Detroit Corporation sued Chicago Corporation for intentional damage to Detroit's goodwill.Detroit had created its goodwill through providing high-quality services to its customers.Thus, no basis for the goodwill appeared on Detroit's balance sheet.The suit was settled and Detroit received $1,500,000 for the damages to its goodwill.

Question

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The $1,500,000 received by Detroit for damages to its goodwill is considered taxable income because Detroit had no basis in the goodwill. Goodwill is an intangible asset that is not reflected on the balance sheet, but tax law requires a basis to be established before any recovery can be considered tax-free. Since Detroit had no basis, the entire amount is taxable as ordinary income.

Detroit Corporation Sued Chicago Corporation for Intentional Damage to Detroit's