Updated July 29, 2026. Quick answer: Because the Code names it. IRC §197(d)(1) lists what a section 197 intangible is, and subparagraph (E) is a covenant not to compete entered into in connection with an acquisition of an interest in a trade or business. That listing is what lets the buyer amortise the payment — and the mirror image is that the dollars do not reach you as capital gain. The buyer’s deduction and your rate are the same allocation, read from opposite ends.
Where the covenant sits in the statute
IRC §197(d)(1) builds the class of section 197 intangibles out of an enumerated list — goodwill and going concern value, workforce in place, business books and records, patents and copyrights, customer-based and supplier-based intangibles, government licences and permits — and at subparagraph (E), a covenant not to compete. Being inside that list is what makes the payment amortisable by the buyer over the §197(a) period.
So the negotiation is structural rather than adversarial by accident. A buyer allocating a million dollars to your covenant gets an amortisable intangible. A buyer allocating the same million to goodwill also gets an amortisable intangible — but the character in your hands differs between the two. The buyer is close to indifferent; you are not. That asymmetry is the whole reason non-compete allocations appear in practice-sale drafts at the numbers they do.
| Allocated to | Buyer | You |
|---|---|---|
| Covenant not to compete | A §197 intangible, amortisable | Not capital gain |
| Goodwill and going concern value | Also a §197 intangible, amortisable | Capital, subject to the goodwill question below |
| Equipment | Depreciable, on its own schedule | Recapture territory, and it is taxed in the year of sale |
The anti-churning trap on the other side. §197(f)(9) restricts amortisation where the intangible was held or used by a related party before the acquisition. In a practice sold to an associate, a family member, or a related entity, that provision can remove the buyer’s deduction while your character is unchanged — so the allocation both sides agreed to stops doing what either of them expected. It is worth knowing the provision exists before the draft arrives, particularly if the buyer is related to you.
One question this site will not answer, and why. Whether goodwill in a practice sale belongs to you personally or to the entity is the most consequential question in a professional-practice deal. It rests on two Tax Court decisions whose primary text we have never been able to obtain from an official court source, and the one-line summaries in circulation overstate what are narrow, fact-bound holdings. So we do not state a rule on it. Anyone telling you the answer is simple, in either direction, is summarising cases they have probably not read either.
How much reaches the covenant at all is decided by the allocation waterfall, in which the residual class is goodwill and everything above it fills first.
Run your own numbers. Dividend vs ordinary income comparer — compare the two rates on your numbers.
Sources
IRC §197(d)(1), including subparagraph (E); IRC §197(a) for the 15-year amortisation period; IRC §197(f)(9) anti-churning. Fetched July 2026.
This states what the cited authority says. It is not tax or legal advice. A practice sale turns on the entity form, the allocation actually agreed and the buyer’s own tax position — and one of the most-asked questions in this area is deliberately not answered anywhere on this site, for the reason given on each page that touches it.