Amortization of intangibles under sections 167 and 197.On September 29, 1997, Tax Executives Institute submitted the following comments to the Internal Revenue Service on proposed regulations under sections 167 and 197 of the Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. , relating to relating to relate prep → concernant
relating to relate prep → bezüglich +gen, mit Bezug auf +acc the amortization of certain intangible property intangible property n. items such as stock in a company which represent value but are not actual, tangible objects. . The Institute's comments were developed under the joint aegis aegis (ē`jĭs), in Greek mythology, weapon of Zeus and Athena. It possessed the power to terrify and disperse the enemy or to protect friends. of its Federal and International Tax Committees whose chairs are, respectively, David L. Klausman of Intel Corporation (company) Intel Corporation - A US microelectronics manufacturer. They produced the Intel 4004, Intel 8080, Intel 8086, Intel 80186, Intel 80286, Intel 80386, Intel 486 and Pentium microprocessor families as well as many other integrated circuits and personal computer networking and Joseph S. Tann, Jr of Ameritech Corporation. The following TEI 1. (communications) TEI - Terminal Endpoint Identifier.
2. (text, project) TEI - Text Encoding Initiative. members also contributed to the development of the submission: David L. Bernard of Kimberly-Clark Corporation, Philip G. Cohen cohen
(Hebrew: “priest”) Jewish priest descended from Zadok (a descendant of Aaron), priest at the First Temple of Jerusalem. The biblical priesthood was hereditary and male. of Unilever United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. Inc., and Judith E. Plump of Cosmair Inc.
The U.S. Department of the Treasury and the Internal Revenue Service have issued proposed regulations under sections 167 and 197 of the Internal Revenue Code, relating to the amortization of certain intangible property. The proposed regulations were published in the FEDERAL REGISTER on January 16. 1997 (62 Fed. Reg REG,
n.pr See random event generator. . 2336), and in the INTERNAL REVENUE BULLETIN on March 31, 1997 (1997-13 I.R.B. 12).(1) A public hearing was held on the regulations on May 15, 1997.
Tax Executives Institute is the principal association of corporate tax executives in North America North America, third largest continent (1990 est. pop. 365,000,000), c.9,400,000 sq mi (24,346,000 sq km), the northern of the two continents of the Western Hemisphere. . Our 5,000 members represent nearly 2,800 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and that taxpayers can comply with in a cost-efficient manner.
Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the proposed regulations under sections 167 and 197 of the Internal Revenue Code, relating to the amortization of certain intangible property.
Prop. Reg. [sections] 1.197-2: Amortization of Goodwill and Other Intangibles
Sections 167(f) and 197 of the Internal Revenue Code provide comprehensive rules for the depreciation and amortization of many intangible assets Intangible Asset
An asset that is not physical in nature.
Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets. . Section 197(a) permits an amortization deduction with respect to the capitalized costs of a "section 197 intangible" that is acquired by the taxpayer and held in connection with the conduct of a trade or business or for the production of income. The amount of the deduction is determined by amortizing the adjusted basis of the intangible ratably over a 15-year period. Section 197(g) of the Code grants authority to the Secretary of the Treasury to prescribe pre·scribe
To give directions, either orally or in writing, for the preparation and administration of a remedy to be used in the treatment of a disease. appropriate regulations.
Section 197 was added to the Code by the Omnibus omnibus: see bus. Budget Reconciliation Act of 1993 and affects taxpayers that acquired intangible property after August 10, 1993, or made a retroactive Having reference to things that happened in the past, prior to the occurrence of the act in question.
A retroactive or retrospective law is one that takes away or impairs vested rights acquired under existing laws, creates new obligations, imposes new duties, or attaches a election to apply the 1993 law to intangibles acquired after July 25, 1991. A "section 197 intangible" -- which includes goodwill, going concern value, workforce in place, information base, know-how, customer-and supplier-based intangibles, governmental licenses and permits, covenants not to compete and other similar arrangements, franchises, trademarks, trade names, and contracts for the use of the foregoing assets -- is defined in Prop. Reg. [sections] 1.197-2(b).
TEI is concerned about the application of the regulations, especially in the international area. We believe that the proposed definition of section 197 intangible property is so broad that it reaches many ordinary, intercompany royalty payments that are deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). under section 162 of the Code, and that, we submit, Congress did not intend to affect by enacting section 197. The regulations should be clarified to ensure the continued deductibility of these items.
A. Application to License Agreements. Prop. Reg. [sections] 1.197-2(b)(11) defines a section 197 intangible as including "any right under a license, contract, or other arrangement providing for the use of' a section 197 intangible. Subparagraph (b)(5) further defines "know-how, etc." as including any "patent, copyright, formula, process, design, pattern, know-how, format, package design, computer software...or interest in film...." Under Prop. Reg. [sections] 1.197-24)(3)(i)(A), in the case of a license, permit, or contract for the use of a section 197 intangible, the amount chargeable to the capital account (and thus amortized over 15 years) includes
all amounts required to be paid
pursuant to the agreement or
right, whether or not
any amount would be deductible under
section 162 if the agreement or right
were not a section 197 intangible.
Although an exception from the general rules is provided for separately purchased contract rights that are limited in amount or have a fixed duration of less than 15 years, the Years, The
the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109]
See : Time definition of a "trade or business" is expansive.(2) Prop. Reg. [sections] 1.1972(e)(3) provides that "the acquisition of a franchise, trademark, or trade name constitutes the acquisition of a trade or business" unless "its value is nominal or the taxpayer irrevocably ir·rev·o·ca·ble
Impossible to retract or revoke: an irrevocable decision.
ir·rev disposes of it immediately after its acquisition." "Nominal" is not defined in the regulations.
Because of the breadth of these definitions, many annual royalty payments under a trademark or patent license are not currently deductible.(3) As drafted, the proposed regulations affect U.S.-based multinational corporations
2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or is contrary to the legislative history of section 197.
When section 197 was enacted in 1993, Congress clearly intended that amounts deductible under prior, law remain deductible under the new provision:
Except in the case of
amounts paid or incurred
under certain covenants not to
compete (or under certain other
arrangements that have the same
effect as covenants not to
compete) and certain amounts
paid or incurred on account of the
transfer of a franchise, trademark,
or trade name, the bill generally
does not apply to any amount that
is otherwise currently deductible
(i.e., not capitalized) under
H.R. Rep. No. 103-213, 103d Cong., 1st Sess. 673 (1993) (Statement of Managers) (emphasis added). For more than five decades, the courts have held that licensing arrangements providing for contingent annual payments have been currently deductible. See, e.g., Associated Patentees v. Commissioner, 4 T.C. 979 (1945), acq., 1959-2 C.B. 3 (providing for the current deductibility of contingent payments in the context of a sale). Current deductibility is also the proper tax and financial accounting result since the licensee licensee n. a person given a license by government or under private agreement. (See: license, licensor)
LICENSEE. One to whom a license has been given. 1 M. Q. & S. 699 n. can avoid payment of the royalty by not using the intangible during the year; this payment is thus not a benefit that extends beyond the end of the year. In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently , requiring capitalization capitalization n. 1) the act of counting anticipated earnings and expenses as capital assets (property, equipment, fixtures) for accounting purposes. 2) the amount of anticipated net earnings which hypothetically can be used for conversion into capital assets. in these circumstances would distort the measurement of income.
Even with respect to fixed royalties, the proposed regulations may produce anomalous a·nom·a·lous
1. Deviating from the normal or common order, form, or rule.
2. Equivocal, as in classification or nature. results. Consider, for example, a licensing agreement with a three-year term that is automatically renewed on a year-to-year basis unless one party terminates the agreement in writing. Under Prop. Reg. [sections] 1.197-2(f)(3)(B)(ii), the royalty for each successive one-year term must be amortized over a 15-year period. If the licensing arrangement is between a U.S. parent and a foreign subsidiary (which is common because of section 367(d)), the subsidiary's earnings and profits will be overstated o·ver·state
tr.v. o·ver·stat·ed, o·ver·stat·ing, o·ver·states
To state in exaggerated terms. See Synonyms at exaggerate.
o . Similarly, a licensing arrangement between two foreign subsidiaries will distort one subsidiary's earnings. We submit that this makes no sense from either a tax policy or economic standpoint.
The broad definitions in the proposed regulations could also adversely affect licensing agreements between domestic affiliates where state law parallels the federal rules. In these circumstances, the licensor will include royalty payments in income currently, while the licensee amortizes the payment over 15 years. Although the consolidated return rules will ameliorate a·mel·io·rate
tr. & intr.v. a·me·lio·rat·ed, a·me·lio·rat·ing, a·me·lio·rates
To make or become better; improve. See Synonyms at improve.
[Alteration of meliorate. the mismatch mismatch
1. in blood transfusions and transplantation immunology, an incompatibility between potential donor and recipient.
2. one or more nucleotides in one of the double strands in a nucleic acid molecule without complementary nucleotides in the same position on the other of income and expense for federal purposes, the net income of the licensee could clearly be overstated for state tax purposes.
For the foregoing reasons, TEI recommends that Prop. Reg. [sections] 1.1972(f)(3) be deleted Deleted
A security that is no longer included on a specified market. Sometimes referred to as "delisted".
Reasons for delisting include violating regulations, failing to meet financial specifications set out by the stock exchange and going bankrupt. from the final regulations.
B. Application to Non-Exclusive Licenses. TEI also recommends that nonexclusive licenses be excluded from the definition of a section 197 intangible. Transfer of these licenses do not constitute a true sale of a trade or business; they merely permit more than one entity to use the technology. Such licensing transactions should not be treated as sales under the final regulations.
C. Application to the Acquisition of Limited Rights. Prop. Reg. [sections] 1. 1972(e)(3)(i) provides generally that the acquisition of a franchise, trademark, or trade name constitutes the acquisition of all or a substantial portion of a trade or business.(4) TEI is concerned that the regulations could be construed to include the acquisition of limited rights to a franchise, trademark, or trade name. If so, certain payments relating to the franchise, trademark, or trade name acquisition would be deductible under section 1253(d),(5) but amounts relating to the patents, know-how, or similar intangibles acquired in connection with those rights would be amortizable am·or·tize
tr.v. am·or·tized, am·or·tiz·ing, am·or·tiz·es
1. To liquidate (a debt, such as a mortgage) by installment payments or payment into a sinking fund.
2. under section 197. This makes little sense. TEI recommends that the final regulations provide that if payments relating to the acquisition of a franchise, trademark, or trade name are deductible under section 1253(d), then the existence of that franchise, trademark, or trade name will not, by itself, result in the acquisition being treated as the purchase of a trade or business.
Prop. Reg. [sections] 1.197-2(h)(6)(ii): The Anti-Churning Rule
Section 197(f)(A) of the Code contains an anti-churning rule to prevent taxpayers from amortizing section 197 intangibles acquired before the effective date of the statute (i.e., August 10, 1993). H.R. Rep. No. 103-111, 103d Cong., 1st Sess. 691 (1993) (House Report). Thus, the term "amortizable section 197 intangible" does not include any section 197 intangible for which depreciation or amortization would not have been allowed but for this section and that is acquired by the taxpayer if (i) the intangible was held or used at any time between July 25, 1991, and August 10, 1993, by the taxpayer or a related party, (ii) the intangible was acquired from a person who held the intangible during this transition period and, as part of the transaction, the user does not change, or (iii) the taxpayer grants the right to use such intangible to a person (or person related to such person) who held or used the intangible during the transition period. Section 197(f)(9)(C) provides that parties are related if G) the related person owns more than 20 percent of the value of stock or capital or profits interest, or (ii) the parties are engaged in the same trade or business under common control. A person is treated as related if such relationship exists immediately before or after the acquisition of the intangible.
In respect of the anti-churning rule, Prop. Reg. [sections] 1.197-2(h)(6(ii) provides --
A person is treated as related
to another person if the
relationship exists --
(A) In the case of a
or immediately after
the acquisition of
the intangible involved; or
(B) In the case of a
series of related
transactions, at any
time during the period
beginning immediately before the
and ending immediately
after the last
acquisition of any
in a series of transactions.
TEI is concerned that the proposed regulations may have ramifications ramifications npl → Auswirkungen pl for purposes of a "busted bust·ed
a. Smashed or broken: busted glass; a busted rib.
b. Out of order; inoperable: a busted vending machine.
2. section 351" transaction.(6) This transaction may typically be described, as follows:
Parent transfers stock of Target
to Newco in exchange for
Newco common stock. Under
a binding agreement made
prior to the transfer, Parent
immediately transfers more
than 80 percent of Newco
stock to underwriters who
sell the stock to the public in
a firm-commitment underwriting Underwriting
1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt).
2. The process of issuing insurance policies. .
A joint election is
made under section
338(h)(10) by Parent and
Newco to treat the transaction
as a deemed asset acquisition.
In the foregoing example, Newco's acquisition of Target's intangible assets would be subject to amortization under section 197's 15-year rule. Under the proposed regulations, however, the momentary mo·men·tar·y
1. Lasting for only a moment.
2. Occurring or present at every moment: in momentary fear of being exposed.
3. Short-lived or ephemeral, as a life. stock ownership of Newco by Parent may create a related-party status between Parent and Newco; the intangible assets would thus fail to qualify for amortization under section 197. TEI submits that this result is contrary to the legislative history of section 197 and established case law and rulings and, moreover, ignores the economic substance of the transaction.
The House report on section 197 provides, as follows:
It is anticipated that in the
case of a transaction to which
section 338 of the Code applies,
the corporation that is
treated as selling its assets
will not be considered related
to the corporation that is
treated as purchasing the
assets if at least 80 percent
of the stock of the corporation
that is treated as selling
its assets is acquired by purchase
after July 25, 1991.
H.R. Rep. No. 103-111 at 780 n.157. See also S. Print No. 36, 103d Cong., 1st Sess. 423 n.34 (1993) (Senate Report). Although this passage technically addresses only the relationship between the new and old targets, we submit the same rationale should obtain for the relationship between Parent and Newco.
Under section 338(a), the target corporation is treated as having sold all of its assets at the close of the acquisition date at fair market value in a single transaction, and is treated as a new corporation that purchased all its assets on the date after the acquisition date. For purposes of these rules, the wholly transitory TRANSITORY. That which lasts but a short time, as transitory facts that which may be laid in different places, as a transitory action. ownership of Newco stock by Parent is ignored. See Private Letter Ruling 9142013 (July 17, 1991) ("Parent is not a person from whom the ownership of stock would, under section 318 of the Code, be attributed to Buyer within the meaning of section 338(h)(3)(A)(iii)."); Private Letter Ruling 9541039 (July 20, 1995) (the acquisition by a new corporation of all the stock of another subsidiary of the new corporation's parent, and the deemed acquisition of the acquired corporation's affiliates, will each qualify under section 338). See also Treas. Reg. [sections] 1.338-2(d) ("[N]ew target is treated as a new corporation that is unrelated to old target for purposes of subtitle sub·ti·tle
1. A secondary, usually explanatory title, as of a literary work.
2. A printed translation of the dialogue of a foreign-language film shown at the bottom of the screen.
tr.v. A of the Internal Revenue Code. Thus, in the section 338(a)(1) deemed sale, new target is treated as purchasing assets from an unrelated person and ... is not considered related to old target for purposes of section 168."). Thus, the proposed regulations conflict with the consistent treatment of the transaction under section 338.
Moreover, the proposed regulations are at odds with the established interpretation of the control requirement under section 351(a). Under the step-transaction doctrine, the momentary ownership of a new entity by a parent company is disregarded dis·re·gard
tr.v. dis·re·gard·ed, dis·re·gard·ing, dis·re·gards
1. To pay no attention or heed to; ignore.
2. To treat without proper respect or attentiveness.
n. for purposes of the reorganization provisions. McDonald's Restaurants There are more than 30,000 McDonald's restaurants in 119 countries. Restaurants
The first McDonald's was not a restaurant at all, but it was a sit-in stand. The company's early franchises were built to a standard pattern that did not offer seating; this was in part to prevent of Illinois v. Commissioner, 688 F.2d 520 (7th Cir. 1982) (stock of Newco sold to the underwriters disregarded in determining whether Parent maintains a sufficient continuity of interest in Newco under section 351); Yoc Heating Corp. v. Commissioner, 61 T.C. 168 (1973) (steps were treated as an integrated transaction; Newco's acquisition of assets Acquisition of assets
A merger or consolidation in which an acquirer purchases the selling firm's assets. was by purchase). See also Rev. Rul. 54-96, 1954-4 C.B. 111 ("The two steps of the transaction [a transfer of assets The conveyance of something of value from one person, place, or situation to another.
The law recognizes that persons are generally entitled to transfer their assets to whomever they wish and for whatever reason. The most common means of transfer are wills, trusts, and gifts. to Newco and an immediate exchange of Newco stock for 20 percent voting stock Voting stock
The shares in a corporation that entitle the shareholder to vote.
Stock for which the holder has the right to vote in the election of directors, in the appointment of auditors, or in other matters brought up at the of another corporation] were part of a prearranged pre·ar·range
tr.v. pre·ar·ranged, pre·ar·rang·ing, pre·ar·rang·es
To arrange in advance.
pre integrated plan, and may not be considered independently of each other for Federal tax purposes.").(7)
Finally, TEI submits that the regulations should be revised because, as proposed, they do not accord with the economics of the transaction. The purpose of the anti-churning rule is to prevent taxpayers from applying the amortization provisions to intangible assets acquired prior to the date of enactment. The transaction described above effectively constitutes a sale of corporate stock to the general public. In these circumstances, there is no abuse of the section 197 rules.
For the foregoing reasons, the anti-churning rule should be clarified to provide that no "tainting" relationship exists between the acquiring person and the seller of the target stock.
Tax Executives Institute appreciates this opportunity to present our views on the international aspects of the proposed regulations under sections 167 and 197 of the Code, relating to the amortization of certain intangible property. If you have any questions, please do not hesitate to call Joseph S. Tann, Jr., chair of TEI's International Tax Committee, at (312) 750-5074, David L. Klausman, chair of TEI's Federal Tax Committee, at (408) 765-6592, or Mary L. Fahey of the Institute's professional staff at (202) 638-5601.
(1) For simplicity's sake, the proposed regulations are referred to as the "proposed regulations"; specific provisions of the proposed regulations are cited as "Prop. Reg. [sections]." References to page numbers are to the proposed regulations (and preamble A clause at the beginning of a constitution or statute explaining the reasons for its enactment and the objectives it seeks to attain.
Generally a preamble is a declaration by the legislature of the reasons for the passage of the statute, and it aids in the interpretation of ) as published in the INTERNAL REVENUE BULLETIN.
(2) An exception also exists under Prop. Reg. [sections] 1.197-2(e)((3)(ii)(A) for certain trademarks or trade names included in computer software or in an interest in a film, sound recording, video tape, book, or similar property.
(3) Under Prop. Reg. [sections] 1.197-2(c)(13)(i)(C), a limited exception exists for contracts that have a fixed duration or amount. It is often difficult for related parties to prove that contracts have a fixed duration. Moreover, section 482 of the Code requires transfers of intangibles to be "commensurate com·men·su·rate
1. Of the same size, extent, or duration as another.
2. Corresponding in size or degree; proportionate: a salary commensurate with my performance.
3. with income." Thus, many cross-border licensing agreements provide for contingent payments. For this reason, in the international area, the scope of this exception is limited.
(4) Exceptions are provided in Prop. Reg. [sections] 1.197-2(e)(3)(ii) for a trademark or trade name used in a computer software and other film or recording property, and for values that are nominal.
(5) Section 1253(d) permits a deduction for amounts paid on account of the transfer, sale, or other disposition of a franchise, trademark, or trade name where the amount (i) is contingent on Adj. 1. contingent on - determined by conditions or circumstances that follow; "arms sales contingent on the approval of congress"
contingent upon, dependant on, dependant upon, dependent on, dependent upon, depending on, contingent the productivity, use, or disposition of the franchise, trademark, or trade name, and (ii) is part of a series of substantially equal payments paid at least annually.
(6) Section 351 (a) of the Code generally permits the tax-free transfer of property to a corporation in exchange for stock in the transferee corporation. If the section does not apply, the transfer is treated as a sale of property and the gain, if any, is taxed under section 1001(c).
(7) Rulings in other areas similarly support disregarding dis·re·gard
tr.v. dis·re·gard·ed, dis·re·gard·ing, dis·re·gards
1. To pay no attention or heed to; ignore.
2. To treat without proper respect or attentiveness.
n. momentary ownership for attribution at·tri·bu·tion
1. The act of attributing, especially the act of establishing a particular person as the creator of a work of art.
2. purposes. Rev. Rul. 72-320, 1972-1 C.B. 270 (momentary ownership of stock of controlled corporations disregarded for S corporation determination); Rev. Rul. 70-391, 1970-2 C.B. 3 (acquired company held not related to acquirer for purpose of anti-churning rules on the investment tax credit); Rev. Rul. 57-53, 1957-1 C.B. 291 (one-month ownership disregarded in determining membership in buyer's consolidated group); Technical Advice Memorandum 8837003 Way 31, 1988) (target not considered affiliated with parent under consolidated return regulations).