Under new IRC Sec. 197, certain intangible property (defined as “IRC Sec. 197 intangibles”) are amortizable ratably over a 15-year period. The new law represents a substantial change from the prior law, under which neither good will nor going-concern value, two examples of IRC Sec. 197 intangibles, were amortizable.
Either as a legislative judgment, or as a rule of administrative convenience, the 15-year amortization period applies regardless of the actual useful life of the IRC Sec. 197 intangible. Moreover, Sec. 197 occupies the amortization field entirely: no other amortization or depreciation rules can apply to intangible property amortizable under IRC Sec. 197.
The amortization deduction provided by IRC Sec. 197 is allowable with respect to the capitalized costs of certain intangible property that is acquired and held by the taxpayer in connection with the conduct of a trade or business or an activity engaged in for the production of income. Although the intangible must be held in connection with a trade or business, it need not constitute part of a trade or business when acquired. The amount of the deduction is calculated by amortizing the adjusted (e.g., cost) basis of the IRC Sec. 197 intangible ratably over the 14-year period, beginning in the month in which the intangible was acquired.
The following IRC Sec. 197 intangibles are defined in the Conference Committee Report which accompanied the legislation:
• Goodwill is defined as “the value of a trade or business that is attributable to the expectancy of continued customer patronage, whether due to the name of a trade or business, the reputation of a trade or business, or any other factor.”
• Going concern value is defined as “the additional element of value of a trade or business that attaches to property by reason of its existence as an integral part of a going concern”;
• Workforce in place is defined as “the composition of a workforce (e.g., the experience, education, or training of a workforce), the terms and conditions of employment whether contractual or otherwise, and any value placed on employees or any of their attributes.”
• Information base is defined to include “business books and records, operating systems, and any other information base including lists or other information with respect to current or prospective customers.”
• Know-how is defined as “any patent, copyright, formula, process, design, pattern, know-how, format, or similar item.”
IRC Sec. 197 intangibles also include these items:
(1) any “customer-based intangible”, such as market share; (2) any “supplier-based intangible”; defined as the value resulting from future acquisition of goods or services, (3) licenses, permits, and other rights granted by governmental units; (4) covenants not to compete; and (5) any franchise, trademark or trade name.
The following items are expressly excepted from IRC Sec. 197 intangible status:
• Certain financial interests, including “any interest in a corporation, partnership, trust, estate, existing futures contract and other enumerated contracts.”
• Land, specifically “the cost of acquiring an interest in land.”
• Computer software, defined to include (i) any computer software which is readily available for purchase by the general public, and (ii) certain acquisitions of computer software not involving the acquisition of a trade or business.
Other items similarly excepted from IRC Sec. 197 status include:
(1) certain interests or rights acquired separately; (2) interests under leases and debt instruments; (3) sports franchises; (4) mortgage servicing; and (5) certain transaction costs.