Court Opinion

ID: 9451326
Source: CourtListenerOpinion
Date Created: 2023-08-04 17:13:57.173779+00
Date Added: 2024-06-11T17:32:40.030866
License: Public Domain

RIVES, Circuit Judge
(dissenting):
I cannot escape the conclusion that the amount of $150,000.00 to be paid by Gay to Balthrope under the contract of May 24, 1958, was actually a part of the purchase price of Balthrope’s stock in KITE, Inc., and was not really a payment for a covenant not to compete and for consulting services. The sale started as a sale of the assets of the radio station. No one estimated the value of those assets at less than $400,000.00. In the opinion of the *35brokers, Stubblefield and Landis, the value was between $400,000.00 and $450,-000.00. Gay originally offered $400,-000.00 for the assets and Balthrope accepted that offer. Gay later suggested that Balthrope take $150,000.00 of the $400,000.00 “as a covenant not to compete, or consulting contract, or any way you want to do it.” At that time Bal-thrope was without any tax advisor. He was a sick man, not going back in the radio business. Agreeing not to compete with Gay was no detriment to Bal-thrope and no real advantage to Gay, except taxwise. There was no genuine bargaining over such a covenant. Its discussion consumed five minutes or less and included no comments on the tax consequences which Gay obviously had in mind, and as to which Balthrope was ignorant. Balthrope accepted the written contract as prepared by Gay.
In Barran v. Commissioner of Internal Revenue, 5 Cir. 1964, 334 F.2d 58, so strongly relied on by the majority, it was pointed out, “that the price paid was substantially in excess of the value of the assets transferred” (334 F.2d at 61). Here the total purchase price, including the $150,000.00, was the minimum estimated value of the assets. There was no evidentiary substantiation of $150,000.00 or any other amount as a fair value for the agreement not to compete and for consultation services. The few letters which Balthrope did write were at Gay’s request, simply “to make this consultation thing stand up.” Mrs. Balthrope had no experience which would qualify her as a consultant. The contract which Gay prepared allocating the $150,000.00 for consulting and managerial services of the Balthropes and for their agreement not to compete provided:
“Connie B. Gay realizes that the foregoing represents a very modest arrangement and that some further consideration should be provided. Accordingly, he further agrees that, if neither Charles W. nor Mary Virginia Balthrope. should survive the term of this agreement, he will pay the remaining installments due hereunder to the estate of the last' survivor but with the privilege of anticipating the balance due without penalty.”
The Tax Court comments that, “This provision has the hollow ring of evidence calculated for use primarily in a tax controversy.” (R. 203.) If the Commissioner took the position that the allocation of $150,000.00 to the covenant had no basis in the economic realities of the transaction, we would, I believe, not hesitate to decide with the Commissioner. While the taxpayer, in view of his ill-advised contract, has a stronger burden, I do not think that the ultimate result should be left so completely to the Commissioner. Such a system tends toward a government of men rather than of law. I cannot escape the conclusion that the allocation was a sham, and that the $150,000.00 was actually a part of the purchase price for Balthrope’s stock.
I, therefore, respectfully dissent.