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Professional Service Goodwill: Who Owns It?

September 01, 2011

For a number of years, when a small professional service corporation has been sold, many tax advisors have encouraged the shareholder-owners to have the payments for goodwill paid to the owners personally. They generally rely on Martin Ice Cream Co. v. Comm’r, 110 T.C. 189 (1998), and Norwalk v. Comm’r, T.C. Memo 1998-279 to mean that the owner’s personal relationships and professional skill belong primarily to the owner, not the corporation. The recent Ninth Circuit Court of Appeals decision in Howard v. U.S., 108 AFTR 2d 2011-5993, 08/29/2011, casts doubt on whether the Martin Ice Cream and Norwalk cases should continue to be relied on, or whether a safer course of action is to have an S Corporation election in place.

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