Legal Ruling 1958-84

Income From California Sources

Income from a covenant not to compete in California, if severable from the sale of other intangibles, is income from sources within California.

Taxpayer, a nonresident, sold his stock interest in a California firm. Part of the consideration received by taxpayer was for his covenant not to compete in California for a period of ten years. Advice is requested whether the income from a covenant not to compete in California constitutes income from sources within California.

Consideration for a covenant not to compete in California, if severable from the sale of other intangibles, is income from sources in California. If, on the other hand, the consideration cannot be so segregated, the entire amount arises from the sale of the asset; under such circumstances the sale of stock by a non-resident would not be taxable in California.