Is anyone familiar with the Personal Goodwill/C-Corp tax dodge?

searcher profile

September 13, 2018

by a searcher in Salt Lake City, UT, USA

If a third party appraisal claims the business owner has significant personal goodwill, wouldn't that devalue the business? For example, if the company is worth $5mm, but the owner's personal goodwill creates $2mm of that value then would you really feel comfortable paying $5mm for the business? Isn't the appraisal claiming that the business is immediately worth less once the owner is no longer involved?

If you want to learn more reference the Martin Ice Cream case.

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commentor profile
Reply by a professional
from West Virginia University in Pittsburgh, PA, USA
CPA's would never, ever participate in a "Tax Dodge" Shaun. When a C corporation is sold, goodwill in many cases is the property of a shareholder rather than of the corporation. The Tax Court has found this to be the case where a business's success depended on its key employees' ability and reputation (the Owner(s) and Key Employee(s)) and there wasn't a noncompete agreement between them and the corporation.

In Martin Ice Cream, the Tax Court reviewed the value of assets split off from a corporation in preparation for a sale. The court divided the intangible assets into two groups. One group, including assets such as business records, was the property of the corporation. The other group, the intangibles assets, consisting of an oral contract made by one of the corporation's two shareholders with the corporation's primary supplier and that same shareholder's relationships with customers of the business, was found to be assets of that shareholder. A factor in the decision was the lack of any noncompete agreement between the shareholder and the corporation.

In summary, personal goodwill doesn't devalue the acquired company. The target's value was enhanced by the presence of the personal goodwill. Hope this helps! Good luck.
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Reply by a searcher
from Harvard University in 1970 Walton Dr, Burlington, WA 98233, USA
Assuming that this post is more than just an intellectual exercise - can you provide a bit more context behind the question? Are you looking at a third party appraisal in the context of making an offer for a company? In that case there are other important questions at play, such as "who hired the appraiser" and "for what purpose". When I completed my acquisition, the bank hired an appraiser who provided a ridiculously high value of the company that was nowhere near the value an informed buyer would pay an informed seller for the company.
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