Page 59 - Business Valuation for Estates & Gift Taxes

Thus, transferable corporate goodwill exists only when the business is not dependent on the professional
skill or other personal characteristics of the owner. Corporate goodwill is the value that stays with the
business exclusive of personal goodwill.

These rulings were superseded by Revenue Ruling 64-235 1964-2 CB 18, and the position of the IRS
Commissioner which, in part, stated the following:

The extent to which the consideration received upon the sale of a professional practice is at-
tributable to goodwill will be determined on the basis of the facts involved in the particular case
and not by whether the business is, or is not, dependent solely upon the professional skill or other
personal characteristics of the owner.

What can be taken from this is that the IRS does not want to be held to a strict interpretation; instead,
each case should be reviewed on its particular facts and circumstances.

A few examples of issues requiring careful consideration before making any judgment about whether
goodwill is of a personal or corporate nature might include the following:

 Does the company have a strong reputation and brand name?

 Is an infrastructure in place to support services and maintain or increase market share?

 Does the company have a specialty or niche service, or does it simply employ one individual
who is a specialist?

 Can business attributes be differentiated between the company and the specialist?

 Can value be created from firm attributes that are transferable to buyers exclusive of any special-
ist employed?

Some factors that can help distinguish between personal and corporate goodwill include the following
characteristics.

Personal Goodwill Characteristics Corporate Goodwill Characteristics

 Small, entrepreneurial busi-  Large business which has
ness highly dependent on formalized organizational
shareholder’s personal skills structure, systems, and con-
and relationships. trols in place.

 No pre-existing non-  Employees have pre-
compete agreement between existing agreements with
the corporation and share- selling company (such as
holder. covenant not to compete,
employment contracts, con-
 Personal services provided fidentiality agreements, and
by the shareholder that are so on) that are owned by the
essential to the fulfillment company (assets of the

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