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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).
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