Goodwill not distributed to sole shareholder


The Tax Court finds that a family trucking business did not distribute appreciated intangible assets under Sec. 311(b).

The Tax Court held that a trucking company’s alleged goodwill was personally owned by its sole shareholder, and therefore the trucking company had no goodwill asset to transfer. Because goodwill was not distributed to the shareholder, he did not transfer it to his sons and therefore was not required to have filed a gift tax return.

Facts: Bross Trucking Inc. was a family business wholly owned by Chester Bross. Bross did not have an employment contract with Bross Trucking, nor did he sign a noncompete agreement. Bross Trucking hauled materials and equipment for road construction projects. In 1998, the U.S. Department of Transportation (DOT) issued an “unsatisfactory” motor carrier safety rating to Bross Trucking, resulting in elevated regulatory scrutiny in subsequent years. Chester Bross decided to cease Bross Trucking operations rather than risk a cease-and-desist order from the DOT.

As a result, in 2003, Bross’s three sons organized a new company, LWK Trucking, as a new and separate entity from Bross Trucking. While about 50% of LWK Trucking’s employees had worked for Bross Trucking, none of Bross Trucking’s employees signed noncompete agreements with the latter company.

Issues: The court analyzed whether Bross Trucking distributed appreciated intangible assets to Bross under Sec. 311(b), whether Bross gave any distributed intangible assets to his three sons, and whether Bross was liable for a penalty for failing to file a gift tax return.

Sec. 311(b) requires a corporation to recognize gain on distributed appreciated assets as if the property were sold to the shareholder at its fair market value (FMV). Because gain is recognized to the extent that the property’s FMV exceeds its adjusted basis, Sec. 311 prevents a corporation from avoiding tax by distributing appreciated property to its shareholders. For purposes of Sec. 311, “property” is defined by reference to Sec. 317(a) as money, securities, and any other property, except for stock of the distributing corporation or rights to acquire it.

The IRS argued that Bross Trucking distributed its intangible assets, including goodwill, to Bross and that Bross then gave those assets to his sons, who used them to set up their new trucking company. According to the IRS, the value of Bross’s gift of the intangible assets, particularly the goodwill, required Bross to file a gift tax return and pay gift tax for tax year 2004. The Tax Court described goodwill as “the sum total of those imponderable qualities which attract the custom of a business,—what brings patronage to the business” (Bross Trucking, slip op. at 19, quoting Philip Morris Inc., 96 T.C. 606, 634 (1991)). Goodwill may be either personal (developed and owned by shareholders) or corporate (developed and owned by the company).

Holding: The Tax Court held that Bross had not made a gift of the intangibles from Bross Trucking to his sons, so he was not required to file a gift tax return or pay gift tax for 2004, and consequently he could not be liable for an accuracy-related penalty.

The court held that because Bross primarily owned the goodwill associated with Bross Trucking personally, the company did not own the goodwill and could not transfer it to him. The Tax Court explained that a company does not have corporate goodwill when all goodwill is attributable to an employee’s personal ability. Looking at Bross Trucking, the court determined its established revenue stream, its developed customer base, and the transparency of continuing operations were a result of Bross’s personal relationships with customers. A key employee who develops this sort of goodwill for a company can transfer it through an employment contract or noncompete agreement to the company, but Bross did not do so because he had no employment contract with Bross Trucking. Therefore, he was free to use his personal goodwill to compete directly with the company.

In addition, any corporate goodwill that Bross Trucking had previously owned was lost due to the negative attention from unsatisfactory safety ratings. Thus, the court determined that the only attribute of goodwill that Bross Trucking may have corporately owned and transferred to Bross was a workforce in place. However, the court determined that Bross Trucking did not transfer an established workforce in place to Bross because only 50% of the LWK employees had been employed by Bross Trucking.

Finally, the court found that Bross Trucking’s customers were interested in changing trucking providers, showing a customer-level business choice rather than a service-provider-level transfer of intangibles. Bross Trucking also remained a going concern and retained all necessary licenses and insurance to continue business.

Because intangibles were not transferred from Bross Trucking to Bross and then to his sons, the court held Bross was not liable for an accuracy-related penalty.

- Bross Trucking, Inc., T.C. Memo. 2014-107

By Matthew Schippers, CPA, CGMA, J.D. candidate, University of Kansas School of Law.


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