Connecticut Administrative Code › Title 12 - Taxation › 740(a) - INCOME TAX › Part II - Nonresident individuals › Section 12-711(b)-20 - Covenants not to compete

Current through July 10, 2024
(a) Connecticut
				adjusted gross income derived from or connected with sources within Connecticut
				includes income that is received by a nonresident individual from a covenant
				not to compete, to the extent that such income is attributable to refraining
				from carrying on a trade, business, profession or occupation in
				Connecticut.
(b) The following
				examples illustrate the application of this section:
Example 1: X, a nonresident individual who is a partner in a
				  law firm, retires during 1994 and, in exchange for receiving the sum of
				  $100,000 in 1994 and each of the nine succeeding years, covenants not to
				  compete with the firm anywhere that the firm is engaged in the practice of law
				  during the next five years. The firm has an office in Connecticut, and an
				  office in Massachusetts. On its 1994 Form CT-1065, the firm properly apportions
				  60% of the net amount of its items of income, gain, loss and deduction to
				  Connecticut, and 40% to Massachusetts. The partners file 1994 income tax
				  returns with both jurisdictions, also properly reporting 60% of their
				  distributive share of partnership income as derived from or connected with
				  Connecticut sources, and 40% as derived from or connected with Massachusetts
				  sources. Whether X worked at the firm's Connecticut office or at its
				  Massachusetts office, X's Connecticut adjusted gross income derived from or
				  connected with Connecticut sources for 1994 and the nine succeeding years shall
				  include 60% of the income that is received by X from the covenant not to
				  compete. If the percentage of X's distributive share of partnership income that
				  is derived from or connected with Connecticut sources has varied from year to
				  year, the average of such percentage for the taxable year in which X retires
				  and for the two preceding taxable years may be used in determining the
				  percentage of the income that is received by X from the covenant not to compete
				  that is derived from or connected with Connecticut sources.
Example 2: Y, a nonresident individual who is an employee of
				  a corporation that has an office in Connecticut and in many other states,
				  accepts an early retirement in 1994 and, in exchange for receiving the sum of
				  $75,000 in 1994 and each of the four succeeding years, covenants not to compete
				  with the firm anywhere in the United States during that period. During her
				  entire career with the corporation and one of its corporate affiliates, Y has
				  worked only in their Connecticut offices. On her previously filed Forms
				  CT-1040NR/PY, Y has properly reported 100% of her salary from these
				  corporations as pay received from services performed in Connecticut. Y's
				  Connecticut adjusted gross income derived from or connected with Connecticut
				  sources for 1994 and the four succeeding years shall include 100% of the income
				  that is received by Y from the covenant not to compete. If the percentage of
				  Y's salary from the corporations that is derived from or connected with
				  Connecticut sources had varied from year to year, the average of such
				  percentage for the taxable year in which Y retires and for the two preceding
				  taxable years could be used in determining the percentage of the income that is
				  received by Y from the covenant not to compete that is derived from or
				  connected with Connecticut sources.
Example 3: Z, a nonresident individual who is the sole
				  proprietor of a home appliance business that has its only store in New York and
				  that, while having numerous Connecticut customers, is not considered to be
				  engaged in a trade or business within Connecticut under §
										12-711(b)-4.
				  Z sells his business for $1.0 million during 1994, and, in exchange for
				  receiving the sum of $200,000 in 1995 and the four succeeding years, covenants
				  not to compete with the purchaser in the home appliance business firm in New
				  York or Connecticut during the next ten years. Z has not previously been
				  required to file a Form CT-1040NR/PY on account of the home appliance business.
				  None of the income that is received by Z either from the sale of the business
				  or from the covenant not to compete is Connecticut adjusted gross income
				  derived from or connected with Connecticut sources, even though Z has
				  covenanted not to compete in Connecticut.
(c) While this section pertains to Section
				12-711(b)
				of the general statutes, for purposes of supplementary interpretation, as the
				phrase is used in Section
				12-2
				of the general statutes, the adoption of this section is authorized by Section
				12-701(c)
				of the general statutes.