57 Tax Notes 1090

Tax Notes

NOVEMBER 16, 1992

LENGTH: 675 words

DEPARTMENT: Letters to the Editor (LTE)

CITE: 57 Tax Notes 1090

HEADLINE: 57 Tax Notes 1090 - THE ARGUMENT OVER NEWARK MORNING LEDGER.

AUTHOR: Johnson, Calvin H.

TEXT:

To the Editor:

Mr. Reuven Avi-Yonah and I have been exchanging letters on Newark Morning Ledger, in which the Supreme Court is to decide whether acquired customer base can be amortized as individual customers turn over. /1/

We argue over accounting. I argue that existing and new customers are just fungible parts of single investment account. The company does not care about the identification of individual customers and the company does not lose capital as customers turn over from a Jones to a Smith. Avi-Yonah argues that old and new customers are separate assets and that the company has a loss when Jones leaves, even if Jones is replaced by Smith. He would allow a loss so long as an expert can tell you a lot of information about individual customers who leave. He argues that two wrongs do not make a right, and we should not penalize a company that loses its old customers, just because it does not capitalize its new customers. I argue that countervailing errors, if errors they were, would be a perfectly fine way to describe the taxpayers net investment. There is no penalty from a drive to describe the taxpayer's true net investment.

We argue over which line of authority has more vigor. I note that the IRS has won 2/3rds of the cases. He argues that since Houston Chronicle taxpayers with experts win most cases. I argue that Houston Chronicle was wrongly decided and easily distinguished and that Ithaca Industries, adopting the mass asset rule, is a healthy precedent that governs this case. He argues that Ithaca Industries is wrongly decided and easily distinguished and that the mass asset rule is dead. And so we pound at each other across the trenches in quite predictable ways.

The resolution of this issue does not, however, depend upon a tit-for-tat fight between accounting analogies or lines of authority. Ultimately, the question is what tax rate should be applied to corporate takeovers. The choice between the competing accounting and competing lines of legal authority depends upon tax policy. Should takeover investments bear tax at normal statutory tax rates or should they benefit from low effective tax rates? The policy here is that of neutrality, that is, that tax should be a level playing field so that the better investments on their pretax virtues will remain the better investments even after tax. In an income tax, investments are made and continued with amounts that are included in basis. In order to identify income and subject the income to tax at the statutory tax rates, one must keep a basis account that is equal to the taxpayer's true investment. When replacement or replenishment of customers is accomplished with tax deducted expenses, amortization or depreciation drops out of the formulas that make the effective tax rates equal to the congressionally intended statutory tax rates. The economic analysis in effective tax rates and economic depreciation is the burning bush of this issue. Effective tax rate and economic depreciation analysis tell us that the taxpayers basis should not be amortized when the taxpayer's investment does not shrink.

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Sincerely yours,

Calvin H. Johnson

Arnold, White & Durkee

Centennial

Professor of Law

University of Texas School of

Law

Austin, Texas

November 9, 1992

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FOOTNOTES

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/1/ See Avi-Yonah, Letter to the Editor, 57 Tax Notes 819 (November 9, 1992); Johnson, Letter to the Editor, 57 Tax Notes 691 (November 2, 1992), Avi-Yonah, Current and Quotable, 56 Tax Notes 427 (October 19, 1992).

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