Depreciation of customer-based intangibles confirmed by Supreme Court in Newark Morning Ledger.

The Supreme Court of the United States recently held in Newark Morning Ledger Co. v. United States(1) that customer-based intangible assets, such as newspaper subscription lists, can be depreciated for federal tax purposes.(2) In a 5-4 decision, the Court held that an intangible asset is depreciable if two conditions are met: (i) the asset has a limited life that can be reasonably estimated; and (ii) the asset can be valued. This decision thus rejects the Internal Revenue Service's per se rule that customerbased intangibles acquired in the purchase of a going concern are indistinct from (non-depreciable) goodwill. The decision in Newark Morning Ledger will directly affect the disposition of many intangible asset disputes currently under audit or in litigation. According to a recent General Accounting Office report, in 1989 the IRS's open cases on customer-based intangibles alone accounted for proposed adjustments of more than $4 billion.(3) Newark Morning Ledger, however, will not summarily resolve these disputes. Indeed, the Court's opinion emphasizes the heavy burden a taxpayer must carry in establishing that the two-part test for depreciation is satisfied.

When the assets of a going concern are acquired by purchase (either outright or by way of a stock acquisition followed by liquidation), the "residual method" is used to allocate the purchase price to the various acquired assets.(4) Under this method, the total purchase price is allocated to assets other than goodwill to the extent of their fair market values and any residual cost basis is allocated to goodwill. In an effort to allocate as little cost basis as possible to the residual goodwill, purchasing companies have argued for the existence of various acquired (non-goodwill) intangible assets to which a portion of the purchase price can be allocated and recovered through depreciation. The GAO report indicated that the value of non-goodwill intangibles reported by taxpayers increased from $45 billion in 1980 to $262 billion in 1987. To support both an limited life and ascertainable value of these acquired intangibles, taxpayers have made extensive use of modern statistical methodologies. Customer-based intangibles (e.g., customer lists, newspaper and magazine subscription lists, and bank core deposits) have attracted much of the attention surrounding the issue of intangible asset depreciation, but taxpayers' overall ingenuity in this area has been impressive. Exhibit I illustrates this ingenuity by reproducing the GAO's listing of the nongoodwill intangible assets claimed by taxpayers.

By eliminating the IRS's blanket argument that customer-based intangibles acquired as part of a going concern are per se indistinct from goodwill, Newark Morning Ledger represents a dear taxpayer victory. The decision offers benefits not only to those taxpayers that participated in the acquisition frenzy of recent years, but also to the financial and statistical experts who are called upon to establish the necessary useful lives and values. At the same time, the decision confirms the factual nature of the intangibles inquiry and the taxpayer's heavy burden of proof.

This article examines the issue of customer-based intangible asset depreciation in light of the Supreme Court's decision in Newark Morning Ledger. After examining the statutory and regulatory requirements for depreciation, the article reviews the results of pre-Newark customer-based intangibles litigation. Newark Morning Ledger is then discussed and analyzed at length. The article concludes with an examination of that decision's implications for taxpayers, including the prospects for legislative action to resolve much of the uncertainty still surrounding the intangible issue.

The Statute and the Regulations

Section 167 provides for a depreciation deduction of "a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)" in the case of business property or property held for the production of income. While tangible property is subject to the cost recovery rules of section 168 (i.e., MACRS), depreciation of intangible property continues to be governed under section 167. Treas. Reg. (section) 1.167(a)-3 provides that a depreciation allowance is permitted for intangible assets with a limited useful life that can be estimated with reasonable accuracy.

Patents and copyrights are the only examples in the regulations of intangibles offered as being depreciable. The provision specifically prohibits a depreciation deduction with respect to goodwill and other intangibles having indeterminate lives. "Goodwill" is not defined in the regulations; instead, that chore has been left to the courts. That intangible assets, other than goodwill,(5) are depreciable has been a longstanding position of Treasury as evidenced by regulatory pronouncements dating back to the early 1900s.(6)

Goodwill, Customer-Based Intangibles, and the Courts

Customer-based intangibles--such as customer lists, subscription lists, client records, bank core deposits, and insurance expirations--have been the source of much litigation over the years. The IRS's position is that these intangibles represent the customer structure of a business and are in the nature of goodwill or otherwise have indeterminate lives. The question whether customer-based intangibles are depreciable thereby is grounded in the definition of goodwill. Goodwill is frequently defined as "the expectancy of continued patronage, for whatever reason."(7)

Prior to 1973, courts had frequently found customerbased intangibles to be indistinct from goodwill, generally by applying the "mass asset" doctrine. Under that rule, an asset that is self-regenerating (i.e., non-fluctuating in value because the loss of some customers was offset by the addition of other customers) provides a non-diminishing benefit for an indeterminate life and, therefore, is non-depreciable.(8) The courts routinely applied the mass-asset rule in rejecting depreciation deductions on customer-based intangibles acquired in the purchase of a going concern? In 1973, however, the United States Court of Appeals for the Fifth Circuit ruled in Houston Chronicle Publishing Co. v. United States,(10) that the mass-asset doctrine did not serve as aper se rule for the non-depreciation of customer-based intangibles. In that landmark case, the taxpayer had acquired a subscribers list for a newspaper that had ceased publication. The court ruled that a depreciation deduction was allowable upon a determination that the intangible had an ascertainable value and a useful life that could be reasonably determined. A jury had concluded that the taxpayer had satisfied its burden of proof in meeting that two-part test in the case of the subscription list; thus, the customer-based intangible was held to be depreciable.

The IRS's response to Houston Chronicle was Rev. Rul. 74-456,(11) which declared customer-based intangibles to be generally indistinct from goodwill and non-depreciable. The IRS did concede, however, that "if in an unusual case the asset . . . is suspectable of valuation, and is of use to the taxpayer... for only a limited period of time, a depreciation deduction is allowable-(12) In the aftermath of Houston Chronicle, the IRS abandoned the "mass asset" doctrine as support for a per se rule against the depreciation of customer-based intangibles, and publicly adopted the facts-and-circumstances approach employed by the Fifth Circuit. In reality, however, the IRS accepted this factual determination approach only in the case of customer-based intangibles related to discontinued operations (as was the case in Houston Chronicle). Where a customer-based intangible was acquired in the purchase of a going concern, the IRS's policy continued to be the assertion of a per se disallowance of depreciation. The IRS argued that such acquired customer-based intangibles were inherently goodwill; therefore, the intangibles were non-depreciable as a matter of law.(13)

The Fifth Circuit's factual determination approach has since been applied to numerous customer-based intangibles, several of which have been found to be depreciable. Customer-based intangibles held to be depreciable include customer or subscription lists,(14)insurance expirations,(15) bank core deposits,(16) credit information files,(17) and veterinary hospital medical records.(15) In these cases, the courts rejected the IRS's contention that customer-based intangibles acquired in the purchase of a going concern were per se goodwill and non-depreciable. In the post-Houston Chronicle cases in which taxpayers have suffered defeats, the taxpayer generally did not satisfy the heavy burden of establishing reasonable estimates of the intangible's useful life or ascertainable value.(19) Some courts, however, continued to cling to the IRS's argument for a per se rule in the case of customer-based intangibles acquired in the purchase of a going concern.(20) Thus, the stage was set for a review of the issue by the Supreme Court.

Newark Morning Ledger Co.

In 1987, the Herald Company ("Herald") was merged into another newspaper publisher, Newark Morning Ledger ("Morning Ledger"), with Morning Ledger remaining as the successor company. Several years earlier, Herald had acquired and liquidated all of the stock of Booth Newspapers, Inc., thereby acquiring all of Booth's assets including its eight newspapers. Prevailing tax law required that Herald allocate its cost basis in the Booth stock (approximately $328 million) to the acquired assets in proportion to those assets fair market values.(21) Under this allocation method, $234 million was allocated to financial and tangible assets, $67.8 million to an asset described as "paid subscribers," and $26.2 million to "going concern value and goodwill." The intangible asset "paid subscribers" represented the 460,000 existing subscribers to the eight Booth newspapers as of the liquidation date. The $67.8 million value was the taxpayer's estimated present value of the future profits to be generated by the paid subscribers established using an "income approach.'' That method was based on an estimate of the average length of time the paid subscribers for each of the newspapers would remain as subscribers, and incorporated an estimate of collection costs associated with the future revenue flow. The estimated useful lives of the paid subscribers for the various newspapers ranged from 14.7 years to 23.4 years.

Herald computed and deducted straight-line depreciation on the paid subscribers asset based on the $67.8 million cost basis and the estimated remaining useful lives. The IRS disallowed the depreciation deductions, arguing that the intangible was indistinct from goodwill. The deficiency was paid and, after a timely refund claim was denied by the IRS, Morning Ledger (the successor corporation) filed a suit for the recovery of the taxes and associated interest in the United States District Court in New Jersey.

A. The District Court Rules in Favor of the Taxpayer. In addressing the requirements for depreciation as set forth in the Treas. Reg. (section) 1.167(a)-3, the district court first addressed the useful life of the paid subscribers asset.(22) The IRS asserted that the paid subscribers were "self-regenerating," thereby bringing into play the mass-asset argument. The district court rejected this argument, however, by concluding that "there is no automatic replacement for a subscriber who terminates his or her subscription."(23) The court then noted that substantial costs and efforts are associated with generating new subscribers as support for this conclusion.

The court next questioned whether the taxpayer had overcome its burden in establishing, with a reasonable degree of accuracy, the useful life of the paid subscribers asset. The taxpayer's statistical analysis of the subscribers' average remaining life was accepted by the court as reasonably accurate. The IRS attacked certain assumptions used in that analysis, but was bound by a pre-trial stipulation that required the adoption of the taxpayer's analysis upon the court's determination that the useful lives of paid subscribers could be estimated with a reasonable degree of accuracy. In other words, the taxpayer had only to establish that a reasonable degree of accuracy could be obtained in determining the estimated lives, not specific accuracy.

The trial court addressed three methods for valuing the paid subscribers asset: the market approach, the cost approach, and the income approach. The market approach was rejected for lack of comparable sales data. The IRS argued for the cost approach which looked at the cost of generating an equal number of new subscribers. The IRS offered expert testimony that valued the paid subscribers asset at less than $3 million under the cost approach, but the court rejected that method in favor of the taxpayer's income approach. The court reasoned the taxpayer's estimate of the present value of future profits attributable to the paid subscribers more closely approximated the price at which the intangible would change hands in the marketplace. The IRS failed to offer any substantive evidence challenging the taxpayer's valuation under the income approach; thus, the $67.8 million value was accepted by the court.

The final issue examined by the district court was whether the paid subscribers asset was "separate and distinct" from goodwill. The court noted that goodwill, by definition, has an indeterminable useful life, and reasoned that an asset with a determinable useful life and capable of being reasonably valued was inherently separate and distinct from goodwill. In finding for the taxpayer, the court faulted the IRS for its failure to substantively challenge the taxpayer's statistical analysis used in determining the paid subscribers' useful lives and valuation.

B. The IRS Wins on Appeal. The United States Court of Appeals for the Third Circuit overturned the district court's conclusion that an asset with a determinable useful life and ascertainable value was, by definition, separate and distinct from goodwill.(24) The appeals court noted that the IRS had conceded that the taxpayer had established a reasonably accurate estimate of the paid subscribers' useful lives and an ascertainable value for the intangible. The court concurred, however, with the IRS's contention that Treas. Reg. (section) 1.167(a)-3's prohibition of the depreciation of goodwill placed a burden on the taxpayer to establish that the value of the intangible was separate and distinct from goodwill. The appeals court noted that, absent convincing evidence to the contrary, a list of existing customers that could terminate their patronage at-will was indistinct from goodwill.

The appellate court analyzed prior customer-based intangible cases and conceded that there was some support for the taxpayer's contention that an intangible asset with a determinable useful life and value was, by definition, not goodwill. The court averred, however, that those cases represented "no more than a minority strand amid the phalanx of cases"(25) that supported an alternative (i.e., the IRS's) view. The court concluded that the taxpayer had not clearly established that the paid subscribers asset was separate and distinct from goodwill. Thus, the intangible was non-depreciable. The court asserted that "customer lists are generally not depreciable when acquired in conjunction with the sale of the underlying business of a going concern."26 The court additionally noted that the cost approach, not the income approach, would be the generally acceptable valuation method in those cases where a customer list was depreciable.

C. The Supreme Court Reverses the Third Circuit. The Supreme Court examined the statistical analysis offered by taxpayer in establishing the paid subscribers' useful lives and valuation.(27) The Court concluded that the taxpayer had satisfied its burden of proof in establishing that the intangible had both a useful life that could be reasonably estimated and an ascertainable value. The Court held that once this two-part test of section 167 has been met, "the expectancy of continued patronage is irrelevant."(28) Thus, the Court rejected the "separate and distinct" test argued by the IRS and upheld by the Third Circuit.

The Court accepted the taxpayer's valuation of the paid subscribers asset ($67.8 million) primarily owing to the IRS's failure to substantively challenge the taxpayer's valuation. The IRS had argued that the income approach was the wrong valuation methodology, but it had "failed to offer any evidence to challenge the accuracy" (29) of the taxpayer's results. The Court acknowledged, in a note to the opinion, that there were "certain vulnerabilities"(30) in the taxpayer's valuation methodology. But since the IRS had relied solely on the argument that the paid subscribers intangible was not "separate and distinct" from goodwill and, therefore, was nondepreciable as a matter of law, those "vulnerabilities" did not become a focus of the IRS's case: when the Court rejected the IRS's "all or nothing" legal argument, its decision for the taxpayer was inescapable. As the Court put it: "This case was lost at trial.(31)

D. Analysis of Opinion. The Supreme Court's rejection of the "separate and distinct" test for depreciation is certain to be a boon to the financial and statistical experts who are employed in establishing the useful lives and values of intangibles. The Newark Morning Ledger decision may also provide a benefit to taxpayers with acquired customerbased intangibles that have reasonably determinable useful lives and ascertainable values. The IRS relied on the "separate and distinct" argument as support for what essentially was a per se rule against the depreciation of customer-based intangibles acquired in the purchase of a going concern. The Supreme Court clearly rejected that proposition. In its stead, it reaffirmed the fact-and-circumstances nature of the intangibles issues and vivified the reasoning of the Fifth Circuit's decision in Houston Chronicle.

The Court's opinion, however, is replete with caution signs for taxpayers eager to write off acquired intangibles. The opinion clearly stresses the taxpayer's heavy burden in establishing that the two-part test for depreciation has been satisfied. It is unlikely that IRS will reduce its scrutiny of acquired intangibles as a result of Newark Morning Ledger. Instead, the IRS's response will likely be to shift its focus toward the statistical methodologies and assumptions employed by taxpayers when establishing these useful lives and values- Thus, the progeny of Newark Morning Ledger will be continued substantial litigation in the acquired intangible area, with both the IRS and taxpayers spending increasing amounts of resources in their efforts to support their mutually exclusive positions.

Prospects for Congressional Action

There are several tax policy reasons for Congress to address the acquired intangibles issue through legislation. First, the current law governing acquired goodwill fails to adequately address the policy goal of allowing the deduction of expenses in the tax year to which the associated revenues are attributable.(32) Financial accounting rules, while driven by goals different than those of tax policy, have a similar matching goal. To recognize that goodwill is a wasting asset, acquired goodwill is amortized over a 40-year period for financial accounting reporting. Even the greatest skeptic would concede that any benefit derived from acquired goodwill depletes over time as customers will base their continued patronage on recent experiences with the business (i.e., self-generated goodwill). Clearly, a company that purchases a going concern must generate customer satisfaction or risk the loss of continued patronage by customers no matter what amount of goodwill exists at acquisition date. Present law distorts taxable income to the extent that acquired goodwill, the cost of which is not depreciable, is treated differently than self-generated goodwill, the costs of which (e.g., advertising and similar expenses) are currently deductible.

Perhaps the most persuasive policy argument for altering the current law governing acquired intangibles is its onerous burden on IRS administration and taxpayer compliance. Prior to the 1981 enactment of ACRS (section 168), a similar situation existed with respect to the depreciation of tangible properties. To resolve the substantial number of disputes between taxpayers and the IRS regarding the economic lives and permissible depreciation methods for tangible properties, Congress enacted the ACRS rules which incorporated uniform class lives and depreciation methods. There have been several failed attempts in recent years to bring similar uniformity to the acquired intangible area. These proposals have ranged from the specific disallowance of depreciation on certain acquired intangibles, including customer-based intangibles,(33) to the bill vetoed by President Bush in 1992 that would have provided a 14-year depreciable life for acquired intangibles, including not only customer-based intangibles but also goodwill.(34) The principal stumbling blocks for any uniform intangibles legislation are the same as those affecting other legislative proposals: revenue considerations and lobbying efforts by interested parties. The current uniform intangibles legislative proposal may be able to overcome these two hurdles.

House Ways and Means Chairman Dan Rostenkowski introduced H.R. 13, "Tax Simplification Act of 1993," on January 5, 1993.(35) Section 501 of the proposed legislation would amend the Internal Revenue Code to include new section 197 ("Amortization of Goodwill and Certain Other Intangibles"). This provision would provide for the 14-year straight-line depreciation of all "section 197 intangibles" in lieu of any other depreciation deduction. The property covered by the provision includes the following: goodwill, going concern, customer-based intangibles (e.g., customer and subscription lists and bank core deposits), workforce in place, government granted licenses, franchises, trademarks, tradenames, patents, copyrights, and covenants-not-to-compete. Self-created intangibles are specifically excluded. Also excluded from new section 197 would be computer software which would be depreciated ratably over a 36-month period under another section of H.R. 13. Section 197 would generally apply to all section 197 intangibles acquired after enactment of the legislation, but an elective provision would allow taxpayers to retroactively apply the new rules to intangibles acquired after July 25, 1991. Outside of the election, intangibles acquired before the enactment date would be governed by current law, as affected by the Newark Morning Ledger decision.

Several aspects of the proposed legislation should increase its probability of passage by Congress. First, the enactment of the proposal would effectively limit any revenue loss associated with the government's loss in Newark Morning Ledger. In a sense this represents a revenue gain that could offset the revenue loss associated with the allowance of depreciation on goodwill. Additionally, the proposed legislation's three-year depreciation period for computer software should eliminate any significant opposition from the high-technology industries. Thus, at little or no revenue loss (and possibly some revenue gain), H.R. 13 represents an opportunity to eliminate significant administrative and compliance costs and uncertainty by providing uniformity in the treatment of intangibles for purposes of depreciation. Some opposition has emerged, however, from labor groups that argue that the legislation could spur another round of takeovers.

Conclusion

The Newark Morning Ledger decision rejects the proposition that acquired customer-based intangibles are per se goodwill and non-depreciable. The case confirms the twopart test for depreciation: (i) the asset must have a useful life that can be determined with reasonable accuracy; and (ii) the asset must have an ascertainable value. If this test has been satisfied, then the asset is distinct from goodwill, even if the asset represents expected continued patronage. The burden on the taxpayer to establish the test for depreciation is a heavy one. If anything, Newark Morning Ledger will impose an even heavier burden on the taxpayer, for the IRS will no longer assert its "separate and distinct" argument, but will instead vigorously attack the assumptions and methodologies employed by taxpayers' experts in establishing useful lives and values.

The acquired intangibles issue will continue to be hotly contested and much litigated. Legislation in the nature of a uniform life (or lives) for all acquired intangibles, including goodwill, could have the same effect as that derived from the enactment of the ACRS legislation for tangible property-- reduced administrative and compliance costs and greater uniformity and certainty. The taxpayer victory in Newark Morning Ledger should increase the likelihood that Congress will provide for some legislative remedy to address the depreciation of intangibles. Indeed, on May 13, 1993, the House Committee on Ways & Means approved the inclusion of intangibles legislation in President Clinton's tax proposals.

Newark Morning Ledger

Exhibit I

Taxpayer-Claimed Intangible Assets

Accelerated market growth
Access programming
Accounts receivable
Accounts/vendors
Acquisition costs/organization expenses
Advertising lists
Advertising contracts
Agreements
Assembled workforce
Backlog
Bargain leases
Broadcasting rights
Brochures/catalogs
Cable franchises
Capital grants expensed
Competitive advantage
Computer programs
Computer software
Computer software license
Computer software manuals
Concessions and scoreboards
Construction contracts
Construction permit
Consulting agreements
Consumer franchises
Contracts (general)
Contracts with related companies
Copyrights
Core deposits (demand, savings,
 certificates of deposit, and premium)
Course material
Covenant not to compete
Credit files
Customer base
Customer contracts
Customer lists
Customer relations
Customer routes
Customer structure
Data base
Dealer network
Deferred financing costs
Deferred organization
Delivery system
Deposit base
Development rights
Diminishing network compensation
Disadvantage competition
Distributions
Drawings
Employment agreement contracts
Equipment leases
Equity in unearned premium
Equity on government-owned property
Favorable financing/favorable savings
Favorable leases
Favorable wage rates
Federal Communications Commission
    license
Field staff
Film contracts
Formulas
Franchises (general)
Gas allocation rights
Gas purchase contracts
Income agreement
Information systems
Insurance client list
Insurance contracts
Insurance expirations (lists)
Insurance-in-force
Key employee
Lease rights
Leasehold improvements
Leasehold interests/equity
Leases (general)
Legal and auditing
Library
Licensing agreement (television, cable,
  radio)
Lists (dealers and others not listed)
Loan portfolio premium
Local media contracts
Location value
Long-term leases
Mailing list
Maintenance contracts
Make-ready costs
Management contracts
Manufacturing agreements
Manufacturing process and procedures
Manufacturing representations
Market service (product support)
Marketing contracts
Medical records
Miscellaneous expenses
Morgue
Mortgage servicing (lists)
Mortgage servicing rights
Negative asset base
Newspaper masters
Nonunion status
Novelty rights
Nurse files
Nurse procedures/manuals
On-air talent contracts
Other advertising relations
Patent application
Patents
Patient files/records
Physician/dental referral
Player contracts
Premium on loan
Premium market population asset
Premium market revenue asset
Premium on early delivery of plant
Premium on investment securities
Prepaid leases
Presold contracts
Product line
Profit and loss revenue
Program format
Proposal contracts
Purchase order contracts
Radio franchises
Rate files/photo files
Real estate option leases
Recipes
Recruitment and financial assets
Research and development
Right to solicit customers
Rights (general)
Safe deposit box contracts
Savings value of escrow fund
Service contracts
Servicing rights
Specialty program contracts
Standstill agreements
Stock of first bank
Student files
Studio space and site leases
Subscription lists
Supply contracts
Technical expertise
Technical manuals
Technician files
Technology
Television franchises
Timber-cutting rights
Timber leasehold
Trademarks
Trade names
Trained staff
Training programs
Television network affiliation
Television spots
Underdeveloped market (competition)
Unfilled purchase orders
Unpatented know-how
Value of loans receivable
Vehicles in service
Water rights

Source: GAO, Issues and Policy Proposals Regarding Tax Treatment of Intangible Assets (GAO/GGD-91-88)

(1) Newark Morning Ledger Co. v. United States, 61 U.S.L.W. 4313 (U.S. No. 91-1135) (April 20, 1993).

(2) Although the term "amortization" is generally used to describe the depreciation of intangibles assets, depreciation is used in this article to describe all forms of cost recovery.

(3) U.S. General Accounting Office, Issues and Policy Proposals Regarding Tax Treatment of Intangible Assets (GAO/GGD-91-88) (August 9, 1991).

(4) See I.R.C. (section) 1060 and Temp. Reg. (section) l.1060-IT(d)(1) and (2)(purchase); I.R.C. (section)338(b)(5) and Temp. Reg. ion) 1.338(b)-2T(b)(stock purchase followed by liquidation).

(5) The prohibition on goodwill first appeared in the regulations in 1927 and has remained there since. See T.D. 4055, VI-2 C.B. 63 (1927).

(6) See, e.g., Regs. 33, Arts. 159 and 162 (1914); Regs. 45, Art. 163 (1919).

(7) Boe v. Commissioner, 307 F. 2d 339, 343 (9th Cir. 1962).

(8) For recent critiques of the mass-asset doctrine, see Johnson, "The Mass Asset Rule Reflects Income and Amortization Does Not," 56 Tax Notes 629 (1992), and Gerard, "Mass Asset Rule = Mass Confusion," 57 Tax Notes 805 (1992).

(9) See, e.g., Golden State Towel and Linen Service, Ltd, v. United States, 373 F. 2d 938 (Ct. C1. 1967) (linen business customer list); Danville Press, Inc., 1 B.T.A. 1171 (1925) (newspaper subscription list); Boe v. Commissioner, 35 T.C. 720 (1961), aft'd, 307 F. 2d 339 (9th Cir, 1962) (medical service contracts); Westinghouse Broadcasting Co. v. Commissioner, 36 T.C. 912 (1961) (spot advertising contracts); Scalish v. Commissioner, 21 T.C.M. 260 (1962) (cigarette vending machine location leases); Thoms v. Commissioner, 50 T.C. 247 (1968) (insurance expirations); Marsh & McLennan, Inc. v. Commissioner, 51 T.C. 56 (1968), all'd, 420 F. 2d 667 (3rd Cir. 1970) (insurance expirations). But see Commissioner v. Seaboard Finance Co., 367 F.2d 646 (9th Cir. 1966) (favorable loan contracts depreciable); Manhattan Co. of Virginia, Inc. v, Commissioner, 50 T.C. 78 (1968) (laundry customer list depreciable).

(10) 481 F. 2d 1240 (Sth Cir, 1973), cert. denied, 414 U.S. 1129 (1974).

(11) 1974-2 C.B. 65.

(12) Id. at 66.

(13) See, e.g., Internal Revenue Service, Industry Specialization Program Coordinated Issue papers-Customer-Based Intangibles (October 31, 1991).

(14) See, e.g., Donrey, Inc. v. United States, 809 F. 2d 534 (Sth Cir. 1987) (subscription list for continuing newspaper); Panich| v. United States,, 834 F. 2d. 300 (2d Cir. 1987) (customer list of trash collection concern). See also Business Services Industries, Inc. v. Commissioner, 51 T.C.M. 539 (1986) (terrainable-at-will customer contracts for MUZAK service).

(15) See, e.g., Richard S. Miller & Sons, Inc. v. United States, 537 F.2d 446 (Ct. Cl. 1976). But see Decker v. Commissioner, 54 T.C.M. 338 (1987), all'd, 864 F.2d 51 (1988),

(16) Citizens & Southern Corp. v. Commissioner, 91 T.C. 463, aff'd withoutpublished opinion, 900 F.2d 266 (11th Cir. 1990); Colorado National Bankshares, Inc. v. Commissioner, 60 T.C.M. 771 (1990), all'd, 984 F. 2d 383 (lOth Cir. 1993); IT&S of Iowa v. Commissioner, 97 T.C. 496 (1991). But see AmSouth Bancorporation and Subsidiaries v. United States, 681 F. Supp. 698 (N.D. Ala. 1988).

(17) Computing & Software, Inc. v. Commissioner, 64 T.C. 223 (1975), acq. 1976-2 C.B. 1.

(18) Los Angeles Central Animal Hospital, Inc. v. Commissioner, 68 T.C. 269 (1977).

(19) See, e.g., Sunset Fuel Co. v. United States, 519 F. 2d 781 (9th Cir. 1975) (valuation method for customer list was arbitrary and unrealistic).

(20)See, e.g., General Television, Inc. v. United States, 449 F. Supp. 609 (D. Minn. 1977), all'd, 598 F. 2d 1148 (8th Cir. 1979) (terminable-atwill subscriber list was customer structure which, in turn, was nondepreciable goodwill); AmSouth Bancorporation and Subsidiaries v. United States, 681 F. Supp. 698 (N.D. Ala. 1988) (bank core deposits akin to non-depreciable goodwill).

(21) Old I.R.C. (sectionb)(2). That provision was replaced by the rules set forth in I.R.C.

(22) 734 F. Supp. 176 (D.N.J. 1990).

(23) Id. at 180.

(24) 945 F. 2d 555 (3rd Cir. 1991).

(25) Id. at 565.

(26) Id. at 568.

(27) 61 U.S.L.W. 4313 (U.S. No. 91-1135) (April 20, 1993).

(28) Id. at 4320.

(29) Id.

(30) Id. at 4319 n.14.

(31) Id.

(32) See, e.g., INDOPCO, Inc. v. Commissioner, 112 S. Ct. 1039, 1043 (1992).

(33) See, e.g., H.R, 3545, 100th Cong., 1st. Sess. (section) 10120 (1987); and H.R. 563, 102d Cong., ist Sess. (1991).

(34) H.R. 4210, 102d Cong., 2d Sess. (section) 4501 (1992).

(35) H.R. 13, 103d Cong., ist Sess. (1993).

MARK B. PERSELLIN is an Assistant Professor of Accounting in the School of Business and Administration at St. Marls University in San Antonio, Texas. He holds a Ph.D. from the University of Houston and is a certified public accountant. Mr. Persellin is a member of the Tax Division of the AICPA and the American Taxation Association. He lectures and writes on varied tax topics; his article on the deductibility of takeover expenses appeared in the May-June 1990 issue of The Tax Executive.