- 12 - OPINION Issue 1. Fair Market Value of the Covenant Not To Compete Entered Into by Mr. Langdon and Bravo The amounts of any tax deficiencies of the parties herein turn on the value of the covenant not to compete. That is so because, as to BDC, the amount properly allocated to intangibles (in excess of basis) is taxable as capital gain. When it is distributed to the shareholder (Mr. Langdon), it is treated as a nondeductible dividend and taxed again to him. See secs. 61(a)(7), 11, 301(c)(1). On the other hand, the amount allocated to the covenant will be taxed to the shareholder as ordinary income, but such amount will escape tax at the corporate level. Thus, it is only taxed once, not twice. The same applies to the consulting agreement. In other words, the consulting agreement and covenant, even though part of a total package, are treated as separate agreements between the buyer and shareholder, and the selling company is not taxed thereon. The buyer's interests are not adverse. It can ratably deduct the cost of the covenant not to compete over the life of the covenant-–in this case 5 years. See sec. 1.167(a)-3, Income Tax Regs. So once again, the more that is allocated to the covenant, the greater the tax benefit to all parties.7 7Bravo, the buyer, was not before the Court.Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Next
Last modified: May 25, 2011