Normally, when the assets of a business are transferred, the transfer of goodwill from the original owner to the new owner constitutes a taxable event. However, it’s often difficult to quantify the value of goodwill or even establish that goodwill has been transferred.
Take a new Tax Court decision, for example. In the case, a taxpayer ended his trucking company’s operations due to regulatory problems. Although the taxpayer’s sons started a new business performing some of the same services, there was no taxable distribution of goodwill from the corporation to the taxpayer, nor was there a gift of the goodwill from the father to the sons. (Bross Trucking, Inc., 2014-107)
Facts: Chester Bross owned 100% of Bross Trucking, Inc. in Missouri. About 90-95% of Bross Trucking customers were companies owned by Bross family members, including a road construction company owned by Chester Bross.
In the late 1990s, Bross Trucking was investigated by federal and state regulatory agencies for safety issues. Subsequently, Bross decided to cease operations. Because they wanted to ensure that the Bross family businesses had a trucking provider, Chester’s three sons—who weren’t connected to Bross Trucking before—started a new company, LWK Trucking, in 2003.
Although many of the employees and customers were the same as they were for Bross Trucking, LWK provided a broader range of services, including truck repairs and providing GPS devices. LWK obtained its own licenses, regulatory authorizations and suppliers, and sought new customers.
In assessing tax and penalties, the IRS asserted that Bross Trucking distributed appreciated intangible assets to its sole shareholder, Chester Bross, and then he made gifts of those assets to his sons. But the Tax Court disagreed. It said that the Bross Trucking’s goodwill was owned primarily by Chester Bross personally, and the company didn’t transfer any goodwill to him in 2004. Thus, there was no taxable distribution to Bross and no gift of goodwill from him to his sons.