Research Paper

ACCT 540

SUMMER 2023

At this point in the semester two of the issues that we have covered include:

1. When a business is purchased, and the acquisition consists of more than one asset, the sales and purchase price must be allocated among the various assets purchased and sold using the so-called residual method. Both buyer and seller must complete a Form 8594 to show this allocation. Goodwill is the residual amount that is left after we first allocate to all identifiable tangible and intangible assets.
2. Regular (C) Corporations have the potential for two levels of tax. So, if a C corporations sells all of its assets and then liquidates, there will be a corporate tax and a shareholder tax imposed (see Chapter 19).

Lets say that the assets of a C corporation are to be sold. The buyer is willing to pay $8.4 Million. We can identify $6.4 Million of value to assign to specific assets. This means that there is a residual $2 Million that would be classified as goodwill.

If the $2 Million goodwill belongs to the C corporation, it will create a gain of $2 Million because the corporation has zero tax basis in self-created goodwill. The corporation will pay $420,000 (21%) tax on this gain. There will be $1,580,000 of consideration related to the goodwill left after paying the corporate tax. This will be distributed to the shareholder and will increase the capital gain on receipt of a liquidating distribution. With a 20% capital gains tax rate the shareholder will pay $316,000 additional tax.

Total tax is $736,000 for the $2 Million goodwill. This is 36.8% of the goodwill.

This is 21% + 20%(79%) = 36.8%.

What if a shareholder of the C corporation has established important, and valuable, contacts in the community that help the business. This value may be an intangible asset such as goodwill. The shareholder might call this his or her personal goodwill.

If the business is sold and the shareholder is paid directly for the value of his or her goodwill, then the 21% corporate tax is avoided on that payment. The corporation then has more money to distribute to the shareholder because no tax is paid on the gain from the goodwill (which will have no tax basis to the corporation).

The $420,000 corporate tax shown above is avoided if the goodwill belongs to the shareholder.Then there is $420,000 additional property to distribute in liquidation. The shareholder will pay $84,000 in additional tax on this added liquidating distribution.

The shareholder will also pay $400,000 in tax on the receipt of the $2 Million for the goodwill.

Total tax is then $400,000 related to the goodwill. This is 20% of the goodwill only the shareholder tax.Notice that this is $336,000 less than if the goodwill is sold by the corporation ($736,000 - $400,000).

We saved 16.8% of the goodwill. This is a reduced 21% corporate tax, minus the shareholder tax of 4.2% on the additional assets paid to the shareholder rather than to the government.

Every dollar of goodwill that we can justify assigning to the shareholder rather than to the corporation will save us 16.8 cents. There is a powerful incentive to document that goodwill belongs to the shareholder and not to the C corporation.

Business (transaction) advisers know this. But they dont know the tax law. So they dont know how to create documentation that supports the personal goodwill.

If this were easy anyone could do it. It Is not easy. But for those who know the law and how to document the existence of personal goodwill, the tax benefits are substantial.

REQUIRED

I want you to write a paper, about 1500-2000 words in length, that explains how to justify personal goodwill. Begin with a plain language explanation of the issue.Do not just copy and paste my explanation. WRITE THIS AS A CLIENT NEWSLETTER AND FEEL FREE TO BE CREATIVE.

Then write a plain language explanation of how one justifies personal goodwill you need to mention court cases and explain what works and what does not work. You are trying to market your services in this area to clients who may need such a planning idea. DO NOT REFERENCE SECONDARY SOURCES!!!!!

Selected examples of casespick a winner and a loser and contrast.

Martin Ice Cream, 110 TC 189 (1998)

Kennedy, TC Memo 2010-206.

Bross Trucking, TC Memo 2014-107

Estate of Adell, TC Memo 2014-155

MacDonald 3 TC 720 (1944)

It is important that for each case that you do cite that you provide enough detail so it is clear why the case it important, what were the facts, how did the court analyze the facts, what conclusion was reached, and what are the implications for someone attempting to make a personal goodwill argument.