MUM: An Effective Tool for Determination of Personal v. Enterprise Goodwill

Tax Reporting

We can support your tax reporting needs related to Fair Market Values as specified in IRS Revenue Ruling 59-60. These valuations are required for share transfers, gift and estate valuations, purchase price allocations and employee compensation (Section 409A).

IRS 409A

Valuations for equity-based stock grants as compensation have an impact on corporations and their employees. Sometimes combined with compensation studies, accurate valuations can have significant tax and economic consequences.

IRC 83(b)

In general, by making an election under Section IRC 83 b of the Internal Revenue Code, the taxpayer chooses to have the U.S. federal income tax treatment of its purchase of the equity determined at the time of transfer rather than at some later date when unrestricted ownership of the equity vests. Often such treatment is desirable when at the time of the grant the stock has no or small fair market value and is expected to appreciate significantly.

ESOP

An employee stock ownership plan (ESOP) is an IRC section 401(a) qualified defined contribution plan that is a stock bonus plan or a stock bonus/money purchase plan. An ESOP provides the workforce of a company with an ownership interest in the company. By giving participants an interest in seeing that the company’s stock performs well, these plans are believed to encourage participants to do what’s best for shareholders, since the participants themselves are shareholders.

C to S Conversion

An entity often makes the decision to convert from a C corporation to an S corporation for the tax advantages associated with this election. Under IRC Section 1374, a corporation making an S corporation election must obtain a valuation to determine the built-in gain, the appreciation in asset value from the period of time when the entity was a C corporation, as of the date of the S corporation election.

Goodwill & Non-competes

Non-compete covenants are created to protect the buyer’s interest in the newly acquired business, so that the seller does not compete with the buyer. Goodwill is defined in Regs. Sec. 1.197-2(b)(1) as “the value of a trade or business attributable to the expectancy of continued customer patronage. This expectancy may be due to the name or reputation of a trade or business or any other factor.” Under the current federal tax rates, the seller, other than a C Corporation, would prefer to sell goodwill and thus benefit from capital gain tax treatment (if the seller has held the stock for more than one year). The buyer, however, is likely to want to protect his or her investment by ensuring that the seller does not immediately compete with the business and/or to retain the seller’s services for a period of time.