Assessing officers need to be aware of the various categories of intangible
assets and/or intellectual properties that may be owned by businesses, because
these items often impact the value of the total enterprise for taxation
purposes. Some intangible assets can be sold separate from a business enterprise
and some can not. Understanding the nature of intangible assets owned by a
business and their value enables an assessing officer to properly classify these
assets for taxation or to separate these assets from taxable tangible assets.
For those who appraise businesses and business assets, it is important to have
an understanding of how to value these properties. This article is intended to
describe the main attributes of intangible assets and intellectual properties
and review the appraisal approaches used to determine their value. The selection
of the appraisal methods and procedures used to determine value is beyond the
scope of this article.
In Gordon Smith and Russell Parr's book, Valuation of Intellectual Property
and Intangible Assets, they define intangible assets as:
"all the elements of a business enterprise that exist after monetary and
tangible assets are identified."
From a layman's point of view, all intangible assets are often referred to
as the "Big Pot Theory Of Goodwill. For an intangible asset to exist from a
valuation, accounting and legal perspective, it must possess certain attributes.
First, there must be a specific bundle of legal rights associated with the
existence of any intangible asset. Secondly, an intangible asset must be able to
produce an economic benefit. The bundle of legal rights will include the
following requisite attributes:
Subject to being destroyed or to a termination of existence at an
identifiable time or as the result of an identifiable event For an intangible
asset to have a quantifiable value from an economic perspective, it must possess
certain additional attributes, which include:
- Subject to specific identification and recognizable description.
- Subject to legal existence and protection.
- Subject to the right of private ownership, and must be legally transferable.
- Tangible evidence of manifestation of the existence of the intangible asset
(e.g., a contract or a license or a registration document).
- It must have been created or have come into existence at an identifiable
time or as the result of an identifiable event.
- Some measurable amount of economic benefit to its owner measured in any of
several ways, including net income, net operating income, or net cash flow
- the ability to enhance the value of other tangible or intangible assets
with which it is associated.
Intangible assets of similar nature and function can be categorized for
general asset identification and classification purposes. The most common
categorization of intangible assets includes the following:
- Technology related (e.g., engineering drawings)
- Customer related (e.g., customer lists)
- Contract related (e.g., franchise agreement, non-compete agreement,
- Data processing related (e.g., computer software)
- Marketing related (e.g., trademarks and trade names)
- Location related (e.g., leasehold interests)
- Going concern value (e.g., a trained and assembled work force, established
- Goodwill related (e.g., reputation and repeat business generating excess
benefits beyond the tangible assets and other identifiable intangible assets.
There is a specialized classification of intangible assets called
intellectual properties. Intellectual properties manifest all of the legal
existence and economic value attributes of other intangible assets. However,
because of their special status, intellectual properties enjoy special legal
recognition and protection. Intellectual properties are created by human
intellectual and/or inspirational activity. Such activity is specific, conscious
and attributed to the activity of identified specific individuals. Because of
this unique creation process, intellectual properties are generally registered
under, and protected by, specific Federal and state statutes.
Intellectual properties are generally grouped into like categories similar in
nature, features, method of creation, economic benefits and legal protection.
The most common categorization of intellectual properties include the following:
- Creative (e.g., copyrights)
- Innovative (e.g., patents)
Appraisers are often called upon to determine the value of intangible assets.
Usually, the objectives of an appraisal include one or more of the following:
- To determine the Market Value of the transferred intangible assets.
- To determine the Fair Value of a royalty or license fee for the continued
use of the intangible assets.
- To determine the reasonable period of time over which payments should be
made with respect to the transfer of the subject intangible assets. The time
period should reflect the wasting, or value diminution, if any, of the subject
When the use of the appraisal will be for tax related matters, the applicable
tax codes that relate to the value and amortization of intangible assets include
IRS Code Section 167 (a) allows as a depreciation deduction a reasonable
allowance for the exhaustion, wear and tear and obsolescence of property used in
the trade or business, or held for the production of income.
IRS Code Section 167 (a)-3 specifically permits the depreciation of
intangibles, except goodwill and going concern value, provided it meets a three
- The asset must be isolated and separated from residual goodwill.
- The taxpayer must establish that the intangible asset in question will have
value in the production of income for only a limited period.
- The length of that limited period must be susceptible to being estimated
with reasonable accuracy.
IRS Code Section 1060 sets forth the requirements for purchase price
allocations and the reporting thereof on form 8594 in descending hierarchy of
four tiered categories of assets.
Temporary regulations 1.338(b)-2T(c)(1) sets forth the allocation of purchase
price to the four tiered cat