Amendments to the sec. 1060 and 338(b) regulations conforming allocation of purchase price to the 1993 intangibles legislation.

• Author: Eisenberg, Andrew M.

On Jan. 16, 1997, the IRS issued various amendments (the Allocation Amendments) to the final and temporary Sec. 1060 and Sec. 338(b) regulations, dealing with changes in the method of allocating the purchase price among the assets of an acquired trade or business. Prior to the issuance of these final and temporary regulations, and following the Aug. 10, 1993 enactment of Sec. 197 (and in some cases since 1991), the old regulations were in conflict with the legislative history of Sec. 197 (Legislative History) over the classification of certain intangible assets (other than goodwill and going concern value). With a minor modification, these amendments conform the old regulations with that Legislative History. For acquisition dates before the effective date of the Allocation Amendments (Feb. 14, 1997), taxpayers have three choices: (1) follow the new rules, (2) follow the old rules or (3) allocate purchase price so as to conform to the language in the Legislative History.

Background

Sec. 1060 provides for the allocation of purchase price among assets of a trade or business after an applicable asset acquisition. Sec. 338(b) provides similar rules for allocation in the case of a deemed purchase of assets pursuant to Sec. 338. The old regulations interpreting both sections employed a residual method of allocation, placing each acquired asset into one of four asset classes, with the purchase price then allocated among the classes in priority order. No asset in any class except for the last may be allocated more than its fair market value (FMV). If the aggregate purchase price allocable to a particular class is less than the aggregate FMV of the assets within the class (which would occur in the case of a bargain purchase), each asset is allocated an amount in proportion to its FMV, with nothing allocated to any junior class.

The four classes specified by the old regulations were as follows:

* Class I: Cash and cash equivalents.

* Class II: Certificates of deposit, U.S. government securities, readily marketable stocks and securities, and foreign currency.

* Class III: All assets not in Class I, II or IV.

* Class IV: Intangible assets in the nature of goodwill and going concern value.

Prior to the Omnibus Budget Reconciliation Act of 1993 (OBRA), which enacted Sec. 197, acquired goodwill and going concern value were not amortizable. Other acquired intangible assets were amortizable if they could be separately identified and their useful lives...