A nonresident who was a longtime key employee of a family-owned New York publishing business received a $1.2 million payment for agreeing not to compete, made as part of the family's sale of the business to an outside buyer. Is that non-compete payment New York-source income subject to New York State personal income tax, and if so, how much of it is taxable?

Plain-English summary

Mark Silverman was a great-grandson of Sime Silverman, who founded "Variety" magazine (published in New York) in 1905. The Silverman family owned Variety, Inc. - publisher of both the New York-based weekly "Variety" and the Los Angeles-based "Daily Variety" - until October 9, 1987, when the family sold its entire interest to Reed Publishing (USA), Inc. Mark Silverman worked for Variety from 1979 onward, most recently as its Special Sections Editor; he was never an officer, director, or controlling shareholder of the company. His only direct ownership stake was through a family trust holding 526 shares, which was sold and terminated as part of the deal - the resulting capital gain wasn't at issue and isn't taxable to New York.

What was at issue was a separate $1,200,000 payment Silverman personally received in 1987 in exchange for signing a five-year agreement not to compete with Reed or Variety (on top of a separate employment agreement with its own non-compete terms). The non-compete agreement itself recited that Silverman had been employed "in a key executive capacity," had made "substantial contributions" to Variety's success, had "extensive and high-level contacts with customers," was "widely known in the industry," and had access to Variety's confidential and proprietary information "at the highest level." At the time, Silverman was a nonresident of New York, having become a Connecticut resident in October 1985 when he married and settled in Greenwich; before that he had lived in New York. His compensation from Variety in the years around the sale included both New York-connected salary and some California-source and other non-New York income.

The Department held that the $1.2 million non-compete payment was, at least in part, New York-source income taxable to Silverman as a nonresident. Under the law then in effect (Tax Law §§ 631(a), 632(a), and 632(b)(1)(B), and Regulation § 131.4(a) and (c)), a nonresident's New York-source income includes compensation for personal services performed in New York, regardless of when or to whom it's paid. Citing its own prior opinion in Matter of Lionel E. and Maxine Gordon, TSB-A-91(2)I, the Department reasoned that a payment for agreeing not to compete "derives its significance and value from" the recipient's personal services when the agreement is connected with a business sale - and here, the non-compete agreement's own recitals tied the payment's value directly to Silverman's key executive role, his industry reputation and contacts, and his access to confidential Variety information, all of which stemmed from services he performed largely in New York, where Variety magazine was published.

Because none of the specific allocation regulations then in place (§§ 131.15 through 131.22) directly addressed how to allocate a non-compete payment made to someone who, unlike a retiring employee, was not being separated from service, the Department fell back on its residual authority under § 131.23 to prescribe a fair method. It chose to apply, by analogy, the formula in § 131.20 that is normally used to allocate a pension or other retirement benefit paid to a multi-state employee who has separated from service - reasoning that the broad definition of "other retirement benefit" in that section was similar enough in nature to cover a payment like Silverman's. Under that borrowed formula: if all of Silverman's Variety services were performed wholly in New York, the entire $1.2 million is New York-source income; if wholly outside New York, none of it is; and if his services were performed partly in and partly out of New York, the taxable share equals his New York-source Variety compensation for the pre-agreement portion of 1987 plus the three immediately preceding taxable years, divided by his total Variety compensation (in and out of New York) for that same period, computed year-by-year under § 131.18 (including years he was actually a New York resident). The opinion notes that a taxpayer may use a longer base period than this default three-plus-partial-year window if he satisfactorily demonstrates his total and New York-allocable compensation for that longer period to the Commissioner. The Department did not itself calculate Silverman's specific allocation percentage in the opinion - it established which method applies and how to run it, leaving the arithmetic (based on the year-by-year compensation figures in the facts) to be applied to his actual numbers.

What this means for you

Employees (not just owners) who receive non-compete payments tied to a business sale

You don't need to have been an officer, director, or controlling shareholder for a non-compete payment to be treated as connected to your personal services. Here, Silverman was a mid-level editor with no corporate control, yet the Department still traced the payment's value to his "key executive," reputational, and confidential-access role described in the agreement itself. If your non-compete agreement's recitals describe your industry standing, client relationships, or insider access as the reason for the payment, expect the state where you performed those services to claim a piece of it - even as a nonresident.

Nonresidents negotiating or receiving a lump-sum non-compete payment in connection with a company sale

Because the payment is sourced to where you performed the underlying services (not where you live when you receive the check), keep clear year-by-year records of your compensation and where you worked during the years leading up to the sale. When you're still employed (not retiring) at the time of the payment, expect the state to borrow its pension/retirement-benefit allocation formula rather than apply a specific non-compete rule, and to look back at a multi-year base period (here, the year of payment plus the three prior years) to compute the taxable share.

Family businesses restructuring or selling to an outside buyer

When a sale package bundles a stock purchase agreement with separate non-competition and employment agreements for family members who also work in the business, expect each piece to be analyzed on its own tax terms. The capital gain from the stock sale and the ordinary compensation under the employment agreement are treated differently from a standalone non-compete payment, which gets its own sourcing and allocation analysis based on where the recipient's services were actually performed.

Common questions

Q: Why did New York treat a payment for not competing as taxable income connected to services, rather than as part of the tax-free capital gain from the stock sale?
A: The Department distinguished the two payments. The capital gain from selling Silverman's trust-held Variety shares was a separate item, reported on his federal and Connecticut returns, and wasn't at issue or taxable to New York. The $1,200,000 non-compete payment was a distinct payment under a separate agreement, and the Department found - based on the non-compete agreement's own language about Silverman's executive role, industry contacts, and confidential access - that its value came from his personal services, not from his (indirect, minimal) equity stake.

Q: Silverman had never been an officer or director and didn't control Variety. Why did that not matter?
A: The Department's analysis turned on the recitals in the non-compete agreement itself, which described Silverman as having been employed "in a key executive capacity," having made "substantial contributions," having "extensive and high-level contacts with customers," being "widely known in the industry," and having access to Variety's confidential information "at the highest level." Those service-based facts, not his ownership or corporate title, were what tied the payment to his personal services and therefore to New York sourcing.

Q: How is the taxable portion of the payment actually calculated?
A: Because no regulation specifically addressed allocating a non-compete payment to someone still employed (not separated from service), the Department applied by analogy the formula used for pension/retirement benefits under Regulation § 131.20. The New York-source share equals Silverman's New York-source Variety compensation for the part of 1987 before the non-compete agreement plus the three preceding taxable years, divided by his total Variety compensation (in and out of New York) for that same period - with each year computed separately under § 131.18. If all his services were in New York, the whole payment is taxable; if none were, none is.

Q: Could Silverman use a different time period than the "three years plus the pre-agreement portion of 1987" default?
A: Yes. The opinion notes that a longer base period may be used if Silverman establishes, to the Commissioner's satisfaction, his total compensation and the New York-allocable portion of it for that longer period, computed under § 131.18. Absent such a showing, the default three-plus-partial-year period applies.

Q: Does this opinion tell us exactly how much of the $1.2 million was taxable to New York?
A: No. The opinion establishes the legal framework and the allocation method to use, but it does not run the numbers against Silverman's specific year-by-year compensation figures (which included California salary and other non-New York income in some years). Applying the formula to his actual facts would be a separate computational step.

Citations and references

• Tax Law § 631(a) (1987) - a nonresident's New York taxable income is New York adjusted gross income less the New York deduction and personal exemption
• Tax Law § 632(a) (1987) - a nonresident's New York adjusted gross income is the federal AGI items derived from or connected with New York sources
• Tax Law § 632(b)(1)(B) (1987) - New York-source items include those attributable to a business, trade, profession, or occupation carried on in New York
• Tax Law § 632(c) (1987) - requires allocation where personal services are performed both within and without New York
• Regulations § 131.4(a) and (c) (1987, now §§ 132.4(a) and (c)) - compensation for personal services performed in New York is New York-source income regardless of when or to whom it is paid
• Regulations §§ 131.15-131.22 (1987, now §§ 132.15-132.22) - specific formulas for apportioning a nonresident's multi-state business/personal-service income
• Regulations § 131.23 (1987, now § 132.23) - residual Commissioner authority to prescribe a fair and equitable allocation method where the specific formulas don't apply
• Regulations § 131.18 (1987, now § 132.18) - year-by-year method for computing New York-source compensation, used in the borrowed allocation formula
• Regulations § 131.20 (1987, now § 132.20) - the pension/retirement-benefit allocation formula applied here by analogy to the non-compete payment
• Matter of Lionel E. and Maxine Gordon, TSB-A-91(2)I (Jan. 29, 1991) - established that a payment for an agreement not to compete, connected to a business sale, is income from the surrender of an intangible/property right tied to personal services

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a92_10i.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-92 (10) I
Income Tax
October 26, 1992

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I920513D

On May 13, 1992, a Petition for Advisory Opinion was received from Mark
Silverman and Pamela Lynch, 152 Marshall Ridge Road, New Canaan, Connecticut
06840,
The issue raised by Petitioners, Mark Silverman and Pamela Lynch, is
whether a payment pursuant to an agreement not to compete constitutes income
taxable for New York State Personal Income Tax purposes when received by a
nonresident.
Petitioner Mark Silverman filed a joint tax return with his spouse,
Petitioner, Pamela Lynch, for 1987. Since the issue raised herein relates to an
item of income which is solely that of Mark Silverman, hereinafter all references
to Petitioner shall refer to Mark Silverman alone.
Petitioner has been employed by Variety, Inc. (hereinafter "Variety"), from
1979 until the present. Variety consists of the weekly magazine "Variety" which
is published in New York and the daily newspaper "Daily Variety" founded in 1933
and published and circulated by a subsidiary of Variety primarily in Los Angeles,
California. In addition, Variety maintains news bureaus and subsidiaries in
London, Rome, Munich, Paris, Madrid, and Australia. Variety filed New York State
Franchise Tax returns, and in 1985, 1986 and 1987, reported issuer's allocation
percentages of 31.12%, 23.21% and 52.08%, respectively.
Variety magazine was founded by Petitioner's great-grandfather, Sime
Silverman, in 1905 and had been owned by the Silverman family from the magazine's
founding until October 9, 1987, when the Silverman family sold all of their
interest in the magazine to Reed Publishing (USA), Inc. (hereinafter "Reed").
At the time of sale to Reed, Syd Silverman, Petitioner's father, owned
5,474 shares of the 7,578 shares issued and outstanding of Variety.
The
remaining shares were equally divided among four trusts established by
Petitioner's father for the benefit of his children. Thus, on the date of sale,
the trust for the benefit of Petitioner owned 526 shares of Variety stock, which
was sold to Reed as part of the sale of the Silverman family interests. The
trust was terminated concurrently with the stock sale, and the capital gain from
the stock sale was reported to Petitioner by the trust as income, and thereafter
on Petitioner's 1987 Federal and Connecticut tax returns. The capital gain is
not taxable for New York purposes, and its taxability is not at issue herein.
The agreement by which the Silverman family sold their interest to Reed
consisted, in relevant part, of a Stock Purchase Agreement between Reed, Syd
Silverman and the Silverman trusts, Non-Competition Agreements between Variety,
TP-9(9/88)

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TSB-A-92 (10) I
Income Tax
October 26, 1992
Reed, and each member of the Silverman family, and employment agreements, which
include their own separate non-compete provisions (with different effective dates
and terms), between Variety and each of the Silverman family members.
In consideration of Petitioner's agreement not to compete with Reed or
Variety for a period of five years, Petitioner received a payment of $1,200,000
in 1987 (hereinafter "Payment"). Petitioner has never been a corporate officer
or director of Variety or any of its subsidiaries, and has never exercised,
either individually or with others, control over the affairs of Variety at any
point in time prior to the sale. At the time of the sale, Petitioner was the
Special Sections Editor of Variety magazine.
Petitioner's non-competition agreement provides, in pertinent part,
that:
WHEREAS, [Petitioner] has heretofore been employed by
[Variety] in a key executive capacity and has otherwise made
substantial contributions to the success of [Variety] and its
subsidiaries; and
WHEREAS, [Petitioner] enjoys extensive and high-level contacts
with customers and prospective customers of [Variety] and its
subsidiaries, is widely known in the industry and has heretofore had
access to confidential and proprietary information of [Variety] and
its subsidiaries at the highest level; and
WHEREAS, the Silverman family founded the business of
[Variety]and its subsidiaries in 1905 and has been continuously and
closely associated with such business since that date, so that there
is a widespread and substantial association of the Silverman family
namewith the business of [Variety] and its subsidiaries throughout
theentertainment industry ....
At the time of sale Petitioner was, and still is, a resident of the state
of Connecticut. Petitioner was a New York State resident up until October, 1985,
when he married Pamela Lynch and the couple established their first home in
Greenwich, Connecticut.
Prior to his marriage, Petitioner resided at his
parents' home in White Plains, New York. Petitioner has been a Connecticut
resident from the date of his marriage to the present.
Petitioner received the following amounts as compensation during the year
of sale and the years preceding:

1984
1985
1986
1987

Total
Salary

California
Salary

Other
Non-NY

$43,525
52,525
59,450
58,460

$11,440
26,504

$
7,305
9,703

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TSB-A-92 (10) I
Income Tax
October 26, 1992

For the taxable year ended December 31, 1987, Section 631(a) of the Tax Law
provided that the New York taxable income of a nonresident individual is the
individual's New York adjusted gross income less the individual's New York
deduction and New York personal exemption.
For taxable year ended December 31, 1987, section 632(a) of the Tax Law
provided that the New York adjusted gross income of a nonresident individual
shall be the sum of the net amount of items of income, gain, loss and deduction
entering into the individual's federal adjusted gross income derived from or
connected with New York sources.
For taxable year ended December 31, 1987, section 632(b)(1)(B) of the Tax
Law provided that items of income, gain, loss and deduction derived from or
connected with New York sources are those items attributable to a business,
trade, profession or occupation carried on in New York State.
For taxable year ended December 31, 1987, section 131.4(a) of the Personal
Income Tax Regulations (hereinafter "Regulations") provided:
(1) The New York adjusted gross income of a nonresident individual
includes items of income, gain, loss and deduction entering into his
Federal adjusted gross income which are attributable to a business,
trade, profession or occupation carried on in New York State.
(2) A business, trade, profession or occupation (as distinguished
from personal services as an employee) is carried on within New York
State by a nonresident when such nonresident occupies, has,
maintains or operates desk space, an office, a shop, a store, a
warehouse, a factory, an agency or place where such nonresident's
affairs are systematically and regularly carried on, notwithstanding
the occasional consummation of isolated transactions without New
York State. This definition is not exclusive. Business is carried
on within New York State if activities within New York State in
connection with the business are conducted in New York State with a
fair measure of permanency and continuity ....
For taxable year ended December 31, 1987, section 131.4(c) (now section
132.4(c)) of the Regulations provides that:
If personal services are performed within New York State,
whether or not as an employee, the compensation for such services
includible in Federal adjusted gross income constitutes income from
New York State sources, regardless of the fact that (1) such
compensation is received in a taxable year after the year in which
the services were performed, or (2) such compensation is received by
someone other than the person who performed the services.

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TSB-A-92 (10) I
Income Tax
October 26, 1992

The consideration received in exchange for an agreement not to compete
constitutes income includible in adjusted gross income for federal income tax
purposes. An agreement not to engage in an occupation or undertaking that would
conflict with the business interests of the buyer constitutes the surrender of
an intangible asset, property right or right of value directly connected with the
sale of the business.
Lionel E. and Maxine Gordon, Adv 0p Comm T & F, January
29, 1991, TSB-A-91(2)I.
Herein, the agreement not to compete states that Petitioner was employed
by Variety in a key executive capacity and that he has made substantial
contributions to the success of Variety and that he had extensive and high-level
contacts with customers and prospective customers of Variety and is widely known
in the industry and had access to confidential and proprietary information of
Variety at the highest levels.
Therefore, Petitioner's agreement not to engage in an occupation or
undertaking that would compete with the business interests of Reed and Variety
is directly connected with the sale of the business, and the Payment Petitioner
received with respect to such agreement derives its significance and value from
Petitioner's personal services and is, therefore, income derived from or
connected with a business, trade, profession or occupation carried in New York
State pursuant to section 632(b)(1)(B) of the Tax Law and section 131.4(a) and
(c) of the Regulations. For taxable year ended December 31, 1987, section 632(c)
of the Tax Law and section 131.4(b) of the Regulations provided that when
personal services are performed both within and without New York State the
portion of the compensation attributable to such services performed within New
York State must be determined pursuant to the Regulations.
For taxable year ended December 31, 1987, sections 131.15 through 131.22
of the Regulations were designed to apportion and allocate to New York State, in
a fair and equitable manner, a nonresident's items of income, gain, loss and
deduction attributable to a business, trade, profession or occupation carried on
partly within and partly without New York State. For taxable year ended December
31, 1987, section 131.23 of the Regulations provides that where the methods
provided under sections 131.15 through 131.22 of the Regulations do not so
allocate and apportion such items, the Commissioner of Taxation and Finance may
require a taxpayer to apportion and allocate those items under such method as he
prescribes, as long as the prescribed method results in a fair and equitable
apportionment and allocation.
Sections 131.15 through 131.22 of the Regulations do not specifically
provide a method of allocating and apportioning the Payment Petitioner received
from the non-competition agreement where Petitioner is not separated from
service. However, section 131.20 provides an allocation formula where an employee
who performed services both within and without New York State is separated from
service and thereafter receives a pension or other retirement benefit.
The
definition of "other retirement benefit" for purposes of section 131.20 of the
Regulations encompasses items which are substantially similar in nature

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TSB-A-92 (10) I
Income Tax
October 26, 1992
to the Payment Petitioner received. Therefore, pursuant to section 131.23 of the
Regulations, Petitioner is required to allocate the Payment from the non­
competition agreement in accordance with section 131.20 of the Regulations.
If Petitioner's services were performed wholly within New York State, the
entire Payment is New York source income.
If Petitioner's services were
performed wholly outside New York State, no part of the Payment is from New York
sources.
If Petitioner's services were performed partly within and partly
without New York State, the portion of the Payment that is attributable to New
York State sources is the proportion of the Payment which the total compensation
Petitioner received from Variety for services performed in New York State during
a period consisting of the portion of the taxable year prior to the agreement not
to compete and the three taxable years immediately preceding the agreement, bears
to the total compensation received from Variety during such period for services
performed both within and without New York State.
For this computation,
Petitioner's compensation for services performed within New York State must be
determined separately for each taxable year or portion of a year in accordance
with the provisions of section 131.18 of the Regulations. The provisions of
section 131.18 of the Regulations should be used for all taxable years including
taxable years during which Petitioner was a resident of New York State.
A determination of the portion of the Payment that is attributable to New
York State on a basis of a period of time greater than the period referred to
above may be made if Petitioner establishes, to the satisfaction of the
Commissioner of Taxation and Finance, the amount of his total yearly compensation
for a longer period of time and the amount allocable to New York State in each
year in accordance with section 131.18 of the Regulations.
It is noted that section 632(a), (b)(1)(B) and (c) of the Tax Law,
referenced herein, has subsequently been renumbered as section 631(a), (b)(1)(B)
and (c) respectively.
Also sections 131.4(a), (b) and (c) and 131.15 through
131.23 of the Regulations, referenced herein, have been renumbered as sections
132.4(a), (b) and (c) and 132.15 through 132.23 respectively.

DATED:

October 26, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.