Sale of Business Generates Ordinary Income

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The Tax Court held that payments to a taxpayer from the sale of his consulting business that he reported as long-term capital gain from his goodwill should instead be taxed as ordinary income. It held that the sales agreement that allocated amounts to the taxpayer as goodwill and to his wholly owned corporation for future consulting services and its client list were not based on economic realities but rather were determined to minimize taxes.

When a taxpayer sells a business in which his or her personal relationships with clients/customers are important to the purchasing entity and, after the sale, is employed by that entity;, a question arises whether payments received by the taxpayer …