Proving that Personal Goodwill Exists
New York State Society of Certified Public Accountants
The CPA Journal
Depending upon one's particular circumstances, the vehicle of choice for a professional business is a pass-through entity, which avoids the double taxation problem. But this was not the case in the 1980s, when many professionals opted for C corporation status because corporate tax rates were lower than individual rates and the corporate form offered better retirement options for shareholder-employees. In 1986, one major change impacted C corporations: Congress repealed the General Utilities Doctrine. Prior to the repeal, C corporations were not subject to a corporate-level tax on the gain attributed to appreciated property distributed to a shareholder in liquidation; however, the Tax Reform Act of 1986 began taxing such gains. Selling stock, as opposed to assets, is one way to avoid such a tax. Another possible solution is to prove that the goodwill is not a corporate asset to begin with. This article focuses on how to successfully negotiate a transfer of a professional corporation involving personal goodwill.