Updated July 28, 2026. Quick answer: §1060(a) allocates consideration “in the same manner as amounts are allocated to assets under section 338(b)(5)” — the residual method. Consideration fills seven classes in order, and every class except goodwill is capped at fair market value. Goodwill sits alone in Class VII and absorbs whatever remains, which is why it is the residual and why it is where the negotiation lands.
The classes, in fill order
| Class | What is in it |
|---|---|
| I | Cash and general deposit accounts |
| II | Actively traded personal property, certificates of deposit, foreign currency |
| III | Mark-to-market assets and debt instruments, including accounts receivable |
| IV | Inventory and stock in trade |
| V | Everything not in another class — equipment, vehicles, buildings, land |
| VI | §197 intangibles other than goodwill and going concern value |
| VII | Goodwill and going concern value |
The instructions are explicit on the ordering — reduce by Class I, then allocate to II, III, IV, V and VI in that order, then Class VII — and on the cap: “The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date.”
Only Class VII can take more than fair market value. That single asymmetry is the whole reason goodwill is the battleground: it is the only place surplus consideration can legitimately go, and it is the class with the best character for a seller.
And the allocation is not settled by the form — nothing requires the two sides to file matching numbers.
Sources
IRC §453(a), (c), (d), (i); §453A(b), (c) and (d); Temp. Reg. §15a.453-1(c) and (d); §1060(a) and Treas. Reg. §1.1060-1(c) and (e); the asset classes at Treas. Reg. §1.338-6(b) as reproduced in the Instructions for Form 8594; §1042(a), (b), (c); §1202(a)(1) and (c)(1); §6621(a)(2). All read July 2026.
This states what the cited authority says. It is not tax advice, and retirement-plan design turns on facts about your business and your other entities that no page can see. Every dollar limit referenced here is indexed and changes annually.