins, Esquire

Robert J. Kovacev, Esquire

John-Mark Turner, Esquire

Karen Wozniak, Esquire

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