Report cash liquidating distributions

There’s no doubt that a firm can distribute tangible property to its shareholders as a dividend, whether it liquidates or not.

Without such an agreement, client goodwill attributable to the personal characteristics of a shareholder isn’t a property right belonging to, or transferable by, a firm.

A NONCOMPETE COVENANT, to be enforceable, must reasonably reflect an employer’s protectable interest in both the nature and the scope of the restraint on the employee.

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.

In planning for a liquidation of their professional practice or advising clients about the liquidation of a commercial organization, CPAs will find that the problems and the solutions are likely to be the same.

Trade secrets, special processes, patents and proprietary information are among an employer’s protectable interests, but how noncompete provisions create an employer property right isn’t clear.

THE PRACTITIONER SHOULD ADVISE the client to terminate employment and noncompete agreements with shareholders before liquidation.

In a professional practice, tangible property such as office equipment, furniture and fixtures makes up a small portion of a firm’s total value.

By far the largest element of value in a profitable professional practice is the intangible .

The IRS asserts that distribution of “clients and customer-based intangibles” to shareholders is taxable, but the Tax Court has held that it isn’t if a noncompete agreement between the shareholder or employee and the firm does not exist.

This apparent contradiction presents some questions to which there are no black-and-white answers.

THE IRS SAYS DISTRIBUTIONS of customer-based intangibles to shareholders are taxable.

Tags: , ,