Question

Below are info on one of the firm's client. Your Senior Manager has asked you to draft an internal memo discussing the implications of the client. Make sure to discuss Issue, Conclusion, Analysis. The manager has also provided you with some sources to start your research for the client.

Joe, a tenured college professor, has been a malcontent for many years at Eastern University. The university has recently offered to pay $200,000 to Joe if he will relinquish his tenured position and resign. Joe is of the opinion that tenure is an intangible capital assets and the $200,000 received for release of the tenure should be a long-term capital gain. Explain why you agree or disagree.
A partial list of sources is:
• Harry M. Flower, 61 T.C. 140 (1973)
• Estelle Goldman, 1975 PH T.C. Memo ¶75,138, 34 TCM 639

Answer 1

:Internal Memo:

Issue:

The issue under consideration is whether an amount of $200,000 received by Mr. Joe in consideration for relinquishment of his tenured position in Eastern University is taxable as ordinary income or capital gain.

Analysis:

The facts of the case are similar to the facts in Estelle Goldman, 1975 PH T.C. Memo 1975-38, 34 TCM 639 wherein, the petitioner Willliam Goldman claimed amount received in consideration for a release of all claims against a corporation by whom he had been previously employed as long term capital gain. The United States Tax court held that "It is a well settled principle of law that consideration received for the transfer of a contract right to receive income for the performance of personal services, is taxable as ordinary income"

Conclusion:

Considering the above facts, it can be conclued that an amount of $200,000 received by Mr. Joe in consideration for relinquishment of his tenured position in Eastern University is taxable as ordinary income and not as Long Term Capital Gain. Accordingly, I am not disagree with the claim of Mr. Joe.