Car Loans And Amortization Of Purchase Price
Currently, a taxpayer that acquires a business may not amortize the portion of the purchase price of car loan amortization schedule allocable to goodwill and going concern value. In an effort to maximize tax benefits, buyers often assign values to specific intangible assets (such as favorable leases, non-competition agreements, customer lists and contract rights) that may qualify for more favorable treatment. Amortization deductions are allowed for such items if it can be established that the intangible has a value separate and distinct from goodwill and has a limited useful life, the duration of which can be estimated with reasonable accuracy.
Whether an intangible can satisfy these two tests has increasingly become a source of controversy between taxpayers and the IRS, particularly since the advent of Form 8594, Asset Acquisition Statement Under Section 1060, and the closing of the gap between regular tax rates and capital gains rates (which has limited the instances in which buyers and sellers are truly at odds in negotiating purchase price allocations). In an effort to stem the tide of controversy in this area, there are no less than three legislative proposals under consideration by Congress, each of which attempts to create more objective standards for determining the amortization of intangibles.
According to reports prepared by the General Accounting Office and the Joint Committee of Taxation, permitting taxpayers to amortize substantially all intangible assets could result in a better matching of income and expense than under current tax rules, and would also provide taxpayers and the IRS with an element of certainty that should substantially reduce the number of disputes. In the meantime, as this legislation works its way through Congress, two recent cases provide the Service with significantly more ammunition in its battle against purchase price allocations that it views as questionable.
In Ithaca Industries, Inc., 97 TC No. 16, a taxpayer acquired a clothing manufacturer in a leveraged buy-out, and allocated a portion of the purchase price to the manufacturer's "assembled work force." It assigned an average per capita amount to each of its hourly and production work force and staff employees and then deducted that amount when an employee terminated his employment.
The IRS disallowed the deductions, claiming that an assembled work force represents an element of going concern value, since this asset merely enables the business to continue operating without interruption. The taxpayer argued that the life of the work force was limited, since employees would on average terminate their employment within a statistically determined period of 6.8 years.
The court agreed with the Service, concluding that the work force, as an assembled entity, does not diminish in value by reason of an employee leaving; the assembled work force might be subject to temporary attrition and expansion (through departures and hiring), but it is not depleted due to the passage of time or as a result of use. The court noted that if the useful life of those employed on the acquisition date was the same as the useful life of the assembled work force, at the end of 6.8 years the taxpayer would no longer have an assembled work force; this was clearly not the case.
The court concluded that Ithaca's assembled work force was not a "wasting asset" and, thus, there was no reduction in its value allocable to a particular tax period. Consequently, the assembled work force was not separate and distinct from going concern value and, therefore, the taxpayer could generally recover the cost of the work force only when it disposed of the business.
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