AICPA - Personal Goodwill, Purchase Agreements, and Covenants Not to C

This article covers the taxation of goodwill in an asset sale...

In general, the disposition of a corporation through an asset sale will result in two levels of tax—taxable gain to the corporation and a taxable distribution to the shareholders. A common strategy for shareholders of closely held corporations to avoid this double tax involves the assertion that a portion of the disposition of the business relates to the sale of personal goodwill of the shareholder and, therefore, a portion of the purchase price should be taxed as capital gain to the shareholder directly.

The concept of personal goodwill is well-established dating back to the decision in Martin Ice Cream Co., 110 T.C. 189 (1998). In recent years, however, decisions in Muskat, 554 F.3d 183 (1st Cir. 2009), Howard, No. 10-35768 (9th Cir. 8/29/11), and H & M, Inc., T.C. Memo. 2012-290, have highlighted the importance of covenants not to compete and asset purchase agreements in establishing the existence of personal goodwill.

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AICPA - Personal Goodwill, Purchase Agreements, and Covenants Not to C:

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