Many of you are aware of the Martin Ice Cream tax court decision (Martin Ice Cream Company v. Commissioner, 110 TC 189 (1998)). In that case the Tax Court recognized that a shareholder's personal relationships and contacts with customers can be personal assets. In the event of a sale of a business these assets can be sold by the individual, not the company. This treatment can have tax advantages for the owners. It is important to recognize that the Martin holding arose because of the exceptional personal services provided by the taxpayer (according to the court he "changed the way ice cream was marketed to customers in supermarkets") and he never entered into a non-compete or employment agreement with his company.
The Tax Court had a chance to revisit its Martin Ice Cream decision recently in Solomon v. Commissioner, TC Memo 2008-102 (April 16, 2008). The taxpayers did not fare so well in this case. Martin Ice Cream was distinguished on the basis that the Martin taxpayer was the controlling shareholder and the success of the ice cream distribution company depended entirely on the taxpayer and the quality of his personal services and customer relationships. The Court also highlighted three other differences between the two cases: (1) the types of businesses were different (personal services in the Martin case versus processing, manufacturing and selling in the Solomon case); (2) the Martin taxpayers signed the acquisition agreements in their personal capacities, the Solomon shareholders did not; and (3) the buyer in Solomon required noncompetes from the taxpayers, but not employment agreements. On this last point, the court interpreted this to mean that the buyer was not acquiring their personal goodwill.
It would appear from the Solomon case that the Tax Court narrowed or at least clarified its ruling in Martin. It is also clear from a reading of the facts in Solomon that careful planning in advance might have led to a different result.