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Legislation on the amortization of intangibles.

Legislation originally introduced on July 25, 1991 by House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) would change the tax treatment of intangible assets. Rep. Rostenkowski's bill would allow a 14-year write-off of acquired intangible assets, including good will and going concern value. The proposal was included in the tax bill recently vetoed by President Bush, and may surface again in any tax legislation considered this session. The fact that the provision was agreed to in conference, and was not listed among the reasons for Bush's veto, gives it substantial credibility.

Under current law, an amortization deduction is allowed only if the taxpayer can show the asset has (1) an ascertainable value distinct from other assets (such as goodwill, which is not amortizable) and (2) a determinable, limited useful life. A recent report issued by the General Accounting Office (GAO) found that in 70% of the reviewed cases the IRS disallowed amortization deductions, on the ground that the asset was not separable from goodwill. Both taxpayers and the Service spend enormous amounts of time and money in examinations and litigation of this issue.

The Rostenkowski proposal (as modified in the tax bill markup by the House Ways and Means Committee) would enact Sec. 197, allowing an amortization deduction for any amortizable Sec. 197 intangible. Amortization would be straight-line over 14 years beginning with the month in which such intangible was acquired.

An amortizable Sec. 197 intangible is any Sec. 197 intangible acquired by the taxpayer after the date of enactment and which is held in connection with the conduct of a trade or business or an activity described in Sec. 212. The term "Sec. 197 intangible" includes goodwill, going concern value, and any of the following intangible items: work force in place; business books and records, operating systems or other information base (e.g., customer lists); any patent, copyright, formula, process, design, pattern, know-how, format or other similar item; any customer-based intangible; any supplier-based intangible; and any other similar item. It also includes any license, permit or other right granted by a governmental unit, agency or instrumentality; any covenant not to compete entered into in connection with the acquisition of a trade or business; and any franchise, trademark or trade name.

The term "Sec. 197 intangible" would not include self-created intangibles (such as goodwill resulting from advertising); financial interests, such as an interest in a corporation, partnership, trust or estate, or under a futures contract, foreign currency contract, notional principal contract, interest rate swap or other similar financial contract; interests in land; interests in a film, sound recording, video tape, book or similar property not acquired in a business acquisition; any right under a contract (or granted by a governmental unit or any agency or instrumentality thereof), if such right has a fixed duration and is not renewable, and was not acquired in a transaction involving the acquisition of assets constituting a trade or business; patents or copyrights not acquired in an acquisition of assets constituting a trade or business or a substantial portion thereof; a franchise to engage in a professional sport, and any items acquired in connection with such a franchise; and interests in any existing indebtedness, except the deposit base of a financial institution.

The term "Sec. 197 intangible" also would not include any computer software (however acquired) that is readily available for purchase by the general public, subject to a nonexclusive license, and not substantially modified; or any software (including custom software) not acquired in a transaction involving the acquisition of a trade or business. The bill provides a 36-month depreciation period for computer software that is not a Sec. 197 intangible.

The original bill excluded from the definition of a Sec. 197 intangible rights or licenses granted by a governmental entity that are indefinite or can be expected to be renewed indefinitely (for example, cable television franchises). The proposal has been modified to include these types of intangibles in the 14-year category.

A special rule disallows recognition of loss on the subsequent disposition of a Sec. 197 intangible if other intangibles acquired in the same transaction are retained: the remaining basis of the loss asset must be allocated to those other assets. Special rules require an intangible asset's character as a Sec. 197 intangible to be carried over in nonrecognition transactions and transactions between affiliated group members. There are also antichurning rules and antiabuse rules.

The effective date of the bill is the date of enactment. However, several exceptions to that general rule are provided. The proposal includes an election to apply the new rules to any acquisition occurring after July 25, 1991 (the date the bill was originally introduced). An election to not apply the new rules was provided for any transaction pursuant to a binding contract in effect on Feb. 12, 1992 and at all times thereafter.

The bill also provided an election to apply the new rules to transactions in all prior open tax years. This retroactive election would have applied to all assets acquired in all transactions in all open years; taxpayers could not selectively elect its application. Assets subject to this election would be amortized over a 17-year (instead of a 14-year) period. Interest would be assessed on any deficiencies arising from election of the retroactive provision, but no interest would be paid on any refunds.

Rep. Rostenkowski touted the proposal as part of his efforts to simplify the tax code. It would add certainty as well as simplicity - taxpayers would no longer have to argue whether an intangible asset is separate from goodwill, and the purchase price would no longer have to be allocated between amortizable and unamortizable intangible assets. The Administration offered its support for the measure - a letter from the Treasury Department the day after the bill was introduced was, according to some commentators, the fastest sign-off in history.

Whenever another tax bill is marked up this year, it appears likely a provision to change the treatment of intangibles will be included, particularly if the bill contains any simplification measures. Taxpayers who are satisfied with the provisions of the Rostenkowski bill as drafted, and those who support specific changes, need to ensure that their interests are protected by being actively involved in the process.
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Author:Wilkins, Rebecca J.
Publication:The Tax Adviser
Date:Jun 1, 1992
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