Discussion:Clarification on Section 197

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Discussion Forum Index --> Basic Tax Questions --> Clarification on Section 197
Discussion Forum Index --> Tax Questions --> Clarification on Section 197

MikeDongo (talk|edits) said:

11 March 2008

Just want to make sure I got this right

ParentCo acquires 100% of TargetCo stock for 20 mil. FMW of assets is 7 mil. 13 mil is attributable to goodwill.

Is the following correct?

Goodwill CANNOT be amortized under Sec. 197 because Reg. 1.197-2

"The term section 197 intangible does not include property described in section 197(e). The following rules and definitions provide guidance concerning property to which the exceptions apply:

(1) Interests in a corporation, partnership, trust, or estate. Section 197 intangibles do not include an interest in a corporation, partnership, trust, or estate. Thus, for example, amortization under section 197 is not available for the cost of acquiring stock, partnership interests, or interests in a trust or estate, whether or not the interests are regularly traded on an established market. (See paragraph (g)(3) of this section for special rules applicable to property of a partnership when a section 754 election is in effect for the partnership.) "

HOWEVER, if ParentCo and TargetCo elect a Sec. 338 election, then the goodwill can be amortized over 15 years

Is that correct?

RJM (talk\|edits) said:	11 March 2008
Mike, my limited understanding is that a 338 deemed asset acquisition does permit you to amortize the S197's. However, the 338 election is a taxable event. Anyone with experience in this want to comment? I am interested in the details as well.

Janakpatel (talk\|edits) said:	11 March 2008
My client bought a new business in 2007 for $2.5 million and paid $450,000.00 goodwill. What do I do with the goodwill? Just park it in a depreciation schedule? Any advice.

KatieJ (talk|edits) said:

11 March 2008

For MikeDongo: Yes, if ParentCo makes a Sec. 338(g) election, or ParentCo and Seller (not TargetCo) make a joint election under Sec. 338(h)(10), OldTargetCo will be treated as if it had sold all of its assets and liquidated on the transaction date, and NewTargetCo had purchased the assets at the start of the next day. Since NewTarget has purchased assets for tax purposes, it can amortize the goodwill and any other intangibles under Sec. 197.

If you do a 338, make sure you have studied the regulations. It's complicated.

For Janak: What did your client buy -- stock, an interest in an LLC or partnership or some other entity, or assets? If they bought stock or an interest in an entity, the excess of the purchase price over the FMV of the hard assets is not purchased goodwill; it's just part of the purchaser's basis in the stock or interest. If they bought assets, there is purchased goodwill that is amortizable under Sec 197.

Janakpatel (talk\|edits) said:	11 March 2008
Thanks KatieJ, the business bought assets, so then I can amortize over 15 years.

MikeDongo (talk\|edits) said:	13 March 2008
KatieJ- Thanks. Looks like we're making the election today. Goodwill is substantial so the tax benefits should outweigh the costs.

KatieJ (talk\|edits) said:	13 March 2008
Mike, I trust you have done your own homework and understand the compliance rules and the consequences of the election, and haven't just made this decision on my say-so. Like I tell my tax research students: "Katie said so" is not authority.