Goodwill is part of this business. Capital gains in this case is computed as the excess of sales consideration over the net worth of the business undertaking. In the past, buyers used to claim deprecation on this excess amount. Post these changes, while the seller will continue to be liable to pay capital gains tax, the buyer will not be eligible to claim depreciation. Further, these amendments also do not differentiate between related party and unrelated party transactions.
There is no distinction between self- generated and acquired goodwill. In nutshell, depreciation on goodwill will not be available in future. Also, these amendments take effect from Financial Year This would impact the acquisitions that have taken place during the aforesaid financial year where the stakeholders would have factored in depreciation on goodwill while working out the commercials.
Even for transactions that have taken place in the past, where the taxpayers were claiming depreciation, going forward, no depreciation would be available. So, to that extent, there is no grandfathering even for the past transactions. In the past, in many cases, taxpayers used to bundle together other intangibles such as dealer network, marketing rights, business information etc.
Considering this amendment, the taxpayers may now need to undertake a detailed exercise of segregating and assigning values individually to other intangibles as well, where depreciation may still be available. Synergies cost savings for strategic deals. Inline Feedbacks. X Please check your email. Learn Advanced Accounting Online. Master accounting topics that pose a particular challenge to finance professionals.
X Phone. You are going to send email to. For purposes of this paragraph h 12 , if the basis of a partner 's interest in a partnership is determined under section a or , such partner is treated as acquiring such interest from a person who is not related to such partner , and such interest is treated as having previously been held by a person who is not related to such partner.
The Commissioner will interpret and apply the rules in this section as necessary and appropriate to prevent avoidance of the purposes of section If one of the principal purposes of a transaction is to achieve a tax result that is inconsistent with the purposes of section , the Commissioner will recast the transaction for Federal tax purposes as appropriate to achieve tax results that are consistent with the purposes of section , in light of the applicable statutory and regulatory provisions and the pertinent facts and circumstances.
The following examples illustrate the application of this section:. Accordingly, under paragraph a 3 of this section, section does not apply to these costs. Accordingly, the software is not a section intangible. Since no other assets were acquired , the software is not acquired as part of a purchase of a trade or business and under paragraph c 4 ii of this section is not a section intangible.
This exclusion applies even though the right does not qualify for exclusion as a right of fixed duration or amount under section e 4 D and paragraph c 13 of this section because the duration exceeds 15 years and the right is not fixed as to amount.
It is also immaterial that the right would not qualify for exclusion as a self-created intangible under section c 2 and paragraph d 2 of this section because it is granted by a governmental unit.
The franchise does not qualify for the exclusion relating to self-created intangibles described in section c 2 and paragraph d 2 of this section because the franchise is described in section d 1 F. In addition, because the acquisition of the franchise constitutes the acquisition of an interest in a trade or business or a substantial portion thereof, the franchise may not be excluded under section e 4. Thus, the franchise is an amortizable section intangible, the basis of which must be recovered over a year period.
However, the amounts that are deductible under section d 1 are not subject to the provisions of section by reason of section f 4 C and paragraph b 10 ii of this section. This basis is amortized ratably over the year period beginning on the first day of the month in which the agreement is entered into.
It does not qualify for the exception in section e 4 D and paragraph c 13 of this section relating to rights of fixed duration or amount because it does not have a term of less than 15 years, and the other exceptions in section e and paragraph c of this section are also inapplicable. Accordingly, the license is a section intangible.
Thus, under paragraph f 3 iii of this section, the license will be closely scrutinized under the principles of section for purposes of determining whether the transfer is a sale or exchange and, accordingly, whether the payments under the license are chargeable to capital account. Because the license is not a sale or exchange under the principles of section , the royalty payments are not chargeable to capital account for purposes section The capitalized costs of entering into the license are not within the exception under paragraph d 2 of this section for self-created intangibles, and thus are amortized under section Although the license conveys an interest in X's trademarks and trade names to Y, the transfer of the interest is disregarded for purposes of paragraph e 2 of this section unless the transfer is considered a sale or exchange of the trademarks and trade names or an undivided interest therein.
Accordingly, the licensing of the technology and the trademarks and trade names is not treated as part of a purchase of a trade or business under paragraph e 2 of this section. The royalty payments for the use of the trademarks and trade names are deductible under section d 1 and, under section f 4 C and paragraph b 10 ii of this section, are not chargeable to capital account for purposes of section The capitalized costs of entering into the license are treated in the same manner as in example 7.
As in Example 7, the exceptions in section e and paragraph c of this section do not apply to the transfer. Accordingly, the transferred property is a section intangible. Y's basis in the transferred intangible includes the capitalized costs of entering into the agreement and the fixed minimum royalty payment payable at the time of the transfer. In addition, except to the extent that a portion of any payment will be treated as interest or original issue discount under applicable provisions of the Internal Revenue Code , all of the contingent payments under the purported license are properly chargeable to capital account for purposes of section and this section.
Any contingent amount that is included in basis after the month in which the acquisition occurs is amortized under the rules of paragraph f 2 i or ii of this section. The rights do not qualify for the exception in e 4 D and paragraph c 13 of this section relating to rights of fixed duration or amount because they are transferred as part of a purchase of a trade or business and the other exceptions in section e and paragraph c of this section are also inapplicable.
Accordingly, the licenses are section intangibles. In addition, however, the retained patents are described in paragraph b 5 of this section. Thus, the annual royalty payments are chargeable to capital account under the general rule of paragraph f 3 ii A of this section unless Y establishes that the license is not a sale or exchange under the principles of section and the royalty payments are an arm's length consideration for the rights transferred.
If these facts are established, the exception in paragraph f 3 ii B of this section applies and the royalty payments are not chargeable to capital account for purposes of section The capitalized costs of entering into the license are treated in the same manner as in Example 7. Thus, the treatment of the payments for use of the customer list is also determined under paragraph f 3 ii of this section.
The customer list, although described in paragraph b 6 of this section, is a customer-related information base. Thus, the exception in paragraph f 3 ii B of this section does not apply. Accordingly, payments for use of the list are chargeable to capital account under the general rule of paragraph f 3 ii A of this section and are amortized under section In addition, the capitalized costs of entering into the contract for use of the customer list are treated in the same manner as in Example 7.
Under paragraph g 1 iv B of this section, X's dis allowed loss is allowed ratably, as a deduction under section , over the remainder of the year period during which the intangibles would have been amortized, and Y may not increase the basis of the amortizable section intangibles that it acquired from Z by the amount of X's disallowed loss.
Under section , the transaction is treated as if P transfers its sole asset to a new partnership in exchange for the assumption of its liabilities and the receipt of all of the interests in the new partnership.
Immediately thereafter, P is treated as if it is liquidated, with B and C each receiving their proportionate share of the interests in the new partnership. The contribution by P of its asset to the new partnership is governed by section , and the liquidating distributions by P of the interests in the new partnership are governed by section C does not realize a basis adjustment under section with respect to the amortizable section intangible unless P had a section election in effect for its taxable year in which the transfer of the partnership interest to C occurred or the taxable year in which the deemed liquidation of P occurred.
Even though the adjusted basis of the new partnership in the two assets is determined solely under section , because the transfer of assets is a transaction described in section , the application of sections b and to P immediately before its termination causes P to be treated as if it held two assets for purposes of section See paragraph g 3 of this section.
Under section f 2 and paragraph g 2 ii of this section, the new partnership continues to amortize the intangible over the 10 years remaining in the original year amortization period. No additional amortization is allowable with respect to this asset. Because E and EF are related persons within the meaning of paragraph h 6 of this section, no portion of any transferred section f 9 intangible that E held during the transition period as defined in paragraph h 4 of this section is an amortizable section intangible pursuant to paragraph h 2 of this section.
Section f 9 F and paragraph g 3 of this section do not apply to any portion of the section intangible in the hands of EF because the basis of EF in these assets was not increased under any of sections , , or The nonrecognition transfer rule under paragraph g 2 ii of this section applies to A's transfer of its one-half interest in the intangible to P, and consequently P steps into A's shoes with respect to A's nonamortizable transferred basis.
The anti-churning rules of paragraph h of this section apply to B's transfer of its one-half interest in the intangible to P, because A, who is related to P under paragraph h 6 of this section immediately after the series of transactions in which the intangible was acquired by P, held B's one-half interest in the intangible during the transition period. Pursuant to paragraph h 10 of this section, these rules apply to B's transfer of its one-half interest to P even though the nonrecognition transfer rule under paragraph g 2 ii of this section would have permitted P to step into B's shoes with respect to B's otherwise amortizable basis.
Therefore, P's entire basis in the intangible is nonamortizable. However, if A not B elects to recognize gain under paragraph h 9 of this section on the transfer of each of the one-half interests in the intangible to B and P, then the intangible would be amortizable by P to the extent provided in section f 9 B and paragraph h 9 of this section. B's proportionate share of P's adjusted basis in one asset is the same as A's proportionate share of P's adjusted basis in that asset, which is not amortizable under section For the other asset, B's proportionate share of the remaining adjusted basis of P is amortized over a new year period.
Pursuant to paragraph h 10 of this section, the application of the nonrecognition transfer rule under paragraph g 2 ii of this section and the anti-churning rules of paragraph h of this section to the facts of this Example 18 is the same as in Example Thus, P's entire basis in the intangible is nonamortizable.
Thus, even though X is related to Y and Y is related to Z, X and Z are not considered to be related for purposes of the anti-churning rules of section If the gain were not taken into account , S would have no tax liability for the taxable year. Under paragraph h 9 ii of this section, the remaining basis does not qualify for the gain-recognition exception and may not be amortized by B.
Because there are no relationships described in paragraph h 6 of this section among the parties to the transaction, any nonamortizable section f 9 intangible held by old target is an amortizable section intangible in the hands of new target. However, a gain recognition election under paragraph h 9 of this section may be made with respect to this transaction. Further, for purposes of determining whether the nonamortizable section f 9 intangible is acquired by new target from a related person , because the transactions are a series of related transactions , the relationship between old target and new target must be tested immediately before the first transaction in the series the formation of Y and immediately after the last transaction in the series the sale to U and the public offering.
See paragraph h 6 ii B of this section. Accordingly, Target may amortize the section intangible. Accordingly, X may not amortize the intangible. If, however, at the time of the exchange , B has a binding commitment to sell 25 percent of the X stock to C, an unrelated third party, the exchange , including A's transfer of the section f 9 intangible, would fail to qualify as a section exchange.
Because the formation of X, the transfers of property to X, and the sale of X stock by B are part of a series of related transactions , the relationship between A and X must be tested immediately before the first transaction in the series the transfer of property to X and immediately after the last transaction in the series the sale of X stock to C.
Accordingly, X may amortize the section intangible. See paragraph h 6 iii of this section. Accordingly, P is entitled to amortize the section f 9 intangible. Pursuant to section g 2 ii of this section, PRS steps into the shoes of A with respect to A's nonamortizable transferred basis in the intangible.
The entire basis adjustment will be allocated to the intangible because the only other asset held by PRS is cash. Ordinarily, under paragraph h 12 v of this section, the anti-churning rules will not apply to an increase in the basis of partnership property under section b if the person acquiring the partnership interest is not related to the person transferring the partnership interest.
However, A is an anti-churning partner under paragraph h 12 vi B 2 i of this section. As a result of the license agreement , A remains a direct user of the section f 9 intangible after the transfer to C. Accordingly, paragraph h 12 vi A of this section will cause the anti-churning rules to apply to the entire basis adjustment under section b. In determining whether the anti-churning rules apply to any portion of the basis increase, A is treated as having owned and used A's proportionate share of partnership property.
Thus, A is treated as holding an interest in the intangible during the transition period. Because the intangible was not amortizable prior to the enactment of section , the section b increase in the basis of the intangible may be subject to the anti-churning provisions. Paragraph h 12 ii of this section provides that the anti-churning provisions apply to the extent that the section b adjustment exceeds the total unrealized appreciation from the intangible allocable to partners other than A or persons related to A, as well as certain other partners whose purchase of their interests meet certain criteria.
Because B and C are not related to A, and A's acquisition of its partnership interest does not satisfy the necessary criteria, the section b basis increase is subject to the anti-churning provisions to the extent that it exceeds B and C's proportionate share of the unrealized appreciation from the intangible.
Under paragraph h 12 ii of this section, the anti-churning provisions also do not apply to the section b basis increase to the extent of A's allocable share of the unrealized appreciation from the intangible because A acquired the ABC interest from an unrelated person after August 10, , and the intangible was acquired by the partnership before A acquired the ABC interest.
Under paragraph h 12 ii E of this section, A is deemed to acquire the ABC partnership interest from an unrelated person because A acquired the ABC partnership interest in exchange for a contribution to the partnership of property other than the distributed intangible and, at the time of the contribution, no partner in the partnership was related to A.
Consequently, the increase in the basis of the intangible under section b is not subject to the anti-churning rules to the extent of the total unrealized appreciation from the intangible allocable to A, B, and C. Therefore, under paragraph h 12 ii of this section, the section b basis increase is amortizable to the extent of A, B, and C's allocable share of the unrealized appreciation from the intangible.
A does not satisfy any of the tests set forth under paragraph h 12 iv B and thus is not an eligible partner. C is not related to B and thus is an eligible partner under paragraph h 12 iv B 1 of this section. Because A is not an eligible partner , the anti-churning rules apply to A's share of the basis increase. The anti-churning rules do not apply to C's share of the basis increase. The book and tax attributes from the first asset i.
The book and tax attributes from the second asset i. Upon disposition of the intangible, each partner 's share of gain or loss will be determined first by allocating among the partners an amount realized equal to the book value of the intangible attributable to such partner , with any remaining amount realized being allocated in accordance with the partnership agreement.
Each partner then will compare its share of the amount realized with its remaining basis in the intangible to arrive at the gain or loss to be allocated to such partner. This is a reasonable method for amortizing the intangible for book purposes , and the results in allocating the income , gain, loss , and deductions attributable to the intangible do not contravene the purposes of the anti-churning rules under section or paragraph h of this section.
A taxpayer may rely on the provisions of regulation project REG C. A taxpayer changing its method of accounting in accordance with this paragraph l 4 must follow the automatic change in accounting method provisions of Rev.
A taxpayer applying paragraph h 12 vii C of this section retroactively must apply paragraph h 12 vii C of this section on a timely filed original return including extensions or an amended return filed no later than July 18, Please help us improve our site!
No thank you. On January 15, , P acquires all of the stock of T, an insurance company, in a qualified stock purchase and makes a section election for T. T issues individual life insurance contracts which are specified insurance contracts as defined in section e 1. P and new T are calendar year taxpayers. New T engages in no other reinsurance transactions other than the assumption reinsurance transaction treated as occurring by reason of the section election.
The facts are the same as Example 1, except that T only issues accident and health insurance contracts that are qualified long-term care contracts under section B. Under section B a 5 , T's qualified long-term care insurance contracts are treated as guaranteed renewable accident and health insurance contracts, and, therefore, are considered specified insurance contracts under section e 1.
In a prior taxable year, as a result of a section election with respect to T, new T was treated as purchasing all of old T's insurance contracts that were in force on the acquisition date in an assumption reinsurance transaction. During the current taxable year, new T enters into an indemnity reinsurance agreement with R, another insurance company, in which R assumes percent of the risk relating to the insurance contracts to which the section f 5 intangible relates.
Under the indemnity reinsurance agreement, new T continues to administer the reinsured policies, but transfers investment assets equal to the required reserves for the reinsured policies together with all future premiums to R. The indemnity reinsurance agreement does not contain an experience refund provision or a provision allowing new T to terminate the reinsurance agreement at its sole option.
New T retains the insurance licenses and other amortizable section intangibles acquired in the deemed asset sale and continues to underwrite and issue new insurance contracts.
In addition, under the indemnity reinsurance agreement, new T is entitled to an experience refund equal to any future profits on the reinsured contracts in excess of the ceding commission plus an annual risk charge.
New T also has a right to recapture the business at any time after R has recovered an amount equal to the ceding commission. In order to increase sales of its products by encouraging consumer loyalty to its products and to enhance the value of the goodwill, trademarks, and trade names of the business, Q advertises its products to the consuming public.
It regularly incurs costs to develop radio, television, and print advertisements. These costs generally consist of employee costs and amounts paid to independent advertising agencies. Q also incurs costs to run these advertisements in the various media for which they were developed. One of the assets acquired is all of Y's rights in certain computer software previously used by Y under the terms of a nonexclusive license from the software developer.
The software was developed for use by manufacturers to maintain a comprehensive accounting system, including general and subsidiary ledgers, payroll, accounts receivable and payable, cash receipts and disbursements, fixed asset accounting, and inventory cost accounting and controls.
The developer does not maintain wholesale or retail outlets but markets the software directly to ultimate users. Y's license of the software is limited to an entity that is actively engaged in business as a manufacturer.
The software will be used by B for the sole purpose of improving its package-tracking operations. B does not purchase any other assets in the transaction or any related transaction. In order to induce X to locate a new manufacturing business in the city, M grants X the right to purchase water for 16 years at a specified price.
G enters into a franchise agreement within the meaning of section b 1 with S pursuant to which G is permitted to acquire and operate a store using the S trademark and trade name at the location specified in the agreement. The agreement contains detailed specifications for the construction and operation of the business, but G is not required to purchase from S any of the materials necessary to construct the improvements at the location specified in the franchise agreement.
However, the assessees are claiming depreciation on the acquired goodwill relying on various favourable Supreme Court's judgment. Hence, as per the decision of the Supreme Court, depreciation would be allowed on the goodwill recognized in a business combination. The Finance Bill proposes to prohibit the depreciation on the goodwill. The following amendments have been proposed to various provisions of the Act.
Amendment to Section 2 It has been proposed that 'block of asset' as defined under section 2 11 shall not include the 'goodwill of a business or profession'. Amendment to Section 32 1.
Clause ii to section 32 1 has been proposed to be amended to provide that 'goodwill of a business or profession' shall not be eligible for depreciation. Further, an amendment has been proposed to Explanation 3 to Section 32 1 which defines the expression 'assets'. It has been proposed that 'goodwill of a business or profession' shall not be treated as an 'intangible asset' for Section 32 1.
Amendment to Section Section 50 is a special provision for computation of capital gains in case of depreciable assets. A new proviso has been proposed to be inserted to Section 50 2 that the CBDT may prescribe a manner to determine the written down value of the block of asset and short-term capital gain if any if goodwill is forming part of the block of asset and depreciation has been claimed on it.
Section 55 provides the meaning of various terms including 'cost of acquisition' for computation of capital gains. It provides that 'cost of acquisition' of a capital asset being goodwill shall be the purchase price if goodwill has been acquired by purchase.
In other cases, it will be nil except in cases covered by sub-clauses i to iv of section 49 1 i [assets acquired through will, gift, succession, etc. The Finance Bill proposes to amend section 55 to provide that the 'Cost of Acquisition' of capital asset being goodwill shall be as follows:. A Proviso is proposed to be inserted to Section 55 2 a that if the assessee has claimed depreciation on goodwill before the Assessment Year , then the cost of purchase of such goodwill shall be reduced by such amount of depreciation.
The amendments proposed to exclude 'goodwill' from 'intangible assets' will have a deep impact on assessees engaged in business or profession. The proposed amendment along with their challenges have been discussed below. Why only goodwill has specifically been excluded from 'intangible asset'?
The term 'intangible asset' has been defined in Section 2 11 and Explanation 3 to section After the proposed amendments, the 'intangible assets' will be intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature not being goodwill of a business or profession. The Memorandum explaining the Finance Bill, provides the following reasons for doing this.
The actual calculation of depreciation on goodwill is required to be carried out in accordance with various other provisions of the Act, which include Section 43 6 C , Explanation 2 of Section 43 6 c , Section 43 1 , etc. There are various components and a variety of elements under an umbrella that together accounts for and gives rise to the goodwill. It includes copyrights, trade-marks, franchises, etc. This view is also confirmed by the Kerala High Court in the case of B.
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