Partnership sale and goodwill

[Margaret CPA in OH]

This is a bit backwards. Partnership has had sale of assets, not distribution. Assets include equipment and goodwill. Total purchase price was, say, $100,000 with equipment valued at $50,000 so goodwill is $50,000. However, goodwill on the books is still worth $100,000 and equipment is fully depreciated.

Is it possible to have a loss on sale of goodwill? Would that be ordinary and the gain on equipment capital or ordinary? My partnership 'answer book' does not address and I don't find it in MTG, at least to my satisfaction.

Thanks!

[jshtax]

Anything allocated to equipment that is fully depreciated would be recaptured as ordinary income. I had an issue like this where we allocated the entire sales price to goodwill as the assets were basically worthless and it was the name of the business that was the driving factor. Keep in mind goodwill is recaptured as well over the book value.

[kcjenkins]

This is a bit backwards. Partnership has had sale of assets, not distribution. Assets include equipment and goodwill. Total purchase price was, say, $100,000 with equipment valued at $50,000 so goodwill is $50,000. However, goodwill on the books is still worth $100,000 and equipment is fully depreciated.

I'm confused? If the purchase was 50K for equipment, and 50K for Goodwill, how can the BV of the Goodwill be 100K?

[Margaret CPA in OH]

This is from a colleague. The Goodwill was originally substantially greater than $100,000 (these are all working, not real, numbers. The unamortized balance on the books was $100,000. The total business assets sold for $100,000 and the fmv (not basis) of the equipment was $50,000.

I don't know whether it's too late to allocate the entire purchase to the Goodwill. I think the contract may have stated that the equipment is worth $50K but the confusion was how or even if the goodwill sale could show a loss.

KC, why couldn't the book value of the seller be 100K? Book value is what it is. I believe the buyer was purchasing the entire business assets for a total of $100k and the fmv of the equipment was $50k. So, per jshtax, the seller shows ordinary income on the depn recapture of the 0 basis equipment but what to do with the high book value of the goodwill.

I just thought it an interesting issue. Not my client but wanted to throw it out to the great minds here.

[kcjenkins]

KC, why couldn't the book value of the seller be 100K? Book value is what it is. I believe the buyer was purchasing the entire business assets for a total of $100k and the fmv of the equipment was $50k. So, per jshtax, the seller shows ordinary income on the depn recapture of the 0 basis equipment but what to do with the high book value of the goodwill.

In your post, I thought you said purchase price [not selling price] was 100K, FMV of the equipment was 50K, so the BV of the Goodwill would have been 50K. If the purchase price of the Goodwill was higher, that changes my answer Yes, you can have a loss on the sale of purchased Goodwill.

[Mr. Pencil]

Is it possible to have a loss on sale of goodwill?

Yes, in a total sale. It is a Section 1231 loss and probably has recapture of amortization. See Pub 544.