Treatment of Goodwill Upon the Sale of a Business: Asset of the Owner v. Asset of the Company

In 1980, Larry E. Howard, D.D.S. incorporated his dental practice and entered into an employment agreement and covenant not to compete with the corporation. In 2002, Dr. Howard retired and negotiated the sale of his practice to a corporate buyer for approximately $613,000, most of which was allocated to intangible assets. Dr. Howard reported over $320,000 of the purchase price on his personal return as long-term capital gain from the sale of personal goodwill. The IRS rejected this claim and asserted that the goodwill was a corporate asset that was distributed as a dividend. The recharacterization resulted in a deficiency determination in excess of $60,000, plus penalties and interest. Dr. Howard thereafter paid the additional tax and sought a full refund. The federal district court found in favor of the IRS and determined that when an employee is covered by a covenant not to compete, any goodwill generated from the employee’s work is an asset of the employer and not personal goodwill. 

Author’s Note: While medical practices generally are not considered to have goodwill, a dental practice can be distinguished and may have goodwill.

© 2010 Parsonage Vandenack Williams LLC

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HIRE Act Introduces New Tax Incentives for Employers For Hiring Employees

The  Hiring Incentives to Restore Employment (“HIRE”) Act, signed into law March 18, 2010, includes several important tax provisions designed to promote job growth and stimulate the United States economy.

Hire Now Tax Cut

$13 billion in tax breaks  are available to qualified employers both in the form of payroll forgiveness for Social Security taxes paid for qualified new hires, as well as a tax credit to employers for keeping those employees on payroll for 52 consecutive weeks.

Social Security Tax Forgiveness

Qualified Employer. A qualified employer is any non-governmental entity hiring in the United States. Federal, state or local governments or instrumentalities, except for state colleges and universities, do not qualify. Any employer may choose to opt out of the forgiveness program.

Qualified Employee. A  qualified employee is any previously unemployed individual hired between February 3, 2010 and January 1, 2011.  The individual must be able to show no more than 40 hours employment in the 60 days prior to hiring. The new hire cannot replace an employee unless the replaced employee’s departure was either voluntarily or for cause. Relatives of the employer, or shareholders owning more than 50 percent of the business, are not eligible employees.

Retained Worker Tax Credit

Employers will be eligible for an additional tax credit for each qualified retained worker kept on the payroll for 52 consecutive weeks. That credit will come as an increase to the Code Sec. 38(b) credit by the lesser of $1,000 or 6.2 percent of wages paid during the 52-week period.

 Qualified Retained Worker. A new worker kept on the payroll for 52 consecutive weeks might qualify as a retained worker. To ensure just pay, that worker needs to earn an amount equal to at least 80 percent of his or her first 26-week accumulated wage in his or her second 26 weeks.

 Employers may claim the retained worker credit only if the full 52-week period is met. Should a worker spend 51 consecutive weeks in employment and then leave, the employer would not be eligible for any portion of the tax credit.

© 2010 Parsonage Vandenack Williams LLC

  For more information, contact info@pvwlaw.com

IRS Issues Guidance on Correction of Certain Failures under Code Section 409A (Notice 2010-6)

The IRS has issued guidance for taxpayers with nonqualified deferred compensation plans on correcting certain failures to comply with the document requirements of IRC Section 409A. Taxpayers may rely on this guidance for tax years beginning on or after January 1, 2009.

Unless specific requirements are met, amounts deferred under a nonqualified deferred compensation plan are includible in gross income under Section 409A to the extent that the deferred amounts are not subject to a substantial risk of forfeiture and were not previously included in income. The amounts includible in income are also subject to two additional taxes.

Nonqualified deferred compensation plans must comply with Section 409A in both form and operation. The newly issued guidance mainly addresses the failure to comply with Section 409A in form (i.e. document compliance).

The IRS guidance, issued in Notice 2010-6, includes the following information:

  1. Clarifies that certain language that is commonly included in plan documents will not cause a document failure.
  2. Provides relief by allowing certain document failures to be corrected without current income inclusion or additional taxes under Section 409A as long as the corrected plan provision does not affect the operation of the plan within one year following the date of correction.
  3. Provides relief by limiting the amount currently includible in income and the additional taxes under Section 409A for certain document failures if correction of the failure affects the operation of the plan within one year following the date of correction.
  4. Provides relief by allowing certain document failures to be corrected without current income inclusion or additional taxes under Section 409A if the plan is the service recipient’s first plan of that type and the failure is corrected within a limited period following adoption of the plan.
  5. Provides transition relief by allowing certain document failures to be corrected without current income inclusion or additional taxes under Section 409A if the document failure is corrected by December 31, 2010, and any operational failures resulting from the document failure are also corrected in accordance with Notice 2008-113 by December 31, 2010. Many examples of common types of failures and the related corrections are also provided.

Modification of Notice 2008-113. The newly issued guidance also modifies Notice 2008-113, which addresses certain operational failures of nonqualified deferred compensation plans. The areas of Notice 2008-113 that have been clarified include: (1) the application of the subsequent year correction method to late payments of amounts deferred; (2) the calculation of the amount that must be paid to the service provider as a correction of a late payment of an amount deferred under a plan if the payment would have been made in property; and (3) the calculation of the amount that must be repaid by the service provider as a correction of an early payment of an amount deferred under a plan if the early payment was made in property.

Modification of Notice 2008-115. Notice 2008-115, I.R.B. 2008-52, 1367, which relates to reporting and wage withholding for 2008 and subsequent years, has also been modified. Specifically, the notice has been modified with respect to: (1) the amount that is required to be included in income by a service provider under Section 409A, and (2) the amount that is required to be reported by the service recipient as an amount includible in income under Section 409A on Form W-2 or Form 1099-Z.

© 2010 Parsonage Vandenack Williams LLC

  For more information, contact info@pvwlaw.com