This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
Picture a Florida C corporation being sold in an asset deal. The company is a specialty distributor, or a regional services firm, or a professional practice — the kind of business where one person’s name and relationships are most of what the buyer is actually paying for. The seller’s accountant runs the numbers and delivers unwelcome news: because it is an asset sale by a C corporation, the gain gets taxed at 21% at the entity level under Section 11, and then again when the proceeds come out to the shareholder. There is no reduced corporate capital gains rate to soften it — Section 1201, which used to provide one, was repealed in 2017.
Then someone at the table says the words that make every deal lawyer’s shoulders tense: what if we allocate part of the price to the owner’s personal goodwill?
The instinct is sound. The doctrine is real. And in a large share of the deals where it gets raised, the covenant package the buyer is simultaneously demanding has already destroyed it.
What Martin Ice Cream actually held
The doctrine comes from Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998). Worth being precise about the facts, because the case is cited loosely far more often than it is read. The shareholder had built a wholesale super-premium ice cream distribution business on personal relationships with supermarket owners and a handshake understanding with the founder of Häagen-Dazs. When the arrangement unwound and the IRS tried to tax the corporation on the value of those relationships, the Tax Court said the corporation never owned them.
The operative sentence is the one to memorize: “This Court has long recognized that personal relationships of a shareholder-employee are not corporate assets when the employee has no employment contract with the corporation. Those personal assets are entirely distinct from the intangible corporate asset of corporate goodwill.”
Note what the court said the shareholder had not done. He had never entered into a covenant not to compete with the corporation, or any other agreement — not even an employment agreement — by which his relationships became corporate property. That absence was the whole ballgame.
Two clarifications before anyone builds a deal on this. First, the entity in Martin Ice Cream was an S corporation in the year at issue, and the transaction was a failed Section 355 split-off rather than a straightforward asset sale. The case is the source of the doctrine, not a factual template. Second, the shareholder in that case did sign a consulting agreement and a noncompete — but with the buyer, not with his own corporation. That distinction is the hinge on which the entire analysis turns.
Bross Trucking, Inc. v. Commissioner, T.C. Memo. 2014-107, tightened the reasoning sixteen years later and gave us the cleanest statement of the mechanism. A key employee who develops relationships for an employer may transfer goodwill to the employer through employment contracts or noncompete agreements, the court explained, and “[t]he transfer is evidenced by the employee’s covenant to not use his or her goodwill to compete against the employer.” Because the owner in Bross had never signed one, his freedom to compete against his own company if he walked away demonstrated that he had never handed the goodwill over.
The noncompete is a conveyance
Read those two cases together and the rule stops being a tax rule and starts being a property rule. Personal goodwill is an asset the individual owns by default. A covenant not to compete running to the corporation is the instrument by which the individual conveys it. Sign the covenant, and the goodwill is on the company’s balance sheet whether anyone booked it or not.
Howard v. United States, 448 F. App’x 752 (9th Cir. 2011), is the cautionary version. A dentist sold his practice and allocated the bulk of the price to personal goodwill. But he had worked for his professional corporation under an employment agreement requiring him to practice solely as its employee, the corporation held complete authority over client acceptance and owned the client files, and he had agreed not to compete for as long as he held stock plus three years after. The Ninth Circuit’s conclusion was that while the relationships he developed with patients may accurately be described as personal, the economic value of those relationships did not belong to him, because he had conveyed control of them to the corporation.
The court also disposed of the drafting workaround in a sentence worth taping to a monitor: “Self-serving language in a purchase agreement is not a substitute for a careful analysis of the realities of the transaction.” Labeling a line item “personal goodwill” on a schedule does not create personal goodwill. (Howard is an unpublished memorandum disposition and is not precedent except as provided by Ninth Circuit Rule 36-3, so treat it as persuasive reasoning rather than binding authority — but the reasoning has been persuasive.)
Where Florida makes this harder than it looks
Now the part that is specific to Florida deals, and that I think gets underappreciated.
Florida is an attractive place to run this analysis because the individual side of the equation is unusually clean. There is no Florida individual income tax — Section 220.02(1) of the Florida Statutes recites the constitutional mandate in Article VII, Section 5 that no income tax be levied on natural persons who are residents and citizens of the state. Meanwhile the corporation pays 5.5% at the state level, a rate now fixed by Section 220.1105(5), which repealed the automatic downward adjustment mechanism that produced the temporary sub-5% rates in 2019 through 2021. So shifting a dollar from the corporate column to the individual column saves the federal 21% plus the Florida 5.5%, against an individual long-term capital gains rate topping out at 20% under Section 1(h)(1)(D), potentially plus the 3.8% net investment income tax under Section 1411 — though a materially participating owner will often be outside the net investment income tax under Section 1411(c)(2), which is a question worth running rather than assuming.
Here is the tension. Florida gives buyers an unusually generous noncompete regime for sale-of-business covenants, and buyers use it. Section 542.335(1)(d)3. provides that where a restrictive covenant is sought to be enforced against the seller of all or part of the assets of a business, the shares of a corporation, a partnership interest, an LLC membership, or an equity interest of any other type, “a court shall presume reasonable in time any restraint 3 years or less in duration and shall presume unreasonable in time any restraint more than 7 years in duration.” Compare the ordinary employee covenant under (1)(d)1., which gets six months presumed reasonable and two years presumed unreasonable.
Even more to the point, Section 542.335(1)(b)4. names “[c]ustomer, patient, or client goodwill” as a legitimate business interest that supports a covenant in the first place. Florida law is explicit that what the covenant protects is goodwill. When a buyer’s counsel drafts a seven-year seller covenant with a goodwill-based legitimate business interest recital, that document is doing exactly what Bross Trucking says transfers goodwill — and if it runs to the target corporation rather than to the buyer, it may be transferring it in the wrong direction.
Note also that the 2025 Florida CHOICE Act, Sections 542.41 through 542.45, does not change this. Its “covered noncompete agreement” is defined in Section 542.43(6) as an agreement between a covered employee and a covered employer, and Section 542.45 closes with an express savings clause: any restrictive covenant that does not meet the CHOICE Act definitions “is governed by s. 542.335.” A seller’s covenant stays under 542.335. But a seller-founder who also rolls into a post-closing employment agreement can end up carrying two covenants under two statutory regimes, which is its own drafting problem — one we take up in more detail in our discussion of why sale-of-business covenants get a longer tail under 542.335.
Getting the structure right
If personal goodwill is going to survive scrutiny, the sequencing has to be right long before closing.
First, the historical record has to support it. Was there ever an employment agreement with the target? Was there ever a covenant not to compete running to the target? If the answer is yes, the goodwill likely moved to the corporation years ago and the analysis is largely over. This is a diligence question about the seller’s own files, and it should be asked at the letter-of-intent stage, not the week before closing.
Second, the personal goodwill has to be sold in a separate transaction by the individual to the buyer, with its own agreement and its own consideration — not carved out of the corporation’s asset purchase agreement as a line item. The covenant not to compete, if there is one, runs from the individual to the buyer. That is the Martin Ice Cream posture.
Third, understand what the reporting mechanics reveal. Under Section 1060, consideration in an applicable asset acquisition gets allocated among the assets, and a written allocation agreement between transferee and transferor is binding on both parties unless the Secretary determines it is inappropriate. On Form 8594, a covenant not to compete entered into in connection with the acquisition of an interest in a trade or business is a Class VI asset — because Section 197(d)(1)(E) makes it a fifteen-year intangible — while goodwill and going concern value sit in Class VII. Both classes are inside the corporation’s asset sale. If the covenant is showing up on the company’s Form 8594, the covenant is a corporate asset.
And Section 1060(e) should be read closely by anyone who thinks this is going to escape notice. Where a 10-percent owner transfers an interest and, in connection with that transfer, enters into an employment contract, covenant not to compete, royalty or lease agreement, or other agreement with the transferee, both the owner and the transferee must furnish such information as the Secretary requires. The statute contemplates exactly this fact pattern and asks about it directly. Our companion piece on Section 1060 allocation and how it drives both cap and character goes deeper on the mechanics, and the threshold question of asset sale versus stock sale in a Florida deal usually needs to be settled first.
The honest summary is that personal goodwill remains a legitimate planning position with real authority behind it, and it is worth real money in a Florida C-corporation asset sale. It is also fragile in a specific and predictable way. The thing that makes it work is the absence of a document. The thing buyers reliably ask for is that document. Deciding which of those you want has to happen before the covenant package gets negotiated, because after that the answer has already been chosen for you. For a broader view of how these pieces fit together, see our mergers and acquisitions overview, and the asset-class definitions themselves are set out in the IRS Instructions for Form 8594.
If you are structuring the sale of a Florida C corporation and trying to work out whether personal goodwill is available to you, feel free to reach out to our firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
