The current rage in dispositional tax planning for closely-held C corporations is to bifurcate the sale transaction into two components comprising: (a) a sale by (i) the target C corporation’s shareholders of their target C corporation stock or (ii) the target C corporation of its assets; and (b) a sale by some or all of the target C corporation’s shareholders of “personal goodwill” associated with the business conducted by the target C corporation. The documented purchase price paid for the first component of the transaction (either the stock of the C corporation or the assets of the C corporation) is based on a fair market value determination that excludes consideration of the personal goodwill component of the transaction. If successful, this tax planning technique allows the selling shareholders to report only shareholderlevel capital gain on the personal goodwill component of the transaction and allows the buyer to claim that this portion of the purchase price is allocable to an acquired intangible, i.e., goodwill, that is amortizable over fifteen years under § 197. More specifically, from the selling shareholders’ perspective, if the first component of the transaction involves a sale of the target C corporation’s assets, the portion of the purchase price attributable to the personal goodwill component of the transaction does not bear the burden of a corporate level of taxation. From the buyer’s perspective, if the first component of the transaction involves a purchase of the target C corporation’s stock, the portion of the purchase price attributable to the personal goodwill component of the transaction is not capitalized into the stock. This planning is premised on the position that certain goodwill associated with the target C corporation’s business can be, and is in fact, owned for tax purposes, by one or more shareholders. If all goodwill associated with the target C corporation’s business activities were in fact owned for tax purposes by the target C corporation, then the personal goodwill component of the transaction is properly viewed as a sale by the target C corporation of such goodwill creating a corporatelevel gain, followed by a distribution from the target C corporation to the shareholders, which in turn creates a shareholder-level gain. If, however, the personal goodwill can be, and in fact is, owned by the selling shareholders and can be, and in fact is, sold by the selling shareholders to the buyer for tax purposes, then its disposition is not subject to corporate-level taxation. Although this planning has garnered much attention recently and could provide significant tax benefits if effective, we believe it deserves further scrutiny before being accepted as an appropriate component of dispositional tax planning for closely-held businesses. This planning technique also highlights the continuing horizontal equity problems associated with the current tax law’s treatment of closely-held businesses. In Part II of this article, we discuss the place that this tax planning technique occupies within a historical context. In Part III, we set forth a substantive discussion of the issues raised by the technique. In Part IV, we discuss the tax policy implications that are raised by the existing application of the corporate income tax regime. Finally, in Part V, we discuss some final thoughts about the implications of the analysis contained in this paper.
Bret Wells and Craig Bergez,
Disposable Personal Goodwill, Frosty the Snowman, and Martin Ice Cream All Melt Away in the Bright Sunlight of Analysis,
91 Neb. L. Rev.
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