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Annual contributions amortized within 15 years

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Tax Hot Topics newsletter The IRS has issued guidance (PLR 202119007) ruling that a taxpayer’s initial contribution to a state fund entitled the taxpayer to receive rights that are considered an amortizable intangible within the meaning of Section 197(d)(1)(D). In addition, the IRS ruled that the taxpayer’s subsequent annual contributions will be treated as contingent payments to retain the rights, and are subject to amortization over the remaining period created by the initial contribution.

The taxpayer addressed by the private letter ruling paid into a program with two funding components: an initial contribution and an ongoing, contingent annual contribution. Contributions to the fund entitle the taxpayer to a certificate and a new standard of review, and the taxpayer represented that the conveyance of these rights occurs upon the initial contribution. The taxpayer’s subsequent payment of each required annual contribution does not create any new rights not already received upon payment of the initial contribution. Such payment is made in further payment for the rights created by the initial contribution.

Section 197(d)(1)(D) defines the term “Section 197 intangible” to mean, among other things, any license, permit, or other right granted by a governmental unit or an agency. Treas. Reg. Sec. 1.197-2(f)(2)(i) provides that any contingent amount that is properly included in the basis of an amortizable Section 197 intangible after the first month of the 15-year period described in Treas. Reg. Sec. 1.197-2(f)(1)(i) and before the expiration of that period, is amortized ratably over the remainder of the 15-year period. For this purpose, the remainder of the 15-year period begins on the first day of the month in which the basis increase occurs.

The IRS concluded that the payment of the initial contribution by the taxpayer will entitle the taxpayer to receive an amortizable Section 197 intangible within the meaning of Section 197(d)(1)(D). Each annual contribution will be treated as an additional payment to retain the rights obtained and the additional basis will be subject to amortization under Section 197 over the remaining 15-year amortization period of the amortizable Section 197 intangible created by the initial contribution.

Contact:
Sharon Kay
Partner
Washington National Tax Office
T +1 202 861 4140

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