1. What worked, and the lessons to be learned, from Martin Ice Cream, 110 TC 189 (1998)
2. And what didn’t work, and the lessons to be learned, from Kennedy, TC Memo 2010-206. Supllemental information:
Regular (“C”) Corporations have the potential for two levels of tax. So, if a C corporations sells all of its assets and then liquidates, there will be a corporate tax and a shareholder tax imposed (see Chapter 19). Let’s assume that a shareholder of the C corporation has established important, and valuable, contacts in the community that help the business. This value may be an intangible asset such as goodwill. The shareholder might call this his or her “personal goodwill.” If the business is sold and the shareholder is paid directly for the value of his or her goodwill, then the 21% corporate tax is avoided on that payment. The corporation then has more money to distribute to the shareholder because no tax is paid on the gain from the goodwill (which will have no tax basis ot the corporation). If the shareholder receives 21 cents more for every dollar of goodwill allocated to his or her level, then the shareholder’s gain will be higher by 21 cents. The shareholder can pay no more than 23.8 cents for every dollar of shareholder gain. This means for every dollar of personal, rather than corporate, goodwill, a net savings of 16.002 cents is realized: Save 21 cents of corporate tax Cost 4.998 cents (23.8 cents of added 21 cents) of shareholder tax Net 16.002 cents per dollar If the goodwill value is $1 million, the savings are $160,002 This has led to an incentive for sellers to ask for contracts that allocate purchase price to the shareholder’s intangibles rather than to the corporation. One cannot simply say it belongs to the shareholder – the facts have to support that.