Pest Management Professional, December 2013
EXIT STRATEGIES Continued from page 28 to the father in exchange for his shares The transaction was intended to be a tax free spinoff avoiding the dreaded double tax but failed when challenged by the Internal Revenue Service IRS A corporate level tax was imposed on the value of the business including goodwill distributed to the father The two challenged the IRS in Tax Court and were able to convince the court a portion of the corporate assets being valued was personal goodwill of the father not business goodwill owned by the C corporation thereby reducing what would amount to the dreaded double tax Similarly in Norwalk the IRS asserted that the corporation an accounting firm had business goodwill Upon liquidation the agency taxed the value of this asset at the corporate level again creating the dreaded double tax As in the aforementioned case the shareholders sued the IRS in Tax Court which found the client relationships belonged to the shareholders in their individual capacity thereby making it personal goodwill and not business goodwill owned by the C corporation GOODWILL TOWARD ALL What is goodwill and why does it make a difference in the aforementioned situations Goodwill is an intangible asset that can be purchased as part and parcel of a business sale Its commonly recognized as a trade name an assembled workforce and the customer relationships created over time both with the company and with management or ownership If the goodwill belongs to the owner individually a purchaser can purchase that goodwill from him with any tax consequences capital gains paid by the selling individual a single tax If the goodwill belongs to the corporation it must be purchased from the corporate seller subject to tax at the corporate level if a C corporation or in the built in gain waiting period of a C corporation making an S election When the corporation is liquidated there is an additional tax at the shareholder level the 30 December 2013 Pest Management Professional www mypmp net
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