United States Tax Court

“ EMPLOYEE recognizes that it is in the mutual interest of himself and EMPLOYER that he remain an active public figure in these areas and, therefore he agrees that he will not unreasonably refuse to perform any services called for by the terms of such agreement. Should a dispute arise between the parties concerning the reasonableness of any EMPLOYEE refusal to perform any said services, such dispute shall be subject to binding arbitration. ”

“ The parties recognize that the value of est must at all times be considered speculative. To this date, the exploitation of est in an economic sense has been largely limited to the United States of America. All economic data with respect to such activities of Erhard Seminars Training, Inc., have been made available to WELBEHAGEN and are warranted by PMSA to be true and correct in all respects. ”

“ The paucity of information displayed by the central figures in the creation and successful development of the Body of Knowledge about these foreign entities to whom this valuable asset had ostensibly been entrusted is inexplicable. ”

“ INTEREST ON ALLEGED INDEBTEDNESS FOR WELBEHAGEN LICENSE Petitioner claimed interest expense deductions in the taxable years ended June 30, 1976 and 1977 with respect to the purported indebtedness incurred in acquiring the 10-year license from Welbehagen. Section 163 allows as a deduction all interest paid or incurred on an indebtedness. It is well settled that the indebtedness referred to in section 163 must be genuine, and that economic realities govern over the form in which a transaction is cast. ”

“ Employer acknowledges that Employee is indispensable for the carrying out of the Employer's educational activities with reference to est. Employer further acknowledges that all employees of Employer are important to Employer's activities. An increasing number of such employees are developing skills and relationships which substantially enhance their importance to the educational activities of the Employer with reference to est.
3. The parties acknowledge that Erhard Seminars Training, Inc. provided additional compensation to its employees through a bonus program. ”

“ During the est training, an individual experiences and looks at in an expanded state of consciousness and without judgment, what is actually so with regard to specific areas in his or her life and the individual's fixed or unconscious attitude about those areas. The est training is about aliveness, satisfaction, fulfillment and the experience of completion. The training does not change what one knows ”

“ Participation as provided for herein shall be independent of any other economic relationship as between the parties. Corporation acknowledges that WE has additional contractual relationships of many kinds which require and provide for activities of WE as an independent contractor. Corporation shall not interfere with or participate in the economic consequences to WE of any such other and independent activities. The parties will from time to time discuss the relevance of any such activities to this agreement. ”

“ This Agreement is entered into this Fourth day of October, 1971, by and between WERNER ERHARD, an individual, hereinafter referred to as SELLER and PRESENTACIONES MUSICALES, SA, a Panamanian corporation, hereinafter referred to as BUYER.
RECITALS
(1) SELLER has originated certain processes, methods and procedures which stimulate the growth and expansion of human mental powers. Unless properly developed, such mental growth and expansion would, in the normal course of human life, remain dormant ”

“ After the initial presentation of the est standard training in 1971, other forms of training were developed and offered to the public for compensation during the year here involved, including communications workshops, the relationships program and graduate review seminars. Generally, seminars consist of 10 sessions, each lasting three hours and 15 minutes, conducted over a four-month period and geared to a particular subject which has been previously discussed in broader terms in the course of the est standard training. ”

“ The parties do contemplate the immediate licensing by WELBEHAGEN of rights for the United States of America at a price which should permit WELBEHAGEN to function under this agreement economically. PMSA acknowledges that it will be impossible for WELBEHAGEN to make payments beyond those provided for and in the manner provided for until and unless additional territorial licensing or sale by WELBEHAGEN take place for geographical areas other than the United States of America. ”

“ The compensation to be paid to EMPLOYEE under this Agreement shall not include payment for his services in other than a person-to-person, face-to face dissemination of the processes, procedures and methods and promotion thereof; and, EMPLOYEE shall receive Ten Percent (10%) of all income from publication, recording, television, motion pictures and any other related dissemination that does not involve a person-to- person, face-to-face presentation. ”

“ It affects an individual's life in the way it would be affected when there was an essential shift in the individual's experience of living from the attempt to become satisfied with the experience of being satisfied.
FN3 The resulting structure that purportedly accomplished these goals was as follows: The Body of Knowledge was sold to Welbehagen, a Netherlands corporation, which was owned by a Swiss charity (Foundation) through a Swiss holding company (Holding) . The stock of petitioner itself was owned by a Channel Islands entity (the Werner Erhard Charitable Settlement) . ”

“ EMPLOYEE shall have a reasonable opportunity to approve all services required of him by EMPLOYER and EMPLOYEE may refuse to perform any services which are not in keeping with his competence, position and personal dignity in the area of mind expansion and growth of mental awareness. ”

“ Under the agreement, petitioner was obligated to pay Welbehagen $10,000,000 on or before August 31, 1985, with interest on the unpaid balance at the annual rate of 10 percent. Petitioner contends that it is entitled to amortize the $10,000,000 purchase price of the license over a period of 10 years.
It is well established that the economic substance of a transaction, rather than its form, must control for Federal tax purposes. ”

“ Each annual installment shall consist of interest at the rate of nine percent (9%) on such sum as shall represent the principal value of licenses disposed of or directly operated by WELBEHAGEN from time to time. No interest shall be paid on any sum in excess of such principal value. WELBEHAGEN may prepay all principal at any time at its own convenience and without the consent of PMSA. So much of any payment as shall not be required for interest shall be attributed to principal. ”

“ BUYER represents that it shall use and develop said processes, methods and procedures in a competent business fashion and use all reasonable effort to maximize gross income from their use and development. ”

“ ERHARD does not now nor will he at any time in the future seek compensation or damages from PMSA or any other entity or individual related to PMSA for any compensation arising under the Employment Contract. Included shall be all claims which Erhard may have, whether or not he has knowledge of them as of this date, with reference to medical reimbursement, automobile expenses or costs, private office provisions, or other business expenses included or beyond Paragraphs 8, 9, 10, 11 or 12 of the Employment Contract of 4 October 1971. ”

“ The parties recognize that in any calendar year in which there is no net profit, there will be no profit participation sum. In any calendar year when the profit participation sum for employees and the profit participation sum for Employee, as set forth in number 5 below, exceeds the net profit, est will make pro rata payment of the net profit. ”

“ Under such circumstances, the graduate list can hardly be categorized as an asset exhausted by the passage of time. In short, we have nothing more than unsupported opinions, to which we give little credence, in the record to show that the assets in question had limited useful lives. [FN6]
Moreover, an asset of this type generally constitutes goodwill, i.e., the expectancy of continued patronage to the taxpayer who acquires the asset. Cf. Boe v. Commissioner, 307 F.2d 339 (9th Cir. 1962) . Goodwill is not a depreciable asset. Section 1.167 (a) -3, Income Tax Regs. ”