Tax Effects of sale of Hsui's process to preserve fresh frui
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Hsui, who is single, is the owner of a sole proprietorship. Two years ago, Hsui developed a process for preserving fresh fruit that gives the fruit a much longer shelf life. The process is not patented or copyrighted, but only Hsui knows how it works. Hsui has been approached by a company that would like to buy the process. Hsui insists that she receive a long-term employment contract with the acquiring company as well as be paid for the rights to the process The acquiring company offers Hsui a choice of two options: (1) $850,000 in cash for a 10-year covenant not to compete at $45,000 per year or (2) $850,000 in cash for a 10-year covenant not to compete and $45,000 per year for 10 years in payment for the process. Which option should Hsui accept? What is the tax effect on the acquiring company of each approach?
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Solution Summary
The solution explains the tax effects of the proposed transaction from Hsui's position and that of the buyer.
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Hsui tax consequences:
If she accepts the covenant not to compete, the income will all be ordinary to her as it is received. There is even a small possibility that self employment tax could be assessed on the payments.
If she accepts payments for the sale ...
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