- 19 - Commissioner, 52 T.C. 367, 376 (1969), affd. per curiam 451 F.2d 173 (9th Cir. 1971). When there is a difference between the tax rates applied to ordinary income and capital gains, the tax interests of buyers and sellers in the allocations between goodwill and covenants not to compete or consulting agreements are antithetical. In such instances: Sellers [prefer] allocations to goodwill because gain on a sale of goodwill is capital gain, while amounts received for a covenant not to compete are ordinary income. Buyers, in contrast, prefer allocations to covenants not to compete because amounts so allocated can be written off over the period covered by the covenant, whereas the cost of goodwill is not depreciable and produces no tax benefit until the goodwill is sold or lost. * * * [Bittker & Lokken, Federal Taxation of Income, Estates and Gifts, par. 4.4.6, at 4-74 to 4-75 (2d ed. 1993).] For years in which capital gain and ordinary income are taxed at the same rate, sellers and buyers will generally lack such tax adversity. Sellers will be indifferent as to whether they will be required to recognize capital gain or ordinary income, and hence may have no tax stake in the allocation between goodwill and covenants not to compete or consulting agreements.6 Buyers, however, will still desire allocations to covenants not to compete or consulting agreements, because such agreements generate tax deductions. 6 A well-noted exception is a seller who has capital losses. See sec. 165(f).Page: Previous 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Next
Last modified: May 25, 2011