Goodwill Not Distributed to Sole Shareholder: The Tax Court Finds That a Family Trucking Business Did Not Distribute Appreciated Intangible Assets under Sec. 311(b)
The Tax Court held that a trucking company's alleged goodwill was personally owned by its sole shareholder, and therefore the trucking company had no goodwill asset to transfer. Because goodwill was not distributed to the shareholder, he did not transfer it to his sons and therefore was not required to have filed a gift tax return. Facts: Brass Trucking Inc. was a family business wholly owned by Chester Brass. Brass did not have an employment contract with Brass Trucking, nor did he sign a noncompete agreement. Brass Trucking hauled materials and equipment for road construction projects. In 1998, the U.S. Department of Transportation (DOT) issued an "unsatisfactory" motor carrier safety rating to Brass Trucking, resulting in elevated regulatory scrutiny in subsequent years. Chester Brass decided to cease Brass Trucking operations rather than risk a cease-and-desist order from the DOT. As a result, in 2003, Brass's three sons organized a new company, LWK Trucking, as a new and separate entity from Brass Trucking. While about 50% of LWK Trucking's employees had worked for Brass Trucking, none of Brass Trucking's employees signed noncompete agreements with the latter company. Issues: The court analyzed whether Brass Trucking distributed appreciated intangible assets to Brass under Sec. 311(b), whether Bross gave any distributed intangible assets to his three sons, and whether Bross was liable for a penalty for failing to file a gift tax return. [ILLUSTRATION OMITTED] Sec. 311(b) requires a corporation to recognize gain on distributed appreciated assets as if the property were sold to the shareholder at its fair market value (FMV). Because gain is recognized to the extent that the property's FMV exceeds its adjusted basis, Sec. 311 prevents a corporation from avoiding tax by distributing appreciated property to its shareholders. For purposes of Sec. 311, "property" is defined by reference to Sec. 317(a) as money, securities, and any other property, except for stock of the distributing corporation or rights to acquire it. The IRS argued that Bross Trucking distributed its intangible assets, including goodwill, to Bross and that Bross then gave those assets to his sons, who used them to set up their new trucking company. According to the IRS, the value of Brass's gift of the intangible assets, particularly the goodwill, required Bross to file a gift tax return and pay gift tax for tax year 2004. The Tax Court described goodwill as "the sum total of those imponderable qualities which attract the custom of a business,--what brings patronage to the business" (Bross Trucking, slip op. …