Proposed intangible asset legislation.

• Author: Luchs, Lorin D.

On Jan. 5, 1993, House Ways and Means Committee Chairman Rostenkowski reintroduced legislation as part of HR 13, the Tax Simplification Act of 1993, that provides uniform rules for amortizing intangible assets - including goodwill.

The proposed legislation generally requires specified intangibles, designated as "Sec. 197 intangibles," to be amortized ratably over 14 years - beginning with the month of acquisition. (See the charts of those assets included (on this page) and excluded (page 314) as Sec. 197 intangibles.) The proposed legislation would be effective for intangibles acquired after the date of enactment. However, an election would be available to apply the legislation to Sec. 197 intangibles acquired after July 25, 1991 (the date that the legislation was first introduced).

Firms that provide appraisal and cost segregation studies for business acquisitions, and are concerned that the proposed legislation will reduce the need for their services, should relax. First, the proposed legislation will not eliminate the need to value tangible assets (includible as "Class III assets" under the Sec. 338 and 1060 regulations) so that any remaining purchase price can be apportioned to the Sec. 197 intangibles ("Class IV assets"). Moreover, under this legislation, each Sec. 197 intangible acquired "in a transaction or series of related transactions" will have to be identified and separately valued, notwithstanding that all acquired Sec. 197 intangibles are amortized over 14 years.

This latter necessity would result from the proposed legislative provision that would not recognize loss (but would recognize gain) on the sale or worthlessness of a Sec. 197 intangible previously acquired in a transaction or series of related transactions -- if one or more other Sec. 197 intangibles, acquired in the same transaction, are retained. (See proposed Sec. 197(f)(1).) Furthermore, the disallowed loss must be apportioned among, and added to the bases of, the Sec. 197 intangibles retained, based on their respective adjusted bases.

Assets Included as Sec. 197 Intangibles

* Goodwill.

* Going concern value.

* Work force in place (agency force or assembled work force.)

* Work force composition (e.g., work force experience, education or

* Employment agreements and relationships.

* Business books and records, operating systems and any other information base. Examples: Technical manuals, training manuals or programs, data files, accounting or inventory control...