Amortizing franchises under new Sec. 197.

• Author: Addison, Emerson J., Jr.

The new Sec. 197 rules for amortizing intangible assets will significantly affect traditional tax strategies for the purchase and sale of business organizations. It is also important for tax practitioners to be aware of the far-reaching effects of Sec. 197 on transfers of intangibles in situations not involving sales of businesses. Transactions potentially affected by these new rules include transfers of trademarks and tradenames, franchises, licenses, permits and many other contractual business arrangements.

Fifteen-year life now

applies to franchises

Prior to the Revenue Reconciliation Act of 1993 (RRA), deductions for amounts paid to acquire franchises, trademarks and tradenames were governed by Sec. 1253(d). The term "franchise" was broadly defined to include any agreement granting a right to distribute, sell or provide goods, services or facilities within a specified area (Sec. 1253(b)(1)). Sec. 1253(d) generally permitted lump-sum payments made to acquire a franchise, trademark or tradename to be amortized over a 10-year period, provided the amount paid did not exceed $100,000. (The 10-year amortization period is also applicable to all transfers made before Oct. 3, 1989, rcgardless of the amount.) If the amount paid exceeded $100,000, a taxpayer could generally elect to amortize the payment over a 25-year period (Sec. 1253(d)(2)(B) and (d)(3)(B), prior to amendment).

Although Sec. 1253(d)(1) continues to govern deductions for periodic payments contingent on the productivity, use or disposition of a franchise, trademark or tradename, the amortization provisions for lump-sum and other nonperiodic payments are now governed exclusively by new Sec. 197(a). This new provision prescribes straight-line amortization over a 15-year period beginning with the month in which the intangible is acquired, regardless of the amount involved or the period for which the franchise is granted. The new rules generally apply to intangibles acquired after Aug. 10, 1993, although a taxpayer may elect to apply these rules to any applicable intangible acquired after July 25, 1991.

Under pre-RRA law, there was some question as to whether Sec. 1253 applied to governmental licenses and permits. In two recent cases, the IRS unsuccessfully challenged the applicability of Sec. 1253 to cable television franchises granted by local communities, and to radio broadcast licenses granted by the FCC (Tele-Communications, Inc., 95 TC 495 (1990), and Jefferson-Pilot Corp., 98...