Tax Policy: Amortizing Purchased Intangible Assets

GAO discussed the current tax rules for the treatment of purchased intangible assets. GAO noted that: (1) Internal Revenue Service (IRS) tax data on unresolved or open intangible asset cases showed that taxpayers in 9 industry groups claimed deductions for 175 types of purchased intangible assets valued at $23.5 billion; (2) IRS believed that 70 percent of the claimed intangible assets were actually good will and not amortizable; (3) tax rules are much clearer for tangible than for intangible assets, and courts have issued conflicting and inconsistent decisions regarding the treatment and definition of intangible assets; (4) eliminating any distinction between the tax treatment of purchased goodwill and that of other purchased intangibles would do away with controversies over whether the taxpayer has purchased an amortizable asset; (5) establishing statutory cost recovery periods would simplify useful life determinations; and (6) proposed legislation would expand amortization of purchased intangible assets through easier amortization qualification standards, a more restrictive definition of good will, and the use of predetermined cost-recovery periods for amortization, and would disallow amortization for specific purchased intangible assets or categories of intangible assets by deeming them to have indeterminable useful lives.