Taxand USA describes the IRS’s willingness to bifurcate amortisable intangibles where anti-churning is an issue.
When it comes to acquisitions and tax, there is nothing buyers love more than a good step-up. Check that — a great step-up. A step-up in the tax basis of the acquired assets allows the buyer to amortise the resulting identifiable intangibles and goodwill/going concern over a 15-year period. A step-up in tax basis can be achieved through several acquisition structures (direct asset purchase, purchase of partnership interests, purchase of S corporation in connection with a Section 338(h)(10) election, Section 336(e) election, etc.).
Unfortunately, when dealing with a business that has certain intangibles, specifically goodwill, going concern and trademarks (and possibly workforce) that existed prior to 10 August 1993, the nefarious anti-churning rules come into play that may taint the step-up and limit or disallow the amortisation of the aforementioned intangibles. However, on 3 March 2017, the IRS released Private Letter Ruling (PLR) 201709003, which gives hope to buyers purchasing a business with potential anti-churning assets.
This is great news for sellers and buyers alike that have been able to track and trace the source of their step-ups. Documentation of transactions with related elections, such as Section 754 elections, that give rise to step-ups is paramount in defending a company’s deductions before federal or state taxing authorities. Moreover, tracing transactions that give rise to deductions is especially important when a selling company is looking to monetise the step-up in a future sale.