Harriet, who is single, is the owner of a sole proprietorship. Two years ago, Harriet developed a process for preserving doughnuts that gives the doughnuts a much longer shelf life. The process is not patented or copyrighted, but only Harriet knows how it works. Harriet has been approached by a company that would like to buy the process. Harriet insists that she receive a long-term employment contract with the acquiring company as well as be paid for the rights to the process. The acquiring company offers Harriet a choice of two options:
(1) $650,000 in cash for the process and a 10-year covenant not to compete at $65,000 per year or
(2) $650,000 in cash for a 10-year covenant not to compete and $65,000 per year for 10 years in payment for the process.
Which option should Harriet accept? What is the tax effect on the acquiring company of each approach?