Category: Deductions & Credits; Partnerships &
LLCs Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background Issue Answer Discussion I think there is case to be made for amortization. There is nothing that clearly and directly prohibits amortization. The purpose of Section 197 is to allow amortization for goodwill and other intangibles purchased in the acquisition of the assets of a trade or business or substantial portion thereof. If the purchase of a partnership interest is viewed as a direct purchase of a share of partnership assets, then the purchasing partner is within the purpose of Section 197. It is interesting to note that the Section 197 regulations dealing with anti-churning issues in the partnership context apply the anti-churning rules at the partner level, treating a transaction between two partners as a direct purchase and sale of assets between the two parties. See Proposed Regulation Section 1.197-2(h)(5). Obviously, that approach supports viewing this transaction at the partner level. One commentator, the author of the Practitioner's Publishing Company volume on tax planning for partnerships, ventures the opinion that Section 197 amortization should be allowable with respect to a Section 743(b) step-up allocated to goodwill. Obviously, this has no authoritative weight. On the negative side, IRC Section 197(c)(2) prohibits amortization of self-created assets--i.e., assets created by the taxpayer. I think it could be argued, perhaps convincingly, that partnership goodwill is a self-created asset. Proposed Regulation Section 1.197-2(d)(2)(i) provides that a Section 197 intangible is "created by the taxpayer" to the extent the taxpayer makes payments or otherwise incurs costs for its creation, production, development, or improvement. While the regulatory definition of "created by the taxpayer" is hardly a perfect fit for partnership goodwill, it could be argued that the taxpayer did indeed make payments and/or incur cost to create the goodwill asset: arguably, any client-service related expenditure contributes to the value of the goodwill asset. On balance, however, I think characterization of goodwill as a self-created asset--at least based on the definition in the proposed a strained interpretation. Even so, nothing prevents the IRS or a court from adopting this interpretation.I think at the moment we have a plausible position for taking amortization. Clearly there is a risk under Section 197(c)(2). Clearly there is a risk that future regulations or judicial decisions could directly address the issue and prohibit amortization. In my view, until such time as something more definitive comes out, a taxpayer properly informed of the risk of potential future tax deficiencies, interest, and (possibly) penalties should be allowed to take a filing position claiming amortization. |
