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September 2014

A Successful Company That Did Not Have Goodwill

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.


Today, the Texas Society of CPAs’ Federal Tax Policy Committee issued a comments letter to the IRS on Notice 2014-21. The IRS requested comments regarding tax consequences of transactions involving virtual currencies, such as bitcoins and other cryptocurrencies. In its letter, the committee suggests that the IRS reconsider or at least provide additional clarification on the tax treatment of virtual currency held for investment versus virtual currency exchanged for goods and services in the ordinary course of business. The committee is also concerned about the uncertainty of determining the proper tax value for accurate tax and information reporting, since there is no official valuation source or official regulator. When a merchant or self-employed individual accepts virtual currencies as payments for goods and services, treating this currency as property would impose substantial and overwhelming compliance burdens on taxpayers, tax return preparers, and IRS enforcement personnel. Be aware that taxpayers taking positions inconsistent with the guidance may be subject to penalties.