1. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
SUITE 445
12100 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90025
www.GivnerKaye.com
BRUCE GIVNER
(bruce@GivnerKaye.com)
OWEN D. KAYE
(owen@GivnerKaye.com)
KATHLEEN GIVNER
(kathy@GivnerKaye.com)
NEDA BARKHORDAR
(neda@GivnerKaye.com)
PHONE (310) 207-8008
(818) 785-7579
FAX (310) 207-8708
(818) 785-3027
February 19, 2015
“C” Corporation Asset Sale
Martin Ice Cream and Bross: Personal Goodwill To Reduce The “Double” Tax
Introduction.
1. Problem Of Sale Of “C” Corporation.
Buyers want to buy assets.
Assume Joe’s basis in the stock is zero. Assume the corporation’s basis in its assets
is zero. Assume the buyer pays $10,000,000 for the assets. The corporate tax is
roughly 34% federal and 8.84% deductible state for about 40% leaving $6,000,000.
Joe then liquidates the corporation and pays 37.1% ($2,226,000), leaving $3,774,000,
for a total tax bite of 62.26%.
By contrast, had it been an “S” corporation, assuming no ordinary income assets, the
tax would have been 33.1% (no 3.8% tax on net investment income) so Joe would
have netted $6,690,000. The difference between the two is $2,916,000, a 29.16% tax
differential.
2. Personal Goodwill.1
2.1. What Is it?
1
Reinstein and Weg, “Personal Service, Loan-Outs, and Other `C’ Corporations – Are They Still Viable? The
Current State of the Art,” 2006 USC Institute.

2. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 2 of 23
2.2. What Are The Benefits?
Selling shareholders’ gain from the sale of personal goodwill is capital gain.
Acquired business does not have entity-level gain on the sale of personal goodwill.
Buyer of personal goodwill may be entitled to amortization deductions under §197.
2.2. What Are The Characteristics?
Personal Goodwill Characteristics
No non-compete agreement between the selling shareholder and the company.
Business is highly dependent on individual’s personal relationships, reputation, skills,
know-how.
Individual’s service is important to the sales process.
Operations in which shareholders are highly involved.
Businesses with few and high-volume customers.
Company is highly technical, specialized, or engaged in professional services.
Company has contracts that are terminable at will.
More common in companies with higher portion of intangible assets.
Loss of key individual would negatively impact company’s revenue and/or profitability.
Business Goodwill Characteristics
Non-compete agreement exists between the selling shareholder and the company.

3. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 3 of 23
Larger business with formal organizational structure, processes, and controls.
Sales are generated from company brand name recognition, company sales team.
Businesses with diversified customer base.
Manufacturing businesses or companies that are asset intensive.
Selling shareholder is not intimately involved with the business.
Companies that have deep management teams.
Companies that have long-term contracts with customers.
Loss of key individual would not materially impact the revenue and/or profitability of the
company, or the individual could be replaced easily.
3. Employee Compensation.

4. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 4 of 23
Case Law.
1. Martin Ice Cream.2
2
110 T.C. 189 (1998).

5. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 5 of 23
2. Norwalk.3
A two-shareholder accounting corporation elected to liquidate. Although each
shareholder had an employment agreement which contained a non-compete and
nondisclosure provision, the agreements expired before the liquidation. The two former
shareholders promptly joined an existing accounting partnership and transferred assets
distributed to them to the new practice.
3
T.C. Memo 1998-279.

6. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 6 of 23
3. Solomon.4
The case involved the sale of a corporate division of Solomon Colors, Inc. that mined,
milled, and sold a particular type of iron ore to the foundry, fertilizer, and cement industries.
Prince Manufacturing Co. paid $1.5 million, with $1.4 million allocated to a customer list and a
covenant not to compete. The remaining $100,000 was allocated to the sale of the ore
business and equaled the equipment value. The terms of the CNTC stated that Solomon
Colors and the individual signatories (Robert and Richard Solomon and their wives) would
not compete with Prince. Of the $1.5 million purchase price, $700,000 was paid directly to
the corporation’s majority shareholders, a father and son who were the company’s chief
executives. The taxpayers claimed that a portion of the asset labeled “customer list” in the
agreement represented relationships with customers, with whom they had built relationships
4
T.C. Memo 2008-102.

7. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 7 of 23
over many decades, and personal goodwill belonging to Robert Solomon and Richard
Solomon. The IRS claimed they sold assets that were customer lists distributed from the
company.
The Tax Court ruled against the taxpayers noting the following. First, nothing in the
agreement between the parties made reference to the sale of personal goodwill. The asset
purchase agreement contained conflicting provisions as to whether payments to
shareholders were for customer lists or non-compete payments. Second, the Tax Court did
not find that the value of Solomon Colors in the market was due to the quality of service and
customer relationships developed by Robert and Richard Solomon. Rather, since the
company was a processing and manufacturing business, as opposed to a personal services
business, the business did not depend on the employee/owners for its success. Finally,
although the taxpayers entered into non-compete agreements, they did not sign employment
or consulting agreements. Since the shareholders were not hired by the buyer, their
personal attributes were not available to the buyer after the sale. These facts prompted the
Tax Court to conclude that it was unlikely Prince was buying personal goodwill. The Tax
Court concluded that the proceeds paid directly to the shareholders were actually attributable
to their CNTC rather than for a customer list or personal goodwill.
4. Howard.5
In 1980, Dr. Larry Howard (dentist) incorporated his practice and was its sole
shareholder, officer, and director. He entered into an employment agreement and a covenant
not to compete with the corporation. The covenant lasted as long as he held any stock of the
corporation plus 3 years.
In 2002, Dr. Howard and Howard Corporation sold the practice to Dr. Brian Finn and
his personal service corporation. In that agreement (the Asset Purchase Agreement), Dr.
Howard was allocated $549,900 for his personal goodwill and $16,000 for consideration for a
covenant not to compete with Finn Corporation. Howard Corporation received $47,100 for its
assets.
5
106 AFTR 2
nd
¶2010-5140 (DC WA 7/30/2010).

8. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 8 of 23
Dr. Howard and his wife filed a joint 2002 return and reported $320,358 as long-term
capital gain income from the sale of goodwill to Finn Corporation. On audit, IRS re-
characterized the sale of the goodwill as a corporate asset and treated the amount received
by the Howards from the sale to Finn Corporation as a $320,358 dividend from Dr. Howard's
PSC. IRS determined that there was a $60,129 deficiency and $14,792 interest owed based
on the difference in long-term capital gain rates and dividend income rates. The Howards
paid the amount, filed a refund claim, and eventually filed a refund suit with the court.
The district court found that the goodwill was a corporate asset of Howard Corporation,
and that the Howards weren't entitled to a refund. The court noted that courts have
distinguished between personal and corporate ownership of goodwill depending on whether
the employee had an ongoing employment contract and a covenant not to compete. The
Court concluded that Dr. Howard was a Howard Corporation employee with a covenant not to
compete with Howard Corporation from '80 through 2003 (plus three years, or 2006). Any
goodwill generated during that time period was Howard Corporation goodwill. If an employee
works for a corporation under contract and with a CNTC with that corporation, as Dr. Howard
did, then the corporation, and not the individual professional, owns the goodwill that is
generated from the professional's work. Dr. Finn testified that the price for the dental practice
had been presented and accepted, without negotiation, and that he didn't recall any
discussion as to the allocation of the proceeds.
5. Kennedy.6
James Kennedy was engaged in an employee benefits consulting business since
1990. In 1995, the sole proprietorship was incorporated as KCG International, a C
corporation. In 2000, the business was sold to Mack & Parker (“M&P”). The parties
executed a final purchase-and-sale agreement that consisted of a goodwill agreement,
consulting agreement, and asset purchase agreement. Under the agreements, Kennedy
would work with M&P as a consultant, without salary, and continue to provide services to his
former clients for the next five years, after which he planned to retire. Also, under the
6
T.C. Memo 2010-206 (9/22/2010).

9. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 9 of 23
agreements, Kennedy and KCG would not compete with M&P for five years. M&P would
make a $10,000 lump-sum payment to KCG and annual payments to KCG and Kennedy for 5
years. The annual payment amounts would depend on revenue received from Kennedy’s
former clients and were allocated 75% to Kennedy in exchange for the “personal goodwill”
associated with his customer relationships, his know-how, and his promise not to compete or
otherwise engage independently in employee benefits consulting. The other 25% was
designated as payment for consulting services. The asset purchase agreement required that
KCG convey its relationships with 46 clients. The goodwill agreement required Kennedy to
convey his personal relationships with the same 46 clients. Almost all of them had been
long-time clients of Kennedy even before he incorporated.
Kennedy began work with M&P and devoted far more time in his new role than he
anticipated. During the first year after the transaction, 46% of M&P’s revenue was traceable
to time billed personally by Kennedy. Kennedy did not receive any wages or fees from
M&P other than payments under the sale documents. After 18 months of this
arrangement, Kennedy negotiated a salary in addition to the payments.
First, the IRS argued that KCG, not Kennedy, owned the customer list and without the
customer list, Kennedy could not transfer goodwill. Second, the IRS argued that Kennedy
had no proof of the existence of any goodwill asset since no appraisal of the personal
goodwill was provided to the court. Third, the IRS contended that even if Kennedy was the
owner of personal goodwill, this asset should not be considered a saleable asset. Any
personal goodwill would be based upon the value of Kennedy’s relationships with his
customers, which the IRS maintains would have no value unless Kennedy continued to
perform services for the clients.
The Tax Court agreed with the IRS that Kennedy did not sell personal goodwill to
M&P, but not for the same reasons. First, the Tax Court acknowledged that a payment to an
individual who provides ongoing services could be considered a payment for goodwill.
However, in the instant case, the Tax Court was convinced the payments to Kennedy were
for services rather than personal goodwill since he worked for M&P for five years,

10. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 10 of 23
received little compensation for his services for 18 months, and agreed not to compete for
five years.
6. H&M, Inc.7
Harold Schmeets was the sole shareholder of Harvey Insurance Agency, Inc. When
people came to Harvey Insurance to buy insurance, they were buying it from Harold
Schmeets. He had far more name recognition as an individual than Harvey Insurance did as
a firm. Harvey Insurance sold its biggest asset, the insurance-brokerage business, to its
main competitor, a local bank, in '92. Schmeets went to work for the bank that bought the
brokerage business.
Under the purchase agreement, Harvey Insurance agreed to sell all files, customer
lists, insurance agency or brokerage contracts, the name of Harvey Insurance, and all the
goodwill of Harvey Insurance to the bank for $20,000. The agreement was contingent on the
execution of an employment agreement with Schmeets. It also contained a noncompete
clause which provided that Harvey Insurance and Schmeets wouldn't compete with the bank
for 15 years. Schmeets became the manager of the bank's insurance agency for a six-year
term. The bank promised to pay Schmeets a base wage of $38,936, annual variable
compensation equal to the greater of $50,000 or 45% of net adjusted income for the year,
and deferred compensation of $74,000 at the end of the six-year term. The total
compensation under the agreement was over $600,000 for his services during the six years.
Schmeets kept the corporation (renamed H&M, Inc. after the sale) active to exploit his
two patented inventions.
On audit, IRS contended that much of Schmeets' wages were actually disguised
purchase price payments to his corporation.
IRS argued that a substance-over-form analysis showed that the value of the assets
that the bank bought should include not only the $20,000 purchase price, but also the
$38,936 annual base wage and $74,000 deferred compensation under the employment
agreement. It claimed that only the annual variable compensation (the greater of $50,000 or
7
T.C. Memo 2012-290.

11. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 11 of 23
45% of net adjusted income for the year) actually represented payment for Schmeets'
services. IRS contended that this allocation more accurately reflected the FMV of Schmeets'
services to the bank and took account of goodwill and the corporation's other intangible
assets. IRS argued that the parties undervalued the assets of Harvey Insurance in the sale
so that the bank could deduct the compensation it paid to Schmeets, and he could avoid
being taxed twice on the proceeds of the sale.
H&M argued that recharacterizing all of the compensation payments as purchase price
payments was inappropriate because the allocation didn't reflect the economic realities of the
transaction. It maintained that Schmeets' compensation under the agreement was
reasonable because the bank needed him to keep the insurance business going, and he had
significant responsibilities as the manager of the bank's agency. H&M further contended
that any goodwill of the business was attributable to Schmeets personally. And it
pointed out that neither party focused on the tax consequences of the transaction. Instead,
both parties wanted to create an employment relationship and both consistently treated the
deal as if they had.
The Tax Court found that the payments to Schmeets weren't disguised purchase price
payments to H&M. It was satisfied that Schmeets and the bank were genuinely interested in
creating an employment relationship and weren't just creating paperwork to produce the tax
consequences they wanted.
The court concluded that, in light of Schmeets's personal relationships, his experience
in running all facets of an insurance agency and his responsibilities as manager of the bank's
insurance agency, the compensation that the bank paid him was reasonable. The
employment agreement contained an extensive list of duties that Schmeets was required to
perform. Not only was Schmeets an insurance salesman, he also had significant
management and bookkeeping responsibilities. He went from working around 40 hours per
week before the sale to double that afterward.
IRS failed to specify what other purchased intangible assets, other than the name
Harvey Insurance, it thought weren't accounted for in the purchase price. It didn't provide any

12. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 12 of 23
persuasive evidence that the name of the corporation had much value other than its
connection with Harold Schmeets himself. The Court found that the name Harold Schmeets
had by far more name recognition in the community than Harvey Insurance.
While the Court disagreed with IRS that the amounts the bank paid Schmeets were
disguised purchase price payments for goodwill, it did agree that the payments weren't simply
the FMV of his services. Schmeets not only brought his personal goodwill to the bank, he
also signed a noncompete provision. However, since Schmeets' individual tax liability wasn't
before the Court, it found that it didn't need to determine the exact allocation between what
he was paid for his services to the agency, his personal goodwill, and his promise not to
compete.
7. Bross Trucking.8
Chester Bross started in the road construction business in 1966. He was extremely
knowledgeable about the industry and contributed to nearly all facets of the Bross family
businesses. He was responsible for arranging and completing the projects in which Bross
Construction participated. He personally developed relationships with the necessary entities
to work in the road construction industry. The “family business umbrella” included Bross
Trucking which was founded in 1982 and owned 100% by Mr. Bross through his revocable
living trust. Bross Trucking engaged in hauling construction-related materials and equipment
for road construction projects. Bross Trucking leased most of its equipment from another
wholly owned Bross entity, CB Equipment, through yearly leases.
Bross Trucking had regulatory problems including maintaining records on drivers and
safety. Mr. Bross felt that the company’s reputation with regulatory authorities was causing
its trucks to be stopped more often. If the problem continued it could disrupt other aspects of
the family business, since the road construction relied on the hauling provided by the trucking
company.
The solution was to form LWK Trucking which was owned by Mr. Bross’s three sons
and a minority shareholder. Bross Trucking continued to exist but no longer operated. No
8
T.C. Memo 2014-107.

13. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 13 of 23
assets were transferred from Bross Trucking to LWK, although that is not how the IRS looked
at it.
The IRS view was that Bross Trucking had distributed its goodwill to Mr. Bross who
then made a gift of the goodwill to his sons. With penalties the IRS was looking for over $2.7
million in corporate income tax and gift tax.
The Tax Court followed the logic Martin Ice Cream logic
…….. there are two regimes of goodwill: (1) personal goodwill developed and
owned by shareholders; and (2) corporate goodwill developed and owned by
the company. Bross Trucking’s goodwill was primarily owned by Mr. Bross
personally, and the company could not transfer any corporate goodwill to Mr.
Bross in tax year 2004.
A factual problem for the IRS was that it is difficult to argue that a company facing the
possibility of being shut down has much in the way of goodwill. The impending suspension
would cause customers to reevaluate whether to trust Bross Trucking and continue to do
business with it. This is the antithesis of goodwill: Bross Trucking could not expect
continued patronage because its customers did not trust it and did not want to continue doing
business with it.
8. Estate of Franklin Z. Adell.9
Franklin Z. Adell died on August 13, 2006, owning a 100% interest in STN.Com, Inc.
(“STN.Com”), a cable uplinking company. STN.Com’s sole business purpose was to
broadcast an urban religious program channel, “The Word Network” (“The Word”). It was Mr.
Adell’s son, Kevin, who created and managed STN.Com. Furthermore, he held all of the key
business relationships.
Pursuant to the services agreement, and continuing through Mr. Adell’s date of death,
The Word paid STN.Com at least 95% of its revenue each month (which was an amount
greater than STN.Com’s actual costs). The Word’s only source of revenue was from
broadcasting contracts that Kevin negotiated and entered into with the religious community.
9
T.C. Memo 2014-155 (8/4/14).

14. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 14 of 23
STN.Com’s primary source of income came from the program fees it received from The
Word.
The estate’s first appraiser made a number of adjustments to STN.Com’s reported
financial results to more accurately reflect STN.Com’s normalized ongoing operating
performance. Among the adjustments was a reduction in officers’ salaries and wages to
reflect market rates. He also adjusted STN.Com’s operating expenses to include an
economic charge for Kevin’s personal goodwill. The adjustment was appropriate because
the success of STN.Com depended heavily on Kevin’s personal relationships with the board
of directors of The Word. Kevin did not have a noncompete agreement with STN.Com,
and, as a result, a potential buyer would not be expected to acquire STN.Com without the
retention of Kevin. The economic charge for Kevin’s personal goodwill ranged from 37.2% to
43.4% of sales over the historical period and from 43.7% to 44.1% of sales over the
projection period.
After making adjustments to the enterprise value to account for STN.Com’s cash and
cash equivalents, interest-bearing debt, and nonoperating assets, Mr. Risius concluded that
the FMV of the STN.Com stock on Mr. Adell’s date of death was ≈ $9.3 million.
Respondent’s expert witness valued the STN.Com stock using the discounted cash
flow method. Mr. Burns addressed the importance of Kevin’s relationship with The Word to
STN.Com’s continued business operations. Instead of applying an economic charge for
Kevin’s personal goodwill similar to the one found in Mr. Risius’ first valuation report, Mr.
Burns concluded that a hypothetical investor would anticipate retaining Kevin as an officer of
STN.Com and would need to compensate Kevin at an acceptable rate of 8.1% of sales. He
concluded that the Fair Market Value of the STN.Com stock on Mr. Adell’s date of death was
$26,341,030.
The Tax Court found that the original value of $9.3 million was the most persuasive.
The Court also rejected the valuation conclusion of Mr. Burns saying that he not only failed to
apply an economic charge for Kevin’s personal goodwill but also gave too low an estimate of
acceptable compensation for Kevin.

15. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 15 of 23
The Court agreed with estate’s expert that Kevin’s goodwill was personally owned
independent of STN.Com and that STN.Com’s success was heavily dependent on The
Word because of their symbiotic relationship.
Planning.
1. Valuation.
Typically, when planning for transactions involving personal goodwill, an exploratory
phase is necessary to determine the existence of personal goodwill by assessing the facts
and circumstances. To the extent personal goodwill is likely to exist, later phases may be
warranted to estimate the value of the tangible assets, identifiable intangible assets, and
personal goodwill to be acquired.
While each case is unique, a basic approach to the valuation process usually includes
an assessment of the aggregate value of the business and the personal goodwill is
captured by considering the “as-is” aggregate cash flows being generated. The value derived
in this scenario is contrasted with the value in a scenario in which the key person is no longer
participating in the business or, taken to an extreme, directly competes with the existing
business. In this scenario, to the extent personal goodwill exists, the “as-is” aggregate cash
flows would be negatively impacted. The difference in value between these two scenarios
can be characterized as the value of the personal goodwill.
2. Documentation.
Non-compete agreements that exist before the transaction have the impact of
transferring personal goodwill to business goodwill.
Employment and non-compete agreements entered into during the transaction
process support the allocation to personal goodwill.

16. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 16 of 23
The documents should clearly state that personal goodwill is being acquired and
exactly what the seller’s role/duties are post-transaction to ensure that the seller’s personal
goodwill becomes the acquirer’s business goodwill.
2.1. Distribution Agreement.
2.2. Management Agreements.
2.3. License & Franchise Agreements.

17. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 17 of 23
3. “S” Election.
If possible, done enough years in advance.
EXHIBIT 1
August 2008 • Vol. 28 No. 7 | An E-Publication of the Los Angeles County Bar Association
Gimme 5: What Every Lawyer Should Know about
Non-Compete Agreements in California
By Holly R. Lake, an associate in Paul, Hastings, Janofsky & Walker LLP’s Los Angeles
office, who practices employment law; and Cindy J. Morgan, also an associate in the firm’s Los
Angeles office, who also practices employment law. They can be reached at
Hollylake@paulhastings.com and Cindymorgan@paulhastings.com, respectively. This article is
provided for informational purposes only and does not constitute legal advice.
Non-compete agreements have been the subject of much debate in California
where their application is often contested and somewhat limited. The starting place
must always be recognition of the general rule: In California, non-compete
agreements are presumptively unenforceable except in very limited
circumstances. Despite the general unenforceability of non-compete agreements, in
very limited circumstances their use can be beneficial to employers. Before trying
to use a non-compete agreement in California, several complex considerations must
be fully explored. Here are 5 important issues for California practitioners to consider
when contemplating the use of, drafting, or reviewing agreements containing post-
employment restrictions.
1. What is a non-compete agreement?
A non-compete agreement (also known as a covenant not to compete) is a
contract between an employee and employer that, after the termination of
employment, restricts the former employee’s ability from working in a similar
profession or trade in competition with the former employer in a specific
geographic area for a set period of time. In states that recognize the general
enforceability of such agreements, the general policy supporting non-compete
agreements is an effort to prevent unfair competition that would occur if the former
employee were allowed to compete against the former employer for a specific period
of time. The legitimate business interest most often cited is “the legitimate interest

18. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 18 of 23
an employer has in safeguarding that which has made his business successful and
to protect himself against deliberate surreptitious commercial piracy. Thus
restrictive covenants will be enforceable to the extent necessary to prevent the
disclosure or use of trade secrets or confidential customer information.” Reed,
Roberts Assocs., Inc. v. Strauman, 40 N.Y. 2d 303, 308, 353 N.E. 2d 590, 593, 386
N.Y.S. 2d 677, 680 (N.Y. 1976).
2. Issues with non-compete agreements specific to California.
In some states, non-compete agreements may be enforced if they are
reasonable in time and geographic scope. However, in 1941, California enacted
California Business and Professions Code §16600, a broadly interpreted provision
that prohibits many restraints on trade. §16600 invalidates most non-compete
agreements on the theory that an individual cannot be barred from seeking
employment in a profession in which he or she has been trained. Nonetheless,
despite §16600, California courts have recognized very narrow exceptions to the
general prohibition against the enforcement of non-compete agreements.
3. Specific areas where non-competes are permitted by statute.
Within the California Business and Professions Code, there are a few limited
exceptions to the general rule against the enforcement of non-compete agreements,
including:
1) in some circumstances where the buyer of a business wants to prohibit
the seller from competing with the newly acquired company; and
2) in the context of the dissolution of a business partnership or the
dissociation of a partner from a partnership.
4. Judicially created exceptions.
In addition to the statutory exceptions, California courts have carved out
narrow exceptions to the rule against non-compete agreements.
First, a non-compete agreement may be upheld if it is necessary to protect an
employer’s trade secrets. Employers rarely prevail under this judicially created
exception, and any attempt to craft such a non-compete implicates several complex
business and legal concerns beyond the scope of this article. Suffice it to say that
trying to enforce a non-compete based on the notion that it is necessary to protect a
client’s trade secrets involves the complicated substantive area of trade secret law in
California, and brings into play sensitive business concerns.

19. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 19 of 23
Second, the Ninth Circuit created the “narrow restraint” exception to §16600;
the California Supreme Court granted review of this issue in Edwards v. Arthur
Andersen, LLP, Case #BC 255796, and until that case is decided, California
practitioners should be extremely wary of the future vitality of the Ninth Circuit’s
“narrow restraint” doctrine.
5. The “inevitable disclosure doctrine.”
The inevitable disclosure doctrine is not recognized in California. The Fourth
District Court of Appeal expressly rejected the inevitable disclosure doctrine as
incompatible with §16600, characterizing it as an “after-the-fact covenant not to
compete restricting employee mobility.” Whyte v. Schlage Lock Co., 101 CA 4th
1443 (2002).
© 2008 Los Angeles County Bar Association • Disclaimer and Proprietary Notice
Privacy Policy • Questions@lacba.org • Contact • Sitemap
EXHIBIT 2
Exhibit ____ OWNER FORM
NON-COMPETITION AGREEMENT
THIS AGREEMENT is made and entered into as of the ____ day of __________,
2000 by and between RUSSELL _______, an individual (“OWNER”), and NATIONAL
_______________, INC., a __________ corporation (“Buyer”).
BACKGROUND
___, LLC and _______, Inc. (collectively, “Sellers”), OWNER and Buyer are parties to
an Asset Purchase Agreement (the “Purchase Agreement”) dated ______ __, 2000,
providing for the acquisition by Buyer of substantially all of the assets and certain of the
liabilities of Sellers. Sellers are engaged in the business of manufacturing, marketing,
distributing and selling _______________ (the “Business”). OWNER is the record and
beneficial owner of all of the issued and outstanding membership interests and capital stock
of Sellers and a key employee of Sellers, and has been substantially involved with Seller’s
operations and management and possesses trade secrets and other confidential
information relating to Sellers and their customers. It is integral to Buyer's acquisition of
the Business and a condition precedent to the closing of such acquisition that OWNER enter
into this Agreement with Buyer to provide for the protection of Sellers’ client relationships

20. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 20 of 23
in existence immediately prior to such acquisition and the trade secrets and other
confidential information owned by Sellers immediately prior to such acquisition. All
capitalized terms not otherwise defined herein shall have the respective meanings set forth in
the Purchase Agreement.
NOW THEREFORE, in consideration of the premises and the mutual representations,
warranties, covenants and agreements contained in this Agreement and in the Purchase
Agreement, the parties hereto, intending to be legally bound, agree as follows:
1. Noncompetition; Confidential Information.
(a) For a period of five (5) years from and after the date hereof,
unless expressly consented to in writing by Buyer, neither OWNER nor any Affiliate (as
hereinafter defined) shall, directly or indirectly: (i) engage, anywhere in the Territory (as
defined in Section 1(c) below), in activities which include any aspect of the Business; (ii) be
or become a stockholder, partner, owner, officer, director or employee or agent of, or a
consultant to or give financial or other assistance to, any person or entity considering
engaging in any such activities or so engaged within the Territory; (iii) seek in competition
with the Business within the Territory to procure orders from or do business with any
customer of either Seller or Buyer whether on OWNER’s behalf or on behalf of another; (iv)
hire, solicit, or contact with a view to the engagement or employment of, any person who is
an employee of either Seller as of the date of the Purchase Agreement or of Buyer or any
affiliate of Buyer; or (v) seek to contract with or engage (in such a way as to adversely affect
or interfere with the Business as carried on by either Seller as of the date of the Purchase
Agreement or by Buyer) any person or entity who has been contracted with or engaged to
manufacture, assemble, supply or deliver products, goods, materials or services to either
Seller or Buyer; provided, however, that nothing herein shall prohibit either Seller and
Affiliates from jointly owning, as passive investors, in the aggregate not more than 5% of the
outstanding publicly traded stock of any corporation so engaged. The duration of OWNER’s
and Affiliate’s covenants set forth in this Section 1 shall be extended by a period of time equal
to the number of days, if any, during which such OWNER or any Affiliate is in violation of the
provisions hereof.
(b) From and after the date hereof, neither OWNER nor any Affiliate
shall, directly or indirectly: (i) use or procure the use of any name including the words “Flo
Control” or any derivative or colorable imitation thereof; or (ii) use in furtherance of any of
their business affairs or disclose to any third party any trade secret, client list, supplier list,
financial data, pricing or marketing policy or plan or any other proprietary or confidential
information relating to Buyer, the Business as conducted by either Seller at any time prior to
and as of the date of the Purchase Agreement, any of either Seller’s products, services,
clients or suppliers as of the date of the Purchase Agreement, or any of Buyer's products,
services, clients or suppliers, so long as the same is not publicly known (other than by the act

21. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 21 of 23
of OWNER or any Affiliate). If OWNER or any Affiliate should use or reveal to any other
person or entity any confidential information, this will be considered a continuing violation on
a daily basis for so long a period of time as such confidential information is made use of by
OWNER, such Affiliate or any such other person or entity.
(c) For the purposes of this Agreement, “Territory” means the
United States, and “Affiliate” means: (i) any corporation of which OWNER owns or otherwise
possesses the power to direct the vote, directly or indirectly, of an amount of voting securities
sufficient to elect a majority of the board of directors of such corporation, and (ii) any other
person or entity controlled by OWNER. For the purposes of this definition of “Affiliate,”
“control” means the power to direct the management and policies of a person or entity,
directly or indirectly, whether through the ownership of voting securities, by contract or
otherwise; provided, that any person or entity of which OWNER owns beneficially or of
record, either directly or through one or more intermediaries, more than 20% of the ownership
interests, shall be conclusively presumed to be an “Affiliate.”
(d) OWNER acknowledges and agrees that the covenants contained
in this Section 1 are fair and reasonable, and that damages alone shall not be an adequate
remedy for any breach by OWNER or any Affiliate of the covenants contained in this Section
1 and accordingly expressly agrees that, in addition to any other remedies which Buyer may
have, Buyer shall be entitled to injunctive relief in any court of competent jurisdiction for any
breach or threatened breach of any such covenants by OWNER or any Affiliate. Nothing
contained herein or in the Purchase Agreement shall prevent or delay Buyer from seeking, in
any court of competent jurisdiction, specific performance or other equitable remedies in the
event of any breach or intended breach by OWNER or any Affiliate of any of their obligations
under this Section 1.
(e) Notwithstanding the equitable relief available to Buyer, OWNER,
in the event of a breach of OWNER’s covenants contained in Section 1 hereof, understands
and agrees that the uncertainties and delay inherent in the legal process would result in a
continuing breach for some period of time, and therefore, continuing injury to Buyer until and
unless Buyer can obtain such equitable relief. Therefore, in addition to such equitable relief,
Buyer shall be entitled to monetary damages for any such period of breach until the
termination of such breach, in an amount deemed reasonable to cover all actual and
consequential losses, and all costs and reasonable attorneys' fees incurred by Buyer in
enforcing this Section 1.
(f) If any court shall find either the duration or geographical limit of
any restriction contained in this Section 1 to be unenforceable in accordance with its terms, it
is the intention of the parties that the restrictive covenant set forth herein shall not be
terminated but shall be deemed to be amended to the extent required to render it valid and

22. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 22 of 23
enforceable, such amendment to apply only within the jurisdiction of the court that has made
the adjudication.
2. Arbitration
(a) All disputes arising out of or relating to this Agreement which
cannot be settled by the parties shall promptly be submitted to and determined in arbitration
in Los Angeles, California, by a panel of three arbitrators (unless otherwise agreed to by the
parties), of whom Buyer shall select one, OWNER shall select one and the third shall be
selected within 10 days of the appointment of the second arbitrator by the two previously
selected, pursuant to the rules and regulations then obtaining of the American Arbitration
Association; provided, that (i) nothing herein shall preclude the Buyer from seeking, in any
court of competent jurisdiction, damages, specific performance or other equitable remedies in
the case of any breach or threatened breach by OWNER or any Affiliate of Section 1 hereof
and (ii) if either party shall fail to select an arbitrator within 10 days of receipt of a written
request to do so by the other party containing the name of the arbitrator selected by such
other party, the American Arbitration Association shall select the arbitrator for the party that
failed to do so. The decision of the arbitrator shall be final and binding upon the parties and
judgment upon such decision may be entered in any court of competent jurisdiction.
(b) It is the intent of the parties that the arbitrators be knowledgeable
in the irrigation products industry. Such arbitrators shall be required to apply the contractual
provisions hereof in deciding any matter submitted to them.
3. Costs of Enforcement. If any party hereto incurs any costs or expenses
in connection with any dispute arising under this Agreement, the prevailing party to such
dispute shall be entitled to recover from the non-prevailing party such prevailing party's
reasonable costs and expenses, including, without limitation, reasonable attorneys' fees and
costs incurred in prosecuting or defending such dispute, as the case may be.
4. Notices. All notices hereunder shall be in writing and shall be sufficiently
given if hand delivered, sent by documented overnight delivery service or registered or
certified mail, postage prepaid, return receipt requested or by telegram, telex, fax or telecopy
(confirmed by U.S. mail), receipt acknowledged, addressed as set forth below or to such
other person and/or at such other address as may be furnished in writing by any party hereto
to the other. Any such notice shall be deemed to have been given as of the date received, in
the case of personal delivery, or on the date shown on the receipt or confirmation therefor, in
all other cases.

23. LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
“C” Corporation Asset Sale – Martin Ice Cream and Bross:
Personal Goodwill To Reduce The “Double” Tax
February 19, 2015
Page 23 of 23
To Buyer:
With a copy to:
If to OWNER:
5. Assignment and Benefit. Buyer may assign this Agreement in whole or
in part to any subsidiary of Buyer or to any person, firm or corporation which becomes a
successor in interest (by purchase of its assets or stock, or by merger or otherwise) to Buyer
in the business being acquired by it pursuant to the Purchase Agreement. Subject to the
foregoing, this Agreement and the rights and obligations set forth herein shall inure to the
benefit of, and be binding upon, the parties hereto and each of their respective permitted
successors and assigns.
6. Entire Agreement and Modification. This Agreement constitutes the
entire agreement between the parties hereto with respect to the matters contemplated herein
and supersedes all prior agreements and understandings with respect thereto. Any
amendment, modification, or waiver of this Agreement shall not be effective unless in writing.
Unless expressly provided, the waiver by a party of any breach of any provision of this
Agreement shall not constitute or operate as a waiver of any other breach of such provision
or of any other provision hereof, nor shall any failure to enforce any provision hereof operate
as a waiver of such provision or of any other provision hereof.
7. Governing Law.
…
8. Severability.
…
9. Counterparts.
…
10. Further Assurances. Each of the parties hereto shall execute such
further instruments and take such other actions as the other party shall reasonably request in
order to effectuate the purposes of this Agreement.
[Signature Page Follows]