Thomas R. Yandell and Dorothy S. Yandell, Husband and Wife v. United States

Appellants brought this action in the court below seeking recovery and refund of individual income taxes for the calendar year 1958. A deficiency had been determined based upon the claim of the Commissioner of Internal Revenue that a certain sum of $15,000, agreed to be paid under a contract accomplishing dissolution of a partnership, should be taxed as ordinary income, whereas the taxpayers had reported the same as capital gains.

Yandell and Clarke had been engaged for some years as partners in the advertising and publishing business in Portland, Oregon. The partners fell out, agreed to dissolve the partnership, and entered into a written agreement whereby Clarke agreed to buy out Yandell for 25 percent of book value of assets (exclusive of balance sheet good will) plus the accounts receivable. Several drafts of an agreement were drawn and successively modified before the final signed agreement was executed. Some of the earlier drafts provided for a sale of the good will of the business, the price therefor to be determined by arbitrators, but made no mention of any covenant by Yan-dell not to compete with Clarke. In the later drafts there was inserted a “covenant not to compete”…