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National Bank's core deposit amortization upheld by Tenth Circuit.

The Tenth Circuit has upheld the Tax Court's allowance of a bank's amortization deduction for the core deposit intangibles (CDIs) acquired (Colorado National Bankshares, Inc. (CNB), 10th Cir., 1/25/93, aff'g TC Memo 1990-495).

CNB acquired seven banks in 1981 and 1982, and allocated basis to and amortized CDIs. The Tax Court upheld the allowance of amortization deductions, relying heavily on its earlier decision in Citizens and Southern Corp., 91 TC 463 (1988), aff'd without opinion, 900 F2d 266 (11th Cir. 1990).

On appeal, the IRS did not challenge the taxpayer's estimates of the predicted life and value of the CDI. Instead, the Service argued, relying on Newark Morning Ledger, 945 F2d 555 (3d Cir. 1991), rev'd, Sup. Ct., 4/20/93, that the CDI was part of goodwill and, accordingly, nonamortizable.

The Tenth Circuit seemed irritated that the IRS, the Treasury and Congress had not promulgated "a specific and uniform definition of goodwill. Although case law established that goodwill constitutes 'the expectancy of continued patronage, or whatever reason,' this amorphous and general definition provides little practical guidance to taxpayers and courts asked to define parameters of the amortization deduction." Seven important reasons were cited by the court in deciding not to adopt the Service's absolute prohibition on CDI amortization. 1. Sufficient evidence demonstrating that these core deposits have a life expectancy that can be determined with reasonable accuracy. 2. The Tax Court's factual determination that these core deposits were not self-regenerating. 3. The reasonableness of the Tax Court's consistent pronouncements on this very question. 4. The lack of a workable and useful definition of goodwill. 5. The adequacy of the residual method of calculating goodwill. 6. The necessity of substantial additional time, effort and expense to produce income from the core deposits. 7. The fact that the core deposits could have been severed and transferred apart from the goodwill of the banks in question.

The appeals court also cited the substantial evidence" presented to the Tax Court by CNB in establishing the existence of an asset separate and distinct from goodwill, and alluded favorably to recognition by the Financial Accounting Standards Board, the Securities and Exchange Commission and the Office of the Comptroller of the Currency of the existence of an asset separate from goodwill.
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Author:Haugh, James W.
Publication:The Tax Adviser
Date:Jun 1, 1993
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