Financial institutions may be subject to new rules for amortizing intangibles.

• Author: Wheeler, Chuck

With the large number of bank consolidations and reorganizations, the treatment of acquired customer-based intangibles takes on particular significance. On Jan. 9, 1997, the IRS released proposed regulations under Secs. 167(f) and 197 that provide definitions and rules for amortizing a broad class of intangible property that banks and other financial institutions may acquire in the course of business operations. Generally, the regulations are proposed to be effective on the date that final regulations are published in the Federal Register.

Sec. 167 permits taxpayers to depreciate or amortize the cost of property used in a trade or business or held for the production of income, if the property has a limited useful life and it may be determined with reasonable accuracy. Formerly, intangible items such as goodwill (specifically excluded from depreciation under Sec. 167) and going concern value could not be depreciated because they lacked an ascertainable life. Generally, Sec. 197, added by the Omnibus Budget Reconciliation Act of 1993, provides a method for depreciating and amortizing certain intangible assets, called "Sec. 197 intangibles," over a 15-year period.

Bank consolidations raise all of the traditional issues with acquired intangibles, such as goodwill and going concern value. In addition, the treatment of certain "customer-based intangibles," including mortgage servicing rights, is of particular significance for financial institutions. A customer-based intangible is any asset with value resulting from the future provision of goods or services pursuant to relationships with customers in the ordinary course of business. Customer-based intangibles subject to Sec. 197 specifically include the deposit bases of financial institutions. Thus, Prop. Regs. Sec. 1.197-2(b)(6) includes rules for amortizing amounts paid for the value represented by existing checking accounts, savings accounts, escrow accounts and other similar items of a financial institution. In addition, Prop. Regs. Sec. 1.1972(c)(11) states that servicing contracts are Sec. 197 intangibles. Thus, mortgage servicing rights acquired as part of the purchase of a trade or business are treated as intangibles within the meaning of Sec. 197, and must be written off over 15 years.

Congress carved out special treatment, however, for certain mortgage servicing rights. Under Sec. 167(f)(3), the cost of a pool of mortgage servicing rights (a bulk purchase) related to residential loans is...