§ 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—
(B)
which is held in connection with the conduct of a trade or business or an activity described in section
212.
(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—
(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),
(D)
any license, permit, or other right granted by a governmental unit or an agency or instrumentality thereof,
(e)
Exceptions
For purposes of this section, the term “section
197 intangible” shall not include any of the following:
(3)
Computer software
(A)
In general
Any—
(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:
(B)
Any right to receive tangible property or services under a contract or granted by a governmental unit or agency or instrumentality thereof.
(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.
(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—
(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.
(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.
(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.
(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—
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.
(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—
(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”.
(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.