A recent Claims Court case addressed whether a radio station's assets include goodwill.
The case involved a country music station in Los Angeles. The station was exchanged by its owner for several other stations. The parties agreed to an allocation of the $185 million purchase price to the tangible assets of the radio station ($3.4 million), some intangible assets ($4.9 million), and then with the bulk of the price being allocated to the FCC license ($176.7 million). No value was allocated to goodwill. These allocations were based on an appraisal.
The IRS asserted the station had $73.3 million of goodwill, by attributing a lower value to the FCC license and allocating the residual portion of the purchase price to goodwill. The appraiser for the taxpayer had indicated that broadcast stations do not possess any goodwill - the IRS contested that assertion.
Goodwill is "the value of a trade or business attributable to the expectancy of continued customer patronage," which expectancy may be due "to the name or reputation of a trade or business or any other factor." Code §197; Treas. Regs. §1.107-2(b)(1). The taxpayer argued that since a station would lose customers if it fundamentally changed is format or on-air personalities, there was no inherent value attributable to future customer patronage. The court found that just because continued customer patronage could disappear if critical business elements are changed by a buyer does not mean there was no expectation of continued customer patronage at the time of sale. Such an interpretation could be used to assert "no goodwill" by many other types of business since most businesses could suffer a lost of continued customer patronage if significant changes are made to the business. Thus, the court rejected the premise that broadcast stations cannot have goodwill.
The taxpayer also argued that an underperforming business lacks goodwill. This was also rejected. The court noted that a tendency of old customers to resort to the old business may exist even when a firm is unprofitable. To accept the taxpayer's position would be to accept that goodwill could come and go as quickly as profits or losses arise.
While the court found there could be goodwill, in this case, it found as a factual matter, based on the value of the other assets of the seller and the use of residual method for determining goodwill, there was in fact no material goodwill that was sold in this instance. Further, the court found that when the residual method of determining goodwill is used, and the parties based on their allocations leave nothing for goodwill, then goodwill is presumed to be zero even if there is goodwill as a factual matter (citing Republic Steel Corp., 28 AFTR 175 (Ct. Cl. 1941).
Deseret Management Corp., 112 AFTR 2d Para 2013-5151 (Ct. Fed. Cl. 7/31/2013)