Legislation on the amortization of intangibles.

• Author: Wilkins, Rebecca J.

Legislation originally introduced on July 25, 1991 by House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) would change the tax treatment of intangible assets. Rep. Rostenkowski's bill would allow a 14-year write-off of acquired intangible assets, including good will and going concern value. The proposal was included in the tax bill recently vetoed by President Bush, and may surface again in any tax legislation considered this session. The fact that the provision was agreed to in conference, and was not listed among the reasons for Bush's veto, gives it substantial credibility.

Under current law, an amortization deduction is allowed only if the taxpayer can show the asset has (1) an ascertainable value distinct from other assets (such as goodwill, which is not amortizable) and (2) a determinable, limited useful life. A recent report issued by the General Accounting Office (GAO) found that in 70% of the reviewed cases the IRS disallowed amortization deductions, on the ground that the asset was not separable from goodwill. Both taxpayers and the Service spend enormous amounts of time and money in examinations and litigation of this issue.

The Rostenkowski proposal (as modified in the tax bill markup by the House Ways and Means Committee) would enact Sec. 197, allowing an amortization deduction for any amortizable Sec. 197 intangible. Amortization would be straight-line over 14 years beginning with the month in which such intangible was acquired.

An amortizable Sec. 197 intangible is any Sec. 197 intangible acquired by the taxpayer after the date of enactment and which is held in connection with the conduct of a trade or business or an activity described in Sec. 212. The term "Sec. 197 intangible" includes goodwill, going concern value, and any of the following intangible items: work force in place; business books and records, operating systems or other information base (e.g., customer lists); any patent, copyright, formula, process, design, pattern, know-how, format or other similar item; any customer-based intangible; any supplier-based intangible; and any other similar item. It also includes any license, permit or other right granted by a governmental unit, agency or instrumentality; any covenant not to compete entered into in connection with the acquisition of a trade or business; and any franchise, trademark or trade name.

The term "Sec. 197 intangible" would not include self-created intangibles (such as goodwill resulting...