taxMost people, including many experienced attorneys and certified public accountants (CPAs), are surprised to learn that an individual owner, shareholder or member can individually own a Corporation’s or Limited Liability Company’s bundle of rights commonly known as goodwill. The same corporation or company may have both enterprise goodwill and personal goodwill. Many of the original cases in this area arose in the context of divorce where an ex-spouse sought compensation or ownership in a divorce. Careful planning can use this individual ownership interest to save substantial tax in the event of the sale of the corporation or company. We recently used the individual ownership of goodwill to save our client in excess of $1.2 million in tax on the sale and a safe, predictable stream of income in the amount of $180,000 per year of his and his wife’s life.

Virtually all states recognize the existence of personal goodwill of a business owner as separate asset or property right. This goodwill property right provides some unique planning alternatives to minimize income tax related to a corporate or company acquisition. This article illustrates how planning with personal goodwill can be used to minimize tax arising from the sale of a corporation or company.

The Importance of State Law

Our analysis begins with state law. The Internal Revenue Code (the “IRC”) assesses taxes by the ownership of property rights to both assets and income. However, those property rights are actually determined by the applicable state law. While the IRC taxes transactions, the applicable state law defines and regulates those property rights. While there is no actual definition in the IRC, goodwill is referred to in the IRC. IRC section 197 provides for and controls the amortization of intangibles including goodwill. State laws recognize goodwill of a corporate or company business may accrue to an individual rather than simply to the business. State law further recognizes that goodwill is a property right or asset that is transferable in the same manner as equipment or other assets. Some of the cases defining and describing goodwill as a property right are found in divorce cases where a spouse seeks compensation for the property right.

Since the individual state law recognizes goodwill as a transferable property right to one degree or another, the IRC uses this state law to define the tax attributes of goodwill. The reference to “company or enterprise goodwill” typically refers to the goodwill of the business or enterprise. Personal goodwill typically refers to the goodwill that accrues to the business owner or another individual. More specifically, personal goodwill generally reflects the personal skills, reputation and personal customer, vendor and referral relationships attributable to the business owner or other individual.

The unique tax advantages

The most recognized use of personal goodwill is to minimize the tax on the sale of a “C” Corporation. A “C” Corporation is a corporation that is taxed under subchapter “C” of the IRC. This means the corporation pays income tax at the corporate level. When income is distributed to the shareholders or owners as dividends, the income is subject to a second level of tax. This is particularly important because many corporate sales are structured as asset purchases. This is for at least two (2) reasons. First, buyers often want protection from seller liabilities which would arise from a stock sale. Second, to obtain a basis step-up through the allocation of the purchase price to depreciable or amortizable assets. The depreciation or amortization can provide a substantial tax benefit for the buyer. Note that this can result in higher tax for the seller due to depreciation recapture. 

For example, the asset sale of a $6 million C Corporation might have the following tax consequences. Tax at the corporate level of $2,058,000 for Federal and State purposes. When income is distributed to the shareholders or individual, tax of $1,971,000. The combined corporate and individual tax rate could exceed 70% for Federal and State tax.

If $2 million is instead allocated to personal goodwill, then this amount is taxed to the business owner as a capital gain resulting in a savings of over $1,000,000 because the personal goodwill is not subject to the corporate tax rate of over 30% and is taxed at the individual level only as a capital gain.

A lesser known application is for the sale of a subchapter “S” Corporation. An “S” Corporation is taxed pursuant to subchapter “S” of the IRC. A subchapter S Corporation does not pay federal tax at the corporate level. The income is taxed in a manner similar to a partnership (There are a few differences such as the inability to make a 754 election for a basis step up on the death of a partner.) The taxation of goodwill is not subject to a second level of tax and is already characterized as a capital asset taxed at the more favorable income tax rates for capital gains.

However, some of the best tax minimization strategies involve the transfer of part of the asset to be sold to a charitable entity prior to the sale. (Please see our article on Cautionary Tales to see how NOT to do this.) This will provide that the portion contributed to the charity is NOT subject to tax and provide a charitable contribution deduction to minimize tax on the remainder of the sale.

A recent sale of a business for $6 million resulted in tax savings in excess of $1.4 million dollars. This was done by contributing the personal goodwill to a Charitable Lifetime Income Trust prior to the sale. In addition, the Seller was able to invest and receive income for life of the amount contributed to a Split Interest Charitable Income Fund.

This provided a very substantial economic benefit for the family as follows:

Donate $3,000,000 of Good Will to A Charitable Lifetime Income Trust

  • By-Pass and Eliminate Capital Gains Taxes on $3,000,000
  • Capital Gains Tax savings are: $600,000 from the contribution
  • Income Tax Deduction of $2,202,641
  • Saves Income Taxes of $814,977
  • Total Tax Savings: $1,414,977
  • Seller receives safe income of $210,000 for his life and for the life of his wife (based on a 7% refund). This is worth $4.2 million or more based upon life expectancies. The percent value of that is $2,224,743.
  • Seller’s favorite Charity receives $3,000,000 or more

The Lifetime-Income Charitable Pooled Trust

The Economic Impact of By-Passing Capital Gains & The Tax-Deductions



Lifetime income Charitable Trust




Capital Gains Rate 30%


Tax on Asset $900,000


Cost to Implement


Net after Taxes


If invested $2,100,000 at 7% $147,000 annually $6,026,337

$3, 657,320

Total Increase in Wealth




Capital Gains Rate


Plus Tax Savings


Net After Tax Advantage


Investment Income Present Value of $10,947,764

Projected Value of $2,829,110

Total Increase in Wealth


The Tax Cases

One of the leading cases on the tax advantage and treatment of personal goodwill is Martin Ice Cream (1998) 110TC 189 where Arnold Strassberg sold the assets of Strassberg Ice Cream Distributors, Inc. (“Strassberg Ice Cream”) to Haagen-Dazs. Included in these assets were intangible assets including his personal relationships with supermarket owners and managers. The Tax Court recognized that these intangible assets were personal goodwill owned individually by Strassberg and not the Corporation or enterprise. Key factors cited by the Tax Court was that Strassberg never entered into a covenant not to compete or even an employment agreement with his own company, Strassberg Ice Cream.

A similar result was found in H&M, Inc. where the individual business owner never entered into an agreement with his corporation prior to the business sale which precluded him from taking his personal relationship skills and business relationships to a competitor or other company. 

What you need to know:

Care should be taken to develop and document the existence of the personal expertise, skills and customer vendor and referral relationships of the business owner. Confirm that the business owner never signed or executed a noncompete agreement or restrictive covenant with corporation or company being sold prior to the sale.

The Buyer and Seller should negotiate and establish the amount or purchase price allocable to the goodwill being transferred. Consider using a separate purchase agreement between the Buyer and the Business Owner selling his or her own personal goodwill.

The personal goodwill should be contributed to a separate limited liability company (“LLC”) prior to the sale. If a contribution is to be made to a charitable organization, that must be done before there is a binding agreement between the Buyer and Seller.

While perhaps the best determination of value is the amount established by unrelated Buyer and Seller. Nevertheless, the contribution is reported on IRS form 8283. That form requires an appraisal for all contributions of property.

As indicated above, a little planning can provide a substantial tax savings and increase the wealth retained upon the sale of the family business.

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