By Tom Ochsenschlager, CPA, JD
The Adell case (Estate of Franklin Z. Adell et al. v. Commissioner; T.C. Memo. 2014-155; No. 1188-11) dealt with the issue of personal versus corporate goodwill. The father who owned the stock of a corporation died and the IRS argued the valuation of the corporation in the estate should include a computation of the goodwill. The estate argued the goodwill was not the corporation’s or the father's, but was personal and belonged to the son who had managed the business for several years before the father's death. The court, in essence, said the son did not have a non-compete agreement with the company and had the right to go out and start a competing business using the connections and goodwill he had personally developed. Accordingly, the value of the stock in the estate was significantly reduced from the IRS's valuation. This would be fairly common occurrence for a family-owned business where the founder of a small business continued his or her ownership, but had passed the management responsibility on to his or her second generation.