BLG Law Note - How to Save $600,000 in a Business Sale
October 16, 2008
Greetings from BLG,
We have helped several clients recently structure transactions to take advantage
of the opportunity represented by the case discussed below, and hope you find the
The buyer and seller in a corporate business sale are often at odds with each other
from a tax and legal perspective. The buyer often prefers to purchase the assets
of the business in order to avoid possible contingent liabilities of the corporation,
and to be able to take depreciation deductions on the purchase price of assets.
On the contrary, in a stock purchase, the buyer must capitalize the purchase price
(i.e., there are no current deductions allowed), absent a special election to treat
the stock purchase as an asset purchase. From the seller's point of view, the seller
would rather sell the stock in the corporation which may attract much more favorable
long term capital gain tax rates, rather than subject the sales proceeds to both
a corporate level tax (which could be 35% or more) and a shareholder level tax
A case involving the sale of an ice cream distributorship (operated through a corporation)
to Häagen Dazs illustrates how the buyer and seller can both come out winners -
Martin Ice Cream Company v. Comm'r of Internal Revenue, 110 T.C. 18 (1998). Martin
Ice Cream Company involved a father and son who disagreed about how best to run
the business. So they decided (concurrently with their negotiations with Häagen
Dazs) that they would transfer the portion of the business involving supermarket
distribution to a newly formed corporation, and give the shares in that corporation
to the father, after which the son retained all the shares in the corporation with
the distribution channel to non-supermarket stores.
The crux of the case lies in what Häagen Dazs was actually buying. The IRS tried
to argue that the substance of the sale was a sale of all the assets of the corporation.
But the father argued, and the Tax Court agreed, that what was most valuable to
Häagen Dazs was the father's personal relationships with supermarket owners and
managers and his ice cream distribution expertise. These "intangible" assets had
never been transferred to either corporation. Rather, they constituted the personal
goodwill of the father. The sales proceeds associated with this asset were therefore
not subject to double taxation as a sale of a corporate asset; rather, they were
taxed to the father, and at much more favorable long term capital gains tax rates.
Had the IRS had its way, the corporate plaintiff would have owed over $600,000 more
in taxes, penalties and interest. However, because of the facts of the case and
how the sellers structured the transaction, they avoided substantial additional
If you would like more information on how such a sale should be structured to achieve
similar results, please give us a call at (415) 395-4700. You can learn more about
us at www.buchananlaw.com .
Buchanan Law Group
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