
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC197]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
               Subchapter B--Computation of Taxable Income
 
      PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
 
Sec. 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--
            (A) which is acquired by the taxpayer after the date of the 
        enactment of this section, and
            (B) which is held in connection with the conduct of a trade 
        or business or an activity described in section 212.

           (2) Exclusion of self-created intangibles, etc.

        The term ``amortizable section 197 intangible'' shall not 
    include any section 197 intangible--
            (A) which is not described in subparagraph (D), (E), or (F) 
        of subsection (d)(1), and
            (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.

                       (3) Anti-churning rules

            For exclusion of intangibles acquired in certain 
        transactions, see subsection (f)(9).

(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--
            (A) goodwill,
            (B) going concern value,
            (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),
                (iii) any patent, copyright, formula, process, design, 
            pattern, knowhow, format, or other similar item,
                (iv) any customer-based intangible,
                (v) any supplier-based intangible, and
                (vi) any other similar item,

            (D) any license, permit, or other right granted by a 
        governmental unit or an agency or instrumentality thereof,
            (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
            (F) any franchise, trademark, or trade name.

                    (2) Customer-based intangible

        (A) In general

            The term ``customer-based intangible'' means--
                (i) composition of market,
                (ii) market share, and
                (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.

        (B) Special rule for financial institutions

            In the case of a financial institution, the term ``customer-
        based intangible'' includes deposit base and similar items.

                    (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.

(e) Exceptions

    For purposes of this section, the term ``section 197 intangible'' 
shall not include any of the following:

                       (1) Financial interests

        Any interest--
            (A) in a corporation, partnership, trust, or estate, or
            (B) under an existing futures contract, foreign currency 
        contract, notional principal contract, or other similar 
        financial contract.

                              (2) Land

        Any interest in land.

                        (3) Computer software

        (A) In general

            Any--
                (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
                (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.

        (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:
            (A) Any interest in a film, sound recording, video tape, 
        book, or similar property.
            (B) Any right to receive tangible property or services under 
        a contract or granted by a governmental unit or agency or 
        instrumentality thereof.
            (C) Any interest in a patent or copyright.
            (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) has a fixed duration of less than 15 years, or
                (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.

           (5) Interests under leases and debt instruments

        Any interest under--
            (A) an existing lease of tangible property, or
            (B) except as provided in subsection (d)(2)(B), any existing 
        indebtedness.

                 (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.

                       (7) 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.

                    (8) 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.

(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--
                (i) no loss shall be recognized by reason of such 
            disposition (or such worthlessness), and
                (ii) appropriate adjustments to the adjusted bases of 
            such retained intangibles shall be made for any loss not 
            recognized under clause (i).

        (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.

        (C) Special rule

            All persons treated as a single taxpayer under section 
        41(f)(1) shall be so treated for purposes of this paragraph.

                 (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.

        (B) Transactions covered

            The transactions described in this subparagraph are--
                (i) any transaction described in section 332, 351, 361, 
            721, 731, 1031, or 1033, and
                (ii) any transaction between members of the same 
            affiliated group during any taxable year for which a 
            consolidated return is made by such group.

     (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.

        (A) Franchise

            The term ``franchise'' has the meaning given to such term by 
        section 1253(b)(1).

        (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.

        (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.

          (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--
            (A) the amount paid or incurred by the acquirer under the 
        assumption reinsurance transaction, over
            (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.

                 (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.

                    (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.

            (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--
                    (I) to recognize gain on the disposition of the 
                intangible, and
                    (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''.
            (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.

        (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).

        (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.

        (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).

(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 Pub. L. 103-66, title XIII, Sec. 13261(a), Aug. 10, 1993, 107 
Stat. 532.)

                       References in Text

    The date of the enactment of this section, referred to in subsecs. 
(c)(1)(A) and (f)(9)(A), (F), is the date of enactment of Pub. L. 103-
66, which was approved Aug. 10, 1993.


                             Effective Date

    Section 13261(g) of Pub. L. 103-66, as amended by Pub. L. 104-188, 
title I, Sec. 1703(l), Aug. 20, 1996, 110 Stat. 1877, provided that:
    ``(1) In general.--Except as otherwise provided in this subsection, 
the amendments made by this section [enacting this section and amending 
sections 167, 642, 848, 1016, 1060, 1245, and 1253 of this title] shall 
apply with respect to property acquired after the date of the enactment 
of this Act [Aug. 10, 1993].
    ``(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.''

                  Section Referred to in Other Sections

    This section is referred to in sections 167, 170, 642, 848, 1060 of 
this title.
