Written by Chris Walton, JDChet Huffman ran the family aerospace parts business as CEO. He had no employment contract with the corporation. He was not subject to a noncompete agreement. His relationships with customers, suppliers, and key employees were personal — they belonged to him, not to the company. When TransDigm Group acquired the business for approximately $50 million, Duff & Phelps valued Chet’s personal goodwill at $19.2 million — roughly 38% of the total acquisition value. That $19.2 million was taxable to Chet individually as long-term capital gain, not to the C corporation at the corporate tax rate.
The IRS challenged the allocation. In Huffman v. Commissioner (T.C. Memo. 2024-12), the Tax Court held that substantial personal goodwill existed, that Chet owned it up until the acquisition, and that the gain on the sale of that goodwill was properly reported by Chet individually. The court found that Chet had built personal goodwill through his relationships with key employees and customers during his tenure as CEO, and that because he had no employment contract or noncompete with the corporation, he had never transferred that goodwill to the company. As part of the acquisition, Chet entered into a four-year noncompete with TransDigm — the first time his personal goodwill was contractually transferred, and the event that documented the allocation.
For M&A counsel, tax advisors, and valuation professionals structuring the sale of a C corporation, Huffman is the most significant personal goodwill case since Martin Ice Cream (1998) and Norwalk (1998). It reaffirms the framework, provides a detailed factual roadmap for establishing personal goodwill, and demonstrates both the enormous tax savings the allocation produces — and the specific evidentiary requirements the IRS will challenge.
The personal goodwill allocation exists because of a structural problem in C corporation acquisitions. When a buyer acquires a C corporation’s assets (rather than its stock), the transaction triggers two levels of tax: the corporation pays tax on the gain from the asset sale, and then the shareholders pay tax on the distribution of the after-tax proceeds. The combined effective rate can approach 50% or more depending on the corporate and individual rates in effect.
Personal goodwill breaks the double-tax structure. If a portion of the acquisition value is attributable to goodwill that belongs to the shareholder personally — not to the corporation — that portion is taxable only once, at the shareholder’s individual capital gains rate. The shareholder sells the personal goodwill directly to the buyer. The corporation sells the enterprise assets. Two sellers, two tax treatments. The personal goodwill piece avoids the corporate-level tax entirely.
On a $50 million acquisition with $19.2 million in personal goodwill, the tax differential is massive. Without the personal goodwill allocation, the entire $50 million passes through the corporate tax first, then the individual tax. With the allocation, $19.2 million is taxed once at capital gains rates. The savings can easily run into the millions — which is precisely why the IRS scrutinizes these allocations aggressively.
The Huffman family operated Dukes Aerospace, an aviation parts business. Chet Huffman served as CEO. His parents, Lloyd and Patricia Huffman, held shares through a family S corporation and a trust. Under a right-to-purchase agreement, Chet exercised options to acquire his parents’ shares for $5 million in 2007. Two years later, TransDigm acquired Dukes Aerospace for approximately $50 million.
Three facts were dispositive on the personal goodwill question:
No employment contract. Chet worked as CEO without a written employment agreement with the corporation. He was not contractually bound to provide his services to Dukes Aerospace. His personal relationships, expertise, and industry reputation were not assigned to the company through any agreement. This is the threshold requirement from Martin Ice Cream: if the shareholder has no employment contract, the corporation has no contractual claim to the shareholder’s personal goodwill.
No noncompete with the corporation. Chet was not subject to a covenant not to compete with Dukes Aerospace. He could have left the company at any time and taken his relationships with him. The absence of a noncompete is the second element of the Martin Ice Cream/Norwalk framework: if the corporation doesn’t restrict the shareholder’s ability to compete, the shareholder’s goodwill has never been captured by the corporation.
Personal relationships with customers and key employees. Duff & Phelps identified two sources of Chet’s personal goodwill: $17.4 million attributable to his relationships with clients and $4.4 million attributable to his relationships with Dukes’s key employees. These relationships were personal to Chet — cultivated over years of direct interaction, not generated by the corporation’s brand, marketing, or institutional infrastructure.
When TransDigm acquired Dukes, Chet entered into a four-year noncompete agreement with TransDigm as part of the acquisition. That noncompete was the first contractual transfer of Chet’s personal goodwill — and the documentary evidence that supported the allocation. The Tax Court found that Chet “continued to own his personal goodwill up until the TransDigm acquisition” and that the gain on the sale of that goodwill was properly reported by its owner: Chet, individually.
The IRS’s position was that Chet had transferred his personal goodwill to the corporation before the acquisition — meaning the goodwill was a corporate asset, taxable at the corporate level. The Tax Court disagreed, citing Bross Trucking, Inc. (T.C. Memo. 2014-107): “A business can only distribute corporate assets and cannot distribute assets personally owned by shareholders.” The converse is also true: a corporation cannot claim ownership of assets that were never transferred to it.
The court noted that “key employees may transfer their personal goodwill via employment contracts or noncompete agreements.” In the absence of such agreements, the personal goodwill remains with the individual. Chet had no such agreements with Dukes Aerospace. His first and only contractual transfer of personal goodwill was the noncompete with TransDigm, executed as part of the acquisition.
The IRS also challenged the Duff & Phelps valuation. The original opinion valued Chet’s personal goodwill at $21.8 million out of $50 million in total enterprise value (as determined by SRR). Shortly before trial, Duff & Phelps revised its estimate downward to $19.2 million to account for an 18-month expected lag time in Chet’s ability to compete after leaving the business. The court accepted the existence and materiality of the personal goodwill but made its own adjustments, concluding that some portion of the overall goodwill had been allocated improperly between the corporation and Chet. The court applied a blended approach — crediting the personal goodwill framework but calibrating the dollar amounts based on the evidentiary record.
Critically, the Tax Court also shifted the burden of proof to the IRS on the personal goodwill valuation issue. Citing the Ninth Circuit’s analysis in Estate of Mitchell, the court found the IRS’s initial determination of Chet’s personal goodwill was “arbitrary.” This procedural holding matters for practitioners: if the IRS’s initial assessment of personal goodwill is not grounded in a reasonable analysis, the taxpayer may be able to shift the burden to the IRS to prove its own valuation.
Huffman reaffirms and extends the framework established by Martin Ice Cream Co. v. Commissioner (110 T.C. 189, 1998) and Norwalk v. Commissioner (T.C. Memo. 1998-279). The two-part test remains the same:
Step one: Did the shareholder have an employment contract or noncompete with the corporation? If yes, the corporation has a contractual claim to the shareholder’s services and relationships, and the goodwill is a corporate asset. If no, the shareholder’s personal relationships and reputation remain personal property. In Martin Ice Cream, the shareholder’s long-term customer relationships were personal assets because no employment or noncompete agreement transferred them to the corporation. In Huffman, the same analysis applies: no employment contract + no noncompete = personal goodwill.
Step two: Did the shareholder’s personal relationships and reputation generate value above and beyond the corporation’s enterprise goodwill? The shareholder must demonstrate that clients, customers, or key employees had relationships with the individual — not with the company’s brand, name, or institutional infrastructure. In Huffman, Duff & Phelps decomposed the goodwill into customer relationships ($17.4 million), key employee relationships ($4.4 million), and the remainder attributable to the corporation. That decomposition — supported by a recognized valuation firm’s analysis — is what gave the allocation credibility.
The framework sounds simple. In practice, it requires careful pre-transaction planning, contemporaneous documentation, and a valuation analysis that can withstand IRS scrutiny years after the transaction closes.
The noncompete agreement occupies a central role in the personal goodwill allocation, and Huffman illustrates both why and how. The logic runs in two directions:
Before the sale: the absence of a noncompete proves the goodwill is personal. If the shareholder has no noncompete with the corporation, the corporation has no contractual mechanism to prevent the shareholder from leaving and taking the relationships. The goodwill can walk out the door. Therefore, it belongs to the person, not the entity.
At the sale: the execution of a noncompete documents the transfer. When the shareholder enters into a noncompete with the buyer as part of the acquisition, the shareholder is selling the buyer the right to prevent the shareholder from competing — which is, in economic terms, the sale of the personal goodwill. The noncompete is both the evidence that the goodwill existed (the buyer paid for it) and the mechanism through which it was transferred (the buyer acquired the contractual right).
For M&A practitioners structuring C corporation asset sales: the noncompete between the shareholder and the buyer is not just a deal term. It’s the documentation that supports the personal goodwill allocation. The noncompete should be negotiated and valued as a separate component of the transaction, with consideration allocated to it in the purchase agreement. The amount allocated to the noncompete should be consistent with the valuation of the personal goodwill. If the noncompete is bundled with the enterprise assets and not separately valued, the IRS has an argument that the personal goodwill was never separately transacted — and the allocation collapses.
A cautionary note from the related case law: in Muskat v. United States, the court rejected a personal goodwill recharacterization because the negotiations did not include a discussion of personal goodwill, and the buyer confirmed it was never discussed. The “strong proof” rule requires that when parties to a transaction have allocated consideration in a written agreement, strong proof must be shown to recharacterize those payments. Structure the allocation at the time of the deal, not after the fact.
Huffman also addressed a second issue that T&E counsel should note: the Tax Court found that Chet’s 2007 exercise of his right to purchase his parents’ shares for $5 million resulted in a taxable gift, because the shares were worth substantially more than $5 million at the time of exercise. The IRS asserted the shares were worth approximately $31.3 million, making the differential a gift from the parents to Chet.
The buy-sell agreement that established the $5 million price was subject to §2703 scrutiny. Section 2703 provides that the value of property for gift and estate tax purposes is determined without regard to any restriction or agreement that fixes a price, unless the agreement was a bona fide business arrangement, was not a device to transfer property for less than adequate consideration, and reflected terms comparable to arm’s-length transactions. The Tax Court found the agreement failed the §2703 test, and the $5 million price was not respected.
For T&E counsel drafting buy-sell agreements for family businesses: Huffman is a reminder that §2703 is actively enforced. A below-market option price that was reasonable when the agreement was drafted may not be reasonable when exercised, if the business has appreciated dramatically in the interim. Build a valuation mechanism into the buy-sell agreement that adjusts the price to fair market value at the time of exercise — or at minimum, document at the time of drafting that the terms are comparable to what unrelated parties would agree to.
If your client is a C corporation shareholder whose personal relationships and reputation drive significant value, and a sale or merger is on the horizon, Huffman provides the checklist for establishing personal goodwill:
Confirm there is no employment contract or noncompete between the shareholder and the corporation. If one exists, it may need to be amended or terminated before the transaction — but this must be done carefully and for legitimate business reasons, not solely to create a tax benefit. The timing and substance of any amendment will be scrutinized.
Engage a valuation firm to prepare a contemporaneous personal goodwill analysis. The analysis should identify the specific relationships that constitute personal goodwill (customers, suppliers, key employees), quantify the value attributable to each, and separate the personal component from the enterprise goodwill. Duff & Phelps’s decomposition in Huffman ($17.4 million in customer relationships + $4.4 million in key employee relationships) is the model.
Structure the acquisition agreement to separately identify the personal goodwill. The purchase agreement should allocate consideration between the corporation’s enterprise assets and the shareholder’s personal goodwill. The shareholder should be a separate party to the agreement — selling personal goodwill directly to the buyer — alongside the corporation selling enterprise assets.
Execute the noncompete between the shareholder and the buyer as part of the transaction. The noncompete is the contractual mechanism that documents the transfer of personal goodwill. It should be separately negotiated, separately valued, and the consideration should be consistent with the personal goodwill valuation.
Document the business rationale. The buyer should be able to articulate why it is paying for the shareholder’s personal goodwill separately from the enterprise assets. The buyer’s due diligence should reflect that customer relationships, key employee relationships, and the shareholder’s reputation were identified as value drivers during the acquisition process — not manufactured after closing for tax purposes.
Not every C corporation sale supports a personal goodwill allocation. The argument fails when the shareholder has an employment contract or noncompete with the corporation (the goodwill has been contractually transferred), when the customer relationships are institutional rather than personal (clients come because of the company’s brand, location, or service infrastructure, not because of the individual), when the business would retain its value if the shareholder departed (the Donahue test: did clients follow the prior owner?), or when the allocation was not documented contemporaneously with the transaction (post-hoc recharacterizations face the Muskat “strong proof” standard).
The personal goodwill allocation is a legitimate tax-planning tool when supported by the facts. It is not a label you apply to value that belongs to the corporation in order to avoid the double tax. The Tax Court in Huffman credited the allocation because the facts supported it: no employment contract, no noncompete, personal customer and employee relationships documented by a recognized valuation firm, and a noncompete with the buyer that provided the contractual mechanism for the transfer. Remove any of those elements and the allocation is at risk.
Huffman v. Commissioner is the Tax Court’s most detailed examination of personal goodwill in a C corporation acquisition in over two decades. The court reaffirmed that personal goodwill exists, that it can be separated from enterprise goodwill, and that the gain from its sale is taxable to the shareholder individually — not to the corporation. But the case also demonstrates the level of evidentiary support required: a recognized valuation firm’s contemporaneous analysis, a clean corporate structure (no employment contract, no noncompete with the corporation), a noncompete with the buyer that documents the transfer, and an acquisition agreement that separately identifies the personal goodwill allocation.
For M&A counsel structuring C corporation asset sales: personal goodwill planning should begin when the transaction is contemplated, not when the purchase agreement is being drafted. The corporate structure (employment agreements, noncompetes) must be clean before the deal begins. The valuation must be prepared contemporaneously. And the allocation must be documented in the transaction agreements at closing. Huffman won because every element was in place. The IRS challenged it anyway — and lost. But the case took until 2024 to resolve a 2009 transaction. The cost of defending the allocation is real, even when the allocation is correct. Build the record strong enough that the IRS’s challenge fails on the facts, not on the documentation.
If you’re structuring the sale of a C corporation and need to determine whether a personal goodwill allocation is supportable, or need a valuation that decomposes total goodwill between the corporation and the shareholder, happy to discuss the analysis. The pre-transaction corporate structure and the contemporaneous valuation are where the allocation is won or lost.
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