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Sale of customer list treated as capital gain or ordinary income

Customer Question
Is the sale of self-created...

Is the sale of self-created intangibles, such customer lists, digital files, web sites, etc subject to capital gain or ordinary income treatment?

Submitted: 6 years ago.Category: Tax
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4/28/2011
Tax Professional: Lev, Tax Advisor replied 6 years ago
Lev
Lev, Tax Advisor
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LEV :

Capital gain treatment for property used in the trade or business is regulated by section 1231 - http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001231----000-.html
These include amortizable section 197 intangibles - see page 28 in IRS publication 544 - http://www.irs.gov/pub/irs-pdf/p544.pdf
However - you cannot amortize any of the intangibles that you created rather than acquired unless you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business. - see page page 28 in IRS publication 535 - http://www.irs.gov/pub/irs-pdf/p535.pdf - see also page 29 - Assets that are not section 197 intangibles.
Thus - self-created intangibles cannot be amortized and therefore - sale of self-created intangibles are not section 1231 transactions.

JACUSTOMER :

Does it make a difference if the self-created intangibles are sold as part of a group of assets that make up a trade or business. The seller has created these intangibles over a 5 year period.

LEV :

The sale of a business is usually a sale of all of the assets of the business are sold. Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss.

When sold, these assets must be classified as capital assets, depreciable property, real property, intangible property (including patents, franchise, trademark, trade name), or property held for sale (inventory or stock in trade).

Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. The buyer and seller should each attach Form 8594 - http://www.irs.gov/pub/irs-pdf/f8594.pdf to their federal income tax return for the year in which the sale occurred. See also instructions - http://www.irs.gov/pub/irs-pdf/i8594.pdf

See page 24 - Sale of a Business - and classes of assets - in this publication - http://www.irs.gov/pub/irs-pdf/p544.pdf

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