United States

Alabama: Goodwill Deductions Disallowed in Computing Business Privilege Tax Liability

Apr 27, 2015
From KPMG TaxWatch

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Recently, the Alabama Tax Tribunal addressed whether a taxpayer was entitled to a deduction for goodwill in computing its business privilege tax (BPT) liability. Alabama’s business privilege tax is based on a taxpayer’s net worth. In computing net worth a taxpayer is allowed a deduction for “the unamortized portion of goodwill….. appearing on the taxpayer’s balance sheet by reason of a direct purchase of another corporation or limited liability entity.” After a series of mergers and acquisitions, the taxpayer deducted goodwill from earlier tax years (1999 and 2000) in computing its BPT liability. After the Department of Revenue disallowed the deductions, the taxpayer appealed to the Alabama Tax Tribunal.

The Tax Tribunal Judge observed at the outset that the deduction is allowed only if the goodwill appeared on the taxpayer’s balance sheet as a result of the taxpayer’s direct purchase of another corporation. The goodwill at issue from 1999 was on the taxpayer’s balance sheet as a result of the taxpayer being purchased by another corporation and the parties’ subsequently making an IRC 338(h)(10) election. The 2000 goodwill resulted when the taxpayer merged with another corporation that had the goodwill on its books. Under the general rules regarding mergers, the surviving entity assumes all the assets, rights, and liabilities of the extinguished entity by operation of law. Thus, the taxpayer appeared to argue that under merger law it should be allowed to claim a goodwill deduction. However, the Judge noted that the general laws addressing mergers did not control the situation at hand, which was controlled by the specific statute that authorized a deduction for goodwill only if the goodwill was on the taxpayer’s balance sheet by reason of a direct purchase of another corporation. In the Judge’s view, if the legislature had intended the deduction to apply to goodwill acquired as a result of a merger, it would have explicitly stated so. As such, the taxpayer was not entitled to the goodwill deductions. Please contact James Kelleher at 404-979-2044 with questions on Amerex Corp. v. State of Alabama.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.