Expenses
Maximizing the Benefits of Sec. 199 in an Asset Sale
Authors’ note: The opinions expressed in this article are those of the authors and are not necessarily those of Pepper Hamilton LLP, Ivins, Phillips & Barker, or their respective clients. The information contained in this article should be reviewed carefully with respect to the specific facts of each individual’s situation.
1 The Sec. 199 deduction was the centerpiece of the American Jobs Creation Act of 2004, §102, P.L. 108-357 (October 22, 2004).
2 A Sec. 338(h)(10) election is available if the target in a stock sale is a member of an affiliated group of corporations filing a consolidated tax return. Under the election, the target corporation is deemed to have sold all its assets for FMV and then liquidated into its corporate parent. Thus, the gain or loss on the stock sale is ignored. The old target corporation is then treated as a new target corporation that purchased all the assets.
3 Sec. 199(a)(2).
4 Sec. 199(c)(1). See generally Granwell and Rolfes, “Musings on Selected Provisions of the Final Section 199 Regulations Applicable to Corporate Manufacturers of Tangible Property,” 47 Tax Mgmt. Memo, No. 18 (September 4, 2006): 355; Conjura, Zuber, and Breaks, “Practical Considerations in Implementing the Section 199 Regulations,” 105 J. Tax’n (August 2006): 68.
5 Secs. 199(c)(4)(A)(i)(I) and (c)(5).
6 Sec. 199(c)(4)(A)(ii).
7 See generally Regs. Sec. 1.338-6(b). Accordingly, the allocation must be made in the following numerical order of the seven classes, up to the FMV of each class: (I) cash, (II) certificates of deposit, (III) accounts receivable and debt instruments, (IV) inventory, (V) all other assets other than class I, II, III, IV, VI, and VII assets, (VI) all Sec. 197 intangibles except goodwill and going concern value, and (VII) goodwill and going concern value (id.).
8 Secs. 199(c)(4)(A)(i)(I) and (c)(5)(B).
9 Regs. Sec. 1.199-3(j)(3)(i).
10 Regs. Sec. 1.199-3(f)(1).
11 Note 7, above, lists the seven asset classes, in the order in which purchase price must be allocated. Class VI includes all Sec. 197 intangibles except goodwill and going concern value, and Class VII includes all goodwill and going concern value (Regs. Sec. 1.338-6(b)(1)). As explained in the text, software that is acquired as part of a business is a Sec. 197 intangible.
12 Sec. 167(f)(1)(A). See also Rev. Proc. 2000-50, 2000-2 CB 601 (distinguishing between internally developed and purchased software).
13 Sec. 197(e)(3). However, software that is publicly available for purchase is not treated as a Sec. 197 intangible, even when acquired in the acquisition of a trade or business.
14 Sec. 199(c)(4)(A)(ii).
15 Regs. Sec. 1.199-3(m)(6).
16 Regs. Sec. 1.199-3(m)(1)(i).
17 Id.
18 Id.
19 Id.