Volume XXII, Issue 1 First Quarter 1996 >.._//, TABLE OF CONTENTS CHAIRPERSON'S LETTER TO TAXATION SECTION MEMBERS 2 REPORTS FROM THE COMMITTEES Corporation Committee 5 Employee Benefits Committee 6 Estates & Trusts Committee 6 International Tax Law Committee 7 Partnership Committee 8 Practice & Procedure Committee 8 State & Local Committee 10 FEATURE ARTICLES The Implied Covenant Not To Compete- An IRS Red Herring? By: Robert L. Cohen & Robert A. Bryant 12 General Considerations of Nonqualified Deferred Compensation Arrangements By: Bryan I. Pukoff 19 STATE AND LOCAL TAX UPDATE Recent Cases 26 SHORT SUBJECTS Book Review 29 Shortcuts 30 SECTION NEWS Calendar of Seminars & Events 32 MICHIGAN TAX LAWYER The Michigan Tax Lawyer is a quarterly publication of the Taxation Section of the State Bar of Michigan that is designed to be a practical and useful resource for the tax practitioner. Features include concise reports in a uniform format from the Section's committees, practitioner articles with the "how to" approach, news of events and of other Section members, and "Short Subjects" providing helpful practice information. Input from members of the Taxation Section is most welcome. Our publication is aimed toward involving you in Section activities and assisting you in your practice. If you have suggestions or an article you wish to have considered for publication, please contact Joseph A Bonventre, Esq. at 1600 First Federal Building, Detroit, Michigan 48226-1962, (313) 965-8300. JOSEPH A. BONVENTRE Editor Publication Committee ERIC T. WEISS WILLIAM E. SIDER State Bar of Michigan Taxation Section Council CAROL J. KARR STEPHEN M. FELDMAN GEORGE W. GREGORY Chairperson Vice Chairperson Secretary-Treasurer REGINALD J. NIZOL Ex-Officio Joseph A. Bonventre Mark C. Larson James H. N ovis William E. Sider Stewart L. Mandell Eric T. Weiss Gary Schwarcz Thomas G. Mies Robert R. Stead Editor's Assistant Mary G. Trayner Subscription Information The Michigan Tax Lawyer (ISSN 0899-2460), (USPS 093930) is published quarterly by the Taxation Section, State Bar of Michigan, 525 North Woodward, Suite 1300, Bloomfield Hills, Michigan 48304-2969. Subscription fee of $5.00 is included in the $30.00 annual Taxation Section membership fee. Second-class postage paid at Bloomfield Hills, Michigan. POSTMAS­ TER: Send address changes to Membership Records, Taxation Section, State Bar of Michigan, 306 Townsend, Lansing, Michigan 48904. Change of Address Individual subscribers should send notification in writing to: Membership Records, Taxation Section, State Bar of Michigan, 306 Townsend, Lansing, Michigan 48904. Citation Form The Michigan Tax Lawyer may be cited as follows: (Vol.) (Issue) MI Tax L. (Page) (Qtr. and Yr.). Disclaimer The opinions expressed herein are those of the authors exclusively and do not necessarily reflect those of the Publication Committee, the Taxation Section Council or the Taxation Section. It is the responsibility of the individual lawyer to determine if advice or comments in an article are appropriate or relevant in a given situation. The Publication Committee, the Taxation Section Council and the Taxation Section disclaim all liability resulting from statements and opinions contained in the Michigan Tax Lawyer. CHAIRPERSON CAROL J. KARR 800 CALDER PLAZA BLDG. GRAND RAPIDS 49503·2250 (616) 459-8311 TAXATION SECTION VICE-CHAIRPERSON STEPHEN M. FELDMAN SUITE 200 32300 NORTHWESTERN HWY. STATE MICHIGAN FARMINGTON HILLS 48334-1567 c (810) 855-6500 SECRETARY-TREASURER GEORGE W. GREGORY 300 WABEEK BLDG. 280 W. MAPLE RD. BIRMINGHAM 48009-3344 (810) 646-4200 COUNCIL February 7, 1996 JOSEPH A. BONVENTRE (313) 965-8293 MARK C. LARSON (313) 568-6790 STEWART L. MANDELL (313) 568-6796 THOMAS G. MIES Dear Taxation Section Members: (313) 421-8022 JAMES H. NOVIS (313) 256-7940 The Taxation Section is reaching out with ... GARY SCHWARCZ (810) 855-8808 WILLIAM E. SIDER (313) 961-8380 National speakers at the Summer Tax Conference. Register for ROBERT R. STEAD Friday and Saturday, June 14 and 15, 1996, at the Grand Traverse Resort for an (616) 949-2300 ERIC T. WEISS enjoyable way to broaden your knowledge. Out-of-state speakers include: Alan (810) 355-5000 M. Ellenby, Senior Manager at Ernst & Young in Chicago; Judge David Laro of EX-OFFICIO the U.S. Tax Court in Washington, D.C.; Andrew Katzenstein with Manatt, Phelps REGINALD J. NIZOL (313) 225-2676 & Phillips in Los Angeles; and C. Clinton Stretch, Director of Tax Legislative COMMISSIONER LIAISON Affairs for Deloitte & Touche in Washington, D.C. Also hear what is happening PAUL R. SOWERBY (810) 851-1200 in Lansing from David Kirvan, Administrator, Single Business Tax, and Paul ( COMMITIEE CHAIRPERSONS Hillegonds, Speaker of the House ofRepresentatives. CORPORATION KENNETH W. KINGMA (810) 528-1111 Liaisons with other State Bar Sections. As an outgrowth of EMPLOYEE BENEFITS SHERILL A. SIEBERT discussion between the Taxation Council and Probate Council regarding the (313) 256-7502 proposed Estate Settlement Act, Robin Ferriby from the Probate Council has ESTATES AND TRUSTS EDWARD M. DERON (313) 963-9625 volunteered to attend Taxation Council meetings to keep us apprised of Probate INTERNATIONAL Council activities. The Administrative Law Section has invited the Taxation EDWARD D. MacDONALD (313) 956-2677 Council to select a representative to their Council and Gary Schwarcz has agreed PARTNERSHIP ANTHONY ILARDI, JR. to serve in that capacity. We are also exploring the possibility of a liaison with the (810) 362-8212 Business Law Section. PRACTICE AND PROCEDURE ERIC M. NEMETH (810) 357-3010 STATE AND LOCAL A legislative liaison to the Michigan Legislature. For the first GREGORY A. NOWAK (313) 259-0500 time this year, we have appointed an official legislative liaison to the Michigan PROGRAM FACILITAlOR that KAREN A. NIZOL legislature and Jim Novis is working in capacity to encourage communication. 16411 NOLA DR. LIVONIA 48154-1206 Legislative representatives will also be invited to meet with Taxation Council (313) 953-0088 members before the May Council meeting in Lansing. A Computer Committee to explore communication through the Internet. The State Bar is preparing to establish a virtual private network on the Internet. Steve Feldman, George Gregory, and Tony llardi have agreed to ( PAST COUNCIL CHAIRPERSONS ALLAN J. CLAYPOOL OSCAR H. FELDMAN JOHN L. KING JACK E. MITCHELL B. COURTNEY RANKIN JOHN N. SEAMAN STEPHEN H. CLINK EUGENE A. GARGARO, JR. DONALD M. LANSKY DENNIS M. MITZEL JOHN J. RAYMOND, SR. PETER S. SHELDON JOHN J. COLLINS, JR. ERNEST GETZ JEFFREY A. LEVINE J. LEE MURPHY DAVID M. ROSENBERGER WILLIAM J. SIKKENGA ROGER COOK JOSEPH D. HARTWIG ARNOLD W. WNGERSHAUSEN LAWRENCE J. MURPHY ANDREW M. SAVEL I. JOHN SNIDER, II CLIFFORD H. DOMKE STEPHEN I. JURMU JERRY D. WPTAK ROBERT B. PIERCE BENJAMIN 0. SCHWENDENER. JR. LAWRFNr.F R VAN Til investigate how the Taxation Section can b~st utilize Internet access to facilitate communication among Section members. Participation in the National Association of State Bar Taxation Sections. Our Vice-Chairperson, Steve Feldman, represented our Taxation Section at the 16th Annual Meeting of the National Association of State Bar Taxation Sections in October. Once again, our Michigan. Tax Lawyer and Taxation Section Membership Directory were applauded as model publications and Steve learned what other Taxation Sections across the country are accomplishing. As we are reaching out, are we reaching you? Let us know what else we can do to maximize your Taxation Section membership. Sincerely, Carol J. Karr, Chairperson Reports from the Michigan Tax Lawyer-1st Quarter 1996 Committees Report of the 453 is not available in a 338(h)(10) Corporation Committee transaction. Kenneth M. Kingma, Chairperson 2. Article Regarding Purchase Kemp, Klein, Umphrey & Endelman, P.C. Price Allocations Involving Suite 600 Columbia Center Noncompete Agreements. The 201 West Big Beaver Road second part of a two-part article P.O. Box 4300 written by Robert L. Cohen concern­ Troy, Michigan 48099-4300 ing purchase price allocations (810) 528-1111 involving noncompete agreements is published in this issue of the 1. Recent Activities. Michigan Tax Lawyer. The portion On November 30, 1995, the Corpo­ printed in this issue discusses the ration Committee conducted a joint various shortcomings of the IRS meeting with the Partnership Com­ implied covenant theory that is based mittee regarding Section 338(h)(10) on Colten v Duvall, 254 Mich 346 elections, which are frequently made (1931), and also discusses two federal in merger and acquisition transac­ tax decisions rejecting that theory. tions today. Robert L. Cohen of Plante & Moran, LLP led the discus­ 3. Clinton Administration sion on this topic. Robert provided Proposal To Repeal The Built-In informative handouts (including a Gains Rules For Large C-To-S recent article he wrote) regarding the Corporation Conversions. Among basics of a 338(h)(10) election follow­ the Clinton administration proposals ing the enactment of recent regula­ to achieve a balanced budget is a tions that expanded its use to acqui­ proposal to repeal the built-in gains sitions of S corporation stock. He rules under Section 1374 for large C also discussed the election's applica­ corporations that elect S corporation tion to sales of stock of a subsidiary status after December 6, 1995. A in a consolidated group. During his notice regarding this proposal was discussion; Robert went through a mailed to members of the Corpora­ handout containing an example that tion Committee and the Tax Section. showed the results of a stock pur­ On February 22, 1996, the Treasury chase involving no 338 election, a Department announced that it will 338(g) election, a 338(h)(10) election, recommend to Congress that the and a straight asset sale by a sole proposed repeal apply only to S corporate shareholder or a sole corporation elections effective for individual shareholder. Copies of taxable years beginning after Janu­ these handouts are available upon ary 1, 1997. A notice regarding this request.