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<p>54 INSIGHTS WINTER 2016
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This discussion focuses primarily on the valuation
of the closely held (or family-owned) company.
Primarily, but not exclusively, this discussion focus-
es on the valuation of a closely held C corporation
that is managed by its shareholder/employees.
In particular, this discussion focuses on the
question of how much of the total business enter-
prise value relates to the personal goodwill of the
There are numerous gift tax, estate tax,
generation-skipping transfer tax, and income tax
reasons why valuation analysts may be asked
to allocate the subject business enterprise total
intangible asset value between (1) the company's
entity goodwill and (2) the individual shareholder/
employee's personal goodwill.
This discussion is informed by the recent U.S.
Tax Court decision in Bross Trucking, Inc., et al.
v. Commissioner of Internal Revenue1 (the "Bross
There are several instances when it is important
for a closely held corporation (and for its owners) to
1. the personal goodwill (owned by the indi-
vidual shareholder/employees) and
2. the entity goodwill (owned by the company
The first instance typically relates to the formation
of the closely held company. In many closely held
corporation formations, individual shareholder/
employees transfer their personal goodwill to the
newly formed corporation in exchange for newly
issued shares of the corporation stock.
Those transfers of personal goodwill may qualify
as a tax-deferred exchange (of personal goodwill for
corporation stock) under Internal Revenue Code
The alternative tax treatment (when personal
goodwill is not transferred) is to treat the issuance of
the corporation stock as taxable equity-based com-
pensation for the shareholder/employee's "sweat
equity" in the newly formed company.
The second instance may involve the conversion
of the closely held C corporation to a closely h