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Sale of Personal Goodwill Tax Strategy Reaffirmed by Tax Court

October 2, 2014 Business & Tax Blog Sale of Business

Owners of C corporations, and S Corporations that previously were C corporations and have built-in gains, can face a significant tax hit upon the sale of their business – two levels of federal income tax and Florida corporate income tax. Where the owner of the business has bona fide personal goodwill that is distinct from the corporate goodwill, such as strong personal relationships with customers, a common tax strategy can be used to mitigate some of the tax hit by bifurcating the sale transaction into a corporate sale of assets and a sale of personal goodwill by the owner to the same buyer as part of the same transaction. The sale of the personal goodwill will be outside of corporate solution and taxable at the preferential long-term capital gain rate. This strategy was first upheld by the Tax Court in 1998 in the Martin Ice Cream case. The Tax Court recently reaffirmed this strategy in Bross Trucking, Inc. v. Commissioner, T.C. Memo 2014-107. However, implementing this tax strategy in a manner that will be respected by the Internal Revenue Service or upheld by a court requires advance planning (ideally before a Letter of Intent is signed and certainly before the sale is closed) and careful implementation.

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043