The Unique Benefits of Treating Personal Goodwill as Property in Corporate Acquisitions

Abstract

Many corporate acquisitions are never consummated due to disagreements over transaction structure, which can have significant after-tax effects on buyer and seller. But the parties may have overlooked a key item during due diligence - an item that, due to its potential tax treatment, could be the key to facilitating the acquisition. That item is the selling shareholder's "personal goodwill."

Personal goodwill exists when the shareholder's reputation, expertise, or contacts gives the corporation its intrinsic value. It is most likely to be found in closely held businesses, especially those that are technical, specialized, or professional in nature or that have few customers and suppliers. Because it can often be sold ancillary to the sale of the corporation's assets or stock, personal goodwill produces a more favorable after-tax result for both buyer and seller. An effective transfer of personal goodwill is also necessary to give buyer the benefit of its bargain.

I adopt the view that personal goodwill, like business goodwill, is marketable property. Under this view, buyers receive a step-up in basis in the goodwill and can amortize it for tax purposes. C corporation sellers can sell the goodwill ancillary to the sale of their corporations and avoid double taxation. All sellers may receive favorable capital gains treatment on the sale.

Keywords: goodwill, acquisition, taxation, due diligence, closely held, corporation

JEL Classification: G34, H25, K22