Break for the Press: IRS Allows Tax-free Intangibles Swap

After a change of heart by the tax service, businesses — including troubled newspapers — will be able to separate certain intangible assets from go...
Marie LeoneMarch 19, 2009

The headlines for newspaper businesses have been grim of late. But it seems the federal government is stepping in to lend a hand. No, not with a bailout, but by reversing a position regarding intangible assets, which may make it easier, from a tax perspective, to swap troubled assets if there is a compelling business reason for it.

Indeed, the market for such transactions is starting to percolate as newspapers markets unravel at a faster clip.

Witness the late-February announcement by E.W. Scripps Co., owner of Denver’s Rocky Mountain News, that its was closing the 150-year-old newspaper. That same month Hearst Corp. said that it was pondering what to do with the San Francisco Chronicle — shutter it or sell it? Hearst also had been thinking about closing Seattle’s Post-Intelligencer, a paper that had its print version discontinued this week in favor of an online-only run.

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Over the past few months, the parent companies of some of the nation’s largest papers have filed for bankruptcy protection, including Tribune Co., owner of 12 newspapers, including the Los Angeles TimesBaltimore Sun, and Chicago Tribune. Other newspapers with parents in Chapter 11 include the Philadelphia Daily News and Philadelphia’s Inquirer,as well as the Minneapolis Star Tribune. More recently, reports have surfaced about financial troubles at other big-circulation papers such as the New York Daily NewsBoston GlobeDetroit News, and Miami Herald.

And it is against that backdrop of a sagging, threatened newspaper industry that the Internal Revenue Service reversed a long-held position on the tax-free exchange of some intangible assets, tax expert Robert Willens says in an advisory to clients. In a recent letter issued by the agency’s chief counsel, the IRS stated that if intangible assets — such as trademarks, trade names, publication mastheads, and customer lists — can be separated from a company’s goodwill assets, and be listed at their own value, then those assets may qualify as “like kind” property under the tax code.

That’s important, because under tax code companies may swap like-kind intangible assets on a tax-free basis if certain criteria are met. For example, the assets have to meet the “nature and character” requirements, which means the rights linked to an asset — such as a patent or copyright — must be similar, and so must the underlying property to which the intangible asset is linked. If that’s the case, a parent company could conceiveably exchange the trade name, masthead and advertiser’s list of a San Francisco paper, for similar intangible assets of a Dallas paper, without either company having to pay taxes on the deal.

This is a departure from guidance issued by the IRS in 2006, which said that trademarks and trade names could not be treated as like-kind property, and therefore not exchanged on a tax-free basis, says Willens. The guidance was based on the observation that the intangible assets were “closely related to,” if not a part of, the goodwill assets of a business. For the most part, the tax code prohibits the goodwill of one company to qualify as being like kind property. 

Willens points out that in 2007 the IRS came out with more specific guidance, concluding that the mastheads, advertiser accounts, and subscriber accounts of newspapers were closely related to — if not a part of — the goodwill, and therefore could not be swapped on a tax-free basis, for comparable assets held by another company, under the like-kind property provision.

But that guidance cited a 1993 Supreme Court case involving the Newark Morning Ledger newspaper, and noted that for depreciation purposes, intangible assets are not considered goodwill and their value be separated from the company’s goodwill. It is likely that the court determination probably led to the change of heart the IRS had this year.

Willens reckons that to demonstrate that it has truly “seen the light,”  the IRS’s reversal was accompanied by the following observation: “Except in rare and unusual situations, trademarks, trade names, mastheads, and customer based intangibles can be separately described and valued apart from goodwill.”

“This is a major concession by the IRS and, clearly, it will encourage businesses to swap intangible assets where such an endeavor is advisable to rationalize the entity’s business operations,” concludes Willens.