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But what they might not say is that employment and noncompete agreements can create serious income tax consequences when a firm or corporation is liquidated and goodwill assets such as client relationships are distributed among the shareholders.

There is the possibility of some relief, however: A CPA firm and its shareholders are in a better position to avoid serious tax consequences if such agreements are not in place when the professional corporation is dissolved.

The shareholder, who treats the fair market value of the property as received in exchange for his or her stock, also recognizes a gain (IRC section 331(a)).

The corporation recognizes income on the excess of fair market value over adjusted basis.

THE IRS SAYS DISTRIBUTIONS of customer-based intangibles to shareholders are taxable.

When a firm or corporation distributes to its shareholders all of its assets, both tangible and intangible, and ceases doing business, the IRS says there is a taxable distribution of its intangible goodwill.

THE CRITICAL ISSUE FOR TAX PLANNING is whether the assets distributed are considered property under IRC code section 336 and whether the corporation owns them.

THE QUESTION OF WHO "OWNS" the clients and customer-based intangibles turns on whether there is an employment or noncompete agreement in effect at the time the intangibles are distributed.

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