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10th Circuit spurns Newark Morning Ledger.

While the U.S. Supreme Court is deliberating arguments it heard last November in Newark Morning Ledger (945 F.2d 562, 3rd Cir., 1991) regarding the ability to amortize acquired intangible assets, there's fresh evidence other courts will not embrace the radical legal formulation adopted by the U.S. Court of Appeals for the 3rd Circuit. That appellate court reversed the Tax Court decision and essentially held intangibles could not be amortized if they were acquired in conjunction with the sale of a business as a going concern (see Tax Briefs, JofA, Dec. 91, page 12).

Colorado National Bankshares. But recently, the 10th Circuit Court of Appeals in Colorado National Bankshares (10th Cir., 2/17/93) affirmed the Tax Court's decision in Newark while ruling on Colorado's ability to amortize core deposits obtained in an acquisition of several banks. (The value of core deposits derives from the spread between the rates paid on such deposits and the rate that would be paid on the "market alternative").

The 10th Circuit found Colorado had met its evidentiary burden by showing the core deposit intangible had an ascertainable value that was independent of goodwill and a limited useful life, the length of which could be ascertained with reasonable accuracy.

Moreover, Colorado's approach was reinforced by regulatory authority. For example, the Financial Accounting Standards Board requires banks to record core deposits as assets separate from goodwill.

Newark rejected. The IRS contended that, as a matter of law, core deposits were part of goodwill and even if a taxpayer could successfully estimate the value and duration of such deposits, the patronage of core depositors was a control element of goodwill.

The 10th Circuit rejected this line of reasoning and, in the process, said it would not adopt the 3rd Circuit's expansive view of goodwill. It further said Newark had presented a totally different situation--the ability to amortize the future profits from at-will subscribers. Consequently, the 10th Circuit chose to follow the Tax Court, which had consistently held core deposits are not per se goodwill.

Finally, the 10th Circuit chided the IRS for being inconsistent. A bank that acquires the right to service loans and sue escrow funds can amortize the value of the right because loans have a definite life span. The result should be the same when, as here, the life span of the core deposits has been estimated with reasonable certainty.

Observation: It remains to be seen whether this new approach to intangibles will influence the Supreme Court's resolution of the matter.
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Apr 1, 1993
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