CRS REPORT RECOMMENDS UNIFORM TREATMENT IN TAXING INTANGIBLES.

                       CRS REPORT FOR CONGRESS

So severe have taxpayer controversies with the Internal Revenue Service over the treatment of purchased intangibles become that a number of bills have been introduced in Congress to provide some legislated bounds on the treatment of these types of assets. H.R. 3505, introduced by Ways and Means Committee Chairman Rostenkowski, would allow a flat 14 year amortization period for all purchased intangibles. H.R. 1456, introduced by Representatives Vander Jagt, Anthony, and Kennelly would allow amortization of intangibles where a limited useful life can be determined. H.R. 563 introduced by Representative Donnelly would disallow deductions for most intangibles altogether. Should Congress decide to legislate in this area, it will need to determine whether treatment of intangibles should be variable or uniform.

Intangible assets are the value of a firm in excess of the value of tangible assets. They may reflect goodwill and going concern value, know-how, customer based intangibles, and a variety of other items. In most cases it is difficult to value these assets or to determine the useful life.

The simplest way to administer the tax law would be to provide uniform treatment for all types of intangible assets, since it is difficult to value different types of intangible assets.

Despite assertions to the contrary, the choice of a uniform amortization period also turns out to provide the same effective tax rate for all intangibles, at least for assets purchased as part of an ongoing business. Neither economic efficiency nor tax equity require that separate amortization periods be ascribed to purchased intangibles depending on their degree of wasting away. The argument that tax lives should correspond to economic lives in this case has not been derived from a rigorous economic analysis, but rather has been based on reasoning by analogy with tangible assets. That reasoning is flawed because it does not take into account the expensing of created intangibles. Assets that deteriorate are replaced by new expenditures that are eligible for such expensing. This treatment provides an automatic benefit that is larger for intangibles that deteriorate more rapidly. Indeed, for an ongoing business with replacement investment, the net income stream of all intangibles is unaffected by the depreciation of the intangible asset -- all intangibles look alike.

This analysis does not, however, apply to those intangible assets that are normally produced for sale (such as some computer software) or assets that are capitalized (such as movies). To properly measure income of these assets requires writing them off over their useful lives.

The issue of international competitiveness in the acquisition of firms due to differential treatment of intangibles in foreign and U.S. tax law does not appear to be a relevant issue in most cases, since foreign tax law would not usually come into play.

                              CONTENTS

The ideal way to measure economic income would be to account for all changes in the value of assets owned in each measurement period. If an asset declined in value because it was being worn out or used up, the decline in value would reduce the period's income. In the same way, any increase in value would become an addition to the period's income. To economists, therefore, this aspect of measuring income is theoretically simple.

As a practical matter, however, the problem of establishing the values of all the assets in the economy has proven insurmountable. In the areas where accounting for income is a pressing and real issue, such as financial statements and the income tax system, a number of second-best solutions have been devised. INCREASES in asset values are generally not counted as income until they are "realized" (made real) in a transaction of some sort, such as when the asset is sold. DECREASES are accounted for under stylized and somewhat arbitrary rules that avoid the necessity of valuing individual assets; categories are established that are said to decline in value at set rates and over set periods. Some categories are assumed not to decline at all and so are not accounted for at all until they are sold (land, for example). Others are assumed to decline at the rate and over the time period of all similar property (buildings, machinery), and so give rise to a deduction for "depreciation" in each accounting period. In tax accounting the rules, at least for tangible assets, are strictly controlled by law and regulation. In general, neither tax nor financial accounting adjust for inflation.

Discussions of the tax treatment of intangible assets usually start by drawing an analogy between tangible assets and intangible assets. The treatment of tangible assets under the income tax has evolved into some fairly fixed principles. Tangible assets that do not lose value through use (or which may actually appreciate in value over time), such as land, are always capitalized and the capitalized costs are not deducted until and unless the asset is sold or exchanged. (Likewise, any appreciation in value is not "recognized" as income to be taxed until it is "realized" in a sale or exchange transaction.) Structures, machinery, and equipment are allocated to categories and assigned depreciable lives and patterns; the present system, dating from the Tax Reform Act of 1986, attempts to approximate the actual economic declines in value, at least overall, for structures and equipment.

The analogies usually drawn, however, are often a bit misleading, for two reasons. First, the analogy is almost always with DEPRECIABLE tangible assets, seldom with land, which ignores the issue of whether the intangibles in question do in fact decline in value through use. Secondly, the cost of most tangible assets, whether purchased or self-produced, is always capitalized, while the cost of most self-produced intangible assets is deducted as incurred. So even as a second-best solution, the analogy with tangible assets is not very instructive.

Current tax treatment is also not very helpful in understanding the issues. Indeed, current tax treatment results in such a high level of controversy that it IS the main issue. The general rule is that an intangible asset may be depreciated or amortized for tax purposes if it can be established that the asset has a determinable cost and a limited, determinable life. "Goodwill" and "going concern value," however, are said never to have these characteristics and therefore never to be depreciable./1/ Since deducting costs by depreciation gives a lower present value of taxes over the life of an investment than deducting them only when the asset is sold, there is an obvious incentive for taxpayers to establish values and limited lives for purchased intangible assets. This becomes a particular issue when purchasing a complete business, where all of the purchase price not allocable to the business's tangible assets must be allocated to intangible assets or to "goodwill." "Goodwill" means, in accounting jargon, the value of a business operation over and above the value assigned to the business's financial assets, physical assets, and intangible assets that can be distinguished from goodwill.

The depreciation rules (and controversies) generally apply to PURCHASED intangible assets, not to self-produced ones. The costs of creating "goodwill," customer relationships, and other such assets are mostly deductible current expenses such as advertising, salaries, and other ordinary business expenses. In current tax law, these expenses are deductible in the year incurred, not matched with the income they produce. (This is not the case with production by companies in the business of creating intangible assets, such as software producers or film makers; their costs are always capitalized and deducted only when the products are sold or used.)

So severe have controversies over the treatment of purchased intangibles become that a number of bills have been introduced in Congress to provide some legislated bounds on the treatment of these types of assets. H.R. 3505, introduced by Ways and Means Committee Chairman Rostenkowski, would allow a flat 14 year amortization period for all purchased intangibles. H.R. 1456, introduced by Representatives Vander Jagt, Anthony, and Kennelly would allow amortization of intangibles where a limited useful life can be determined. H.R. 563 introduced by Representative Donnelly would disallow deductions for most intangibles altogether.

In the next section of the paper, there is a discussion of the types of intangible assets which are at issue and some of the economic characteristics. The following sections take up the issues of administrative simplicity, economic efficiency, and equity (or"fairness"). We also briefly discuss the issue of international competitiveness in acquiring firms, primarily because such an issue has been raised so frequently.

TYPES OF INTANGIBLE ASSETS

Some intangible assets have long been identified in law or regulations and have established rules. Patents, for example, are granted for 17 years, so this is the maximum useful life. (Taxpayers are allowed to prove a shorter life if they can.) Copyrights also have legally established lives, but they are quite long (the author's life plus 50 years in most cases), so economic lives would usually have to be established by "facts and circumstances" for depreciation purposes. Trademarks, franchises, and the like are given special rules under Internal Revenue Code section 1253 for certain types of economic interests, but otherwise are considered to have indefinite lives and not depreciable./2/ Contracts, leases, and similar instruments with legally limited lives are also trouble-free, since they could probably be depreciated without opposition from the Internal Revenue Service (IRS) if they can be properly valued. Likewise, assets for which there are separate markets or that are purchased by themselves, such as software and subscription lists, are often easy to value and noncontroversial.

Taxpayers in recent years have increasingly gone beyond these established boundaries, however, and attempted to allocate portions of the purchase price of newly acquired businesses to such things as the business's technological and firm-specific knowledge and its relationship with its customers, markets, or employees ("core deposits" of banks, "client base" of professional offices, "insurance-in-force" of insurance companies, customer lists or "market share" in general, trained workforce, and the like). Although IRS has usually argued that these "assets" are indistinguishable from goodwill, some courts have allowed taxpayers to make the distinction and thus establish the existence of a separate asset with a determinable value and a limited life. These assets share the characteristic that their value is intimately related to the continued operation of the business, which is why IRS considers them indistinguishable from goodwill.

It is instructive to consider just why these assets have economic value. An intangible asset such as knowledge or a relationship with clients might have value over and above the name- recognition or "goodwill" value of a business for two reasons. One is that building such knowledge or such relationships usually involves costs (for example, training classes, development costs, advertising, joining professional associations or country clubs, buying lunches). The other is that even if little or no outlays are involved, it may still take some time to develop the knowledge or form the necessary relationships, so that the value of a purchased customer base or existing pool of knowledge at least will equal the present value of the extra income it will bring in. The purchaser of a going concern is frequently willing to pay extra to avoid these outlays and opportunity costs.

To illustrate how a customer base, for example, can be valuable even if it costs nothing to establish, imagine a professional office whose business associations grew simply by word-of-mouth, as physicians' were once reputed to do. Suppose that, once established, one could expect to clear a steady $100,000 annually from this practice's base of repeat customers, and that it takes three years for a new practice to grow to that level. Finally, suppose that enough clients come to the new practice in the first year to bring in $10,000, the second year, $25,000, and the third year $50,000. From the fourth year on, the clients on the list would be contributing $100,000. If one had a chance to buy this practice as a going concern, netting $100,000 a year, instead of starting from nothing and building up over three years, what would the customer base be worth? Its value is the difference between income with and without this client base, which is $90,000 the first year, $75,000 the second year, and $50,000 the third year. The value of the purchased base, therefore, would at least equal the discounted value of the extra income.

In the situation envisioned here, there is no contract with each customer guaranteeing or anticipating future payments from that customer. If that were the case, each contract would be an asset with a determinable value and (presumably) a set life (the length of the contract). The value discussed above arises because it is known (or believed) that, in the course of a year, some of the customers will make enough payments to produce the expected income, although which customers exactly is not known. In actual sales, such values are often established by statistical analyses of customer turnover rates, the business's records of average gross per customer, and the like. Thus, it is obviously not the individual customers who are the assets being purchased here, as would be the case with explicit contracts; the asset being purchased is the mass asset consisting of the entire customer base. The value of this base is maintained, because customers who disappear (through death or relocation) would be automatically replaced by the same word-of-mouth process that created the business initially. Thus, even though the existing customers disappear, the customer base does not. In this case, the purchased intangible, like goodwill, is not a depreciating asset. (In some cases, direct costs such as advertising may be necessary to maintain the customer base; in this case, the asset does depreciate, but the costs of maintaining it are expensed.)

It is also obvious that these assets are not likely to have much value apart from their connection to an ongoing business. Customers and suppliers make their own choices about whom to do business with, influenced by the business's reputation, location, personalities, waiting rooms, and many other factors that are not easily transferred from one business to another. At the very least, it is unlikely that the value of the assets would be the same if sold separately from the business.

Knowledge or technology as a source of value seems simpler but is made complicated by the tax structure. Knowledge or technology useful to any similar business (a computer program, for example) has a market value apart from the business in which it is used, but technology useful only in a specific firm does not. The one would normally be purchased on the open market and its cost depreciated; the other (which might be merely a specialized modification of the purchased general knowledge) would normally be developed in the business and its costs deducted as current expenses. The latter, if purchased as a part of the purchase of an ongoing business, would most likely be treated as nondepreciable "goodwill" by IRS.

The conceptual problems that have made the administration of and compliance with the tax rules for intangible assets such a nightmare seem to relate primarily to assets sold as a part of or in connection with the sale of an on-going business operation. The remainder of this report is devoted primarily to a discussion of these types of assets. Assets that are readily marketable or that are created and sold separately do not necessarily involve the same issues.

ADMINISTRATIVE SIMPLICITY

A principal reason for interest in legislative reform of the tax treatment of purchased intangibles is to simplify the administration of the tax law. A recent study of the General Accounting Office (GAO) ³ surveyed some of the disputes and conflicts which have arisen for this reason. These administrative issues were also reviewed in a recent pamphlet published by the Joint Committee on Taxation. ⁴ There are several administrative issues which have arisen. Some have to do with disputes over whether part of the purchase price reflected goodwill itself or other amortizable assets. Others have to do with practical problems in valuing assets and establishing a useful life.

The GAO recommended defining various types of intangible assets and assigning them useful lives, based largely on the notion that this treatment would match income and expense more closely and GAO's conclusion that such a treatment would be feasible. Other groups testifying at recent hearings of the Ways and Means Committee on October 2, 1991, including the Treasury Department and the American Bar Association, recommended a single amortization period for all intangible assets. These recommendations were made largely on the grounds of administrative simplicity.

The single amortization period, regardless of its length, would probably be the simplest approach to the treatment of intangibles. Unlike the GAO suggestion, there would be much less of an incentive to allocate intangible assets to particular types and thus less controversy since these assets are very difficult to value. (The American Bar Association notes, however, that there would still be incentives, depending on the treatment of capital gains, to assign more of the basis to assets which are less likely to be sold separately.)

There was also some discussion about the tax treatment of intangibles purchased separately. It would be simpler to include all intangibles; however, it would also be possible to apply a general rule to intangibles purchased with the sale of a business while allowing other treatment for purchased intangibles. The Treasury Department, for example, suggested that software purchased under a nonexclusive license (e.g. commercial software purchased for use in a firm as opposed to a software firm purchasing an exclusive right) should be treated separately. The American Bar Association suggested that separately purchased intangibles be excluded from the general coverage of a single amortization schedule, with appropriate safeguards to prevent abuse. ⁵

No tax treatment will completely eliminate disputes about valuation. For example, in any sale of a business there will be an incentive to allocate value to those assets which are more generously treated (such as equipment and amortizable intangibles) and less to those assets which are less generously treated (such as land and goodwill). In general, however, the valuation problems are probably much greater between different types of intangible assets versus the division between tangible and intangible assets. Hence, the most important simplifying approach would be to have a single amortization period.

The American Institute of Certified Public Accountants (AICPA) has recommended in testimony at the hearings that different amortization periods be provided for different industries. While this approach would not be as simple as a uniform treatment of intangibles, it would probably be simpler than an asset by asset treatment.

Those who support a single amortization period on administrative grounds frequently do so even though they believe that not varying the amortization treatment is distortionary or inequitable. The American Bar Association, for example, suggested that the Treasury Department might study whether useful lives vary significantly across industries or categories of assets and that consideration be given to having different amortization periods.

It is not clear given the discussion whether these groups are referring to economic efficiency issues, or whether their comments have to do with equity or fairness to taxpayers. It is most likely the former. Nevertheless, we discuss these issues separately. In the following two sections, this analysis concludes that neither economic efficiency nor tax equity require that separate amortization periods be ascribed to purchased intangibles depending on their degree of wasting away. The argument that tax lives should correspond to economic lives in this case have not been derived from a rigorous economic analysis, but rather have been based on reasoning by analogy with tangible assets. From an economic perspective, that reasoning is flawed.

ECONOMIC EFFICIENCY AND TAX NEUTRALIY

This section considers the economic efficiency issues related to the treatment of intangibles which are purchased as part of an ongoing business. Such intangibles include items such as goodwill, trademarks, customer bases, and technological know-how. This analysis does not, however, apply to intangibles which are created in order to be sold, such as movies and some computer software.

Efficient allocation of capital depends on a correct measure of income for tax purposes. If an asset is depreciated at a faster rate or over a shorter period of time than suggested by its economic decline, the effective tax rate for the asset will be lowered. The result is a misallocation of investment into those assets with the more favorable treatment, and an economically inefficient mix of investment.

That tax depreciation should be governed by economic depreciation in order to obtain tax neutrality and efficiency is a fundamental notion of tax analysis. (Or, if subsidies are to be allowed, they should be designed to have a proportional effect on the tax rate for different assets.) It seems natural, therefore, to argue that the same rules should apply in the case of purchased intangibles. Indeed, that is a major thrust of the study by the General Accounting Office, "Issues and Proposals Regarding Tax Treatment of Intangible Assets." ⁶ This study suggested the adoption of different amortization schedules for purchased intangibles, based on estimated useful life or degree of wasting away. In testimony before the Ways and Means Committee, the GAO recommended that amortization of intangibles, including goodwill, be allowed over specific statutory periods.

As suggested earlier, despite the intuitive appeal of this type of analogous reasoning, it is not consistent with the objectives of tax neutrality. Essentially, there is no need to match amortization periods to actual depreciable lives, and therefore no reason to further complicate the tax treatment by doing so. The simple reason is that the principal requirement for tax neutrality -- the capitalization of created intangibles -- has not been met. Created intangibles, whether generated through worker training, labor inputs, or advertising are expensed. Although there may be legitimate tax policy reasons for not capitalizing these assets (the obvious constraint being measurement of the costs), the fact that they are expensed is crucial to the issue of economic efficiency. If our framework of analysis is constrained by the expensing of created intangible assets, there is no reason to vary the amortization period with durability of a purchased asset.

To explain this issue, it is perhaps first important to note that there are actually two different efficiency issues associated with the tax treatment of assets. The first has to do with the incentives to allocate resources to different types of investments. Barring spill-over effects, allocative efficiency is reached when all assets are subject to the same effective tax rates. It is this type of issue that suggests that the cost of longer lived assets, such as buildings, be deducted over long periods of time and that the cost of shorter lived assets, such as machinery and equipment, be deducted over shorter periods of time.

The second efficiency issue has to do with the effect of the tax system on the selling of assets. When an asset is sold, the taxpayer is subject to capital gains taxes, which in general means that tax burdens rise when assets are expected to be sold. This treatment has two effects. First, it may affect the allocative efficiency issue if taxpayers expect, at the time they make an investment, that the asset will be sold at some future data. Secondly, it creates a lock-in effect, discouraging businesses from being sold.

To illustrate these effects table 1 presents calculations of the effective tax rate for different types of assets, including intangibles, land, equipment, and structures. Tax rates are calculated assuming the assets are sold every ten years, every twenty years, every thirty years, or not at all. When assets are sold, the calculations take into account the successive series of capital gains taxes which are paid at each round, as well as the treatment of the asset for depreciation and amortization purposes in the hands of the purchaser. We consider intangible assets which depreciate at different rates, and also examine two cases. In one case the intangible cannot be deducted at all, but rather reduces the capital gain on a future sale. In the other case, intangibles are amortized over a ten year period, a period which was simply chosen for illustrative purposes. (The mathematical analysis underlying these effective tax rates is presented in the appendix.)

By comparing across assets, one can see how different types of assets are treated by the tax law. This is the efficiency issue which is normally concerned with the setting of depreciation rates. By comparing across sales periods, one can see the extra tax which arises due to sales of assets.

As the results in table 1 show, intangibles are treated more generously than other assets in all of the cases studied. The lock-in effect (the additional tax which occurs because of sale of assets) varies across asset types. Not surprisingly, it is less serious for equipment, where depreciation in the hands of the purchaser offsets much of the capital gains tax. Moreover, for those intangibles which do not depreciate or depreciate slowly and which cannot be deducted by the purchaser, the change in tax liability due to selling assets is larger than for tangible assets.

                               TABLE 1:

It may be argued, however, that the single asset comparison in table 1 is not representative of the characteristics of an ongoing business. In an ongoing business, the value of assets, either tangible or intangible, does not deteriorate over time; rather these assets are replaced. An ongoing business must add new capital investment as well as continue to engage in activities which will maintain intangible assets.

Accordingly, in table 2 the effective tax rates are calculated for an asset with the assumption of replacement investment. These effective tax rates require that one take into account the tax treatment of all of the generations of replacement investment as well as the original investment. As a result, the tax burdens are larger for depreciable assets such as structures and equipment when assets are sold, because the calculations account for recent vintages of replacement investment which are held for a short period of time and which are not fully depreciated.

When reinvestment is considered for intangibles, it simply converts, in mathematical terms, every intangible asset into a non- depreciating asset. Each new increment of replacement investment is expensed. The flow of net income becomes identical for both short lived and long lived intangibles. ⁷ Or, another way to put it is that an intangible which depreciates rapidly is automatically given beneficial treatment via the expensing of replacement investment. Providing a fixed treatment -- whether it is no write off or a fixed write-off period -- for all intangible assets results in equal treatment of all intangibles. Providing differential treatment would FAVOR short lived intangibles, not make the treatment neutral.

It is perhaps worth restating why there is no reason from an efficiency standpoint to provide amortization lives for purchased intangible assets which vary by the durability of the asset. First, for a single asset sale, the tax burden imposed at sale is relatively unimportant for a short lived asset because the asset's value has fallen so much and the capital gains tax is extremely small relative to the original investment. For the more realistic case of an ongoing business, while the value of the intangible asset may deteriorate, the expensing of replacement investment by the purchaser automatically provides an offsetting benefit for shorter lived intangibles, so that all intangible assets are treated the same only if the treatment of purchased intangibles does not vary with the expected life.

                               TABLE 2:

Moreover, it seems likely that the barriers to sale are less severe in the case of intangible assets, which cannot generally be sold as separate assets from the business itself. It seems unlikely that the decision to sell an ongoing business is so highly responsive to tax considerations. Lock-in effects are probably more serious for other types of assets than intangibles.

The efficiency analysis suggests that choice of a single amortization period does not result in distortions in the tax treatment of different types of intangible assets. Thus, if a single amortization period is considered superior on administrative and simplicity grounds, it is also completely consistent with tax neutrality.

Note that this conclusion rests on the prior constraint that created intangibles will continue to be eligible for expensing. For assets where this treatment does not apply, such as intangibles created for sale (e.g. commercial computer software which is treated as inventory by the creating firm) or for assets where costs are capitalized (e.g. movies), it is appropriate to allow amortization over the expected useful life.

ISSUES OF FAIRNESS AND EQUITY

There is occasionally confusion about what is meant by equity or fairness. The previous section has demonstrated that equal treatment of intangibles (across the general category of intangibles) in an ongoing business when measured as an effective tax rate is consistent with a single amortization period. But even if it weren't, there is much less reason to see differences in tax rates across asset types as a matter of equity, rather than efficiency. That is because taxpayers can adjust their behavior to adapt to tax burdens. In that adjustment process aftertax rates of return tend to be equated and pre-tax returns diverge. Thus, from an economic perspective, the notion of horizontal equity or fairness across taxpayers is not a particularly relevant issue. To the extent that taxes on capital fall in general on high income individuals, the amortization period or the ability to amortize at all may be relevant in that more generous treatment makes the tax system slightly less progressive.

There is also an inevitable redistributional effect any time the tax law changes. Individuals who have existing assets expect the purchase price to be affected by the tax treatment of the purchaser. Thus, allowing more generous treatment would provide a windfall gain for these individuals and allowing less generous treatment would result in a windfall loss. These consequences are inevitable, and occur with any type of tax change. By historical comparison with other tax law changes, windfall gains and losses from restructuring the amortization of intangibles would appear modest.

ISSUES OF "INTERNATIONAL COMPETITIVENESS"

The issue of so-called international competitiveness is addressed because it has been raised with regard to the tax treatment of intangibles. The basic argument which has been made is that the tax laws of foreign countries frequently allow amortization of intangibles, giving foreign acquirers a competitive advantage over U.S. acquirers. (This discussion has mostly related to acquisition of U.S. firms, but could also apply to acquisitions of foreign firms.) That is, foreign acquirers are willing to bid higher for a firm than U.S. acquirers because they can write off the cost of the purchase.

This argument is questionable on several grounds. ⁸ The first and perhaps most straightforward reason is that in most cases the tax laws of the foreign country are not relevant. A foreign acquirer of a U.S. firm will have to pay tax based on U.S. tax law, since income earned in the U.S. is subject to U.S. tax. Some countries do not tax foreign source income at all, and thus their rules would never come into play. Other countries tax worldwide income, but only include dividends from foreign incorporated subsidiaries. In this case, again the U.S. tax would not matter if the firm is organized as a subsidiary and if profits are reinvested. Even if profits are eventually paid, there is a deferral of any potential application of the foreign tax system. Finally, even in those cases where the foreign tax comes into play (when income is repatriated or when the firm operates through a branch), the foreign tax system would only have an effect on tax liability if foreign taxes were higher than U.S. taxes. It is difficult to discern a clear competitive advantage in this case.

A second reason for questioning this argument is that the relative attractiveness of different types of investments is a function of the whole array of tax differentials, including rates and differential treatment of various assets. It is not appropriate to isolate one aspect of the tax law and draw conclusions from that provision.

The final reason for some skepticism is that this argument has never been put in any sort of general framework of efficient economic choice. In general, the standards of efficient worldwide capital allocation are met if firms in each country do not have their investment choices distorted by taxes. This issue involves comparing the tax treatment for a given firm of making an investment domestically versus making an investment abroad, not comparing the tax treatment of two different firms considering the same investment.

CONCLUSION

The primary conclusion of this economic analysis of the tax treatment of purchased intangibles is that, should Congress decide to legislate in this area, the administratively simple approach also is the appropriate approach from an economic standpoint. Uniform amortization periods for intangibles purchased as part of the sale of an ongoing business is the proper treatment to achieve uniform effective tax rates for different types of intangibles. (This uniform treatment could involve allowing no amortization at all, expensing, or some fixed amortization period.)

How long that amortization period should be is less clear. While shorter amortization periods reduce tax barriers to sale, they also favor assets which are already generously treated. Reducing or increasing the amortization period (or disallowing deductions altogether) has ambiguous effects on economic efficiency.

From an economic perspective, the issues usually raised concerning so-called fairness and international competitiveness do not appear to be very relevant.

[APPENDIX IS NOT SUITABLE FOR ONLINE REPRODUCTION.]

² Ibid. p. 11.

³ United States General Accounting Office, Issues and Policy Proposals Regarding Tax Treatment of Intangible Assets, Report GAO/GGD-91-88, August 1991.

⁴ Joint Committee on Taxation, Description of Proposals Relating to the Federal Income Tax Treatment of Certain Intangible Property, September 30, 1991.

⁵ That is, firms could attempt to complete a sale through sale of the firm and separate sale of certain assets, so rules would have to be put in place to prevent use of this mechanism.

⁶ U.S. General Accounting Office, Issues and Policy Proposals Regarding Tax Treatment of Intangible Assets, Report to the Joint Committee on Taxation, August 1991.

⁷ This point was made in a CRS report on customer based intangibles. See Jack Taylor, Amortization of Customer-Based Intangibles: An Economic Perspective, Congressional Research Service Report 91-218 E, March 6, 1991. A related point is made in the discussion of this issue by the Joint Committee on Taxation. See Description of Proposals Relating to the Federal Income Tax Treatment of Certain Intangible Property, Committee on Ways and Means, Joint Committee on Taxation, September 30, 1991, p. 32.

⁸ This issue is addressed in more detail in a memorandum by David Brumbaugh, Foreign Tax Treatment of Goodwill and its Effect on Acquisitions on U.S. Companies, Congressional Research Service, January 17, 1989.