Can a CPA company obtain an injunction to enforce a non-compete obligation? A CPA firm can only win a lawsuit after a former employee has caused damage to the business, so all state courts that recognize non-compete obligations give employers the right to obtain an injunction to enforce the agreement in certain circumstances. A CPA firm, in consultation with its lawyer, must demonstrate three things to obtain such an order: make non-compete obligations, use the services of a lawyer who designed and prosecuted them in the jurisdiction, and who knows how the courts will address the issues at issue. For most acquisitions where the target employee owner has played a significant role in the operation of the acquired business, the acquirer and owner will enter into a non-compete agreement as part of the transaction. This is usually the case whether or not the owner has an ongoing relationship with the business. The treatment of the non-compete obligation, either as a netting agreement or as an integral part of the acquisition of goodwill, will significantly alter the tax treatment for both the owner and the acquirer. Taxpayers and consultants should pay attention to and document the intent of a non-compete obligation at the time of negotiation. In addition, it is important to understand the intended uses and methods of valuations and valuations prepared for financial statement purposes before relying on them for federal tax purposes. This is not to say that such a valuation does not reflect the value of a particular asset, but rather that the intent and content of the agreement should govern tax treatment. Non-Compete Obligations – An Overview by William M.

Corrigan Jr., www.mobar.org/journal/1998/mayjun/corrigan.htm. In both types of non-compete obligations, the payment is considered a legitimate business expense. If you buy a business and pay the previous owner $300,000 for their agreement not to compete, you can take that $300,000 as a business expense. The same applies if you pay an employee for signing a non-compete agreement. To determine whether a commitment is compensatory or capitalistic, it is important to understand the intention of the federation. The main purpose of a restrictive agreement in the context of a merger and acquisition transaction is often to protect the acquirer`s investment in the company. In certain situations, the purchaser may wish to attach a certain value to the non-compete obligation. There are important non-tax reasons why a purchaser wants the consideration to be assigned to a non-compete obligation. For example, the acquirer`s lawyers may want the agreement to cite a specific consideration outside of the purchase price paid for the shares or assets for a non-compete agreement believing that the agreement has a better chance of being enforced by a court if a dispute arises over the performance of the parties. What does a company do if a former employee violates a non-compete obligation? It`s not uncommon for a client to inform a CPA company when a former employee applies for their business.

In this case, the company must decide whether or not to summon the client to testify on behalf of the company. If he does not testify against the former employee in court, the company is in a difficult situation. It may choose to force the client to do so (and likely to upset it) or it may allow the client not to testify and possibly not provide admissible evidence of a violation. On the advice of their lawyers, some firms find it easier to settle their dispute or try to settle it differently outside of court. In Schilbach, T.C. Memo. In 1991-556, the court considered a transfer of personal goodwill and also considered the intent of the agreement. In this case, the taxpayer lost his malpractice insurance, was physically and mentally exhausted, and intended to leave his practice and enter a new area of medical practice. When selling his business, the taxpayer signed an undertaking not to compete; However, given the taxpayer`s intentions and his physical and emotional state, it was clear that even without the agreement, the taxpayer had never intended to compete with the buyer and was not in a position to do so. Therefore, the agreement was not intended to compensate the seller for giving future income.

As a result, the Tax Court found that the medical practice had goodwill equivalent to the value determined by the taxpayer at the time of liquidation. Source: “Non-Competition Agreement”, The Practice CPA, Jan 00, AICPA. When the CPA left the newly incorporated company and opened its own practice, the company filed a lawsuit to enforce the non-compete agreement and other restrictions. The court found that the non-compete obligation existed between the PCA and the seller and was unenforceable. Since the seller had essentially “withdrawn from the market” and agreed not to compete with it, it had no legitimate business interest in preventing the CPA from working in the metropolitan area to which the seller had gone, even if it was in competition with the buyer. However, the court allowed the buyer to make a claim for unlawful interference with his contract to purchase the company. CONSULT A LAWYER Non-compete obligations vary considerably from state to state, and our legal system attaches great importance to the right of individuals to earn a living. Given that the judicial climate weighs somewhat on a company or company, it is particularly important that a competent lawyer drafts a non-competition agreement informed by the relevant regional laws. Whether a CPA wants to protect his or her own business, is employed in the industry, or advises a client company, the following advice applies: Example 2: The facts are the same as in Example 1, except that T is a subchapter S corporation and P and J agree to an election under section 338(h)(10) that treats the transaction as a purchase and sale of assets. The purchase contract stipulates that the parties agree on a distribution of the purchase price, which must be prepared by T and examined by P. Shortly after the closing of the transaction, a tax advisor is asked how to process the covenant and the corresponding value of $15 million attributed to the valuation for income tax purposes. Is the entire fair value of J$15 million taxable as compensation? Before concluding that J has a decent income of $15 million, the practitioner should review the applicable case law that may tell him otherwise.

In addition to all the issues relating to the valuation of a non-compete obligation where the acquirer enters into a compensatory non-compete agreement in connection with the acquisition of a business, the consideration paid creates an intangible asset that can be depreciated under section 197 (see The Regulations. Section 1.197-2 (b) (9)). This is the case whether the acquirer acquires transactions or business through a share or an acquisition of assets (same section). Consequently, the buyer has a legitimate interest in the counterparty being more allocated to the non-compete obligation in the case of a share acquisition, since the acquisition of shares alone does not lead to an increase in the tax base for the assets of the target company. .