Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.ibd From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: Executive Update Date: Tue, 17 Nov 92 12:53:40 EST Message-ID: <3.1992Nov17.125340@AmeriCast.com> 11/17/92 TITLE Executive Update Deductions Of 'Soft' Assets Hinge On Pend- ing Ruling At Stake Is Availability Of Tax Benefits To Firms Following Ac- quisitions Vineeta Anand In Washington The ability of companies to deduct the value of goodwill and "soft" assets may rest on a ruling in a newspaper's dispute with the Internal Revenue Service that was heard by the Supreme Court last week#m#cq#m#. Rep. Dan Rostenkowski, an Illinois Democrat and chairman of the House Ways and Means Committee, this year sponsored legislation that would have Taxes allowed companies to write off the value of acquired companies' goodwill, or reputation, and intangible assets, such as customer lists, employees, supplier contracts and trademarks. The write- offs would have been spread out over 14 years. Goodwill is not deductible under current tax law. The Rostenkowski proposal was part of the tax package vetoed by President Bush earlier this month and widely expected to be resurrected and put before President-elect Clinton next spring. Capitol Hill watchers, however, doubt Congress will pass the package before the Supreme Court decision, expected by July. The Supreme Court ruling could affect the outcome of the legislation. The court case involves a protracted fight between the IRS and Herald Co., now part of Newark Morning Ledger Co. The company wrote off $67.7 million for the value it ascribed to 460,000 paid subscribers it acquired as part of its 1977 purchase of Booth Newspapers Inc. The IRS generally has nixed such deductions, arguing that soft assets such as subscriber lists do not have limited lives like plant and equipment and that their value is intertwined with the reputation of the purchased firm. Its position has spawned long and costly battles with hundreds of companies that bought businesses during the 1980s at prices well above the appraised value of their hard assets. The IRS so far has supported the tax bill because of the fuzziness of current law regarding what is goodwill and the high cost of battling companies in court. But a win for the agency in the Newark Morning Ledger dispute would un- dermine that support and make it more difficult for Congress to pass the legislation. The agency's record in court has been mixed. It lost several key cases but has won some others. The Newark Morning Ledger case came to the Supreme Court after the newspaper won the initial round with the IRS in U.S. District Court only to have the Third Circuit of Appeals rule in favor of the agency in September 1991. Because of the uncertainty over which way the Supreme Court will rule, companies battling the IRS are trying to push for faster settlements of their disputes. "It's like reading tea leaves," noted McGee Grigsby#m#cq#m#, head of the tax department in the Washington office of Latham & Watkins, a Los Angeles law firm. The saga began when Herald Co. depreciated part of the value of the acquired subscriber lists between 1977 and 1980, when the IRS nixed the deductions. The company paid the tax agency back taxes for deductions it had claimed. Newark Morning Ledger Co. then filed for a refund in 1988. When the IRS failed to pay up, the company took the matter to court. Last week#m#cq#m#, the Supreme Court justices grilled lawyers for both sides equally and seemed unconvinced by arguments from former Supreme Court nominee Robert Bork, who was representing Newark Morning Ledger Co. Bork argued that the value of paid subscribers acquired with the purchase of the Booth newspapers should be depreciable because they can be statistically assumed to drop off after a certain period of time. The justices also did not seem to buy Deputy Solicitor General Lawrence G. Wallace's argument that the continuing patronage of acquired subscribers is the same as goodwill, which cannot be written off under current law. Tax lawyers and accountants agree that the tax bill will languish if the nation's highest court rules against Newark Morning Ledger. Not only would the IRS's support likely disappear, but a Supreme Court victory for the tax collection agency also would alter the assumptions under which the tax bill was written. If the IRS wins the case, the proposal suddenly would become a money-losing item, which Congress might find hard to pass at a time when the new administration is ex- pected to focus on reducing the deficit. The bill, which assumes many companies actually write off intangible assets over shorter periods because the IRS loses many disputes, is currently es- timated to raise $425 million over five years. If the Supreme Court hands down a win for Newark Morning Ledger Co., the IRS likely would become more enthusiastic about the Rostenkowski bill because it would create a single standard for the depreciation of intangible assets. Support from other quarters might evaporate, however, if companies concluded they would be better off depreci- ating intangible assets and fighting it out with the IRS. "If (Newark Morning Ledger) loses, the Rostenkowski bill is dead. It will never see the light of day again," predicted Grigsby. "If the government loses, most people wouldn't really care, because they believe they are correct anyway. But it would be nice for the Supreme Court to affirm what they have been doing." This article is copyright 1992 Investors Business Daily. Redis- tribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM