Section 52 Section 197 Intangibles

• Library: Bus Trans 2005

The enactment of I.R.C. § 197 has substantially decreased the incentive for the IRS to reallocate purchase price to intangible assets such as goodwill and going concern value. Under former law, these assets were not amortizable. But I.R.C. § 197 provides that all “section 197 intangibles” acquired after August 10, 1993, that are used in a trade or business or an activity described in I.R.C. § 212 will be amortizable on a straight line basis over a 15-year life beginning with the month in which the intangible asset is acquired. An I.R.C. § 197 intangible includes:

• goodwill
• going concern value
• work force in place
• business books and records
• patents;
• copyright formula;
• process, design, pattern, know how, format, or any other similar item;
• any customer-based intangible;
• any supplier-based intangible;
• any license, permit, or other right;
• any covenant not to compete; and
• any franchise, trademark, or trade name.

See I.R.C. § 197(d). Assets specifically excluded from the definition of I.R.C. § 197 intangible are set forth in I.R.C. § 197(e).

It is important to note that I.R.C. § 197 mandates a 15-year amortization period if an asset is within its scope. Accordingly, the cost of a noncompetition agreement with a term of 5 years, or any other term, would be amortizable over a 15-year period despite its shorter economic useful life.

I.R.C. § 197 sets forth numerous other rules that limit recognition of losses on intangibles in certain circumstances and that limit availability of any I.R.C. § 197 amortization in cases in which the intangible has been “churned”—i.e., transferred from or used by a related person before July 25, 1991. For a further discussion of issues associated with I.R.C. § 197 intangibles, see:

• James A. Doering, The Amortization of Intangibles: Before and After Section 197, 71 Taxes 621–35 (Oct. 1993)

• F. Michael Dell, Proposed Rules on Amortization of Intangibles Provide Important Guidance, Few Surprises, 86 J. Tax’n 278–83 (May 1997)

D. (§10.53) Capitalization of Costs Under I.R.C. § 263

Late in 2003, the IRS issued final regulations under I.R.C. § 263 that address capitalization of certain expenditures incurred in connection with acquisition of intangibles or business acquisitions. See Treas. Reg. §§ 1.263(a)-4 and 1.263(a)-5.

A taxpayer is required to capitalize amounts paid that “facilitate a transaction.” The defined transactions include an acquisition of assets constituting a business or an acquisition of an ownership interest...