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Hastings Business Law Journal

Abstract

Use of a personal goodwill allocation in the sale of assets is the current darling of the tax wonk world, made popular again by the recent case of Bross Trucking v. Commissioner. The ability to allocate some of a corporate seller’s purchase price in a sale of assets to an individual shareholder rather than to the corporation saves that individual shareholder from being subject to the double taxation of a C corporation.

Despite its ability to save on taxes, company advisors are reluctant to allocate part of a purchase price to personal goodwill because of the uncertainty surrounding how to have the allocation respected by the Service and upheld by the courts. While commentators believe that they have come up with a list of criteria that will pass muster with the courts, those same commentators admit that following the list only makes it less likely that the allocation will be respected, not that it is foolproof.

However, even the commentators have missed the mark slightly. By taking a fresh, in-depth look at the cases that created the concept of allocating personal goodwill, this article discloses what the accepted criteria list left out, what the real requirements have been, and why those requirements aren’t supportable.

Finally, this article proposes a simple legislative fix that would provide certainty in the world of personal goodwill, allowing taxpayers and practitioners the assurance that their allocations would not just survive a deficiency claim from the Service, but actually reduce the ability of the Service to make that claim in the first place.

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