In the recent case of Bross Trucking, Inc., TC Memo 2014-107, the Tax Court again considered whether the shareholder of a corporation was possessed of personal goodwill relative to the business of the corporation. The case is important because the existence of personal goodwill may enable a shareholder of a C corporation that is selling its assets to receive a significant part of the purchase price directly from the buyer, rather than through the corporation. If a C corporation sells its assets, the corporation pays tax on any gain realized, and if the after-tax proceeds are distributed to the shareholders, they may realize additional gain and pay additional tax at their level. If the shareholder can establish that he owns personal goodwill related to the corporation’s business, he can sell that goodwill directly to the buyer and avoid any corporate tax on that component of the sales price.
A sale was not at issue in the Bross case. Mr. Bross was the sole shareholder of Bross Trucking, which provided trucking services to construction companies, many of which were owned by members of his family. Bross Trucking was charged with several regulatory violations and was in danger of having its trucking operations shut down, so Mr. Bross decided that Bross Trucking should cease its trucking business. To ensure continued availability of trucking services for his construction companies, Mr. Bross’ sons formed a new trucking company. No assets were actually transferred from Bross Trucking to the new company, but about 50 percent of its employees were former employees of Bross Trucking.
On audit, the IRS took the position that Bross Trucking distributed its goodwill to its shareholder Mr. Bross, who then made a gift of that goodwill to his sons. This distribution would cause the corporation to recognize a tax gain because the goodwill had significant value but no tax basis. The Tax Court determined that Mr. Bross personally owned any goodwill that existed. There were a few keys to this conclusion. The court found that Mr. Bross developed numerous personal relationships with customers and suppliers that were important to the business of Bross Trucking. Mr. Bross had no employment agreement in place with Bross Trucking that prohibited him from competing with the corporation. In the court’s view, this meant that any goodwill attributable to those relationships was owned by Mr. Bross and not by Bross Trucking. Additionally, Bross Trucking could not really have goodwill of any significant value, given that it was on the verge of being shut down by the regulators.
Finally, the court considered whether there could have been a transfer of goodwill associated with the workforce in place at Bross Trucking by virtue of the fact that 50 percent of the new company’s employees had previously been employed by Bross Trucking. The court determined there was no transfer of a workforce in place because the new company hired its own employees and there was no plan or program for such an employee transfer. Also, the other 50 percent of the employees of the new company, including a number of key employees, did not previously work for Bross Trucking.
The IRS also contended that Mr. Bross made a gift to his sons of the goodwill assets he received from Bross Trucking. The court held he did not transfer any goodwill to his sons because he did not receive any goodwill from Bross Trucking. This does not mean that Mr. Bross could not have made a gift of his own personal goodwill in the trucking business to his sons. The court’s apparent reasoning for there being no gift by Mr. Bross of his own goodwill was its factual finding that the new company developed its own customers through the contacts the sons had and the company did not use any of Mr. Bross’ goodwill.