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Third Circuit reverses Newark Morning Ledger.

How to amortize acquired intangible assets has become the principal tax issue of 1991. It is ironic that legislation was recently proposed to standardize amortization practices in response to IRS court defeats. But before the ink had dried on the proposal, the IRS began to secure important court victories. It is now possible an emboldened IRS will withdraw its support for the legislation.

In Newark Morning Ledger Co. (3rd Cir. 1991), a chain of newspapers was acquired, and the taxpayer assigned a portion of the purchase price to an asset called "paid subscribers." This asset represented the profits to be derived from the "at will" subscribers acquired, most of whom were expected to continue after the acquisition.

To sustain amortization, the asset had to be distinguished from goodwill. The taxpayer contended it had only to meet a two-part test to show the asset was not the equivalent of goodwill: that it possessed a limited useful life and had an ascertainable value.

The IRS, however, argued that the test had three parts and the taxpayer failed to satisfy the third prong: that ascertainable value had to be distinct from goodwill. The IRS claimed the "paid subscribers" asset simply quantified the expectation that subscribers would continue their patronage. As such, it was part of goodwill, defined as the expectancy of continued patronage.

Moreover, the Third District Court of Appeals went on to hold that the three-part test can be satisfied only in cases where the operative facts are similar to those that existed in Houston Chronicle Publishing Co. [481 F.2d 1240 (5th Cir. 1973)]. There, the subscription lists were not acquired as part of an ongoing business but were "idle assets of a defunct business." Accordingly, the third circuit, although disavowing such an approach, essentially resurrected the long-discredited "mass asset" rule, which treats customer-based intangibles as equivalent to goodwill.

Observation: Taken together with the Tax Court's decision in Ithaca Industries Inc. (97 TC no. 16)--when an asset known as "assembled work force" was held to be nonamortizable--the IRS can be expected to mount a furious assault on past transactions involving service company acquisitions featuring substantial amounts of intangible assets.
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Article Details
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Author:Dionne, Marylouise
Publication:Journal of Accountancy
Date:Dec 1, 1991
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