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Proposed intangible asset legislation.

On Jan. 5, 1993, House Ways and Means Committee Chairman Rostenkowski reintroduced legislation as part of HR 13, the Tax Simplification Act of 1993, that provides uniform rules for amortizing intangible assets - including goodwill.

The proposed legislation generally requires specified intangibles, designated as "Sec. 197 intangibles," to be amortized ratably over 14 years - beginning with the month of acquisition. (See the charts of those assets included (on this page) and excluded (page 314) as Sec. 197 intangibles.) The proposed legislation would be effective for intangibles acquired after the date of enactment. However, an election would be available to apply the legislation to Sec. 197 intangibles acquired after July 25, 1991 (the date that the legislation was first introduced).

Firms that provide appraisal and cost segregation studies for business acquisitions, and are concerned that the proposed legislation will reduce the need for their services, should relax. First, the proposed legislation will not eliminate the need to value tangible assets (includible as "Class III assets" under the Sec. 338 and 1060 regulations) so that any remaining purchase price can be apportioned to the Sec. 197 intangibles ("Class IV assets"). Moreover, under this legislation, each Sec. 197 intangible acquired "in a transaction or series of related transactions" will have to be identified and separately valued, notwithstanding that all acquired Sec. 197 intangibles are amortized over 14 years.

This latter necessity would result from the proposed legislative provision that would not recognize loss (but would recognize gain) on the sale or worthlessness of a Sec. 197 intangible previously acquired in a transaction or series of related transactions -- if one or more other Sec. 197 intangibles, acquired in the same transaction, are retained. (See proposed Sec. 197(f)(1).) Furthermore, the disallowed loss must be apportioned among, and added to the bases of, the Sec. 197 intangibles retained, based on their respective adjusted bases.

Assets Included as Sec. 197 Intangibles

* Goodwill.

* Going concern value.

* Work force in place (agency force or assembled work force.)

* Work force composition (e.g., work force experience, education or

* Employment agreements and relationships.

* Business books and records, operating systems and any other information base. Examples: Technical manuals, training manuals or programs, data files, accounting or inventory control systems, customer and subscription lists, insurance expirations, patient or client files and advertisers lists.

* Formula, process, design, patterns, format and know-how.

* Patent or copyright acquired as part of a trade or business.

* Package design.

* Certain computer software acquired as part of a trade or business. (See also excluded computer software below.)

* Film, sound recording, video tape, book, or similar property acquired as part of a trade or business.

* Customer-based intangibles such as customer base, circulation base, undeveloped market or market growth, insurance in force, mortgage servicing contracts, investment management contracts, plus deposit base and similar assets of financial institutions.

* Supplier-based intangibles such as relationships (contractual or otherwise) with suppliers of goods or services. (See also excluded contractual relationships below.) Examples: Favorable shelf or display space at a retail outlet and favorable credit rating or supply contracts.

* Other intangible property similar to work force, information base, know-how, customer-based or supplier-based intangibles.

* Licenses, permits or other rights issued or renewed by a governmental unit, agency or instrumentality (even for an indefinite period or subject to renewal). Examples: Taxicab medallions, television or radio broadcasting licenses, liquor licenses, airport landing or takeoff rights, or regulated airline routes.

* Covenants not to compete and similar arrangements entered into in connection with the acquisition of a trade or business, including not only the trade or business's assets but also stock in a corporation or an interest in a partnership that is in a trade or business. This category also includes amounts paid to the trade or business's former owner under a continuing service arrangement, to the extent that these payments are not reasonable for the services actually rendered.

* Franchise, trademark and trade names (excluding certain contingent amounts paid or incurred on account of the transfer of a franchise, trademark or trade name).

Assets Excluded as Sec. 197 Intangibles

* Intangibles that otherwise would constitute Sec. 197 intangibles but which are created by, produced specifically for, a taxpayer not in connection with the acquisition of a trade or business. This exception for self-created intangibles does not apply to

- entering (or renewing) a contract to use a Sec. 197 intangible;

- any license, permit or 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.

* Accounts receivable or other similar rights to income for goods and services provided to customers before acquisition of a trade or business.

* Right to receive tangible property or services under a contract if not acquired as part of a trade or business.

* Interests in a corporation, partnership, trust or estate.

* Interests under existing futures contracts, foreign currency contracts, notional principal contracts, interest rate swaps, or other similar financial contracts.

* Interests in land (such as a fee interest, life estate, remainder, easement, mineral rights, timber rights, grazing rights, riparian rights, air rights, zoning variances, and other similar land rights).

* All computer software, not acquired as part of a trade or business, and computer software, acquired as part of a trade or business, that

- is readily available for purchase by the general public;

- is subject to a nonexclusive license; and

- has not been substantially modified.

Computer software not constituting a Sec. 197 intangible would be amortizable over 36 months.

* Interests in films, sound recording, video tapes, books, or other similar property if not acquired as part of a trade or business.

* Interests in patents or copyrights not acquired as part of a trade or business.

* Interests as lessor or lessee under an existing lease of real or tangible personal property.

* Interest as a creditor or debtor under any indebtedness that existed on the date the interest was acquired.

* Professional sports franchises.

* To the extent excluded by regulations, a right received under a contract, or granted by a governmental unit, agency or instrumentality, if

- the right is not acquired as part of a trade or business; and

- the right either:

1. has a fixed duration of less than 14 years; or

2. is fixed as to amount and the cost is properly recoverable under a method similar to the unit of production method.
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Article Details
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Author:Luchs, Lorin D.
Publication:The Tax Adviser
Date:May 1, 1993
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