Rev. Rul. 66-81

Advice has been requested whether the goodwill of a corporation, liquidated under section 333 of the Internal Revenue Code of 1954, is property to which a portion of the shareholders' basis in their stock must be allocated where the shareholders continue the business of the corporation as a partnership under the circumstances described below.

A corporation using the accrual method of accounting operated a catering service for many years. Its four shareholders, who were also its directors and employees, elected to liquidate the corporation under section 333 of the Code. The liquidation was thereupon effected in conformance with the provisions of section 333 of the Code. Each shareholder made and filed timely elections under subsections (c) and (d) of section 333 of the Code. Immediately thereafter the shareholders formed a partnership which continued the business of the corporation without interruption, in the same location, with substantially the same name and with the same customers.

Section 1.333-1(b) of the Income Tax Regulations requires the transfer of all the property, both tangible and intangible, of the liquidating corporation to its shareholders. Goodwill is an intangible asset and where the shareholders continue the business of the liquidated corporation, its goodwill may have value in the hands of its shareholders. See North American Service Co., Inc. , 33 T.C. 677 (1960), acquiescence C.B. 1960-2, 6.

Section 334(c) of the Code provides that the basis of property received in liquidation under section 333 of the Code shall be the same as the basis of such stock canceled or redeemed in the liquidation, decreased in the amount of any money received by the shareholder, and increased in the amount of gain recognized to him.

Section 1.334-2 of the regulations provides that the basis of such stock, as adjusted thereunder, should be allocated to the various assets received on the basis of their net fair market values. In Ralph R. Garrow , 43 T.C. 890 (1965) the Tax Court held that this manner of allocation is mandatory.

Where in a liquidation under section 333 of the Code the goodwill of a corporation has value in the hands of its shareholders, a portion of the basis of the shareholders' stock must be allocated to it.

Since the partnership formed by the shareholders was operated so that its customers recognized it as a continuation of the business of the corporation, the goodwill of the corporation had value in the hands of the shareholders.

Accordingly, where a corporation is liquidated under section 333 of the Code and the goodwill of the corporation has value in the hands of its shareholders, a portion of the basis of the shareholders' stock must be allocated to the goodwill.