* This disposition is not appropriate fo r publication and is not precedent except as provided by 9th Cir. R. 36-3.

** The Honorable Edward R. Korman, Senior District Judge for the U.S. District Court for Eastern New York, Brooklyn, sitting by designation. NOT FOR PUBLICATION UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

LARRY E. HOWARD, et al., Plaintiffs - Appellants,

v. UNITED STATES OF AMERICA, Defendant - Appellee. No. 10-35768 D. C. 2:08-cv-00365-RMP MEMORANDUM *

Appeal from the United States District Court for Eastern Washington, Spokane Rosanna Malouf Peterson, Ch ief District Judge, Presiding Argued and Submitted July 13, 2011 Seattle, Washington Before: CLIFTON and N.R. SMITH, Ci rcuit Judges, and KORMAN, Senior District Judge. ** Dr. Larry E. Howard and Joan M. Howard(jointly, the “Taxpayers”) appeal the district court’s grant of summary judgment infavor of the United States on their claim 

# FILED

AUG 29 2011 MOLLY C. DWYER, CLERK

U.S. COURT OF APPEALS2 for a refund of a tax deficiency and interest payment. The Taxpayers maintain that the goodwill proceeds from the sale of Dr. Howard ’s dental practice were personal assets subject to federal income taxation as long-term capital gain. The government contends that the goodwill proceeds belonged to Dr. Howard’s professional service corporation (the “Howard Corporation”), wh ich the Internal Reve nue Service properly recharacterized as a dividend payment. We have jurisdic tion under 28 U.S.C. § 1291, and we review the district court’s grant of summary judgment de novo

. Bagdadi v. Nazar , 84 F.3d 1194, 1197 (9th Cir. 1996). Goodwill “is the sum total of those imponderable qualities which attract the custom of a business,—what brings patronage to the business.” Grace Brothers v. Comm’r , 173 F.2d 170, 175–76 (9th Cir. 1949). For purposes of federal income taxation, the goodwill of a prof essional practice may attach to both the professional as well as the practice. See, e.g., Schilbach v. Comm’r , 62 T.C.M. (CCH) 1201(1991). Where the success of the venture depends entirely upon the personal relationships of the practitioner, the practice does not generally accumulate goodwill. See Martin Ice Cream Co. v. Comm’r , 110 T.C. 189 at 207–08 (1998). The professional may, however, transfer his or her goodwill to th e practice by entering into an employment contract or covenant not to compete with the business. See, e.g., Norwalk v. Comm’r , 76 T.C.M. (CCH) 208, *7 (1998) (finding th at there is no corporate goodwill where3 “the business of a corporation is dependent upon its key employees, unless they enter into a covenant not to comp ete with the corporation or other agreement whereby their personal relationships with clients becomeproperty of the corporation”) (emphasis added); Martin Ice Cream Co. , 110 T.C. at 207–08 (finding that “personal relationships . . . are not corpor ate assets when the employee has no employment contract [or covenant not to compete] with the corporation”) (emphasis added); Macdonald v. Comm’r , 3 T.C. 720, 727 (1944) (finding “ no authority which holds that an individual’s personal ability is part of the assets of a corporation . . . where . . . the corporation does not have a right by contract or otherw ise to the future services of that individual”) (emphasis added) . In determining whether goodwill has been transferred to a professional practice, we are especi ally mindful that “each case depends upon particular facts. And in arriving at a particular conclusion . . . we . . . take into consideration all the circumstances . . . [of] the case and draw from them such legitimate inferences as the occasion warrants.” Grace Brothers v. Comm’r , 173 F.2d 170, 176 (9th Cir. 1949). In the instant case, Dr. Howard worked for the Ho ward Corporation pursuant to an employment contract by which he ag reed “to practice dentistry solely as an employee of the [Howard] Corporation and . . . [to] devote his entire professional time to the affairs of the [Howard] Corpora tion.” Under this agreement, the Howard4 Corporation retained “complete control a nd authority with respect to the acceptance or refusal of any clie nt” and “all files . . . and other records concerning clients of the [Howard] Corporation . . . belong[ed] to . . . the [Howard] Corporation.” In addition to the employment contract, Dr. Howard agreed not to “engage . . . in any business . . . competitive to that of the [Howard Corporation,]” as “long as [Dr. Howard] h[eld] any stock [in the Howard Co rporation]” and for a period of three years thereafter. Under these circumstances, while the relationships that Dr. Howard developed with his patients may be accurately describe d as personal, the economic value of those relationships did not belong to him, because he had conveyed control of them to the Howard Corporation. Pursuant to the underlying purchase agreement, the buyer obtained the goodwill of the dental practice. The purchase ag reement provides that “[t]he personal goodwill of the [p]ractice . . . [was] established by Dr. Howard . . . [and] is based on the relationship between Dr. Howard and the patients.” To preserve the value of the goodwill, Dr. Howard entered into a restrictive covenant with the buyer, (the “Covenant Not to Compete”). In accordance with the Cove nant Not to Compete, both Dr. Howard and the Howard Co rporation agreed “not to practice dentistry . . . within a radius of ten . . . miles from the [practice] . . . until three . . . years from the date [Dr. Howard and the Howard Corporation] discon tinue[] . . . dentistry [at the practice.]”5 Along with the Covenant Not to Compete, the Howard Corporation executed a provider agreement with Bryan K. Finn, DDS, PS, the buyer’s professional service corporation. The Taxpayers make two arguments ba sed on the language of the purchase agreement. First, they re ly on the declaration that the goodwill “represents a personal, non-corporate asset that is being conveyed indivi dually by Dr. Howard . . . .” The argument that this clause is dispositive of the issue whether the goodwill belonged to the Howard Corporation or to Dr. Howard is without merit. By now it is well settled that “the incidence of taxation depends upon the substance, not the form of [a] transaction.” Comm’r v. Hansen , 360 U.S. 446, 463 (1959). As a result, we “look[] to the objective economic realities of a trans action rather than to the particular form the parties employed.” Frank Lyon Co. v. United States , 435 U.S. 561, 573 (1978). Self-serving language in a purchase agreement is not a substitute for a careful analysis of the realities of the transaction. Second, the Taxpayers contend thatthe purchase agreement impliedly terminated both the employmen t contract and the non-competition agreement, thereby transferring the accumulated goodwill of the practice back to Dr. Howard. This argument appears to be inconsistent withthe agreement entered into between the Howard Corporation and the buyer by which the Howard Corporation arranged for Dr.6 Howard to provide “dental treatment on the patients of [the buyer.]” Dr. Howard was compensated for the services he rendered to the buyer by the Howard Corporation—an arrangement that lasted for approximately three years and during which the Howard Corporation paid a ll of Dr. Howard’s operating expenses. Nevertheless, even if we accept the premis e that the purchase agreement terminated both the employment contract and the non- competition agreement, such a release would constitute a dividend paym ent, the value of which would be equivalent to the price paid for the goodwill of the dental practice. See 26 U.S.C. § 316(a) (a “dividend” is “any distribution of pr operty made by a corporation to its shareholders”); 26 U.S.C. § 301(b)(1) (“the amount of any distribution shall be the amount of money received, plus the fair market value of . . . property received”); 26 U.S.C. § 301(c)(1) (“that portion of [a] distribution which is a dividend . . . shall be included in gross income”). Finally, the Taxpayers concede that Dr . Howard chose to conduct his business as a C corporation to take advantage of ta x benefits that accrued to him over the years. As one of the members of the panel aptly observed at oral argument, “so having then made himself available to the advantages of using the corporation, and having entered into the agreements that he did with the corporation, then why should we try then to allow him . . . out of what he got himself into.” Audio Recording of Oral Argument,7 Howard v. United States , No. 10-35768 (9th Cir. July 13, 2011). Dr. Howard has offered no compelling reason why he should be let out of the corporate structure he chose for his dental practice. The judgment of the district court is AFFIRMED

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