Customer Based Intangibles

In numerous cases, the courts, utilizing the amortization schedule payment calculator, have ruled that customer-based intangibles are an inseparable part of a non-depreciable asset body called goodwill. Under this theory, goodwill is considered a self-regenerating asset in that the expiring components (e.g., the customers) are replaced so that the value of the asset remains relatively constant over time. Even if the value of the goodwill fluctuates over time, there is no practical method to measure its useful life, since goodwill cannot be separated into distinct elements or assets, each having its own depreciable useful life.

Yet other courts have held that certain customer based assets are capable of being of value and do possess a determinable useful life. Such a determination, however, is factual, and the taxpayer bears the burden of establishing the right to claim the deduction. The Supreme Court's recent decision in Newark Morning Ledger Co. and the enactment of Section 197 are the latest attempts to clarify the amortization of customer-based intangibles.

Newark Morning Ledger Co. In Newark Morning Ledger, the Supreme Court held that in order to claim a depreciation deduction for customer-based intangibles the taxpayer must be able to prove that the asset can be valued and that it has a limited useful life. Once these two criteria have been met, the deduction may be claimed regardless of how much the asset continues to reflect the expectancy of continued patronage. According to the Court, the significant question is whether the asset is capable of being valued and has a determinable life, not if the asset falls within the concept of goodwill. The taxpayer's burden of proof, in order to sustain the deduction, is significant to meeting this test.

This decision will benefit those taxpayers who acquire a business and now will receive significant deductions for the amortization of acquired intangibles. Some taxpayers may also benefit if they did not allocate any of the purchase price of an acquired business to amortizable assets or were too conservative in their estimate of the value of the acquired intangible assets. While the Supreme Court's decision in Newark Morning Ledger eliminated the controversy over whether some customer-based intangible assets are separate and distinct from goodwill, it is still possible for the Service and taxpayers to disagree as to the useful lives and value of the purchase assets. As a result, Congress attempted to reduce potential disputes by enacting Section 197, concerning the tax treatment of purchased intangibles. Despite the enactment of Section 197, the Newark Morning Ledger decision will continue to be relevant for those purchasing assets before the enactment of Section 197 or for those who do not elect to have Section 197 applied retroactively. Section 197 Most of the uncertainty regarding the depreciable status of acquired intangibles has been removed with enactment of Section 197 as part of the 2003 Omnibus Budget Reconciliation Act.(12) In addition to removing uncertainty, this provision provides for consistent treatment of taxpayers in similar situations.