business in estate? Writing off goodwill as worthless?

[WITAXLADY]

Their Dad passed away 01/03/2019. Ran a very good construction business - LLC for the operation = Sch C

Looks like buildings were rented in a partnership.

12/31/19 - Foreman wanted his 401K so could assume business was virtually worthless at that point. 2 other employees continued with odd jobs until early spring and sister to owner (Aunt) continues to work as bookkeeper- company bleeding $12,000/month with her salary, utilities, etc.

Only income is from sale of equipment and inheritance that should go to his 2 children.

Sometime in July 2019 - company restructured from old company to new within the estate.

My client (daughter) wants the tax person who has been doing the taxes over the years to write-off the goodwill since when the foreman left (with tools, trucks, etc to start up his own business) the company itself virtually became unsalable and the $1 million minus equipment should be a loss - including writing off the Goodwill...

Accountant says only way to do that is to restucture the business by 12/31 and make shares so she can write it off on her personal taxes?

Why can this not be finalized and written off from the appraised value?

Thank you for your thoughts

D Eckerman WI

 

 

 

[Lee B]

My thoughts are, first who was the executor for the estate, because this looks like a big mess with one legal misfire after another.

Your client needs competent legal advice,because whoever the executor was sure didn't have any!

[DANRVAN]

15 hours ago, WITAXLADY said:

Their Dad passed away 01/03/2019. Ran a very good construction business - LLC for the operation = Sch C

In that situation, case law would say that goodwill was personal vs business and died with the owner, unless there were some key employees under contract and noncompete agreement.  Suppose it could have come from long term construction contracts, if they were rock solid; not likely.

 

15 hours ago, WITAXLADY said:

Sometime in July 2019 - company restructured from old company to new within the estate.

A partnership or corporation with ownership going to heirs?

 

15 hours ago, WITAXLADY said:

written off from the appraised value?

The appraisal included date of death goodwill on a sole proprietor's construction business?  Out of curiosity, I would ask for a copy of it to see what method was used to make the business valuation.

 

15 hours ago, WITAXLADY said:

Accountant says only way to do that is to restucture the business by 12/31 and make shares so she can write it off on her personal taxes?

That does not sound right, have you talked to the accountant and asked why a second restructure is needed?

At this point what does your client have ownership in?  Shares in a worthless partnership or corporation created by the estate?  Ownership in equipment?

15 hours ago, WITAXLADY said:

foreman left (with tools, trucks, etc to start up his own business)

Stolen from the estate?

 

[WITAXLADY]

Foreman left - "gifted" - I do not know why he did not buy!! brother/son gave it to him when he left....

 

I could talk to the accountant but I needed more to back up my position... we are not very friendly - she is a very competitive CPA

Estate and business was appraised at time of death - and included goodwill as it was a very successful business - he died untimely -  about 1 hour from hospital release - choked on a pierce of apple crisp!

The company really is no more so, exactly, I am unsure what a restructure could do as there is really no value as of 12/31/19 or minimal - except the accountant thinks then the client could write off the goodwill

But that begs the question - in the restructure - how does that new entity have any value?

Wouldn't it be -0- at the time? Or is the accountant thinking the appraised value would carry thru to the new entity? and then -0- upon time of dissolution or when the shares carry thru to client - they now become worthless as a business loss on the personals?

Why would the goodwill die with the owner? He has a customer list, good employees , good reputation, etc? That would continue if the business was sold as a whole rather than piecemeal?

 

My client says the attorney and her brother  - neither one have a clue and she is trying to stay out of it for the most part as tis is in WI and she is in CA and she wants to still be able to talk to her brother...

However, she knows her dad would not want to pay lots of taxes on this and she will pay her share but not leave deductions on the table..

Looking for something to cite or give to the accountant and brother -

Thank you again!

Best,

Darlene

 

 

 

[DANRVAN]

13 minutes ago, WITAXLADY said:

Why would the goodwill die with the owner? He has a customer list, good employees , good reputation, etc? 

The business is valued at the fmv on date of death, that is what a unrelated buyer would pay for it.   

There are two types of goodwill, personal and business.  The personal goodwill was tied to the sole owner, so it is gone.  

There could be some value to the customer list, and as mentioned key employees; if under an employment contract and non-compete agreement.  But in this case the foreman left and two remaining employees ended up doing odd jobs.  So I am curious how business goodwill was valued.

Since the valuation was made at the estate level which you were not involved in, then it is probably not a concern for you how it was valued.  I just question the competency of the appraiser, but a moot point for you.   If the estate was liable for inheritance taxes that would be a concern.  

Before you can move forward, you need to know what the current structure of the business is and what exactly your client has ownership in.

 

[Medlin Software, Dennis]

If I follow, your client is an heir.  The value of the estate seems to have been set.  Since then, the estate value has dropped.  Your client likely needs legal counsel.  If you client is an executor/administrator, they may be liable for not managing the estate in the best interests of the estate. If your client is simply an heir, they may want to pursue action against those managing the estate, even before settlement.

With the given scenario, the estate's goodwill value drops daily, the longer the former employee has no "competition" for the existing clients (assuming as written, the remaining employees are not really competing).  If the current value of the business is truly just sale of equipment, then whomever is allowing the business to continue accruing salary and other expenses is clearly not acting in the best interests of the estate.  (Makes me wonder if the aunt is running the estate, as she is the only one who seems to be benefiting from the "business".)

On the other hand, if the restructure was some form of the executor/admin "selling" the business, then there are a larger number of worms to deal with, especially if your client is one of or the only buyer.

---

I would not touch any part of this estate process at all.  I would refer to a probate/estate attorney, who also has probate/estate expert accountant/CPA/EA's on staff.  If your client has already taken on former estate assets or liability in some form, then maybe deal with that on its face, but only if your client is accepting what they have done or allowed to be done, and is not interested in getting a second opinion (which seems not to be the case).

[WITAXLADY]

I never said good will was not deductible.  I said the EOV isn’t an adequate or correct determination of the goodwill, in my opinion, based upon regulation 20.2031-3.

 

#1 – The EOV does not comply with Estate Valuation standards, as discussed below.

#2 – It would be very difficult to sit on a witness stand and argue the EOV is a reputable valuation, when you weren’t able to find a buyer and subsequently had to start selling assets, on a piece-by-piece basis.

 

This is from the CPA to my client..

 

I am 100% fine with walking away from this engagement.  I’m the preparer and it is my license.  We can agree to disagree.  My findings are laid out below and I won’t be persuaded otherwise.

Jxxx hired Cxxxx Business Services for an “Estimate of Value” of Sxxxxx Construction LLC.  The value was based on the entity being sold intact to a 3rd party person and made no reference to the sole-owner’s death and even referenced lack of management as a challenge (but made no discount).  The value was $902,717.  I’ve attached a copy for your records.

 

In my professional opinion (take it for what it is worth),  the EOV would not be a valid appraisal for estate purposes since it does not comply with Regulation 20.2031-3, which requires:

 

The net value is determined on the basis of all relevant factors including -

(a) A fair appraisal as of the applicable valuation date of all the assets of the business, tangible and intangible, including good will;

(b) The demonstrated earning capacity of the business; and

(c) The other factors set forth in paragraphs (f) and (h) of § 20.2031-2 relating to the valuation of corporate stock, to the extent applicable.

 

The attached EOV does not take into account the value of the assets or liabilities, as of the date your father passed away.

 

I’m not a valuation expert, but in my professional opinion, there should be some discount for “lack of marketability”.  My position is supported by the fact that you couldn’t locate a buyer to purchase the business as a whole.

 

The loss on the equipment sale and the net operating loss will pass through to you went the revocable trust is liquidated and closed.

 

What can or should my response be to the CPA or my client, please?

 

Thank you,

Darlene

Edited December 11, 2020 by jklcpa
actual names replaced with "xxxx"

[WITAXLADY]

ps - K-1 for 2019 is -0- with a NOL of $160,00

[DANRVAN]

4 hours ago, WITAXLADY said:

The EOV does not comply with Estate Valuation standards,

That is correct.  I find hard to believe that a competent appraiser would find any goodwill in this case where continuing success of the business was dependent on the deceased sole proprietor.

5 hours ago, WITAXLADY said:

What can or should my response be to the CPA or my client

I would ask to see an accounting of the business and the estate, including a date of death value and current value of the assets.  

Also ask how long before the estate is expected to close.

If your client then has major concerns you would advise her to see an attorney.

Other than that, she waits to see what flows from the estate until it closes.