The amortization of purchased intangible assets.

Author's note: The authors gratefully acknowledge the assistance of Jamie B. Fowler, CPA, Senior Manager, KPMG Peat Marwick, New York, N.Y., in the completion of this article.

On Apr. 20, 1993, the U.S. Supreme Court released its anxiously awaited decision in the Newark Morning Ledger Co.(1) case on the amortization of purchased intangible assets. Holding 5-to-4 for the taxpayer, the Supreme Court held that a taxpayer that proves its acquired intangible assets have both an ascertainable value and a limited useful life, the duration of which can be ascertained with reasonable accuracy, may depreciate those assets over that useful life.

The Court rejected a long-argued IRS position that some assets are, as a matter of law, inseparable from goodwill and thus not subject to amortization.(2) The Court held that the issue is one of fact and that "[t]he significant question for purposes of depreciation is not whether the asset falls within the core of the concept of goodwill'. . . but whether the asset is capable of being valued and whether that value diminishes over time."(3)

This article will analyze the Supreme Court's decision in light of the lower courts' holdings; examine the questions still unanswered by the decision; look to its implications; discuss applicable strategies and new legislation; analyze the industry implications; and point out planning opportunities.

Statutory and Regulatory History

The lack of consistency in the statutory and regulatory interpretations by the courts, in, e.g., Houston Chronicle Publishing Co.,(4) Donrey, Inc.,(5) Citizens and Southern Corporation and Subsidiaries(6) and Colorado National Bankshares, Inc., and Subsidiaries,(7) had created much uncertainty and provided little guidance for the taxpayer before the Supreme Court's decision in Newark Morning Ledger.

Sec. 167(a) allows "as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)--(1) of property used in the trade or business, or (2) of property held for the production of income." Under Regs. Sec. 1.167(a)-3, the depreciation deduction for an intangible asset, which is less susceptible to obvious signs of "exhaustion, wear and tear," is allowed only if the life of the intangible asset is known to be limited from experience or other factors and can be estimated with reasonable accuracy. Unfortunately, the regulation does not provide a definition of intangible property; however, two examples of intangibles, patents and copyrights, are given.(8)

Goodwill is not defined by statute. Numerous definitions, from "the avoidance of start-up costs" to "continued patronage," can be found in a swollen body of case law.(9) Furthermore, no depreciation deduction is currently allowed for goodwill since it lacks an ascertainable useful life.(10) Theoretically, the existence of goodwill continues as long as the related business continues.(11)

Under the "indivisible-asset" or "mass-asset" theory, the courts had ruled in numerous cases that customer-based intangibles are an inseparable part of a nondepreciable asset body called goodwill. Under this theory, goodwill is categorized as a self-regenerating asset in that the expiring components (customers) are replaced so that the value of the asset remains relatively constant over time. Even if the value of goodwill fluctuates, there is no way to measure its useful life since goodwill cannot be separated into distinctive elements or assets, each having its own depreciable useful life.(12) Other courts (see discussion below) have ruled that certain customer-based intangibles can be valued and assigned a useful life. Such a determination is factual and the taxpayer bears the burden of establishing the right to claim the deduction.

Court Interpretations

The courts have struggled with the definition of what constitutes an amortizable intangible asset. Before the Houston Chronicle decision, courts often swayed toward the idea that intangible assets could not be separated from goodwill and therefore could not be depreciated.(13) In Houston Chronicle, the taxpayer had acquired all of the assets of a competing newspaper, including all of its subscription lists. A valuation study established the value of the subscription lists by reference to an estimate of the number of subscribers that would have become Houston Chronicle subscribers on the closing of the former paper multiplied by the average cost of obtaining a new subscriber, i.e., the cost approach. Based on experience, the taxpayer used a useful life of five years for depreciation purposes. The Service argued that the lists were not amortizable as a matter of law, and that the "mass-asset" theory applied to deny the depreciation deduction. The Fifth Circuit rejected the argument that all subscription lists are inextricably linked with goodwill, and held that the taxpayer had met its burden of proof in determining the separate value of the lists and their useful lives.

Soon after the Fifth Circuit's decision in Houston Chronicle, the IRS announced its official position on the depreciation of intangible assets in Rev. Rul. 74-456.(14) In that ruling, the Service concluded that the determination that customer-based intangibles are indistinguishable from goodwill is factual, rather than a matter of law. As such, the burden is on the taxpayer to establish that the intangible asset has a value separate and distinct from goodwill and a limited useful life that can be ascertained with reasonable accuracy.

Donrey represented another taxpayer victory involving the depreciation of newspaper subscription lists. In that case, it was held that newspaper subscription lists were depreciable in the context of a purchase of an ongoing newspaper. The value of those lists was determined by reference to the "advertising revenue enhancement" attributable to the subscribers, i.e., the additional revenue derived from advertisers. A jury found that the paid subscription lists in question had a value separate from goodwill. An assigned depreciable life of 23 years was determined based on an analysis completed by a market research and consulting firm that serviced the newspaper industry. The Eighth Circuit agreed that the taxpayer had met its dual burden of proof; the lists had an ascertainable value separate and distinct from goodwill, and a limited useful life that could be reasonably estimated.

The concepts in these cases in the publication subscription area are equally applicable in the banking area. Both Citizens and Southern Corp. and Colorado National Bankshares serve as examples of taxpayer victories in the allowance of depreciation of bank intangibles, i.e., core deposits. "Core deposit base" is a term used in the banking industry to represent the "present value of the future stream of income to be derived from employing the purchased core deposits of a bank."(15)

In Citizens and Southern Corp., the taxpayer had acquired nine banks and sought to depreciate the banks' deposit base. It valued these intangibles by comparing the acquisition costs of the core deposits with the alternative cost of borrowing funds to run its business. The taxpayer argued that core deposits were a low-cost source of funds that contributed to the profitability of a commercial bank. The Tax Court decided that studies done by the taxpayer, which estimated the percentage of accounts that would close over a given period of time, established the estimated useful life of the deposits. Thus, the Tax Court concluded that the deposit base was not a self-regenerating asset, and that it had a value separate and distinct from goodwill.

In Colorado National Bankshares, the Tax Court and the Tenth Circuit agreed with the taxpayer's contention that core deposits were separate and distinct assets, and not merely portions of the goodwill associated with preexisting customer relationships. The Tax Court recognized that the Financial Accounting Standards Board, the Securities and Exchange Commission and the Office of the Comptroller of the Currency require that core deposits be recorded as an asset separate and distinct from goodwill for financial statement purposes. The Tax Court also found that the fact that new accounts would be opened as old accounts were closed did not make the deposit base self-regenerating.

The Tax Court has consistently held that core deposits are not goodwill, and that the depreciation deduction is dependent on the finding of an ascertainable value and useful life. The Tax Court has further held that the fact that industry experience has shown that deposit accounts close at predictable rates is sufficient to establish the estimated useful life of an asset for depreciation. Finally, the Tax Court has consistently held that the value of a deposit base is determined as the benefit of using core deposit funds versus the cost of alternate sources of funds.

The Newark Morning Ledger Case

In 1976, The Herald Company ("Herald") purchased all of the outstanding stock of Booth Newspapers, Inc. ("Booth"), a corporation that published newspapers in eight different Michigan communities, with approximately 460,000 total subscribers. In 1977, Booth was liquidated into Herald under then applicable Secs. 332 and 334, and on June 30, 1987, Herald merged into the Newark Morning Ledger Company. Herald allocated its adjusted tax basis in the Booth stock to the assets received on liquidation based on their respective fair market values (FMVs). Of its total adjusted tax basis of $328 million, Herald allocated approximately $68 million to an intangible asset entitled "paid subscribers," and took related depreciation deductions on its 1977 through 1980 tax returns. The Service disallowed those deductions; Herald paid the additional taxes and interest; and Newark, as successor to Herald, filed a claim for refund. The only issues remaining before the trial in the District Court for the District of New Jersey were whether the subscriber lists had (1) a value "separate and apart" from goodwill and (2) useful lives that could be determined with reasonable accuracy.

* District Court

Three alternatives were considered by the District Court to value the acquired "paid subscribers:" (1) the market approach, which uses prices paid for subscribers in transactions that can be used for comparative purposes; (2) the cost approach, which determines the value of an existing subscriber based on the cost of obtaining a new subscriber, allowing for the age of the existing subscriber; and (3) the income approach, which uses the present value of the expected cash stream generated by a "paid subscribers" asset over its limited duration to calculate its value. The absence of data on the sale of paid subscriber lists of an ongoing newspaper made the market approach inapplicable. Similarly, insufficient data on the cost of obtaining incremental subscribers also limited the use of the cost approach, which would value only new subscribers, not existing subscribers. Although the Service insisted that the cost approach was the only method that could be used in valuing the subscribers, the District Court recognized that the cost of acquiring a new subscriber did not reflect the value of the existing subscribers.

The income approach, as used by two independent valuation experts for Newark, calculated the present value of the net revenue stream (i.e., subscription revenue less the cost of collecting that revenue) generated by the paid subscribers over their limited lives. A third expert for Newark sanctioned this method as "a generally accepted valuation principle." The fair market values that resulted from the computations of the two expert witnesses were $60 million and $68 million.

The Service did not dispute the accuracy of the valuation methodology, but argued instead that a value separate from goodwill was absent, and that the income method was inappropriate as a valuation approach. The District Court held for the taxpayer.

* The Third Circuit

In its reversal of the District Court's decision, the Third Circuit noted that to depreciate an intangible asset, the taxpayer must demonstrate that the asset is separate and distinct from goodwill. The court also emphasized that it is not enough to demonstrate that "paid subscribers" has an ascertainable value and a limited useful life.

In making its decision as to whether an asset such as "paid subscribers" was separate from goodwill, the court relied on the general definition of goodwill provided in the regulations and case law.(16) Case law has interpreted the regulations to mean that "in order to qualify for depreciation of an intangible asset, a taxpayer must establish that the intangible asset (1) has an ascertainable value separate and distinct from goodwill, and (2) has a limited useful life, the duration of which can be ascertained with reasonable accuracy."(17) (Emphasis omitted.)

The court found that Newark did not provide sufficient evidence to conclude that the asset "paid subscribers" was separate and distinct from goodwill. The court ruled that the projected revenue stream from "paid subscribers" resembled the commonly used definition of goodwill.

Although the Third Circuit ruled against the taxpayer, various other circuits had ruled differently in similar cases involving intangibles.(18) It was up to the Supreme Court to resolve potential conflicts.

* Supreme Court

Opinion: The Court stated that "a taxpayer [who is] able to prove that a particular asset can be valued and that it has a limited useful life may depreciate its value over its useful life regardless of how much the asset appears to reflect the expectancy of continued patronage."(19) The Court stressed that such a determination is a question of fact, not law. Because Newark met its burden of proving its "paid subscribers" was a non-self-regenerating intangible asset that could be valued and had a useful life, the Court held that Newark could amortize it over its useful life.

The Court reviewed the history of the litigation surrounding the definition of goodwill, and determined that customer-based intangibles could be distinguished from goodwill.(20) Specifically, the Court examined the Fifth Circuit's decision in Houston Chronicle, which allowed an amortization deduction for a subscription list acquired from discontinued operations. The Court also discussed the relevance of the much cited mass-asset theory, which distinguishes between those intangible assets that are self-regenerating and those that are not. Under the mass-asset theory, subscription lists are normally categorized as self-regenerating assets. However, the Court distinguished between typical subscription lists and Newark's "paid subscribers" on the basis that this asset could be specifically valued and "lifed." Thus, the Court held that Newark provided sufficient evidence to prove that its "paid subscribers" was not a self-regenerating asset and had a separate value. It was irrelevant to the Court that the asset resembled goodwill. In a footnote to the case, the Court stated:

We emphasize that while the "expectancy of continued patronage" is a serviceable description of what we generally mean when we describe an intangible asset that has no useful life and no ascertainable value, this shibboleth tells us nothing about whether the asset in question is depreciable.(21)

Writing for the majority,(22) Justice Blackmun agreed with the Third Circuit's ruling that it is often very difficult for the taxpayer to distinguish an intangible asset from goodwill. However, he wrote that "sometimes they manage to do it." Justice Blackmun emphasized that the significant question is "whether the asset is capable of being valued and whether that value diminishes over time." In holding for the taxpayer, the Court also affirmed that goodwill is a residual concept.

The majority opinion differentiated between Ithaca Industries, Inc.,(23) and Newark Morning Ledger. In Ithaca Industries, the taxpayer was not permitted to depreciate the value allocated to the trained work force over the time each employee remained with the purchasing company. The Tax Court found that the trained work force was nondiminishing since the work force remained unchanged (i.e., old employees could always be replaced by training new employees). The majority opinion distinguished Newark Morning Ledger from this fact pattern on the grounds that a new subscriber did not necessarily serve to replace an old subscriber who terminated a subscription and, thus, "paid subscribers" was not considered a self-regenerating asset.

Another principle affirmed in the decision was the use of the income valuation method. The Court concluded that the subscribers were "seasoned" and "represented a reliable and measurable source of revenue. In contrast to new subscribers, who have no subscription history and who might not last beyond the expiration of some promotional incentive, the |paid subscribers' at issue here provided a regular and predictable source of income over an estimable period of time."(24) The cost associated with generating 460,000 new subscribers was deemed not relevant since it would represent a different asset. The Court concluded that the Service failed to present sufficient evidence to challenge the application of the income approach.

Dissent: The dissenting opinion, delivered by Justice Souter, focused on two issues: (1) the intangible asset, "paid subscribers," did not have a useful life and therefore resembled goodwill and (2) with the decision, the Court effectively redefined the regulations under Sec. 167.

Writing for the minority, Justice Souter argued that the asset "paid subscribers" was not depreciable under Sec. 167 since it did not have a limited useful life. Newark's expert statisticians testified that they were able to estimate how long each subscriber would continue to subscribe to each newspaper as of the date of the Booth liquidation. Justice Souter argued that the experts actually made "a prediction about the combined effect of pre-sale goodwill and post-sale satisfaction with the paper as [Newark] presumably continues to produce it."(25) The justice also argued that the life of the subscription list must be bifurcated between its value before and after the acquisition of Booth's stock. Additionally, he stressed that the statisticians did not attempt to determine the life of the asset based on future events such as company management and customer satisfaction. Since Newark did not fulfill these criteria, "paid subscribers" could not be depreciated under Sec. 167.

Justice Souter also asserted that the majority recharacterized the standard definition of goodwill. "Paid subscribers" undeniably resembled the concept of goodwill. He wrote that "the courts of appeals have consistently held that |goodwill,' in this context, refers to 'the expectancy of continued patronage' from existing customers or, alternatively, to the prospect that 'the old customers will resort to the old place.'"(26) Justice Souter argued that the accepted meaning of goodwill encompasses customer-based intangibles such as subscription lists, and disagreed with the residual approach to defining goodwill under Sec. 167.

Under this accepted definition of "goodwill," there can be no doubt that the asset [Newark] calls "paid subscribers" or "subscriber relationships" is simply the goodwill associated with those subscribers. Once this is clear, it becomes equally clear that [Newark] should lose, since the intangible asset regulation expressly and categorically bars depreciation of goodwill ....(27)

It should be noted that Justice Blackmun, in addressing the dissent's concerns regarding the definition of goodwill, stated:

The dissent suggests that we are. .. seeking to "modify the per se ban on depreciating goodwill. ..." But we are doing nothing of the kind .... The dissent's mistake is to assume that because the "paid subscribers" asset looks and smells like the "expectancy of continued patronage," it is, ipso facto, nondepreciable . .. [W]e have concluded that because the "paid subscribers" is an asset found to have limited useful life and an ascertainable value which may be determined with reasonable accuracy, it is depreciable. By definition, therefore, it is not "goodwill."(28)

Throughout its opinion, the majority consistently made it clear that its decision might have been different had the Service disputed the factual issues surrounding the case. The Service did not contest the issue of whether "paid subscribers" had a determinable useful life and an ascertainable value. Rather, the Service argued that the asset was not amortizable under the current statute since it was indistinguishable from goodwill. It was the government's position that, as a matter of law, "paid subscribers" equated to continued patronage of customers, the often cited definition of goodwill. Unfortunately for the Service, the majority did not agree with this position.

It is unclear whether the decision would have been different if the Service had disputed Newark's statistical evidence or other facts. What is clear is that in the future the Service will closely scrutinize a taxpayer's method of valuing its acquired intangible assets and the method used to determine the useful lives of those assets. In fact, the Service may return to its posture in IT&S of Iowa, Inc.,(29) in which the methodology used in valuing the core deposit intangible was reviewed and critiqued in great detail.

Unanswered Questions and Implications

* New legislation

The Omnibus Budget Reconciliation Act of 1993 (the "1993 Act") includes the much anticipated amortization of intangibles provision. The intangibles provision enacts new Sec. 197, which allows taxpayers to amortize intangible assets, including goodwill and going concern value, over a 15-year period. The 1993 Act is effective and mandatory for intangible assets acquired after the date of enactment.

A taxpayer can elect to apply the provisions to intangible assets acquired after July 25, 1991. The election would be a one-time election and could be revoked only with IRS consent. The election would apply to the taxpayer and any other taxpayer under common control of the taxpayer (as defined in Sec. 41 (f)(1)) after Aug. 2, 1993, or when the election is made.(30)

When the initial intangibles bill was introduced, it was believed to be revenue neutral. In light of the Newark Morning Ledger decision, new projections have estimated that it may now be a revenue raiser.

Under the 1993 Act, a Sec. 197 asset includes such intangibles as goodwill, going concern value, workforce in place, business books and records, patents, copyrights, formulas, processes, designs, patterns, know-how and formats, customer-based intangibles, supplier-based intangibles, covenants not to compete, franchises, and trademarks or trade names. The inclusion of such assets as goodwill and going concern value are especially noteworthy since those assets are not depreciable under current law. New Sec. 197 would exclude as intangible assets such items as interests in corporations, partnerships, trusts, estates, land, certain computer software, certain interest in film, sound recordings, video tapes, books or other similar property, and generally any investment not acquired in a trade or business asset acquisition.

In 1991, the Joint Committee on Taxation asked the General Accounting Office to analyze the data relating to unresolved or open purchased intangible assets cases. The study revealed that "[t]axpayers in nine industry groups had claimed deductions for 175 types of purchased intangible assets that they identified as different from goodwill and valued at $23.5 billion."(31) The study also revealed that the IRS proposed adjustments of "about $8 billion" in its evaluation of those intangibles. Of the approximately 175 types of intangibles, customer-based and market-based intangible assets comprised the largest category. The report seemed to favor the revision of current law to provide for the depreciation of purchased intangible assets in order to settle the myriad of disagreements between the Service and taxpayers.

The adoption of the intangibles legislation will be favored by taxpayers that prefer simplicity and certainty. The ability to amortize acquired intangible assets, including goodwill, without having to overcome the difficult factual burden dictated by the courts, is appealing to many taxpayers. The need for costly appraisals would be eliminated and the costs of accounting and legal fees related to asset classification would be minimized. Taxpayers would also avoid the litigation costs associated with court proceedings necessary to defend their positions.

Taxpayers that have purchased intangibles with a limited useful life of less than 15 years may conclude that they can fare better under the facts and circumstances test set out in the Newark Morning Ledger decision. Those taxpayers may dislike the legislation and may feel that the factual burden that must be overcome in reliance on Newark Morning Ledger is not significant.

Although many taxpayers may favor the facts and circumstances test, it is unknown whether the Newark Morning Ledger decision will completely resolve the conflict that surrounds the depreciation of acquired intangibles. Now that the facts will be under closer examination, the Service may raise additional issues. Without legislative intervention, the undue burden on those taxpayers that cannot afford to pay for the experts needed to justify the depreciation of their intangible assets may never be alleviated. Additionally, it is unknown if state taxing authorities will adhere to the intangibles legislation.

Future Implications

* Valuation issues

The Supreme Court's broad decision in Newark Morning Ledger substantially increases the ability of taxpayers with purchased intangible assets to claim additional amortization deductions. The biggest winners are those taxpayers who acquire a business and receive significant amortization deductions for the acquired intangible assets. These taxpayers generally include newspaper and magazine publishers, and banking and insurance taxpayers that purchase businesses with customer lists, advertiser lists or other customer-based intangibles.(32)

Other taxpayers that might benefit include those that did not allocate any of the purchase price of a business acquisition to amortizable assets, and those taxpayers that were too conservative in their estimate of the value of the acquired intangible assets. The decision to pursue additional amortization deductions should be considered very seriously. The taxpayer must be able to meet the substantial burden of proof by establishing that the intangible asset has a limited useful life and a reasonably ascertainable value. The majority opinion in Newark Morning Ledger noted that this "burden often will prove too great to bear."

In the future, the Service will aggressively examine methods of valuation and estimates of useful lives associated with acquired intangible assets. The taxpayer should carefully consider the methodology used to determine the value and life attributable to intangible assets. This process often involves complex analyses and is best evaluated by an experienced valuation professional.

At her confirmation hearing, IRS Commissioner Richardson commented that the Service intends to manage existing cases involving intangibles by promoting consistent treatment. The Service will focus on factual issues such as the valuation method used, useful life claimed, method of amortization and the opinions of the expert witnesses. Taxpayers should also be aware that the Service is not only aggressively pursuing these factual issues, but delaying further analysis of cases that relate to Newark Morning Ledger. In fact, the National Office has sent a memo directing all appeals officers not to resolve or compromise any open intangibles cases. In light of these facts, there is now a substantial burden on taxpayers to substantiate the value and useful life of customer-based intangible assets.

However, it should be noted that the Conference Report to the 1993 Act contains a provision regarding the backlog of pending intangibles cases. The conferees urge the Service to expedite the settlement of cases under present law. When considering settlements and handling existing controversies, the conferees strongly encourage the Service to consider the principles of the new legislation so as to produce consistent results for similarly situated taxpayers.

* INDOPCO

The Supreme Court held in INDOPCO, Inc.,(33) that legal and investment advisory fees incurred in a friendly acquisition do not qualify for deduction under Sec. 162(a) as ordinary and necessary trade or business expenses. The Court ruled that these acquisition expenses produced significant benefits extending beyond the current tax year. The taxpayer argued that the acquisition expenses were not a capital cost since they did not create a separate and identifiable asset. INDOPCO involved the deductibility of self-created assets, while Newark Morning Ledger involved the deductibility of purchased intangibles.

Although these cases raise separate issues regarding the deductibility of intangible assets, both wrestle with the idea of whether acquired intangible assets are separate and distinct from goodwill, and therefore deductible. Taxpayers and practitioners should be aware that the Service may try to extend INDOPCO to recharacterize certain purchased intangible assets as nondeductible acquisition costs.

* Claims for refund

Taxpayers that have recently acquired a business may want to consider the possibility of amending returns for open tax years, especially if they feel they can receive substantial additional amortization deductions. Refund claims must be filed within three years from the date the return was filed, or, if later, two years from the date the tax was paid. If the time for assessment was extended, the taxpayer is not precluded from seeking refunds for any time within the extended period and six months thereafter.

Taxpayers should be aware that when refund claims are made, the Service often reaudits the tax year. It is also possible that the Service might attack the claim for refund on the basis that the claim constitutes a change in the method of accounting. Accordingly, the taxpayer could be required to file Form 3115, Application for Change in Accounting Method.

Taxpayers that seek additional amortization deductions should consider Sec. 1060, which generally applies to asset acquisitions after Oct. 9, 1990. Under this provision, buyers and sellers must use the residual method to allocate the purchase price among transferred assets. if they agree in writing to the fair value allocated to the acquired assets, it is binding on both the buyer and the seller.

* Financial implications

In response to the favorable ruling in Newark Morning Ledger, taxpayers considering business acquisition strategies should be aware that the value of their customer-based intangibles has probably increased. Just one day after the decision came down, The Wall Street Journal noted that "[t]he ruling boosted stock prices of several companies with sizable intangible assets .... "(34) Additionally, companies required to issue financial statements must review tax liability accounts established on their balance sheet to insure that they are properly stated in light of the favorable decision in Newark Morning Ledger. Tax footnote disclosures in the financial statements may be required to explain certain adjustments. Accordingly, financial statements and footnote disclosures could become even more interesting reading.

* Industry implications

While the Supreme Court's decision directly affects any company owning customer-based intangible assets, certain industries will benefit more than others. For example, the Court's opinion has enormous future benefits for cable companies in two respects. Now cable operators can depreciate their subscriber lists in the same manner as newspaper companies and can also depreciate franchises that have ascertainable values and limited useful lives.(35) In addition, broadcasting,(36) cable, publishing, banking, insurance, telecommunications and technology-based companies have been rightfully spared from large amounts of lost depreciation deductions on their intangible assets. Intangible assets such as advertiser and subscriber lists, contracts, affiliation agreements, customer lists, core deposits and insurance expirations rations are the assets that produce revenue for these industries. By allowing for the depreciation of these intangible assets, the Court has given the best opportunity for the proper matching of revenue and expense.

Planning Opportunities

The broad and favorable decision reached in Newark Morning Ledger gives rise to a number of tax planning opportunities. Perhaps the key aspect of the decision is that the focus in the intangibles area has been placed on facts and circumstances; i.e., if the asset can be identified, valued and lifed, it can be amortized. Accordingly, such focus can be viewed as swinging the advantage into the taxpayer's court. Considering the likely future IRS strategy to challenge the value and life of intangible assets, the importance of a well-reasoned and documented valuation and appraisal report cannot be overemphasized.

Also, the decision by the Court will likely affect current taxpayer negotiations with the Service for controversies involving intangible asset issues, regardless of the level the case has reached within the Service (i.e., the agent, appeal or docket level). While the Service will move cautiously in this regard, taxpayers' bargaining positions should generally be strengthened by the decision.

Intangibles legislation received a strong push forward in light of the decision, which has given rise to another planning opportunity. Taxpayers making asset acquisitions after July 25, 1991 should prepare computations of depreciation deductions under two sets of alternatives. The first alternative should calculate depreciation over a 15-year period, as provided in new Sec. 197 of the intangibles legislation. The second alternative should calculate depreciation in light of the existing statute, regulations and case law (e.g., Newark Morning Ledger). The mix of the allocated purchase price between customer lists, covenants not to compete, goodwill, etc., as well as their economic lives, will determine which of the alternatives is more advantageous from a tax perspective. Obviously, there are numerous business, financial and other nontax concerns that affect such a determination, not the least of which is the simplicity and certainty that the intangibles provisions provide. Lastly, asset purchase price allocations should receive careful attention in light of the interplay between Newark Morning Ledger and the intangibles provisions of the new legislation.

Conclusion

The Supreme Court's rejection in Newark Morning Ledger of the long-held position by the Service that certain assets are, as a matter of law, indistinguishable from goodwill, shifts the focus of attention from a legal analysis to a factual one. The road leading from Houston Chronicle has been a long and arduous one, involving numerous detours along the way. The rainbow at the journey's end, while striking, will be short-lived for many, particularly in light of the potential counterattack by the Service and the new intangibles legislation.

While tax planning opportunities do exist and are worth considering, companies acquiring customer-based intangible assets may find themselves trading off accelerated tax deductions and the ensuing potential disputes with the Service for deductions involving greater simplicity and certainty. (1) Newark Morning Ledger Co., Sup. Ct., 4/20/93 (71 AFTR2d 93-1380, 93-1 USTC [paragraph] 50,228), rev'g and rem'g 945 F2d 555 (3d Cir. 1991)(68 AFTR2d 91-5552, 91-2 USTC [paragraph] 50-451), rev'g 734 F Supp 176 (DC N.J. 1990)(65 AFTR2d 90-760, 90-1 USTC [paragraph] 50,193). (2) See IRS Coordinated Issues Paper, "Customer Based Intangibles" (6/8/92). (3) Newark Morning Ledger, note 1, Sup. Ct., at 93-1 USTC 87,877. (4) Houston Chronicle Publishing Co., 481 F2d 1240 (5th Cir. 1973)(32 AFTR2d 73-5312-A, 73-2 USTC [Paragraph]9537), cert. denied. (5) Donrey, Inc., 809 F2d 534 (8th Cir. 1987)(59 AFTR2D 87-505, 87-1 USTC [Paragraph]9143). (6)Citizens and Southern Corporation and Subsidiaries, 91 TC 463 (1988), aff'd per curiam, 919 F2d 1492 (11th Cir. 1990)(91-1 USTC [paragraph]50,043). (7) Colorado National Bankshares, Inc., and Subsidiaries, TC Memo 1990-495, aff'd, 984 F2d 383 (10th Cir. 1993)(71 AFTR2d 93-738, 93-1 USTC [Paragraph]50,077). (8) See also Regs. Sec. 1.167(a)-6(a). (9) See Seaboard Finance Co., 367 F2d 646 (9th Cir. 1966)(18 AFTR2D 5803, 66-2 USTC [paragraph] 919707); Imperial News Co., Inc., 576 F Supp 865 (E.D. N.Y. 1983)(52 AFTR2D 83-6377, 83-2 USTC [paragraph] 9691); Merle P. Brooks, 36 TC 1128 (1961); Richard M. Boe, 307 F2d 339 (9th Cir. 1962)(10 AFTR2D 5458, 62-2 USTC [paragraph] 9699). (10) Regs. Sec. 1.167(a)-3. (11) Metropolitan Laundry Co., Ltd., 100 F Supp 803 (N.D. Cal. 1951)(41 AFTR 297, 52-1 USTC [paragraph] 9129). (12) See General Television, Inc., 449 F Supp 609 (DC Minn. 1977)(40 AFTR2D 77-5926, 79-1 USTC [paragraph] 9136), aff'd per curiam, 598 F2d 1148 (8th Cir. 1979)(44 AFTR2D 79-5115, 79-2 USTC [paragraph] 9411); Golden State Towel and Linen Service, Ltd., 373 F2d 938 (Ct. Cl. 1967)(19 AFTR2D 950, 67-1 USTC [paragraph] 9302). (13) See Robert C. Winmill, 305 US 79 (1938)(21 AFTR 962, 38-2 USTC [paragraph] 9550); Winn-Dixie Montgomery, Inc., 444 F2d 677 (5th Cir. 1971)(28 AFTR2D 71-5012, 71-1 USTC [paragraph] 9488); Dodge Brothers, Inc., 118 F2d 95 (4th Cir. 1941)(26 AFTR 620, 41-1 USTC [paragraph] 9309). (14) Rev. Rul. 74-456, 1974-2 CB 65. (15) Citizens and Southern Corp., note 6, TC, at 465. (16) See Regs. Sec. 1. 167(a)-3; Houston Chronicle, note 4; Maurice L. Killian, 314 F2d 852 (5th cir. 1963)(11 AFTR2D 1028, 63-1 USTC [paragraph] 9347); Boe, note 9; Seaboard Finance Co., note 9. (17) Newark Morning Ledger, note 1, 3d Cir., at 91-2 USTC 89,668, citing Houston Chronicle, note 4. (18) See, e.g., Houston Chronicle, note 4; Donrey, note 5; The Chronicle Publishing Co., 67 TC 964 (1977); Tenneco, Inc., 433 F2d 1345 (5th Cir. 1970)(26 AFTR2D 70-5780, 70-2 USTC [paragraph] 9695); Annabelle Candy Co., 314 F2d 1 (9th Cir. 1962)(10 AFTR2D 5500, 63-1 USTC [paragraph] 9146). (19) Newark Morning Ledger, note 1, Sup. Ct., at 93-1 USTC 8 7,8 70. (20) See Richard S. Miller & Sons, Inc., 537 F2d 446 (Ct. Cl. 1976)(38 AFTR2D 76-5247, 76-2 USTC [paragraph]9481); Houston Chronicle, note 4; Donrey, note 5; Des Moines Gas Co. v. Des Moines, 238 US 153 (1915).(21) Newark Morning Ledger, note 1, Sup. Ct., at 93-1 USTC 87,873, n. 9. (22) Justices Stevens, O'Connor, Kennedy and Thomas joined Justice Blackmun in the majority decision. The dissenting opinion was delivered by Justice Souter and joined by Chief Justice Rehnquist and Justices White and Scalia. (23) Ithaca Industries, Inc., 97 TC 253 (1991). (24) Newark Morning Ledger, note 1, Sup. Ct., at 93-1 USTC 87,878.(25) Id., at 87,882. (26) Id., at 87,879. (27) Id. (28) Id., at 87,877, n. 13. (29) IT&S of Iowa, Inc., 97 TC 496 (1991). (30) The Revenue Reconciliation Act of 1993, HR 2141, House Ways and Means Committee version released May 19, 1993. (31) GAO Report on "Tax Policy: Issues and Policy Proposals Regarding Tax Treatment of Intangible Assets" (8/12/91), at 3. (32) Middleton and McBurney, "The Morning After Newark Morning Ledger: What Should Taxpayers Do Now?" 59 Tax Notes 817 (5/10/93). (33) INDOPCO, Inc., 112 Sup. Ct. 1039 (1992)(69 AFTR2D 92-694, 92-1 USTC [paragraph] 50,113). (34) The Wall Street Journal, 4/21/93, at A3. (35) Tele-communications Inc. and Subsidiaries, 95 TC 495 (1990). (36) See Jefferson-Pilot Corporations and Subsidiaries, 98 TC 435 (1992), aff'd, 4th Cir., 1993 (93-1 USTC [paragraph] 50,348), in which it was held that a radio broadcast license issued by the FCC was a Sec. 1253 asset subject to amortization.