26 U.S.C. § 197 — Amortization of goodwill and certain other intangibles

(a) General rule: A taxpayer can deduct the cost of any "amortizable section 197 intangible." This deduction spreads the intangible's adjusted basis (for gain purposes) evenly over a 15-year period, starting the month the taxpayer acquired it. (b) No other depreciation or amortization deduction allowable: Except for the deduction in subsection (a), no other depreciation or amortization deduction is allowed for an amortizable section 197 intangible. (c) Amortizable section 197 intangible: (1) In general, this term means any "section 197 intangible" that the taxpayer acquired after this section became law, and that is held in connection with a trade or business or an activity described in section 212. (2) It does not include a section 197 intangible the taxpayer created itself, unless the intangible is one of the kinds listed in (d)(1)(D), (E), or (F) — a government license or permit, a covenant not to compete, or a franchise, trademark, or trade name. This exclusion does not apply if the intangible was created as part of a transaction (or series of related transactions) that involved acquiring assets making up a trade or business or a substantial part of one. (3) Special anti-churning rules can further exclude intangibles acquired in certain transactions; see subsection (f)(9). (d) Section 197 intangible: (1) In general, this term means: (A) goodwill; (B) going concern value; (C) items like workforce in place, business books and records, patents, copyrights, formulas, processes, designs, know-how, customer-based intangibles, supplier-based intangibles, and other similar items; (D) any license, permit, or other right granted by a government unit or agency; (E) a covenant not to compete (or a similar arrangement) entered into when acquiring an interest in a trade or business or a substantial part of one; and (F) any franchise, trademark, or trade name. (2) A "customer-based intangible" means market composition, market share, and other value coming from future sales through existing customer relationships. For a financial institution, it also includes deposit base and similar items. (3) A "supplier-based intangible" means the value coming from future purchases through existing supplier relationships. (e) Exceptions: The term "section 197 intangible" does not include: (1) financial interests, such as an interest in a corporation, partnership, trust, or estate, or an interest under a futures contract, foreign currency contract, notional principal contract, or similar financial contract; (2) any interest in land; (3) computer software that is either readily available to the public under a nonexclusive license and not substantially modified, or that was not acquired as part of buying a trade or business or a substantial part of one — "computer software" here means any program that makes a computer perform a function, not including a database unless it is in the public domain and incidental to qualifying software; (4) certain interests not acquired as part of buying a trade or business or substantial part of one, including interests in films, sound recordings, video tapes, books, or similar property; rights to receive tangible property or services under a contract or government grant; interests in a patent or copyright; and, as regulations may provide, certain contract or government-granted rights with a fixed duration under 15 years or a fixed, recoverable amount; (5) interests under an existing lease of tangible property, or (except as provided in subsection (d)(2)(B)) existing debt; (6) rights to service residential mortgage debt, unless acquired as part of buying a trade or business (other than such servicing rights) or a substantial part of one; and (7) professional fees and transaction costs for a deal where gain or loss was not recognized under the corporate reorganization rules in part III of subchapter C. (f) Special rules: (1) If several amortizable section 197 intangibles were acquired in one transaction or series of related transactions, and one is disposed of (or becomes worthless) while one or more others from that same transaction are kept, no loss is recognized on the disposed-of intangible; instead, appropriate adjustments are made to the basis of the retained intangibles for the unrecognized loss. A covenant not to compete (described in subsection (d)(1)(E)) is never treated as disposed of, or worthless, before the entire business interest it was tied to is disposed of. Businesses treated as one taxpayer under section 41(f)(1) are treated as one taxpayer for this rule too. (2) If a section 197 intangible is transferred in certain transactions — including incorporations, partnership contributions, corporate reorganizations, partnership distributions, or like-kind exchanges under sections 332, 351, 361, 721, 731, 1031, or 1033, or a transfer between members of the same affiliated group filing a consolidated return — the person receiving it is treated as the transferor for this section, up to the transferor's adjusted basis. (3) Any amount paid or incurred under a covenant not to compete (or similar arrangement) described in subsection (d)(1)(E) must be capitalized, not deducted immediately. (4) A "franchise" has the meaning given in section 1253(b)(1). Renewing a franchise, trademark, trade name, license, permit, or other right described in subsection (d)(1)(D) is treated as a new acquisition, but only as to the costs of that renewal. Amounts covered by section 1253(d)(1) are not counted under this section. (5) For an amortizable section 197 intangible created by an "assumption reinsurance transaction," its basis equals the amount the acquirer paid or incurred, minus the amount required to be capitalized under section 848; the deduction rule in subsection (b) does not apply to amounts capitalized under section 848. (6) A sublease is treated the same as a lease of the underlying property for this section. (7) An amortizable section 197 intangible is treated as depreciable property under section 167. (8) This section does not apply to an increase in value that, without this section, would properly be counted in the cost of property that is not itself a section 197 intangible. (9) Anti-churning rules: A section 197 intangible described in subsection (d)(1)(A) or (B) — goodwill or going concern value — (or one that would not have qualified for depreciation or amortization without this section) generally does not count as "amortizable" if acquired after this section became law, and: (i) the taxpayer or a related person held or used it at any time between July 25, 1991, and that enactment date; (ii) it was acquired from someone who held it during that same window, without the actual user of the property changing as part of the deal; or (iii) the taxpayer lets someone who held or used it during that window (or someone related to that person) keep using it. Whether the "user" changes is determined under regulations the Secretary prescribes; deductions allowed under section 1253(d) count as amortization deductions for this purpose. An exception applies if the person who sold the intangible elects to recognize gain on the sale and pay tax on it (combined with other tax on that gain) at the highest individual income tax rate — then the anti-churning rule only applies to the extent the buyer's basis exceeds the gain the seller recognized. A "related person" is someone related under section 267(b) or 707(b)(1) (using 20 percent instead of 50 percent for this purpose), or someone whose trade or business is under common control with the taxpayer's, tested at the moment right before or right after the acquisition. This anti-churning rule does not apply to property acquired because of someone's death, where the basis is set under section 1014(a). For partnerships, these anti-churning tests are applied at the partner level, treating each partner as owning and using their share of partnership assets. And the term "amortizable section 197 intangible" excludes any intangible acquired mainly to dodge either the acquisition-date requirement in subsection (c)(1) or this anti-churning rule. (10) For a section 197 intangible that would count as tax-exempt use property under section 168(h) if that section applied to it, the amortization period under this section cannot be shorter than 125 percent of the lease term, as defined in section 168(i)(3). (g) Regulations: The Secretary must prescribe regulations needed to carry out this section, including regulations to prevent people from using related parties or other means to avoid its purpose.