Deducting a portion of the costs of sec. 197 intangible assets over a shorter period.

New Sec. 197 requires that the costs of certain purchased intangible assets be amortized ratably over 15 years. However, if the purchaser pays for the intangible assets over a period of years and those payments contain unstated interest, a portion of the purchase price will be treated as interest under Sec. 483 and 1272 and deducted over the period the payments are made.

Example: As part of the acquisition of a trade or business P gets a a five-year covenant not to compete from the prior owner at a cost of $1,000,000. If P pays the whole $1,000,000 at closing, the cost will be ratably amortizable over 15 years. However, if P pays that $1,000,000 to the seller in five annual payments of $200,000 each, a portion of the last four payments will be treated as unstated interest. The portion of the purchase price treated as interest will be deductible in the years the payments are made, and only the remaining purchase price will be amortizable over 15 years.

This approach is applicable to any Sec. 197 intangible and can be applied in any situation in which the seller is willing to take the purchase price in payments over time. The approach could benefit the seller as well, because structuring the sales agreement in this fashion may allow the seller to defer recognition of some of the gain under the installment sales method.