In August of 2014, the U.S. Tax Court (the Court) made a decision in a case that addresses personal goodwill, the Estate of Adell v. Commissioner, T.C. Memo 2014-155. In this case, the decedent, Franklin Z. Adell, and his son Kevin formed The Word Network (The Word), a 24-hour television station that broadcasts urban religious ministries and gospel music, as a §501(c)(3) organization. The decedent was also sole owner of STN.Com which was organized to provide the satellite uplink services necessary to give The Word access to national and international cable television distribution. Although Mr. Adell was a board member and officer of STN.Com and The Word, Kevin operated both companies and was the face of the operation as he was the individual soliciting content and pursuing broadcast opportunities. On the date of Mr. Adell’s death, August 13, 2006, Kevin, who was the personal representative of the estate, reported the value of Mr. Adell’s 100% interest in STN.Com at $9.3 million . The respondent (Commission of Internal Revenue) reported the value at $26.3 million.
The primary dispute in this case was the treatment of the goodwill associated personally with Kevin. This was not a corporate asset; indeed, Kevin served as STN.Com’s president, but had never entered into an employment agreement or a noncompete agreement with STN.Com, and his personal connections with The Word and its religious affiliates were crucial to the future of both The Word and STN.Com.
After analyzing the opinions of the various experts, the Court found that the estate’s appraiser presented the best evidence of value in that it properly accounted for Kevin’s personal goodwill. Therefore, the Court concluded that the fair market value of the STN.Com stock owned by the estate on August 13, 2006, was $9.3 million, the amount originally reported on the estate tax return.
For more details on this case and a review of the U.S. Internal Revenue Code and U.S. Treasury Regulations as they pertain to the value of an estate and calculating the goodwill of a business, refer to the full article.
By Cindy Andresen, ASA