purchase price of insurance business

[schirallicpa]

This is a new client. The previous tax preparer did not amortize the portion of the purchase price that was considered intangible "business" purchase - the agency's clients.

I know there are times under GAAP when things like this just never get amortized, and are re-valued - if you will - if they decline in value. Whats the correct treatment on the tax return. Can anyone point me to "code".

thanks!!

[jasdlm]

I think that under IRC 197 you can amortize over 15 years. I also think that you can write off clients who 'leave' more quickly, but I don't know how you would go about tracking it.

[kcjenkins]

If you have determined that this intangible asset is an amortizable one then you use the asset entry, category Z subcategory 9 and it is 15 years SL. Section 197(c )(1) provides that, with certain exceptions, the term “amortizable section 197 intangible” means any section 197 intangible, (A) that is acquired by the taxpayer after the date of the enactment of § 197, and ( that is held in connection with the conduct of a trade or business or an activity described in § 212.

Section 197(d)(1) provides that the term “section 197 intangible” means (A) goodwill; (

going concern value; © 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 items, (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 the 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.

Under § 197(f)(9)(A), the term “amortizable section 197 intangible” does not include any section 197 intangible that is goodwill or going concern value (or for which depreciation or amortization would not have been allowable but for § 197) and that is acquired by the taxpayer after the date of the enactment of § 197, 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.

An intangible described in § 197(f)(9) (a section 197(f)(9) intangible) is treated as an amortizable section 197 intangible only to the extent permitted under § § 1.197-2(h). The purpose of the anti-churning rules of § § 197(f)(9) and § § 1.197-2(h) is to prevent the amortization of section 197(f)(9) intangibles unless they are transferred after the applicable effective date in a transaction giving rise to a significant change in ownership or use. Section 1.197-2(h)(1)(ii). Section 1.197-2(h)(12) provides special rules that apply for purposes of determining whether transactions involving partnerships give rise to a significant change in ownership or use.

Under § 1.197-2(h)(5), a section 197(f)(9) intangible may be amortized by the acquirer of the intangible if the intangible was an amortizable section 197 intangible in the hands of the seller (or transferor), but only if the acquisition transaction and the transaction in which the seller (or transferor) acquired the intangible or interest therein are not part of a series of related transactions.

[schirallicpa]

You guys are awesome. This is exactly what I was thinking, and you, especially, kcjenkins - are always so helpful.

thank you!!

[kcjenkins]

I like to help when I have the time, and in this case I knew right where the cite was so it was easy for me.

[jainen]

>>there are times under GAAP when things like this just never get amortized<<

In my observation the tax code generally does NOT follow Generally Accepted Accounting Principles, which is why corporate returns have a Schedule M to reconcile the dual sets of books.

You provide little information about "the portion of the purchase price that was considered intangible "business" purchase - the agency's clients." In my opinion a customer list or set of work files might constitute a Section 197 intangible if it was identified and valued as such in the transaction. However, if for some reason the previous tax preparer did not do so, the taxpayer presumably has already established an accounting method in respect to that item. In my opinion you can not change it now without IRS permission using Form 3115.

[kcjenkins]

Actually, that depends on how long ago the business was purchased. If it was 2008, and only one year was omitted, it's not too late to correct directly. Of course, if it's more than two years ago, then it would be a change in method, and need approval.