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Schwartz v. Wisconsin Department of Revenue9/11/2002
. Randall Schwartz appeals from a circuit court order affirming a decision and order of the Wisconsin Tax Appeals Commission (the Commission). The Commission determined that $112,278 of a $175,000 payment Schwartz received for the sale of his interest in Global Fastener & Supply, Inc. (Global), was taxable income paid in exchange for a covenant not to compete. The Commission further determined that the remainder of the payment was nontaxable income paid in exchange for a release of Schwartz's personal injury claims. On appeal, Schwartz contends that: (1) the Commission erred in failing to follow, or give sufficient weight to, the Internal Revenue Service's (IRS) acceptance of Schwartz's allocation of the $175,000 payment; (2) the Commission otherwise erred in allocating the taxable and nontaxable portions of the payment; and (3) the Commission improperly denied his request for a rehearing. We reject Schwartz's arguments. We affirm the circuit court order upholding the Commission's decision and order.
FACTS
. We take the relevant facts from the Commission's decision and order and from portions of the record made before the Commission. From 1985 until 1990, Schwartz was one of three shareholders of Global. Schwartz was also the principal salesperson for Global. In 1990, Schwartz came to believe that the other shareholders in Global, James Witt and Arthur Salani, were acting improperly and contrary to Global's best interests. As a result, Schwartz suffered anxiety and panic attacks. He continued to exhibit these symptoms for several years thereafter. Due to his condition, Schwartz was unable to work for Global from August 1990 until January 1991.
. In January 1991, Schwartz, Witt, Salani and Global entered into a settlement and purchase agreement (Agreement) that was dated and effective as of September 15, 1990. Under the terms of the Agreement, Schwartz sold his interest in Global in exchange for $350,000. Global paid Schwartz $100,000 at the closing and executed a promissory note to Schwartz for the $250,000 balance. The Agreement provided that $175,000 of the $350,000 payment to Schwartz was allocated to his personal injury claims and his covenant not to compete. The Agreement provided as follows:
The parties shall allocate, for tax purposes, $175,000 (including $100,000 paid in cash at Closing) in consideration of the release by [Schwartz] of the possible claim for personal injury (and, therefore, such allocated amount shall be excludable as income for tax purposes in accordance with Internal Revenue Code section 104(a)(2) and the other relevant Code sections and Treasury regulations) and for the covenant not to compete.
As the above provision reveals, the Agreement did not specifically state how much of the $175,000 payment was allocated for the release of Schwartz's personal injury claims and how much for his covenant not to compete.
. The parties additionally executed a mutual release agreement and Salani and Witt also executed a directors' resolution, both of which addressed the $175,000 payment. Like the Agreement, neither of these documents specified how the payment was allocated between Schwartz's release of his personal injury claims and his covenant not to compete. Further, Global's own accounting books did not make any specific allocation regarding the payment.
. All the parties to the Agreement honored their promises. Global satisfied the $250,000 note by payments to Schwartz of $8000 per month, consisting of $6139 in principal and $1861 in interest. Schwartz did not make any further claims against Global or Witt and Salani with regard to his personal injury claim, and he complied with the restrictions
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