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Sunday, August 24, 2014


The question of “personal goodwill” often comes up in sales of corporate assets. When a business is sold, the shareholder will often seek to sell his or her “personal goodwill” in the business separately from the corporation’s sale of its assets, so as to obtain individual capital gains rates on the goodwill portion. But personal goodwill can also have relevance to estate tax valuation of stock, as illustrated by a recent Tax Court case.

In the case, the decedent owned all of the shares of stock of a corporation that were being valued for estate tax purposes. However, the son of the decedent was heavily involved in the business, including having various personal relationships with outsiders that assisted in revenue generation. Thus, a reduction in the value of the stock was sought for the personal goodwill of the son in the business. The Tax Court agreed, and resolved a dispute as to the value of the reduction in value for the son’s personal goodwill.

The Court noted that goodwill is often defined as the expectation of continued patronage by existing customers. Citing the well-known case of  Martin Ice Cream Co. v. Commissioner, 110 T.C. 189, 207-208 (1998), the Court acknowledged that a key employee may personally create and own goodwill independent of the corporate employer by developing client relationships. While the corporation may benefit from that goodwill, it does not own it and thus it is not a corporate asset for valuation purposes. The Tax Court accepted a multi-million dollar charge to operating expenses in computing value for the value of the son’s relationships.

The Tax Court noted one limitation on deducting employee personal goodwill – a covenant noncompete or similar agreement that transfers the exclusive use and benefit of the relationships to the employer. Here, the son did not have such an agreement, but they are common in business for unrelated employees so they may often operate to negate adjusting value in this manner.

Estate of Franklin Z. Adell, et al. v. Commissioner, TC Memo 2014-155

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