The Omnibus Budget Reconciliation Act of 1993 (OBRA) included a long-awaited change in the way intangible assets are amortized: Deductions are allowed for most intangibles, including goodwillgoing concern values, over a 15-year amortization period. Previously, part of a business's purchase price could be allocated to intangible assets and amortized for tax purposes only if their value and life could be ascertained accurately. David N. Fuller, CFA, senior valuation consultant, Business Valuation Services, Inc., Dallas, explains how taxpayers who acquired intangible assets during a certain period can decide whether to apply the new law or the old one to those assets.
In Newark Morning Ledger Co. v. United States (no. 91-1135 [U.S. April 20, 1003] rev'g and rem'g 945 F.2d 555 [3rd Cir. 1991]), the U.S. Supreme Court held a taxpayer must satisfy the "substantial burden" of proving an asset had an accurately determinable value to sustain amortization deductions. Disputes have arisen in the past over both the value and amortizability of intangibles and significant public and private resources have been devoted to related litigation. To simplify the treatment of acquired intangible assets and prevent future disputes, OBRA allows amortization deductions for most intangible assets.
The new law is effective for intangible assets acquired after August 10, 1993. However, taxpayers may elect to apply it to intangibles acquired between July 25, 1991, and the effective date (the election period) or apply prior law. Such an election applies to all a taxpayer's transactions in this period and may not be selectively made for one transaction but not another.
OBRA allows amortization deductions for most intangibles, determined by ratably amortizing an asset's adjusted basis over a 15-year period beginning with the month it was acquired.
Amortizable intangible assets-- referred to in the act as section 197 intangibles--include customer-based intangibles, supplier-based intangibles, books and records, patents, proprietary technology, copyrights, licenses, trademarks and trade names, franchise values, noncompetition agreements and goodwill-going concern values.
Excluded are financial and land interests, computer software (if readily available for purchase by the general public without substantial modifications and not acquired as part of a trade or business), certain interests or rights acquired separately (such as an interest in a...