Printer Friendly

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.
COPYRIGHT 1993 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Apr 1, 1993
Previous Article:Stock gifts and minority discounts.
Next Article:IRS issues transfer pricing regulations.

Related Articles
Third Circuit reverses Newark Morning Ledger.
Amortization of intangibles: IRS prevails.
National Bank's core deposit amortization upheld by Tenth Circuit.
Depreciation of customer-based intangibles confirmed by Supreme Court in Newark Morning Ledger.
Newark Morning Ledger: a clear but narrow victory.
Supreme Court rules two-pronged test applicable when amortizing intangible assets.
The amortization of purchased intangible assets.
Section 197: Congress and the IRS attempt to settle disputes involving amortization of intangibles.
Third Circuit addresses burden of proof in valuing intangibles.
Corrupting the church.

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters