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Washington Tax Alert - April 18, 2008 - Sale of corporate assets

Washington Tax Alert from Don Barnes, dbarnes@washingtontaxlaw.com
April 18, 2008

During the past ten years, some CPA firms have advised clients that a corporation selling assets can avoid Federal income taxes at both the corporate and shareholder level by taking the position that the goodwill of the business is not being sold by the corporation, but rather by the individual shareholders of the corporation. This position was based on the Tax Court's opinion in Martin Ice Cream Co. v. Commissioner , 110 T.C. 189 (1998).

As a general matter, I do not think this tax advice is sound because it fails to recognize the unusual facts in the Martin Ice Cream case. Yesterday, the Tax Court issued an opinion in which it rejected the taxpayer's position that individual shareholders of a corporation had sold the business' goodwill and customer list. See Solomon v. Commissioner , T.C. Memo. 2008-102. The Solomon case may be the first of many cases brought by the Service challenging taxpayers' interpretation of Martin Ice Cream .