Updated July 29, 2026. Quick answer: The seven classes are not a menu. Treas. Reg. §1.338-6(b) reduces the consideration by Class I, then fills Class II, then III, then IV, then V, then VI — each at fair market value — “and finally to Class VII assets.” Goodwill is not allocated to. It is the residual. Which means the amount of your sale taxed at capital rates is decided by what the other six classes absorb first.
The ordering rule
The engine, quoted. Treas. Reg. §1.338-6(b)(2)(i): consideration “(as reduced by the amount of Class I assets) are allocated among Class II acquisition date assets of target in proportion to the fair market values of such Class II assets at such time, then among Class III assets so held in such proportion, then among Class IV assets so held in such proportion, then among Class V assets so held in such proportion, then among Class VI assets so held in such proportion, and finally to Class VII assets.” Goodwill is not allocated. It is whatever survives.
Class I is different in kind: it does not join the queue, it reduces the pool. Treas. Reg. §1.338-6(b)(1) provides that consideration is “first reduced by the amount of Class I assets”, which are cash and general deposit accounts — and note the carve-out, “other than certificates of deposit”, which are Class II.
| Class | What it holds | Why it matters to you |
|---|---|---|
| I | Cash and general deposit accounts | Reduces the pool before allocation |
| II | Actively traded personal property, plus CDs and foreign currency | Broader and narrower than “marketable securities” |
| III | Mark-to-market assets and debt instruments “(including accounts receivable)” | The class most sellers forget |
| IV | Stock in trade, inventory, and property held primarily for sale to customers in the ordinary course | Wider than shelf inventory |
| V | “all assets other than Class I, II, III, IV, VI, and VII” | Defined only by exclusion — equipment, real property, and anything ejected elsewhere |
| VI | All §197 intangibles “except goodwill and going concern value” | Covenants not to compete, customer lists, licences |
| VII | Goodwill and going concern value | The residual |
Two clauses that change outcomes. Class VI is defined by subtraction — it exists to strip goodwill and going concern value out of the §197 universe and hold everything else, which is where the buyer’s and seller’s interests diverge hardest. And Class VII captures goodwill “whether or not the goodwill or going concern value qualifies as a section 197 intangible” — so goodwill lands there even in a deal where the buyer cannot amortise it.
The seven-class list is not closed. Treas. Reg. §1.338-6(b)(3) permits the IRS to add items to any class “by designation in the Internal Revenue Bulletin” without amending the regulation.
For a service business the decisive row is Class III — receivables absorb consideration at full value before anything reaches goodwill.
Sources
IRC §1060; Treas. Reg. §1.338-6(b)(1), (b)(2)(i) through (b)(2)(vii) and (b)(3); IRC §197; IRC §1092(d)(1); IRC §1221(a)(1). All read July 2026.
This states what the cited authority says. It is not tax or legal advice. A business sale turns on the entity type, the deal documents and the allocation actually agreed, none of which a page can see, and the numbers here are structural rather than yours.