Modernization Is Needed for §197 Intangible Asset Amortization

Intangible assets are significant business assets whose definition continues to expand as to the nature and types of such assets and to grow in importance in today’s digital age. Section 197 needs to be updated and modernized to treat businesses more similarly rather than favor those with mostly tangible assets, provide certainty, and address types of intangible assets that did not exist in 1993.

Section 197 has had only minor changes since it was added to the tax law in 1993 with its last change in 2005. In the meantime, there have been significant changes to depreciation rules for tangible property, most notably 100% expensing under the Tax Cuts and Jobs Act of 2017 for many categories of tangible assets. In addition, numerous types of intangibles have come into existence that did not exist in 1993 when the World Wide Web was just dawning on a wide scale that led to significant changes in how businesses promote their products and it launched and continues to launch numerous new products and services. Updating and modernizing §197 and related rules on amortization must be prioritized for an improved tax system that better reflects how we live and do business today.

Section 197, Amortization of goodwill and certain other intangibles, was enacted in 1993 (Revenue Reconciliation Act of 1993, P.L. 103-66, §13261) to address a significant issue of whether certain intangibles such as workforce in place and customer lists were amortizable and if yes, how to determine their amortizable life. The IRS and some courts viewed these types of intangibles as too similar to goodwill which at the time was not amortizable for tax purposes. Prior to the enactment of §197, a study by the Government Accountability Office on 175 types of intangibles identified within nine industry groups suggested the need for guidelines for amortization of these assets to prevent ongoing disputes between taxpayers and the IRS and to “provide uniform treatment for all taxpayers” (See GAO, Tax Policy: Issues and Policy Proposals Regarding Tax Treatment of Intangible Assets, GAO/GGD-91-88 (Aug. 1991)).

Section 197 generally allows acquired intangibles for use in a trade or business, including goodwill, to be amortized over 15 years using the straight-line method. Congress intended for §197 to provide “a single method and period for recovering the cost of most acquired intangible assets and by treating acquired goodwill and going concern value as amortizable intangible assets” (See “reasons for change” in House Committee Rep. to P.L. 103-66).

While the list of amortizable §197 intangibles is broad, it is a list assembled in the early 1990s. The enactment of §197 predates the start of eBay, Amazon.com, Google, Meta, and Decentraland. Enactment prior to widespread use of email and the internet and before e-commerce and social media became vital elements of everyday business activities, means that many critical types of intangibles that a business may acquire and use today are not specifically noted in §197.

Commonly acquired intangibles that may not readily fall into a §197 asset category created in 1993 include domain names for websites (URLs), various social media assets such as LinkedIn or Instagram usernames or handles, and various digital assets such as virtual land and avatars used in a digital marketplace like the metaverse. While some of these assets may be similar to the list of amortizable assets specified at §197(c), they do not exactly fit into any of the specified categories. But given the legislative intent in enacting §197, these new types of assets, particularly where they do not have a readily determinable useful life, likely would have been included in §197 if they had existed in 1993. Broadening of the language defining amortizable §197 intangible should also consider how to describe new types of intangibles that we will continue to see in the future.

Section 197 should be updated to ensure that modern and future types of acquired intangibles are §197 intangibles rather than assets with an uncertain life or that are not amortizable. Section 197 should also be modernized to ensure that the list of self-created assets and separately acquired intangibles (not acquired as part of a trade or business) that are not §197 intangibles is appropriate to the purpose of §197 and §162. An update in line with why §197 was enacted, will eliminate uncertainty on the treatment of commonly acquired intangible assets today and in the future, and ensure consistent treatment of these assets by businesses. Specificity in the income tax rules for these assets also promotes economic growth and efficiency via certainty on the tax treatment and perhaps even incentives to develop, acquire, and use such business assets.

Modernization of §197 should also address the anti-churning rule at §197(f)(9). As discussed later, this rule is complex and outdated and should be repealed as a “deadwood” provision.

Despite the importance of intangible assets to businesses and the economy, our income tax law tends to treat them less favorably than tangible assets used in a business. For economic stimulus and development, as well as equity among types of businesses, when favorable tax treatment is provided for tangible business assets, consideration should also be given to expanding the covered assets to include certain acquired intangibles that play an operational role similar to equipment and other tangible assets. These favorable depreciation rules are often designed to encourage the purchase of the favored assets, and that position also applies to intangible assets. These taxpayer favorable provisions include expensing under §179, bonus depreciation, and short depreciation and amortization lives.

Finally, given the expansion of the types of intangible assets used by businesses today relative to 1993, and the continuing innovation and change in how businesses operate in the digital world and the types of assets used, it would be informative to study today’s intangibles, similar to what the GAO did in 1991 leading up to the enactment of §197. This would allow for review of the categorization and description of intangible business assets, consideration of the appropriate amortization lives, the treatment of self-created intangibles for use in the business, and the appropriate treatment of the separate acquisition of intangible assets (not acquired as part of the acquisition of a trade or business).

Proposed Modification to the Description of “Section 197 Intangible”

The Problem: To illustrate why new types of intangible assets are often not covered by §197, a review of the definition of “section 197 intangible” at §197(d)(1) must be examined. Section 197(d)(1), generally defines “section 197 intangible” as:

(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, [emphasis added]
(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.

Treas. Reg. §1.167(a)-3(b), Safe harbor amortization for certain intangible assets, provides that certain intangible assets may be treated as having a useful life of 15 years. However, exceptions to this 15-year amortization period include most intangibles acquired from another person (unless it is an amortizable “section 197 intangible”), or where the asset has a useful life that can be estimated with reasonable accuracy.

Analysis and Solution: While the term “any other similar item” is included in the definition of §197 intangible (see above highlighted phrase), it is limited to the items that fall under §197(d)(1)(C), rather than to the entire list of intangibles at §197(d)(1). It is not clear that all modern intangibles such as social media assets and domain names are like the items listed at §197(d)(1)(C); likely most new types of intangibles do not fit into the above categories. Section 197 should not leave taxpayers with uncertainty as to whether a domain name or social media name and account, for example, are a customer-based intangible or similar item.

Treas. Reg. §1.167(a)-3(b) does not eliminate the need to modernize the list of §197 intangibles because it also leaves uncertainty as to the treatment of a domain name, social media intangibles and similar intangibles acquired as part of a trade or business for use in a business.
Greater certainty and simplicity would result by modifying §197(d) to list a domain name and social media assets. Adding the following to the end of paragraph (d)(1) would address this and similar issues:

(G) domain name or similar asset,
(H) social media and similar assets,
(I) any similar intangible asset.

Further modernization of §197 involves determining which missing modern intangibles should be excepted under the general exceptions for self-created intangibles and/or separately acquired intangibles. Sections 197(c) and 197(e) provide several exclusions, notably, the following:

Self-created §197 intangibles other than items described in (D), (E) and (F) at §197(d) are not 15-year intangible assets. Thus, a self-created trademark is a 15-year intangible asset, but the costs to create a customer list or goodwill is not a §197 intangible (generally, such costs are deducted when incurred; that is, the customer list is created from daily business operations).
Computer software that is readily available for purchase by the general public is subject to a nonexclusive license and has not been substantially modified, such as purchasing a license to use Microsoft Word. Generally, acquired “off-the-shelf” software is treated as an intangible amortized over 36 months (§167(f)).
Certain interests or rights acquired separately (not as part of the assets constituting a trade or business). This exception at §197(e)(4) applies to the following assets:
Any interest in a film, sound recording, video tape, book, or similar property.
Any right to receive tangible property or services under a contract or granted by a governmental unit or agency or instrumentality thereof.
Any interest in a patent or copyright.
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.

Self-created domain names, social media and metaverse intangibles, and similar digital assets should be excluded for the same reasons why self-created customer-based intangibles and goodwill are excluded, namely that they are generated from daily business activities. Whether a separately acquired domain name or other digital assets not specifically listed in §197 should be excluded from being a 15-year amortizable intangible asset warrants further study, along with review of the current list at §197(e)(4).

Further study and public comments should prove valuable in best defining the categories to be added to §197 as well as indicating which assets should be excluded from §197 if self-created and/or separately acquired (see later discussion on a study).

Repeal of the Anti-Churning Rule at §197(f)(9)

Section 197(f)(9) provides an anti-churning rule that excludes from the term “amortizable section 197 intangible” certain intangibles (i) held or used during the “transition period” defined as any period on or after July 25, 1991 and on or before enactment date (August 10, 1993) by the taxpayer or a related person, or (ii) acquired from someone who held the intangible during the transition period and as part of the transaction the user of the intangible does not change, or (iii) where the right to use the intangible is granted to a person (or someone related to that person) who held or used the intangible during the transition period.

Anti-churning rules serve an important purpose when a significant, favorable depreciation or amortization rule is added to the law. Such a rule prevents a taxpayer from engaging in transactions to enable existing ownership of assets to be transformed in some way to become subject to the new rule to benefit the original owner.

The §197 anti-churning rule is quite complex for various reasons including concern about converting pre-§197 goodwill into an amortizable asset and issues regarding various transactions involving partnerships. An indication of the complexity is the length and intricacy of the IRS guidance on this rule. Treas. Reg. §1.197-2(h) that explains the anti-churning rule along with examples 27 to 31 at Treas. Reg. §1.197-2(j) comprises over 8,200 words. In contrast, Treas. Reg. §1.197-2(b) defining section 197 intangible is just over 1,700 words in length.
President Obama’s revenue proposals for FY2017 included repeal of the §197 anti-churning rule. The rationale provided for this change follows.

“The rules under section 197(f)(9) are complex.Because it has been more than 20 years since the enactment of section 197, most of the intangibles that exist today did not exist during the transition period and, thus, would not be subject to section 197(f)(9).Even though the number of intangibles subject to section 197(f)(9) may be minor, taxpayers must nevertheless engage in due diligence to determine whether such intangibles exist and then navigate the complex rules of section 197(f)(9). Accordingly, the complexity and administrative burden associated with section 197(f)(9) outweighs the current need for the provision.” (Dept. of the Treasury, General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals (Feb. 2016). This proposal was also included in the Administration’s FY 2016, FY 2015 and FY 2014 revenue proposals.)

The AICPA has also called for repeal of the §197(f)(9) anti-churning rule. The AICPA notes the complexity of this rule and that it is outdated. They also note that the rule treats taxpayers who owned intangible assets during the §197 transition period differently from taxpayers who did not own intangible assets until after §197 was added to the tax law (AICPA, Compendium of Tax Legislative Proposals - Simplification and Technical Proposals, p. 50 (Jan. 2025)).

The fact that §197 was enacted over 30 years ago, the need for simplification and equity among taxpayers for an effective tax system, and the growing prevalence and importance of intangible assets support repeal of the §197(f)(9) anti-churning rule.

Favorable Depreciation Rules Should Not Apply Only to Tangible Business Assets

Since at least the 1990s, the importance of intangible assets, such as software and intellectual property, has become a significant element of economic activity. In 2006, the Federal Reserve Board determined that “investment in intangible assets in the United States exceeds all investment in tangible property and, if properly accounted for, would raise measured productivity growth significantly (See National Research Council, Intangible Assets: Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth, p. 1 (2009)).

Despite the importance of intangible assets to most businesses, favorable tax rules, such as bonus depreciation (§168(k)) and the expensing election of §179 only apply to tangible personal property (certain software is included in §179 but not other intangible assets). Inclusion of specified intangible assets for the §179 expensing election (particularly those with a life of less than 15 years or separately acquired (not along with other assets constituting a trade or business)) would offer simplification for small businesses and encourage further investment in these important assets.

Beyond §197 modernization, other intangibles should be considered for immediate expensing. For example, a new small business might have start-up expenditures beyond the expensing limit of §195 and have to amortize them over 15 years despite the existence of a §179 expensing limit of $1,250,000 (2025 amount) for certain tangible assets and software.

Advancements in digital and other intangible assets have often led to advancements in hardware. Also, many intangibles, such as an acquired domain name, are as important to business operations as manufacturing equipment. Thus, when favorable tax depreciation rules are provided for tangible personal property (such as more rapid depreciation or shorter lives), consideration should also be given to which acquired intangible assets should also be afforded favorable amortization treatment including immediate expensing.

Need for a Study with Public Comments

Given the expansion of the types of intangible assets used by businesses today compared to 1993, and the continuing innovation and changes in the digital world, it would be informative to study today’s intangibles, similar to what the GAO did in 1991 leading up to the enactment of §197 (GAO/GGD-91-88, noted earlier). In July 2000, the Treasury Department issued a comprehensive study on depreciation—Report to The Congress on Depreciation Recovery Periods and Methods, which is another good example of the benefits to be derived from focused research and discussion, along with public comments, on how to be sure amortization rules for today’s intangible assets is appropriate to reflect how businesses operate today.

A study allows for appropriate legal and economic analysis with input through public comment. This process would also allow for identification of intangible assets beyond web-based and social media-based ones to also consider tokenized assets and other digital assets, emission allowances, ESG (environmental, social, and governance) data, and more. A study would also be helpful to create a process for regular updating of what should be a §197 intangible.

An example of a study with public input is one completed in the United Kingdom in 2023 on digital assets. The UK Law Commission, “a statutory independent body,” studies laws to make reform recommendations to Parliament (apparently similar in purpose to the U.S. Uniform Law Commission). A “call for evidence” on the project sought information from interested parties “on the ways in which digital assets are being used, treated and dealt with by market participants.” Digital assets: Final report was released by the commission in June 2023.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Annette Nellen is a professor at San José State University. This article stems from the author’s longstanding research on amortization of intangibles. Some of the ideas presented here were previously presented in Federal Tax Reform and the Future of §197, 58 Tax Mangmt. Memo. 351 (Aug. 21, 2017). This paper is expanded from part of the California Lawyers Association Taxation Section’s 2023 DC Delegation project. Professor Nellen is the author of Amortization of Intangibles, 533 Tax Management.