sale of clients - capital gain?

[Rapid Robert]

Suppose a tax firm wishing to shed some clients arranges to refer them to another firm and receive a commission over the next several tax seasons for those clients go with the new firm. As part of the deal, existing workpapers and tax software data files are transferred to the new firm.

Assuming the clients were with the old firm for at least two consecutive tax seasons leading up to the referral, is the income from this to be considered ordinary business income, or long term capital gain (asset with zero basis). As sale of an asset, it would be an installment sale, correct?

[RonCPA]

Sale of client list is an intangible under IRS Code Section 197 (d) (1) (C) (ii). Capital gain, not ordinary income for the seller. As long as you don't continue to provide services (work) for the buyer. If you did work for the buyer, it could be earned income, or at least the reasonable compensation portion of the payments.

For the buyer, as they make payments over the next several years, per IRS Code Section 1.197-2 (f) (2) (i): If you pay or incur an amount that increases the basis of an amortizable section 197 intangible after the 15-year period begins, amortize it over the remainder of the 15-year period beginning with the month the basis increase occurs.

Caveat: For CPA's, you need to review the AICPA and your state licensing rules. Many do not allow commissions or they are restricted. Some only allow payments for client lists when a practice is sold. Of course as in any transaction, your situation may vary, always do your homework prior to the transaction.