Mar 09, 2016

What does personal goodwill have to do with ice cream?

Generally speaking, “goodwill” is an intangible asset, often representing something owned by a business entity that is not shown on a balance sheet. Goodwill represents the value of a business as a going concern, customer relationships, brand name, etc. Personal goodwill is the recognition that in some cases those items are owned by an individual employee and/or shareholder and not the business entity. Personal goodwill is a saleable asset, separate and distinct from corporate goodwill, which is owned by the business.

What does this have to do with ice cream? One of the original Tax Court cases where the concept of personal goodwill was recognized is Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998). In the Martin Ice Cream case the Tax Court held that the personal relationships of a shareholder-employee, in the ice cream industry, are not corporate assets when the employer has no covenant not to compete with the shareholder. The Tax Court recognized the personal goodwill of a key employee in connection with the sale of an ice cream distribution business.

The recognition of personal goodwill as a separate asset is important in structuring the sale of a business, and minimizing income tax consequences to the seller. This holds true, in particular, when the seller is a C corporation, where the sale may trigger two levels of tax. By having the individual shareholder sell personal goodwill, one level of income tax, and, importantly, the tax that is paid, is classified as long term capital gains.

Selling a business will necessarily require careful attention and analysis of the tax consequences. Buyers and sellers may have different tax results based on allocation of purchase price to various classes of assets, including personal goodwill. Clients should not hesitate to discuss the concept of personal goodwill, and the “ice cream” case, with their advisors when structuring the purchase or sale of a business.

Feel free to contact us for additional information regarding purchasing or selling businesses. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client Alert authored by: Mitchell D. Weinstein, Principal