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Newark Morning Ledger: a clear but narrow victory.

The U.S. Supreme Court decision in Newark Morning Ledger (4/20/93), while a clear victory for taxpayers seeking to amortize "customer-based" intangibles (CBIs), does little to clear up the confusion that consistently has surrounded this area. (For background on this case, see Tax Briefs, JofA, Apr.93, page 24).

The Court concluded CBIs are not, as a matter of law, inseparable from goodwill even though their value is related to the expectancy of continued customer patronage. The Court reaffirmed the notion CBIs are depreciable if the taxpayer can prove they have an ascertainable value separate from goodwill and limited useful lives the length of which can be ascertained with reasonable accuracy.

The Court rejected the premise of the Third Circuit's decision (945 F. 2d 562, 3d Cir., 1991), which had concluded that, in the context of a going concern's sale, it is simply too difficult to separate the customer list's value from the goodwill value of the customer structure or customer relationships.

In this case, the taxpayer was able to sustain its "heavy" burden of proof regarding the values and duration of CBIs. However, the Court noted the taxpayer's success was largely a function of the manner in which the government litigated the case: Its strategy was designed to show that, as a legal matter, CBIs and goodwill are inextricably intertwined; it did not attempt to impugn the taxpayer's expert witnesses regarding their views on CBIs' useful lives.

In the future, the government will shift its focus to a given dispute's factual aspects and taxpayers hoping to prevail will be forced to produce reams of documentation attesting to the validity of the statistical techniques employed in establishing values and useful lives for CBIs.

Observation: The decision's limited scope sets the stage for a revival of legislation previously introduced by House Ways and Means Chairman Dan Rostenkowski (D-Illinois) to standardize the amortization of intangibles over a 14- to 16-year period. For budget purposes, such legislation likely would be considered a revenue raiser, which presumably would enhance its prospects.
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Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Jul 1, 1993
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