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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?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).
Such agreements can protect firms, the lawyers say.
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 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.
When such a business distributes its property, it generally is deemed to have sold the property at fair market value, which requires it to recognize a gain (IRC section 336(a)).