IRS Unable to Prove The Transfer of
Material Goodwill
Bross Trucking, Inc., et al.,
Commissioner of Internal Revenue,
T.C. Memo 2014-107 (June 5, 2014)
The IRS (the “Respondent”)
contended that Chester Bross (“Mr.
Bross” or the “Petitioner”) was
liable for a tax deficiency related to
the distribution of Bross Trucking’s
shares to himself, which were
then transferred to his sons. The
Respondent argued that appreciated
intangible assets, particularly
corporate goodwill, was distributed.
Background
The Respondent alleged that
intangible assets in Bross Trucking
were transferred to Mr. Bross on
February 1, 2004 and later distributed
to his three sons.
However, the Tax Court (the “Court”)
ruled that intangible assets, in
the form of corporate goodwill
or personal goodwill, were not
transferred to Mr. Bross or his sons
for the following reasons:
1. Bross Trucking lost most of its
corporate goodwill by the date
of the alleged transfer of
intangible assets through various
regulatory infractions that led
to a suspension of operations
by the regulatory authorities.
As a result, Mr. Bross and his sons
created a new trucking company,
LWK Trucking, to take over the
business that would be lost if
they attempted to continue
serving customers under the
Bross Trucking name. The Court
stated that the services offered
by LWK Trucking differed from
those of Bross Trucking and that
the Bross name was hidden on
leased trucks.
2. Mr. Bross did not transfer
personal goodwill to Bross
Trucking because no employment
contract or noncompete
agreement existed between Bross
Trucking and Mr. Bross.
3. Because Mr. Bross’ sons were not
employees of Bross Trucking, the
transfer of personal goodwill
could only be attributed toMr. Bross.
4. “Bross Trucking’s customers had
a choice of trucking options and
chose to switch from Bross Trucking
to LWK Trucking.” Therefore, no
customer base was transferred.
The Court noted that “a business can
distribute only corporate assets and
cannot distribute assets personally
owned by shareholders. The only
attribute of goodwill that Bross
Trucking may have corporately owned
and transferred to Mr. Bross was a
workforce in place.”
50% of Bross Trucking’s employees
transferred to LWK Trucking. The
Court argued that there was some
value in the transferred workforce
but that a new workforce also was
created separate from Bross Trucking,
with “new key employees.”
The Tax Court’s Conclusion
The Court ruled that the Petitioner had
no tax deficiency for the 2004 tax year
or the 2006 tax year as it pertained to
the alleged distributed assets.
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