Tax consequences of liquidating a partnership the sociology of marital and dating relationships
But what they might not say is that employment and noncompete agreements can create serious income tax consequences when a firm or corporation is liquidated and goodwill assets such as client relationships are distributed among the shareholders.
There is the possibility of some relief, however: A CPA firm and its shareholders are in a better position to avoid serious tax consequences if such agreements are not in place when the professional corporation is dissolved.
The IRS determined their firm had realized a 8,000 gain on liquidation of its goodwill and Norwalk and De Marta, as shareholder partners, realized capital gains from the distribution of the goodwill.
The IRS argued that when the corporation was liquidated, it distributed to its shareholders “customer-based intangibles” in addition to tangible assets.
The Tax Court has held goodwill to be a vendible—and taxable—asset that can be sold with a professional practice 37 TC 39, 44 (1961)).
According to the IRS, when a corporation distributes “clients and customer-based intangibles” to its shareholders, IRC sections 331 and 336 apply; such intangibles include the corporation’s client base, client records, workpapers and goodwill (including going-concern value).
There’s no doubt that a firm can distribute tangible property to its shareholders as a dividend, whether it liquidates or not.
awyers advise CPAs to have employment and noncompete agreements in their accounting practices.
They recommend that all employees, including those who are shareholders, promise—in writing—not to take clients with them if they leave the firm.
Such agreements can protect firms, the lawyers say.
The shareholders recognize capital gains on the fair market value of the property received in excess of their basis in the stock.
But what about distributions of the business’s intangible property and goodwill?
In the cases discussed in this article, the Tax Court did not distinguish between personal service corporations, such as CPA firms, and commercial organizations, such as an ice cream distribution company, in identifying the individual ownership of customer-based intangibles.