Tax News
Personal Goodwill Developments
October 19, 2010
Ever since the Martin Ice Cream case, personal goodwill has been the sweet spot of disposing a business.  The disposition of personal goodwill is generally taxed at capital gains rates of 15% and as long as there continues to be an arbitrage between capital and ordinary rates, taxpayers will likely persist in attempting to fall within the personal goodwill cubby hole.  In the fund context the issue usually arises for fund managers in the estate planning and divorce context, or at the fund level if the fund is on the buy side and a founder is trying to sell all or a portion of its business to the fund.

The Martin Ice Cream is a pro-taxpayer case, but unfortunately, is quite limited to its facts.  In the second half of 2010 there were several negative for the taxpayer decisions. One such decision is James P. Kennedy et ux. v. Commissioner; T.C. Memo. 2010-206 (September 22, 2010).  In this case the Tax Court ruled that the goodwill allocation was tax motivated, and thus, it ruled against the taxpayer.  However, no penalties were imposed.  The other case is Howard v. U.S., 106 AFTR 2d 2010-5140 (July 30, 2010).  In this case the taxpayer also lost, this time because it had a noncompete agreement.  Thus, the goodwill was corporate and not personal.  In light of these cases, funds and their participants should be particularly careful in structuring personal goodwill sales.
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Tags: personal goodwill, personal goodwill tax, personal goodwill taxation