Sale of Business Goodwill

[gfizer]

I have a new client who sold his garbage collection business in 2011. He received the bulk of the sale proceeds in 2011 but the portion of the proceeds designated as business goodwill was held by the buyer until such time as the buyer had had ample time to operate the business and know that the number of customer accounts, book of business value, etc. were not overstated. Once everything checked out my client received the final payment in 2012.

The previous preparer reported the sale of the various business assets (except the goodwill) on Schedule D and Form 4797 in 2011 leaving me to deal with the goodwill on the 2012 return. Am I correct in saying that the goodwill should be reported on Form 4797 as a section 197 intangible with -0- cost and -0- depreciation/amortization? Or should this be handled some other way?

Thanks,

Gina

[OldJack]

>> Once everything checked out my client received the final payment in 2012.<<

It sounds like the total sale should have been reported as an installment sale in 2011. Maybe you need an amended return.

[gfizer]

I thought the exact same thing, Jack. I asked the previous preparer why she hadn't reported it as installment sale and how she had intended to handle this in 2012 but she was unable to recall what her plans were. Basically a big mess. She sold her practice to HRB and wasn't allowed to keep any of her files or even prepare returns for any of her old clients for 2 years, although she says she is sure she made notes in the file. Needless to say the HRB office manager was less than helpful. Let's just say I hope they never need any information from me.

[Maribeth]

It might not be as bad as it appears. Have you seen the contract? On an installment sale, all of the depreciation recapture is reported in the first year; and then the ordinary income comes next, with the capital gains being reported last. It might be okay, if you look at the structure of the sale.

[michaelmars]

She sold her practice to HRB and wasn't allowed to keep any of her files or even prepare returns for any of her old clients for 2 years, .

HOW can anyone sell their files and not keep copies? those files are hers and believe me if there is a lawsuit by client or audit [some can go back 7 years] how can she ever hope to defend herself. Either she is a moron or you are getting a snow job.

[kcjenkins]

Given the way it was handled then, I think your first idea may be the best choice you have. But the client should have a copy of the return, so you could look at amending based on the client's records.

[jainen]

>>Maybe you need an amended return.<

There should indeed be an amendment, but only to tax the goodwill in 2011 since he elected out of installment treatment. According to Pub 537, "To make this election, do not report your sale on Form 6252. Instead, report it on Form 8949, Form 4797, or both....Once made, the election can be revoked only with IRS approval."

[Guest Taxed]

Was the business a corporation? Have you seen the sales documents and stipulations etc. I had one corporation (family owned) that was sold when the owner died. The children got an attorney involved to negotiate the sale etc. In my situation I was told to file as an installment sale becuase the sales price was paid over 3 years. I don't seem to recall any special treatment for goodwill because the price and terms they negotiated was all inclusive. I do recall there was a no compete clause and the older son went to work for the buyer in a sales management capacity.

I am not a lawyer or a CPA, so whenever I run into a business sale situation, I ask my clients to get me direction from their lawyers. I actually had to refer one client to a CPA because the complexity (foreign buyer) was beyond my pay grade!

[jklcpa]

Didn't either the buyer or seller attach Form 8594? I would guess that the previous preparer's memory is foggy on this as well.