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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 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.

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

But a question arises when it distributes to its shareholders all its assets—both tangible and intangible—and ceases doing business: Is there a taxable distribution of its intangible goodwill? According to the Tax Court, on the other hand, the answer is that it depends.

In a firm or corporate liquidation, or when a shareholder redeems his or her interest, it’s not uncommon for the business to distribute property as well as money in exchange for the capital stock a shareholder held.

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.When a firm or corporation distributes to its shareholders all of its assets, both tangible and intangible, and ceases doing business, the IRS says there is a taxable distribution of its intangible goodwill.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).

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