Federal Tax Research 10th Edition by Roby Sawyers,William Raabe,Gerald Whittenburg,Steven Gill

Exercise 29

Ramon, Clarita, and Juan are shareholders in the computer consulting firm 3Geeks. Because the business has had several years of success, Juan is ready to leave the business and requests to be bought out. After negotiations among the owners, it is agreed that Juan will receive $300,000 for his stock and $500,000 for agreeing not to provide any computer consulting services for one year starting October 1 of the current year. This $500,000 is the same amount Juan was guaranteed to receive each year as salary. How should 3Geeks treat the $500,000 payment to Juan