Personal Goodwill

[Katie]

Hi,

A doctor sold his business (C Corp) in an asset sale during 2007. The purchase agreement specifically allocates 30% of the purchase price to tangible business assets and the remaining 70% to personal goodwill paid directly to the owner.

I have calculated the loss on the business asset sale on form 4797 and included on the 1120.

1. How do I accurately report the personal goodwill on his form 1040?
2. Do I complete 1 form 8594 that shows the personal goodwill amount or do I prepare 2 one for the business and one for the personal goodwill?

Thanks for any tips!

Katie

[RJM]

Katie- I am not cerain, but my first inclination would be to list only the fixed assets on the 8594. Specifically the personal goodwil is NOT an asset of the corporation, which is the entity required to file the 8594. At the bottom of the form is a block for explaining what else was included in the asset purchase, including employment agreements. That's where I would explain the personal goodwill, and the probably employment agreement with the new owner. That way the doc is also reminded to claim the income, which is LTCG on sched D. Any one else? who actually has done one of these?

[Burke]

Personal Goodwill

I've done them, but not for a C Corp. I really don't see how the goodwill can be separated from the business, as it is a major part of the sale price. It would involve his client lists (patients), etc. I would look at it as a corporate asset, as it does not appear more than one doctor was involved here. I think I see your rationale, however, and the method you mention would work. BUT, it is a depreciable asset for the buyer, is that another corporation? And wouldn't a doctor be a PC anyway?

[Roland Slugg]

Read ...

... the buy-sell agreement. It will say if the goodwill is being sold by the corporation or by the doctor. Hopefully, it will be the doctor.

[PIGLEE]

I have been trying to work this out for a client who is thinking of selling their business. When I saw that the goodwill was capital gains, and in the C Corp (personal service) was taxable at 35% I have been looking for another way. RJM stated that Goodwill is NOT an asset of the corporation, does this have to be stated or decided somewhere along the way (earlier in the corp minutes), or can it been done on the purchase agreement. Do you know where I can find this information in print? I love this forum.

[Bees Knees]

Goodwill can be BOTH and asset of the corporation and the individual shareholder.

Example:

You own Piglee Tax Services, Inc. which is an S corporation located on 10th and main street.

Many of your clients would follow you to your new location if you sell Piglee Tax Services and open up a tax prep business out of your office in home. That is your personal goodwill and any non-compete agreement upon the sale of Piglee Tax Services, Inc. should include payments to you as an individual, outside of the corporation.

Other potential customers see the Piglee Tax Services sign on the building as they drive by and note that that business has been their for the past 15 years. They do not know or care who owned the business. All they know is there is a tax service there, so eventually they walk in to get their taxes done. It does not matter if Piglee Tax Services has just changed ownership. It still has some goodwill attached to the corporation.

In a sales contract where the buyer pays for goodwill, it should be split between how much belongs to the selling corporation, and how much belongs to the shareholder as an individual.

[RJM]

Hi Piglee, Note that the any or all goodwill can be owned by the Corp, or any and all can be owned by an individual (ie personal goodwill), and in any combination. The economic substance of the goodwill is a facts and circumstances sort of thing.

However, given that goodwill exists, and that some or all may be owned by the seller personally, the buyer and seller must agree to this economic substance and reflect it in the language of the asset purchase agreement, as Roland stated. If it is not in writing, then you will have great difficulty supporting any personal goodwill allocation to the IRS.

So, it is very important for attorneys to draw up the purchase agreements such that Personal goodwill is purchased from an Individual, not a business entity, and of course the facts must support that Personal goodwill actually exists, and can be differentiated from Entity goodwill, AND can be separately valued. A great reference is the Dec 2007 issue of The Tax Adviser pg 709. Also refer to the "Martin Ice Cream" and "Norwalk" tax court cases, both 1998. -Bob

[Katie]

Thank you for your replies!

The contract/sale agreement specifically states that 100% of the goodwill is allocated to the owner of the corporation.

I plan to report the sale of all other assets on the 1120 and the personal goodwill on his 1040.

[PIGLEE]

Thanks

Thank you for all your great answers, great big help. I love this forum. Also I like the Piglee Tax Service name, going to keep that in my back pocket. I collect pigs, and have about 80 in my office.

[Burke]

I hope they are the inanimate kind.