Sale/trade-in of delivery route (goodwill)

[ILLMAS]

TP delivers baked goods to all of their customer assigned to their route, TP paid $60K for the route and has taken amortization of $23K = $37K basis.  The bakery they delivered for, bought back the route for $130K and resold the route back to the TP (minus a couple of stores) for $100K, TP received a check for $30K.  

Option One

Original Cost $60K

Amortization -23K

Basis            $37K

Sales Price $130K

Less Basis  $37K

Gain             $93K

New Route $100K on books

TP pays taxes on $93K

Option Two (trade-in)

Original Cost $60K

Amortization -23K

Trade-in        $40K

New Basis    $77K

Sales Price $130K

Gain             $53K

New Route $77K on books

It seems option two is more beneficial to the TP, but can one do a trade-in on goodwill?

Thanks

MAS

[Lion EA]

If you're talking about a like-kind exchange, isn't that for real estate only? TCJA?

[ILLMAS]

I was envisioning more like a vehicle trade-in, not an like-kind exchange which will probably net the same results.

[Lee B]

10 hours ago, Lion EA said:

If you're talking about a like-kind exchange, isn't that for real estate only? TCJA?

You are correct, the TCJA limited like kind exchanges, which is what a trade-in is, to real property only.

[Lion EA]

A vehicle trade-in is a like-kind exchange, but like-kind exchanges are limited to real property only -- with thanks to cbslee for confirming my memory of that TCJA change. You're probably talking about 2019 or 2020, so definitely under the TCJA change.

[DANRVAN]

16 hours ago, ILLMAS said:

$130K and resold the route back to the TP (minus a couple of stores) for $100K, TP received a check for $30K.  

Look at the substance of the transaction.  

The bakery reduced taxpayers route by a few stores and compensated him $30,000.  That is how I would treat it.

They went through some extra hoops to get there for legal/admin purposes, but they still have the route minus a few stores + a check for $30,000.

[ILLMAS]

13 minutes ago, DANRVAN said:

Look at the substance of the transaction.  

The bakery reduced taxpayers route by a few stores and compensated him $30,000.  That is how I would treat it.

They went through some extra hoops to get there for legal/admin purposes, but they still have the route minus a few stores + a check for $30,000.

Interesting....  Let's see if more people agree with this.

[Lion EA]

My first thought was a sale of an asset and a purchase of an asset. But, I see the step-transaction that Danrvan's explaining.

[DANRVAN]

28 minutes ago, ILLMAS said:

Let's see if more people agree

Are you aware of the "substance-over-form doctrine"?  Why would you not use it to your client's advantage?

Looks to me like you would have a gain of about $12,000 if basis is allocated on 30,000 / 130,000 figures.

[jklcpa]

46 minutes ago, DANRVAN said:

Look at the substance of the transaction.  

The bakery reduced taxpayers route by a few stores and compensated him $30,000.  That is how I would treat it.

They went through some extra hoops to get there for legal/admin purposes, but they still have the route minus a few stores + a check for $30,000.

 

31 minutes ago, ILLMAS said:

Interesting....  Let's see if more people agree with this.

 

Yes, I agree with Dan that if the client still has the same route with a reduction of several customers, then I'd say company bought back those several customers for the $30K. My answer would be different if this was not substantially the same route though.

I'd prorate the cost, amortization, and remaining basis saying that what was bought back was 30/130 or ~23.08% of the route and report that against the $30K proceeds so that the client would report ~  $21, 460 of gain  (30K - 8540 of basis).

What I wouldn't do is frontload an entire $30K of basis against this sale and report -0- gain.

[DANRVAN]

4 minutes ago, jklcpa said:

  $21, 460 of gain

That is correct, I was thinking roughly 22,000 instead of 12,000 as I posted above.

There are other possible methods of allocating such as sales or volume per store.

[DANRVAN]

31 minutes ago, Lion EA said:

step-transaction

that's it, the step-transaction-doctrine