Covenants not to compete

(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.

(Effective November 18, 1994)

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