'Assembled work force' may not be amortized.

• Author: Fiore, Nicholas J.

The O Corporation was formed in 1948. In 1983, the T Corporation was set up for the purpose of acquiring O's assets and business. Later in 1983, T and O merged.

On its 1984 return, T claimed a deduction for amortization of work force in place, the value inherent in having a trained staff of employees in place. The IRS disallowed this deduction, claiming that work force in place was a part of going-concern value (and therefore not properly amortizable). The Tax Court (opinion Scott, J.) holds for the Service, ruling that work force in place could not be amortized.

Sec. 167(a) allows as a deduction for depreciation a reasonable allowance for the exhaustion and wear and tear of property used in a trade or business or of property held for the production of income. The term "property" includes intangibles. Regs. Sec. 1.167(a)-3 provides that an intangible asset may be amortized if the intangible asset is known from experience or other factors to be of use in the business or in the production of income for only a limited period, the length of which can be estimated with reasonable accuracy. . . .

To depreciate an intangible asset, a taxpayer must demonstrate that the asset has a limited useful life, the duration of which can be estimated with reasonable accuracy, and an ascertainable value separate and distinct from goodwill or going-concern value.

T contends that the assembled work force is an asset separate and distinct from goodwill or going-concern value and that this asset has an ascertainable limited useful life. T concludes that the replacement cost method can be used to value the assembled work force and that when valued on this basis no part of the value of this assembled work force is an integral part of going-concern value. The IRS contends that an assembled work force represents the value inherent in having a trained staff of employees in place, enabling the business to continue without interruption, and is going-concern value. The Service argues that, because going-concern value is not a depreciable asset, T is not entitled to a deduction for amortization of the assembled work force.

The IRS contends that, as a matter of law, the value of an assembled work force represents going-concern value. T argues that the determination of whether the assembled work force is an intangible asset with an ascertainable useful life and value and, therefore, subject to amortization, is a question of fact. Although it has been consistently held that...