Internal Revenue Code:Sec. 197. Amortization of goodwill and certain other intangibles
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Contents |
Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter B - Computation of Taxable Income
PART VI - ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
Statute
Sec. 197. Amortization of goodwill and certain other intangibles
(a) General rule
A taxpayer shall be entitled to an amortization deduction with
respect to any amortizable section 197 intangible. The amount of
such deduction shall be determined by amortizing the adjusted basis
(for purposes of determining gain) of such intangible ratably over
the 15-year period beginning with the month in which such
intangible was acquired.
(b) No other depreciation or amortization deduction allowable
Except as provided in subsection (a), no depreciation or
amortization deduction shall be allowable with respect to any
amortizable section 197 intangible.
(c) Amortizable section 197 intangible
For purposes of this section -
(1) In general
Except as otherwise provided in this section, the term
''amortizable section 197 intangible'' means any section 197
intangible -
(A) which is acquired by the taxpayer after the date of the
enactment of this section, and
(B) which is held in connection with the conduct of a trade
or business or an activity described in section 212.
(2) Exclusion of self-created intangibles, etc.
The term ''amortizable section 197 intangible'' shall not
include any section 197 intangible -
(A) which is not described in subparagraph (D), (E), or (F)
of subsection (d)(1), and
(B) which is created by the taxpayer.
This paragraph shall not apply if the intangible is created in
connection with a transaction (or series of related transactions)
involving the acquisition of assets constituting a trade or
business or substantial portion thereof.
(3) Anti-churning rules
For exclusion of intangibles acquired in certain
transactions, see subsection (f)(9).
(d) Section 197 intangible
For purposes of this section -
(1) In general
Except as otherwise provided in this section, the term
''section 197 intangible'' means -
(A) goodwill,
(B) going concern value,
(C) any of the following intangible items:
(i) workforce in place including its composition and terms
and conditions (contractual or otherwise) of its employment,
(ii) business books and records, operating systems, or any
other information base (including lists or other information
with respect to current or prospective customers),
(iii) any patent, copyright, formula, process, design,
pattern, knowhow, format, or other similar item,
(iv) any customer-based intangible,
(v) any supplier-based intangible, and
(vi) any other similar item,
(D) any license, permit, or other right granted by a
governmental unit or an agency or instrumentality thereof,
(E) any covenant not to compete (or other arrangement to the
extent such arrangement has substantially the same effect as a
covenant not to compete) entered into in connection with an
acquisition (directly or indirectly) of an interest in a trade
or business or substantial portion thereof, and
(F) any franchise, trademark, or trade name.
(2) Customer-based intangible
(A) In general
The term ''customer-based intangible'' means -
(i) composition of market,
(ii) market share, and
(iii) any other value resulting from future provision of
goods or services pursuant to relationships (contractual or
otherwise) in the ordinary course of business with customers.
(B) Special rule for financial institutions
In the case of a financial institution, the term
''customer-based intangible'' includes deposit base and similar
items.
(3) Supplier-based intangible
The term ''supplier-based intangible'' means any value
resulting from future acquisitions of goods or services pursuant
to relationships (contractual or otherwise) in the ordinary
course of business with suppliers of goods or services to be used
or sold by the taxpayer.
(e) Exceptions
For purposes of this section, the term ''section 197 intangible''
shall not include any of the following:
(1) Financial interests
Any interest -
(A) in a corporation, partnership, trust, or estate, or
(B) under an existing futures contract, foreign currency
contract, notional principal contract, or other similar
financial contract.
(2) Land
Any interest in land.
(3) Computer software
(A) In general
Any -
(i) computer software which is readily available for
purchase by the general public, is subject to a nonexclusive
license, and has not been substantially modified, and
(ii) other computer software which is not acquired in a
transaction (or series of related transactions) involving the
acquisition of assets constituting a trade or business or
substantial portion thereof.
(B) Computer software defined
For purposes of subparagraph (A), the term ''computer
software'' means any program designed to cause a computer to
perform a desired function. Such term shall not include any
data base or similar item unless the data base or item is in
the public domain and is incidental to the operation of
otherwise qualifying computer software.
(4) Certain interests or rights acquired separately
Any of the following not acquired in a transaction (or series
of related transactions) involving the acquisition of assets
constituting a trade business or substantial portion thereof:
(A) Any interest in a film, sound recording, video tape,
book, or similar property.
(B) Any right to receive tangible property or services under
a contract or granted by a governmental unit or agency or
instrumentality thereof.
(C) Any interest in a patent or copyright.
(D) To the extent provided in regulations, any right under a
contract (or granted by a governmental unit or an agency or
instrumentality thereof) if such right -
(i) has a fixed duration of less than 15 years, or
(ii) is fixed as to amount and, without regard to this
section, would be recoverable under a method similar to the
unit-of-production method.
(5) Interests under leases and debt instruments
Any interest under -
(A) an existing lease of tangible property, or
(B) except as provided in subsection (d)(2)(B), any existing
indebtedness.
(6) Mortgage servicing
Any right to service indebtedness which is secured by
residential real property unless such right is acquired in a
transaction (or series of related transactions) involving the
acquisition of assets (other than rights described in this
paragraph) constituting a trade or business or substantial
portion thereof.
(7) Certain transaction costs
Any fees for professional services, and any transaction costs,
incurred by parties to a transaction with respect to which any
portion of the gain or loss is not recognized under part III of
subchapter C.
(f) Special rules
(1) Treatment of certain dispositions, etc.
(A) In general
If there is a disposition of any amortizable section 197
intangible acquired in a transaction or series of related
transactions (or any such intangible becomes worthless) and one
or more other amortizable section 197 intangibles acquired in
such transaction or series of related transactions are retained
-
(i) no loss shall be recognized by reason of such
disposition (or such worthlessness), and
(ii) appropriate adjustments to the adjusted bases of such
retained intangibles shall be made for any loss not
recognized under clause (i).
(B) Special rule for covenants not to compete
In the case of any section 197 intangible which is a covenant
not to compete (or other arrangement) described in subsection
(d)(1)(E), in no event shall such covenant or other arrangement
be treated as disposed of (or becoming worthless) before the
disposition of the entire interest described in such subsection
in connection with which such covenant (or other arrangement)
was entered into.
(C) Special rule
All persons treated as a single taxpayer under section
41(f)(1) shall be so treated for purposes of this paragraph.
(2) Treatment of certain transfers
(A) In general
In the case of any section 197 intangible transferred in a
transaction described in subparagraph (B), the transferee shall
be treated as the transferor for purposes of applying this
section with respect to so much of the adjusted basis in the
hands of the transferee as does not exceed the adjusted basis
in the hands of the transferor.
(B) Transactions covered
The transactions described in this subparagraph are -
(i) any transaction described in section 332, 351, 361,
721, 731, 1031, or 1033, and
(ii) any transaction between members of the same affiliated
group during any taxable year for which a consolidated return
is made by such group.
(3) Treatment of amounts paid pursuant to covenants not to
compete, etc.
Any amount paid or incurred pursuant to a covenant or
arrangement referred to in subsection (d)(1)(E) shall be treated
as an amount chargeable to capital account.
(4) Treatment of franchises, etc.
(A) Franchise
The term ''franchise'' has the meaning given to such term by
section 1253(b)(1).
(B) Treatment of renewals
Any renewal of a franchise, trademark, or trade name (or of a
license, a permit, or other right referred to in subsection
(d)(1)(D)) shall be treated as an acquisition. The preceding
sentence shall only apply with respect to costs incurred in
connection with such renewal.
(C) Certain amounts not taken into account
Any amount to which section 1253(d)(1) applies shall not be
taken into account under this section.
(5) Treatment of certain reinsurance transactions
In the case of any amortizable section 197 intangible resulting
from an assumption reinsurance transaction, the amount taken into
account as the adjusted basis of such intangible under this
section shall be the excess of -
(A) the amount paid or incurred by the acquirer under the
assumption reinsurance transaction, over
(B) the amount required to be capitalized under section 848
in connection with such transaction.
Subsection (b) shall not apply to any amount required to be
capitalized under section 848.
(6) Treatment of certain subleases
For purposes of this section, a sublease shall be treated in
the same manner as a lease of the underlying property involved.
(7) Treatment as depreciable
For purposes of this chapter, any amortizable section 197
intangible shall be treated as property which is of a character
subject to the allowance for depreciation provided in section
167.
(8) Treatment of certain increments in value
This section shall not apply to any increment in value if,
without regard to this section, such increment is properly taken
into account in determining the cost of property which is not a
section 197 intangible.
(9) Anti-churning rules
For purposes of this section -
(A) In general
The term ''amortizable section 197 intangible'' shall not
include any section 197 intangible which is described in
subparagraph (A) or (B) of subsection (d)(1) (or for which
depreciation or amortization would not have been allowable but
for this section) and which is acquired by the taxpayer after
the date of the enactment of this section, if -
(i) the intangible was held or used at any time on or after
July 25, 1991, and on or before such date of enactment by the
taxpayer or a related person,
(ii) the intangible was acquired from a person who held
such intangible at any time on or after July 25, 1991, and on
or before such date of enactment, and, as part of the
transaction, the user of such intangible does not change, or
(iii) the taxpayer grants the right to use such intangible
to a person (or a person related to such person) who held or
used such intangible at any time on or after July 25, 1991,
and on or before such date of enactment.
For purposes of this subparagraph, the determination of whether
the user of property changes as part of a transaction shall be
determined in accordance with regulations prescribed by the
Secretary. For purposes of this subparagraph, deductions
allowable under section 1253(d) shall be treated as deductions
allowable for amortization.
(B) Exception where gain recognized
If -
(i) subparagraph (A) would not apply to an intangible
acquired by the taxpayer but for the last sentence of
subparagraph (C)(i), and
(ii) the person from whom the taxpayer acquired the
intangible elects, notwithstanding any other provision of
this title -
(I) to recognize gain on the disposition of the
intangible, and
(II) to pay a tax on such gain which, when added to any
other income tax on such gain under this title, equals such
gain multiplied by the highest rate of income tax
applicable to such person under this title,
then subparagraph (A) shall apply to the intangible only to
the extent that the taxpayer's adjusted basis in the
intangible exceeds the gain recognized under clause (ii)(I).
(C) Related person defined
For purposes of this paragraph -
(i) Related person
A person (hereinafter in this paragraph referred to as the
''related person'') is related to any person if -
(I) the related person bears a relationship to such
person specified in section 267(b) or section 707(b)(1), or
(II) the related person and such person are engaged in
trades or businesses under common control (within the
meaning of subparagraphs (A) and (B) of section 41(f)(1)).
For purposes of subclause (I), in applying section 267(b) or
707(b)(1), ''20 percent'' shall be substituted for ''50
percent''.
(ii) Time for making determination
A person shall be treated as related to another person if
such relationship exists immediately before or immediately
after the acquisition of the intangible involved.
(D) Acquisitions by reason of death
Subparagraph (A) shall not apply to the acquisition of any
property by the taxpayer if the basis of the property in the
hands of the taxpayer is determined under section 1014(a).
(E) Special rule for partnerships
With respect to any increase in the basis of partnership
property under section 732, 734, or 743, determinations under
this paragraph shall be made at the partner level and each
partner shall be treated as having owned and used such
partner's proportionate share of the partnership assets.
(F) Anti-abuse rules
The term ''amortizable section 197 intangible'' does not
include any section 197 intangible acquired in a transaction,
one of the principal purposes of which is to avoid the
requirement of subsection (c)(1) that the intangible be
acquired after the date of the enactment of this section or to
avoid the provisions of subparagraph (A).
(10) Tax-exempt use property subject to lease.--In the
case of any section 197 intangible which would be tax-exempt use
property as defined in subsection (h) of section 168 if such
section applied to such intangible, the amortization period
under this section shall not be less than 125 percent of the
lease term (within the meaning of section 168(i)(3)).
(g) Regulations
The Secretary shall prescribe such regulations as may be
appropriate to carry out the purposes of this section, including
such regulations as may be appropriate to prevent avoidance of the
purposes of this section through related persons or otherwise.
Sources
(Added Pub. L. 103-66, title XIII, Sec. 13261(a), Aug. 10, 1993,
107 Stat. 532.)
References in Text
AMENDMENTS
2004 - Pub. L. 108-357, Sec. 886(a). Section 197(e) (relating to
exceptions to definition of section 197 intangible) is amended by
striking paragraph (6) and by redesignating paragraphs (7) and (8)
as paragraphs (6) and (7), respectively.
Effective <<NOTE: 26 USC 197 note.>> Dates.--the
amendments made by this section shall apply to property acquired
after the date of the enactment of this Act.
2004 - Pub. L. 108-357, Sec. 847(b)(3). Section 197(f) (relating to
special rules) is amended by adding at the end the following new
paragraph: "(10) Tax-exempt use property subject to lease.--...".
REFERENCES IN TEXT
The date of the enactment of this section, referred to in
subsecs. (c)(1)(A) and (f)(9)(A), (F), is the date of enactment of
Pub. L. 103-66, which was approved Aug. 10, 1993.
Miscellaneous
EFFECTIVE DATE
Section 13261(g) of Pub. L. 103-66, as amended by Pub. L.
104-188, title I, Sec. 1703(l), Aug. 20, 1996, 110 Stat. 1877,
provided that:
''(1) In general. - Except as otherwise provided in this
subsection, the amendments made by this section (enacting this
section and amending sections 167, 642, 848, 1016, 1060, 1245, and
1253 of this title) shall apply with respect to property acquired
after the date of the enactment of this Act (Aug. 10, 1993).
''(2) Election to have amendments apply to property acquired
after july 25, 1991. -
''(A) In general. - If an election under this paragraph applies
to the taxpayer -
''(i) the amendments made by this section shall apply to
property acquired by the taxpayer after July 25, 1991,
''(ii) subsection (c)(1)(A) of section 197 of the Internal
Revenue Code of 1986 (as added by this section) (and so much of
subsection (f)(9)(A) of such section 197 as precedes clause (i)
thereof) shall be applied with respect to the taxpayer by
treating July 25, 1991, as the date of the enactment of such
section, and
''(iii) in applying subsection (f)(9) of such section, with
respect to any property acquired by the taxpayer or a related
person on or before the date of the enactment of this Act, only
holding or use on July 25, 1991, shall be taken into account.
''(B) Election. - An election under this paragraph shall be
made at such time and in such manner as the Secretary of the
Treasury or his delegate may prescribe. Such an election by any
taxpayer, once made -
''(i) may be revoked only with the consent of the Secretary,
and
''(ii) shall apply to the taxpayer making such election and
any other taxpayer under common control with the taxpayer
(within the meaning of subparagraphs (A) and (B) of section
41(f)(1) of such Code) at any time after August 2, 1993, and on
or before the date on which such election is made.
''(3) Elective binding contract exception. -
''(A) In general. - The amendments made by this section shall
not apply to any acquisition of property by the taxpayer if -
''(i) such acquisition is pursuant to a written binding
contract in effect on the date of the enactment of this Act and
at all times thereafter before such acquisition,
''(ii) an election under paragraph (2) does not apply to the
taxpayer, and
''(iii) the taxpayer makes an election under this paragraph
with respect to such contract.
''(B) Election. - An election under this paragraph shall be
made at such time and in such manner as the Secretary of the
Treasury or his delegate shall prescribe. Such an election, once
made -
''(i) may be revoked only with the consent of the Secretary,
and
''(ii) shall apply to all property acquired pursuant to the
contract with respect to which such election was made.''
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 167, 170, 642, 848, 1060
of this title.
