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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
If an asset described in one of the classifica- are amortized over 15 years. They include the partners or shareholders) can make the elec-
tions above can be included in more than one following assets. tion. But each partner or shareholder must pay
class, include it in the lower-numbered class. • Goodwill. the tax on his or her share of gain.
For example, if an asset is described in both • Going concern value. To make the election, you, as the transferor,
Class II and Class IV, choose Class II. • Workforce in place. must attach a statement containing certain in-
• Business books and records, operating formation to your income tax return for the year
Example. The total paid in the sale of the systems, and other information bases. of the transfer. You must file the tax return by
assets of Company SKB is $21,000. No cash or • Patents, copyrights, formulas, processes, the due date (including extensions). You must
deposit accounts or similar accounts were sold. designs, patterns, know how, formats, and also notify the transferee of the election in writ-
The company's U.S. Government securities similar items. ing by the due date of the return.
sold had a fair market value of $3,200. The only • Customer-based intangibles. If you timely filed your return without making
other asset transferred (other than goodwill and • Supplier-based intangibles. the election, you can make the election by filing
going concern value) was inventory with a fair • Licenses, permits, and other rights granted an amended return within 6 months after the
market value of $15,000. Of the $21,000 paid by a governmental unit. due date of the return (excluding extensions).
for the assets of Company SKB, $3,200 is allo- • Covenants not to compete entered into in Attach the statement to the amended return and
cated to U.S. Government securities, $15,000 connection with the acquisition of a busi- write “Filed pursuant to section 301.9100-2” at
to inventory assets, and the remaining $2,800 ness. the top of the statement. File the amended re-
to goodwill and going concern value. • Franchises, trademarks, and trade names. turn at the same address the original return was
Agreement. The buyer and seller may en- See chapter 8 of Pub. 535 for a description of filed.
ter into a written agreement as to the allocation each intangible. For more information about making the elec-
of any consideration or the fair market value of tion, see Treasury Regulations section
any of the assets. This agreement is binding on Dispositions. You cannot deduct a loss from 1.197-2(h)(9).
both parties unless the IRS determines the the disposition or worthlessness of a section
amounts are not appropriate. 197 intangible you acquired in the same trans-
action (or series of related transactions) as an- Patents
Reporting requirement. Both the buyer other section 197 intangible you still hold. In-
and seller involved in the sale of business as- stead, you must increase the adjusted basis of The transfer of a patent by an individual is trea-
sets must report to the IRS the allocation of the your retained section 197 intangible by the non- ted as a sale or exchange of a capital asset
sales price among section 197 intangibles and deductible loss. If you retain more than one sec- held longer than 1 year. This applies even if the
the other business assets. Use Form 8594, As- tion 197 intangible, increase each intangible's payments for the patent are made periodically
set Acquisition Statement Under Section 1060, adjusted basis. Figure the increase by multiply- during the transferee's use or are contingent on
to provide this information. Generally, the buyer ing the nondeductible loss by a fraction, the nu- the productivity, use, or disposition of the pat-
and seller should each attach Form 8594 to merator (top number) of which is the retained ent. For information on the treatment of gain or
their federal income tax return for the year in intangible's adjusted basis on the date of the loss on the transfer of capital assets, see chap-
which the sale occurred. See the Instructions loss and the denominator (bottom number) of ter 4.
for Form 8594. which is the total adjusted basis of all retained
intangibles on the date of the loss. This treatment applies to your transfer of a
Dispositions of In applying this rule, members of the same patent if you meet all the following conditions.
Intangible Property controlled group of corporations and commonly • You are the holder of the patent.
• You transfer the patent other than by gift,
controlled businesses are treated as a single
entity. For example, a corporation cannot de- inheritance, or devise.
Intangible property is any personal property that duct a loss on the sale of a section 197 intangi- • You transfer all substantial rights to the
has value but cannot be seen or touched. It in- ble if, after the sale, a member of the same con- patent or an undivided interest in all such
cludes such items as patents, copyrights, and trolled group retains other section 197 rights.
the goodwill value of a business. intangibles acquired in the same transaction as • You do not transfer the patent to a related
Gain or loss on the sale or exchange of am- the intangible sold. person.
ortizable or depreciable intangible property held Covenant not to compete. A covenant not Note. For dispositions after December 31,
longer than 1 year (other than an amount recap- to compete (or similar arrangement) that is a 2017, certain patents are not treated as capital
tured as ordinary income) is a section 1231 gain section 197 intangible cannot be treated as dis- assets. See Noncapital Assets, earlier. Also,
or loss. The treatment of section 1231 gain or posed of or worthless before you have dis- see Patents and copyrights in chapter 3.
loss and the recapture of amortization and de- posed of your entire interest in the trade or busi-
preciation as ordinary income are explained in ness for which the covenant was entered into. Holder. You are the holder of a patent if you
chapter 3. See chapter 8 of Pub. 535, Business Members of the same controlled group of cor- are either of the following.
Expenses, for information on amortizable intan- porations and commonly controlled businesses • The individual whose effort created the
gible property and chapter 1 of Pub. 946, How are treated as a single entity in determining patent property and who qualifies as the
To Depreciate Property, for information on in- whether a member has disposed of its entire in- original and first inventor.
tangible property that can and cannot be depre- terest in a trade or business. • The individual who bought an interest in
ciated. Gain or loss on dispositions of other in- the patent from the inventor before the in-
tangible property is ordinary or capital Anti-churning rules. Anti-churning rules vention was tested and operated success-
depending on whether the property is a capital prevent a taxpayer from converting section 197 fully under operating conditions and who is
asset or a noncapital asset. intangibles that do not qualify for amortization neither related to, nor the employer of, the
into property that would qualify for amortization. inventor.
The following discussions explain special However, these rules do not apply to part of the
rules that apply to certain dispositions of intan- basis of property acquired by certain related All substantial rights. All substantial rights to
gible property. persons if the transferor elects to do both of the patent property are all rights that have value
following. when they are transferred. A security interest
Section 197 Intangibles • Recognize gain on the transfer of the prop- (such as a lien), or a reservation calling for for-
erty.
• Pay income tax on the gain at the highest feiture for nonperformance, is not treated as a
substantial right for these rules and may be kept
Section 197 intangibles are certain intangible tax rate.
assets acquired after August 10, 1993 (after by you as the holder of the patent.
July 25, 1991, if chosen), and held in connec- If the transferor is a partnership or S corpo-
tion with the conduct of a trade or business or ration, the partnership or S corporation (not the
an activity entered into for profit whose costs
Chapter 2 Ordinary or Capital Gain or Loss Page 23