In the recent case of Bross Trucking, Inc., the Tax Court provided further guidance to taxpayers about a technique we have long known to be beneficial to shareholders of C corporations.
When a C corporation sells all of its assets, the shareholder is actually taxed twice: First, the corporation that she owns pays a tax on any gain in asset value. Second, the shareholder pays individual income tax on the remaining sales proceeds that the corporation later distributes to her. We have successfully argued that a sizeable amount of those proceeds should only be taxed once, at the capital gains rate. Our argument has been that one important asset – goodwill – belongs solely to the shareholder, and not the corporation, because the shareholder worked hard to establish customer relationships, win contracts and a build an income stream for the business. For this reason, only the shareholder owns, and only she can sell, the goodwill. So when the goodwill is sold, only she is taxed at the capital gains rate. The corporation pays no tax on the personal goodwill asset. The shareholder is therefore only taxed once.
The Tax Court validated this important planning technique, which we utilize based on a 1998 court decision. We are happy to see that the Tax Court agrees with our planning strategy.