I wish you continued the discussion. But it probably is permissive for me to continue develop the discussion to cover the possible situation range of your client's situation.
This article below has the most complete discussion from regular income to capital gain to self employment income.
Below is a complete IRS settlement guideline on the subject. It is a settlement guideline because the subject matter is a grey area.
The below articles give us strong argument for personal goodwill.
Below is a link of affirming tax court case on economic reality of carrying out the agreement.
The IRS latest instruction places the Covenants not to compete entered into in connection with the acquisition of a business into Section 197 intangibles for amortization. This could be a non-earned income argument vs. self employed income (1099 misc.).
Section 197 Intangibles
Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years. They include the following assets.
Going concern value.
Workforce in place.
Business books and records, operating systems, and other information bases.
Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items.
Licenses, permits, and other rights granted by a governmental unit.
Covenants not to compete entered into in connection with the acquisition of a business.
Franchises, trademarks, and trade names.
See chapter 8 of Pub. 535 for a description of each intangible.
Covenant not to compete. A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before you have disposed of your entire interest in the trade or business for which the covenant was entered into. Members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity in determining whether a member has disposed of its entire interest in a trade or business.
Please feel free to follow up.