Congress Is Looking At A Hard Fight Over Soft Assets

In the days when most U. S. businesses actually made things, tax planning was simple. When you bought a company, you acquired the assets: machinery, a building, and maybe some delivery trucks. The government gave you a break by letting you write off the cost of all that newly acquired property over a period of years: say, 10 years for widget-stampers. Simple as pie.

Not any more. These days, the value of many companies is not in tangible stuff but rather in more ethereal assets, such as customer relationships. For many businesses--in finance, publishing, and services--there are few assets of value except for customer and subscriber lists, a bank's core depositors, and the like. "Intangibles," says Bruce W. Morgan, an economist at Arthur Andersen & Co., "are the guts of what the business is all about."

The simple rules no longer apply. And all the confusion has sown the seeds for what promises to be a nasty battle on Capitol Hill over how to tax intangibles. The stakes are enormous: In 1987, the last year for which figures are available, $262 billion in intangible assets changed hands. The struggle could spill over into another, even hotter controversy: whether companies can continue to deduct all advertising expenses.

BRAWL. The dispute began two years ago when the Internal Revenue Service cracked down on companies that tried to depreciate the value of their intangibles. But in two recent court cases, one involving a newspaper subscriber list and a second involving a roster of bank depositors, judges allowed the write-offs. Now, businesses are claiming deductions for virtually all assets, from pizza-crust recipes to the value of a lower-paid, nonunion work force. "Taxpayers and the government are spending a lot of time, effort, and money battling it out," says Cleveland tax lawyer Alan Doris. "There's a lot of frustration on both sides."

Now, the brawl has hit Capitol Hill. In one corner is Representative Guy Vander Jagt (R-Mich.). Acting on behalf of insurance agents and others, he would give broad leeway in writing off the cost of intangibles in a corporate acquisition. Lifting a page from the tax treatment for plant and equipment, he would even let the Treasury Dept. set up formal depreciation schedules. In the other corner is Representative Brian J. Donnelly (D-Mass.), a feisty tax reformer who wants to settle the controversy by flatly barring acquiring companies from writing off any costs of intangible property.

That argument can be taken one step further--and it's a leap that is keeping publishers, broadcasters, and advertisers awake nights. Today, a company that buys an ad can write off its full cost right away. But what if the company is allowed to depreciate the cost of buying customer lists generated by those ads? Doesn't that mean that the cost of producing those lists--such as advertising--should be deducted over several years, as well? That would cost taxpayers a bundle, but the logic could prove compelling, especially to lawmakers looking for ways to pay for new tax breaks. Changing the tax treatment of advertising could raise $15 billion over five years, according to the Congressional Budget Office.

The battle over intangibles, which has been fought mainly behind the scenes, will burst into the open in the next several weeks, when the General Accounting Office issues a report on the issue. The GAO is expected to urge Congress to set up depreciation schedules for intangibles. And it may propose the same treatment for advertising costs. This may be just the goad legislators need to sort out the mess. Trouble is, the money that Congress puts back in the pockets of banks and insurance agents could come from the hides of newspapers, TV stations, and their advertisers.

Howard Gleckman in Washington