'Assembled work force' may not be amortized.

The O Corporation was formed in 1948. In 1983, the T Corporation was set up for the purpose of acquiring O's assets and business. Later in 1983, T and O merged.

On its 1984 return, T claimed a deduction for amortization of work force in place, the value inherent in having a trained staff of employees in place. The IRS disallowed this deduction, claiming that work force in place was a part of going-concern value (and therefore not properly amortizable). The Tax Court (opinion Scott, J.) holds for the Service, ruling that work force in place could not be amortized.

Sec. 167(a) allows as a deduction for depreciation a reasonable allowance for the exhaustion and wear and tear of property used in a trade or business or of property held for the production of income. The term "property" includes intangibles. Regs. Sec. 1.167(a)-3 provides that an intangible asset may be amortized if the intangible asset is known from experience or other factors to be of use in the business or in the production of income for only a limited period, the length of which can be estimated with reasonable accuracy. . . .

To depreciate an intangible asset, a taxpayer must demonstrate that the asset has a limited useful life, the duration of which can be estimated with reasonable accuracy, and an ascertainable value separate and distinct from goodwill or going-concern value.

T contends that the assembled work force is an asset separate and distinct from goodwill or going-concern value and that this asset has an ascertainable limited useful life. T concludes that the replacement cost method can be used to value the assembled work force and that when valued on this basis no part of the value of this assembled work force is an integral part of going-concern value. The IRS contends that an assembled work force represents the value inherent in having a trained staff of employees in place, enabling the business to continue without interruption, and is going-concern value. The Service argues that, because going-concern value is not a depreciable asset, T is not entitled to a deduction for amortization of the assembled work force.

The IRS contends that, as a matter of law, the value of an assembled work force represents going-concern value. T argues that the determination of whether the assembled work force is an intangible asset with an ascertainable useful life and value and, therefore, subject to amortization, is a question of fact. Although it has been consistently held that no deduction for amortization is allowable for goodwill and going-concern value, it also has been consistently held that the determination of whether an intangible asset is part of goodwill or going-concern value is a question of fact. Accordingly, whether the assembled work force is an intangible asset with an ascertainable value and a limited useful life separate from goodwill or going-concern value is a question of fact.

Going-concern value is the additional element of value that attaches to property by reason of its existence as an integral part of a going concern. It is characterized by the ability of an acquired business to continue to operate and generate income without interruption during and after acquisition. While goodwill and going-concern value are often referred to conjunctively, technically, going-concern value is the ability of a business to generate income without interruption, even though there has been a change in ownership; and goodwill is a "preexisting" business relationship, based on a continuous course of dealing, which may be expected to continue indefinitely.

T's contention is that the existence of a trained and operational staff allowed T to step into the shoes of O. T acquired an organization that was doing business and earning money, had a staff of employees trained in operating sewing machines, working with fabrics, etc., and had an established routine for preparing garments. While the employees of O were not bound over to T, this fact does not detract from the probability that the employees would join T's operation. Therefore, the assembled work force represents going-concern value, which has been regarded as not having an ascertainable useful life.

Generally, an asset has been regarded as an asset distinct from goodwill and going-concern value when the evidence shows such asset to be a wasting asset with a reasonably ascertainable useful life and value. An asset is subject to amortization only if it is a wasting asset. Depreciation is intended to reflect the loss in value of an asset used to produce income and to make a meaningful allocation of the cost to the tax period benefited by the use of the asset.

In this case, it is "the assembled work force" that T claims is a wasting asset, not each individual worker. Although the assembled work force is used to produce income, this record fails to show that its value diminishes as a result of the passing of time or through use. As an employee terminated his employment, another would be hired and trained to take his place. While the assembled work force might be subject to temporary attrition as well as expansion through departure of some employees and the hiring of others, it would not be depleted due to the passage of time or as a result of use. The turnover rate of employees represents merely the ebb and flow of a continuing work force. An employee's leaving does not interrupt or destroy the continued existence of the whole. To the extent the leaving of any employee reduces the value of the assembled work force as a whole, this value would be restored by the hiring of a new employee. The whole of the assembled work force is equal to the sum of its employees, but each employee enjoys no separate capital standing independent of the whole. Because the assembled work force does not diminish in value as a result of the passage of time or through use, there is no loss in value that must be allocated to the tax period benefited by the use of the assembled work force.

Accordingly, the assembled work force is not separate and distinct from going-concern value and, because it is not a depreciable asset, amortization deductions claimed by T are not allowable. ITHACA INDUSTRIES, INC., 97 TC No. 16

REFLECTIONS: While currently, amounts attributable to such intangible assets may not be deducted, several proposals that would change the treatment of intangibles have been proposed recently. The General Accounting Office has recommended that purchased intangible assets, including goodwill, be amortized over specific statutory cost recovery periods. Several alternative bills have been introduced in Congress. One group of proposals would establish a single predetermined cost recovery period for the amortization of all intangibles. Another set of proposals would disallow amortization for specific intangibles (or categories of intangibles) by "deeming" them to have indeterminable useful lives.