Clyde had worked for many years as the chief executive of red industries, Inc.,

Question

Clyde had worked for many years as the chief executive of red industries, Inc., and had been a major shareholder. Clyde and the company had a falling out, and clyde was terminated. Clyde and Red executed a document under which Clyde's stock in red would be redeemed and Clyde would agree not to compete againist Red in its Geographic service area. After extenive negotiations between the 2 parties, Clyde agreed to surrender his Red stock in exchange for $600,000. Clydes basis in the shares was $143,000 and he had held the shares for 17 years. The agreement made no explicit allocation of any of the $600,000 to Clydes agreement not to compete againist Red. How should Clyde treat the $600,000 payment on his 2014 tax return?

Explanation / Answer

Mr Clyde is holding the shares for 17 years indicates that the share is a long term asset and any gain resulting from transfer of long term asset is to be assessed in the tax return as long term capital gain.

Since no explicit allocation is made for the payment of $ 600,000 to Clydes, the whole amount to be treated as sale consideration received.

From the value of consideration the adjusted bais of $ 143,000 to be dected to arrive at the gain (Long Term Capital Gain).

The long term capital gain is taxed at a separate rate of taxation.

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