Discussion:Character of sale of intangibles
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Discussion Forum Index --> Tax Questions --> Character of sale of intangibles
| 5 October 2007 | |
| Hi,
Does anyone know a reason why the sale of the following would NOT be treated as capital assets: trade names, customer relationships, assembled workforce, and supplier relationships. I am doing some reading to make sure that I am not missing something, but the client wants an answer yesterday, and I thought I would check here to see if anyone knows of any traps. Thanks you! | |
| 5 October 2007 | |
| These appear to be 197 intangibles and are capital assets. | |
| 5 October 2007 | |
| Thanks for your reply. Not all 197 intangibles generate capital gain, ie covenant not to compete generates ordinary income. Also, (discovered just a few minutes ago), the sale of franchises, trademarks, and trade names may generate ordinary income if Sec 1253 applies. Those are the traps I am worried about. | |
| 5 October 2007 | |
| If the assets were "Amortizable Section 197 Intangibles," I believe you'd follow the rules under IRC Sec. 1245/1231. See IRC 197(f)(7). For e.g., if your client were selling an acquired supplier-based intangible which she was amortizing, she may need to recapture part of any gain as ordinary. | |
| 5 October 2007 | |
| In the absence of a specific contract customer relationships probably belong to the shareholder who developed them, not the corporation. Still ordinary income, though. | |
| 5 October 2007 | |
| Thanks Bengoshi and Dennis. Dennis, why do customer relationships generate ordinary income? | |
| 6 October 2007 | |
| customer relationship is basically what the covenant not to compete is all about. | |
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