Question

Did you notice, when you read Fitch, that whatever tangible assets (computers, furniture, etc.) were included in the accounting practice at issue in that case ap-parently added up to so little that the IRS didn’t even bother trying to argue that any of the purchase price paid (twice!) for the practice should be allocated to anything other than goodwill and other § 197 intangibles…??? Briefly explain what a “§ 197 intangible” is and why Congress decided to throw all purchased intangibles (such as in Fitch) together into a 15-year amortization pot.

plz ans asap....

Answer 1

Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (or after July 25, 1991, if chosen) in connection with the acquisition of a business which must be amortized over 15 years from the date of acquisition regardless of the assets useful life.You start amortization the month the intangible is acquired. Use Form 4563 to report annual amortization. The annual amortization amount is generally determined by dividing the cost by 15.An amortizeable section 197 intangible is treated as depreciable property; it is not a capital asset. If held for more than one year, it will generally qualify as a section 1231 asset and be subject to the rules of section 1231.

Applicable Intangible Assets

For purposes of Section 197, intangible assets include:

1. Goodwill
2. Going concern value
3. The workforce in place (that is, current employees, including their experience, education, and training)
4. Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers
5. A patent, copyright, formula, process, design, pattern, know-how, format, or similar item
6. A customer-based intangible, including customer base and relationships with customers
7. A supplier-based intangible (the value of future purchases due to relationships with vendors)
8. Any item similar to items (3) through (7)
9. A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals)
10. An agreement or covenant not to compete or non-compete agreement entered into in connection with the acquisition of an interest in a trade or business; and
11. A franchise, trademark, or trade name
12. A contract for the use of, or a term interest in, any item in this list.5

You can't amortize items 1 through 8 that you created rather than acquired unless you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business.6

Amortization of Intangible Assets for Tax Purposes

For corporations to take these tax deductions, the Internal Revenue Service mandates that they amortize their legal and competitive intangible assets over 15 years. This list includes going concern value, patents, copyrights, trademarks or trade names, franchises, noncompete agreements, licenses and permits.

You must generally amortize over 15 years the capitalized costs of "section 197 intangibles" you acquired after August 10, 1993. You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income.