I.R.C. § 197(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.
I.R.C. § 197(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.
I.R.C. § 197(c) Amortizable Section 197 Intangible —
For purposes of this section—
I.R.C. § 197(c)(1) In General —
Except as otherwise provided in this section, the term “amortizable section 197
intangible” means any section 197 intangible
I.R.C. § 197(c)(1)(A) —
which is acquired by the taxpayer after the date of the enactment of this section,
and
I.R.C. § 197(c)(1)(B) —
which is held in connection with the conduct of a trade or business or an activity
described in section 212.
I.R.C. § 197(c)(2) Exclusion Of Self-Created Intangibles, Etc. —
The term “amortizable section 197 intangible”
shall not include any section 197 intangible—
I.R.C. § 197(c)(2)(A) —
which is not described in subparagraph (D), (E), or (F) of subsection (d)(1), and
I.R.C. § 197(c)(2)(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.
I.R.C. § 197(c)(3) Anti-Churning Rules —
For exclusion of intangibles acquired in certain transactions, see subsection (f)(9).
I.R.C. § 197(d) Section 197 Intangible —
For purposes of this section—
I.R.C. § 197(d)(1) In General —
Except as otherwise provided in this section, the term “section 197 intangible”
means—
I.R.C. § 197(d)(1)(A) —
goodwill,
I.R.C. § 197(d)(1)(B) —
going concern value,
I.R.C. § 197(d)(1)(C) —
any of the following intangible items:
I.R.C. § 197(d)(1)(C)(i) —
workforce in place including its composition and terms and conditions (contractual
or otherwise) of its employment,
I.R.C. § 197(d)(1)(C)(ii) —
business books and records, operating systems, or any other information base (including
lists or other information with respect to current or prospective customers),
I.R.C. § 197(d)(1)(C)(iii) —
any patent, copyright, formula, process, design, pattern, knowhow, format, or other
similar item,
I.R.C. § 197(d)(1)(C)(iv) —
any customer-based intangible,
I.R.C. § 197(d)(1)(C)(v) —
any supplier-based intangible, and
I.R.C. § 197(d)(1)(C)(vi) —
any other similar item,
I.R.C. § 197(d)(1)(D) —
any license, permit, or other right granted by a governmental unit or an agency
or instrumentality thereof,
I.R.C. § 197(d)(1)(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
I.R.C. § 197(d)(1)(F) —
any franchise, trademark, or trade name.
I.R.C. § 197(d)(2) Customer-Based Intangible
I.R.C. § 197(d)(2)(A) In General —
The term “customer-based intangible” means—
I.R.C. § 197(d)(2)(A)(i) —
composition of market,
I.R.C. § 197(d)(2)(A)(ii) —
market share, and
I.R.C. § 197(d)(2)(A)(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.
I.R.C. § 197(d)(2)(B) Special Rule For Financial Institutions —
In the case of a financial institution, the term “customer based intangible” includes
deposit base and similar items.
I.R.C. § 197(d)(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.
I.R.C. § 197(e) Exceptions —
For purposes of this section, the term “section 197 intangible” shall not include
any of the following:
I.R.C. § 197(e)(1) Financial Interests —
Any interest—
I.R.C. § 197(e)(1)(A) —
in a corporation, partnership, trust, or estate, or
I.R.C. § 197(e)(1)(B) —
under an existing futures contract, foreign currency contract, notional principal
contract, or other similar financial contract.
I.R.C. § 197(e)(3) Computer Software
I.R.C. § 197(e)(3)(A) In General —
Any—
I.R.C. § 197(e)(3)(A)(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
I.R.C. § 197(e)(3)(A)(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.
I.R.C. § 197(e)(3)(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.
I.R.C. § 197(e)(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:
I.R.C. § 197(e)(4)(A) —
Any interest in a film, sound recording, video tape, book, or similar property.
I.R.C. § 197(e)(4)(B) —
Any right to receive tangible property or services under a contract or granted by
a governmental unit or agency or instrumentality thereof.
I.R.C. § 197(e)(4)(C) —
Any interest in a patent or copyright.
I.R.C. § 197(e)(4)(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.R.C. § 197(e)(4)(D)(i) —
has a fixed duration of less than 15 years, or
I.R.C. § 197(e)(4)(D)(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.
I.R.C. § 197(e)(5) Interests Under Leases And Debt Instruments —
Any interest under—
I.R.C. § 197(e)(5)(A) —
an existing lease of tangible property, or
I.R.C. § 197(e)(5)(B) —
except as provided in subsection (d)(2)(B), any existing indebtedness.
I.R.C. § 197(e)(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.
I.R.C. § 197(e)(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.
I.R.C. § 197(f) Special Rules
I.R.C. § 197(f)(1) Treatment Of Certain Dispositions, Etc.
I.R.C. § 197(f)(1)(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.R.C. § 197(f)(1)(A)(i) —
no loss shall be recognized by reason of such disposition (or such worthlessness),
and
I.R.C. § 197(f)(1)(A)(ii) —
appropriate adjustments to the adjusted bases of such retained intangibles shall
be made for any loss not recognized under clause (i).
I.R.C. § 197(f)(1)(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.
I.R.C. § 197(f)(1)(C) Special Rule —
All persons treated as a single taxpayer under section 41(f)(1) shall be so treated for purposes of this paragraph.
I.R.C. § 197(f)(2) Treatment Of Certain Transfers
I.R.C. § 197(f)(2)(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.
I.R.C. § 197(f)(2)(B) Transactions Covered —
The transactions described in this subparagraph are—
I.R.C. § 197(f)(2)(B)(i) —
any transaction described in section 332, 351, 361, 721, 731, 1031, or 1033, and
I.R.C. § 197(f)(2)(B)(ii) —
any transaction between members of the same affiliated group during any taxable
year for which a consolidated return is made by such group.
I.R.C. § 197(f)(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.
I.R.C. § 197(f)(4) Treatment Of Franchises, Etc.
I.R.C. § 197(f)(4)(A) Franchise —
The term “franchise” has the meaning given to such term by section 1253(b)(1).
I.R.C. § 197(f)(4)(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.
I.R.C. § 197(f)(4)(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.
I.R.C. § 197(f)(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—
I.R.C. § 197(f)(5)(A) —
the amount paid or incurred by the acquirer under the assumption reinsurance transaction,
over
I.R.C. § 197(f)(5)(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.
I.R.C. § 197(f)(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.
I.R.C. § 197(f)(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.
I.R.C. § 197(f)(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.
I.R.C. § 197(f)(9) Anti-Churning Rules —
For purposes of this section—
I.R.C. § 197(f)(9)(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.R.C. § 197(f)(9)(A)(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,
I.R.C. § 197(f)(9)(A)(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
I.R.C. § 197(f)(9)(A)(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.
I.R.C. § 197(f)(9)(B) Exception Where Gain Recognized —
If—
I.R.C. § 197(f)(9)(B)(i) —
subparagraph (A) would not apply to an intangible acquired by the taxpayer but for the last sentence
of subparagraph
(C)(i), and
I.R.C. § 197(f)(9)(B)(ii) —
the person from whom the taxpayer acquired the intangible elects, notwithstanding
any other provision of this title—
I.R.C. § 197(f)(9)(B)(ii)(I) —
to recognize gain on the disposition of the intangible, and
I.R.C. § 197(f)(9)(B)(ii)(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).
I.R.C. § 197(f)(9)(C) Related Person Defined —
For purposes of this paragraph—
I.R.C. § 197(f)(9)(C)(i) Related Person —
A person (hereinafter in this paragraph referred to as the “related person”) is
related to any person if—
I.R.C. § 197(f)(9)(C)(i)(I) —
the related person bears a relationship to such person specified in section 267(b) or section 707(b)(1), or
I.R.C. § 197(f)(9)(C)(i)(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”.
I.R.C. § 197(f)(9)(C)(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.
I.R.C. § 197(f)(9)(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).
I.R.C. § 197(f)(9)(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.
I.R.C. § 197(f)(9)(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).
I.R.C. § 197(f)(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)).
I.R.C. § 197(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.
(Added by Pub. L. 103-66, title XIII, Sec. 13261, Aug. 10, 1993; amended by Pub. L. 108-357, title VIII, Sec. 847(b)(3), 886(a), Oct. 22, 2004, 118 Stat. 1418.)
BACKGROUND NOTES
AMENDMENTS
2004 - Subsec. (e)(6)-(8). Pub. L. 108-357, Sec. 886(a), amended subsec. (e) by striking par. (6) and redesignating par. (7) and (8)
as par. (6) and (7), respectively. Prior to being struck, par. (6)
read as follows:
“(6) Treatment of sports franchises. --A franchise to engage in professional football,
basketball, baseball, or other professional sport, and any item acquired in connection
with such a franchise.”
Subsec. (f)(10). Pub. L. 108-357, Sec. 847(b)(3), amended subsec. (f) by adding par. (10).
EFFECTIVE DATE OF 2004 AMENDMENTS
Amendment by Sec. 847(b)(3) of Pub. L. 108-357 effective for leases entered into after October 3, 2004.
Amendments by Sec. 886(a) of Pub. L. 108-357 effective for property acquired after the date of the enactment of this Act [Enacted:
Oct. 22, 2004].
EFFECTIVE DATE
Effective for property acquired after August 10, 1993. Section 13261(g)(2)-(3) of
Pub. L. 103-66, as amended by Pub. L. 104-188, Sec. 1703(l), provided that:
“(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.”
