Digging into Intangibles

Is a construction permit a "Section 197" intangible asset?
Robert WillensOctober 25, 2010

As companies begin to prepare for year-end closings, some will look to identify and value their intangible assets. As a result, they may find guidance issued last year by the Internal Revenue Service useful as they sort through their balance sheet.

In the case cited in a private-letter ruling released last May, the corporate taxpayer is a regulated electric utility. The utility’s subsidiary, SubA, is taking steps to obtain approvals that would permit the construction and operation of two nuclear units. Another subsidiary, SubB, is doing the same. Further, both SubA and SubB have submitted applications for obtaining a “combined license.”

A combined license is issued for a definite time period that cannot exceed a predetermined set of years from the date on which the commission granting the license finds that the inspections, tests, analyses, and acceptance criteria have been met. (In general terms, the commission referred to in the letter is a federal regulatory agency whose mission is to regulate the civilian use of nuclear materials.) Once the initial documents are issued, a combined license can then be renewed pursuant to the commission’s requirements. However, at issue in this case is whether the combined license is a “Sec. 197 intangible asset.” The IRS ruled that it is.1

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Section 197(a) provides that a taxpayer shall be entitled to an amortization deduction with respect to any amortizable Section 197 intangible. The amount of the deduction is determined by amortizing the adjusted basis of the intangible asset ratably over the 15-year period beginning with the month in which the intangible is acquired. An amortizable Section 197 intangible, in turn, is any Section 197 intangible that (1) is acquired after August 10, 1993, and (2) is held in connection with the conduct of a trade or business. That includes an intangible asset related to any license, permit, or “other right” granted by a governmental unit, or an agency or instrumentality thereof.2

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By contrast, Section 197(e)(2) and the related Regulation Section 1.197-2(c)(3) provide that a Section 197 intangible does not include any interest in land. For this purpose, an interest in land includes a fee interest, life estate, remainder, easement, mineral right, timber right, grazing right, etc. However, an interest in land does not include an airport landing or takeoff right, a regulated airline route, or a franchise to provide cable television service. So into which category does a combined license fall?

Section 197’s legislative history provides the answer. To be sure, legislative history states that the costs of acquiring licenses, permits, and other rights related to improvements in land, such as building construction or use permits, are to be taken into account in the same manner as the underlying improvement in accordance with present law. Before the enactment of Section 197, numerous U.S. Tax Court cases held that the costs of obtaining a Federal Communications Commission radio or television construction permit and broadcasting license were to be capitalized to an intangible asset. The FCC licenses, in these cases, involved the cost of obtaining a construction permit for broadcast facilities and the cost of obtaining a broadcasting license.

Arguably, the IRS observed, an FCC construction permit is related to the broadcast tangible property, and therefore has the same economic useful life as the tangible property. However, the tax court capitalized all FCC-related costs into a “license intangible” in this case — which dates back to 1959.3

Similarly, the FCC ruling concluded that a combined license issued by the commission is a separate intangible asset. Accordingly, the ruling concluded that the combined license is, indeed, a Section 197 intangible, and is not excepted from the definition by reason of Regulation Section

Contributor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for


1 See LTR 200922003, February 19, 2009.
2 See Section 197(d)(1)(D). Regulation Section 1.197-2(b)(8) provides that Sec. 197 intangibles include any license, permit, or other right granted by a governmental unit even if the right is granted for an indefinite period or is reasonably expected to be renewed for an indefinite period.
3 See Radio Station WBIR, Inc. v. Commissioner, 31 T.C. 803 (1959) and KWTX Broadcasting Co. v. Commissioner, 31 T.C. 952, aff’d per curiam, 272 F.2d 406 (5th Cir. 1959).

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