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Amortization of Intangibles (Portfolio 533)

Product Code: TPOR40
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Amortization of Intangibles, written by Annette Nellen of San Jose State University, describes the §197 rules on amortizing intangible assets and the rules on amortizing intangible assets that are not §197 intangibles. 

This Portfolio discusses in depth §197 and its tax planning pitfalls and opportunities. The Portfolio also discusses the situations in which intangible assets are excluded from amortization under §197. Such intangibles may be amortizable under the rules of §167 and the regulations thereunder. Rules provided under §263(a) and the regulations thereunder are also discussed because the need to identify when expenditures create capitalizable intangible assets is crucial to knowing if amortization rules apply.  In addition, special rules, such as those for separately acquired software and patents, are covered. Other provisions dealing with non intangibles, such as start-up costs and R&D expenditures, are also noted.

This Portfolio also provides an overview to special rules related to amortization of intangibles, such as treatment for alternative minimum tax purposes, accounting method changes, and purchase price allocations under.  

A discussion of pre-§197 law is included in the Worksheets as taxpayers may have such assets. In addition, the Worksheets include a table with examples illustrating the various rules that might apply due to the interaction of the capitalization and amortization provisions. 

Amortization of Intangibles allows you to benefit from:

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
  • Invaluable practice documents including tables, charts and lists.
  • Plain-English guidance from world-class experts.
  • Real-world and in-depth analysis that lets you explore various options.
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
  • Alternative approaches to both common and unique tax scenarios.

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.

 

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Detailed Analysis

I. General Introduction

II. Amortization Overview

A. In General

B. When Amortization Applies

1. Framework

a. Incurred

b. Capitalization versus Expensing

c. Applicable Amortization Provision

d. Placed in Service

2. Amortization Trends

3. Amortization and Tax Reform

III. Section 197 Intangibles

A. In General

1. Historical Background to the Enactment of § 197

2. Purpose

3. Related Rules

4. Overview to the Operation of § 197

5. Intangible vs. Tangible

B. Section 197 Intangibles Defined

1. Relevance of How the Intangible was Obtained

a. Overview

b. Transactions Involving the Acquisition of Assets Constituting a Trade or Business or Substantial Portion Thereof

c. Self-Created Intangibles

2. Goodwill and Going Concern Value

3. Workforce in Place

4. Information Base

5. Know-How, Patents, Copyrights, Package Designs, Software, Etc.

a. In General

b. Package Design Costs

c. Software

6. Customer-Based Intangibles

7. Supplier-Based Intangibles

8. Other Similar Items

9. Licenses, Permits and Other Rights Granted by Governmental Units

10. Covenants Not to Compete and Similar Arrangements

11. Franchises, Trademarks, and Trade Names

12. Contracts for the Use of § 197 Intangibles and Term Interests in § 197 Intangibles

C. Computing the § 197 Deduction

1. Placed in Service

2. Computation of the Amortization Deduction

3. Contingent Amounts

4. Intangibles Leased to Tax-Exempt Entities

D. Disposition of § 197 Intangibles

1. Denial of Loss on Certain Dispositions of § 197 Intangibles

2. Character of Gain or Loss

3. Nonrecognition Transactions

E. Special Rules for Applying § 197

1. Certain Partnership Transactions

2. Reinsurance Transactions

3. Anti-Abuse Rules

F. Effective Date Rules

1. In General

2. Election to Apply § 197 to Acquisitions After July 25, 1991

a. Basic Rules

b. Mechanics of Election

c. Partnership Rules

d. Controlled and Consolidated Group Rules

e. Foreign Corporation Rules

3. Binding Written Contract Election

4. The Anti-Churning Rules

a. General Rule

b. Exceptions to the Anti-Churning Rules

c. Partnership Rules

d. Anti-Abuse Rule

5. The Impact of the 1993 RRA on Pre-§ 197 Audit Cases

6. Effective Date of the Regulations

G. Tax Planning Under § 197: An Example

IV. Intangibles Excluded From or Not Governed by § 197

A. In General

B. Expenditures Required to be Capitalized Under Regs. § 1.263(a)-4 and -5

1. History

2. Intangible Benefits Required to be Capitalized

a. Overview

b. Acquired Intangibles

c. Created Intangibles

d. Expenditures to Create or Enhance a Separate and Distinct Intangible Asset

e. Intangibles to be Identified in Future Guidance

f. Facilitative Costs to Acquire or Create an Intangible Described Above

g. Facilitative Costs to Acquire a Trade or Business, Change Capital Structure of a Business or Certain Other Transactions

3. 12-Month Rule

C. Amortization Possibilities Under § 167

1. Regs. § 1.167(a)-3 Basics

2. Judicial Interpretation of Regs. § 1.167(a)-3(a)

3. Evolution of the Houston Chronicle Test

a. The Mass Asset Rule

b. Definitional Goodwill

c. Newark

4. The Valuation Requirement

5. The Limited Useful Life Requirement

6. Straight-Line Method

7. 15-Year Safe Harbor Amortization for Certain Intangible Assets

8. Other Amortization Rules Under § 167

D. Non-Amortizable Intangibles

E. Intangibles Specifically Excluded from § 197 and How Treated

1. In General

2. Interests in a Corporation, Partnership, Trust, or Estate

3. Interests Under Financial Contracts

4. Interests in Land

a. In General

b. Easements

c. Grazing Rights

d. Life Estates and Remainder Interests in Property

5. Certain Computer Software

a. Developed Computer Software

b. Acquired Computer Software

6. Separately Acquired Interests in Films, Sound Recordings, Videotapes, or Books

7. Separately Acquired Patents and Copyrights

8. Separately Acquired Governmental or Contract Rights

9. Interests Under Leases of Tangible Property

a. In General

b. Lease Cancellation Payments

10. Interests Under Indebtedness

11. Certain Transaction Costs

12. Separately Acquired Mortgage Servicing Rights

13. Separately Acquired Contracts for the Use of § 197 Intangibles

F. Intangibles Specifically Covered by Other IRC Provisions

1. Special Rules for Costs Incurred by Authors, Photographers, and Artists

2. Certain Musical Works and Copyrights

3. Start-Up and Organizational Costs

4. Research and Development (R& D) Expenditures

5. Geological and Geophysical Expenditures

V. Related Rules and Guidance

A. Alternative Minimum Tax (AMT)

B. Accounting Method Changes

C. Purchase Price Allocation Under § § 338 and 1060 Asset Acquisitions After March 15, 2001

D. State Law

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Working Papers

Table of Worksheets

Worksheet 1 Capitalization and Amortization Framework

Worksheet 2 Examples of Various Intangibles and their Tax Treatment

Worksheet 3 Outline of the § 1.197-2 Regulations

Worksheet 4 Omnibus Budget Reconciliation Act of 1993 Conference Report on Section 197 H.R. Rep. 213, 103d Cong., 1st Sess. 672â€"696 (1993)

Worksheet 5 Congressional Research Service Report Amortization of Customer-Based Intangibles: An Economic Perspective

Worksheet 6 Sample Covenant Not to Compete

Worksheet 7 IRS Settlement Initiative Program for Intangible Assets (released Feb. 9, 1994)

Worksheet 8 Amortization of Specific Types of Intangible Property Under Pre-§ 197 Law

Bibliography

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Treasury Rulings:

Cases:

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Annette Nellen
Annette Nellen (B.S., CSU, Northridge; MBA, Pepperdine University; J.D. Loyola Law School) is a Professor of Accounting & Taxation in the College of Business at San José State University, and a Fellow with the New America Foundation.