57 Tax Notes 1603

Tax Notes

DECEMBER 14, 1992

LENGTH: 566 words

DEPARTMENT: Letters to the Editor (LTE)

CITE: 57 Tax Notes 1603

HEADLINE: 57 Tax Notes 1603 - THE MASS ASSET RULE IS NOT THE BLOB THAT ATE LOS ANGELES.

AUTHOR: Johnson, Calvin

TEXT:

To the Editor:

By letter to the editor, published in Tax Notes on November 30, /1/ Mr. Bernard J. Long, Jr., of the Washington, D.C. bar argued that the mass asset rule erroneously assumes that customer base is 'self- generating.' It assumes, he says, that new customers simply 'come in' as old ones leave. If customer base were self-generating, he says, then it would be logical to conclude that customer base was not depreciable. But new customers do not come in, he says, 'any more than a new printing press 'comes in' when the old one wears out.' Therefore, he concludes, the Supreme Court in Newark Morning Ledger should allow a purchased customer base to be amortized, rejecting the mass asset rule.

A self-generating mass asset sounds pretty ominous, kinda like a drive-in flick about the 'Blob That Ate Los Angeles.' I suppose there are some benignly self-generating aspects of customer base: new customers move into the house that old customers leave and continue the subscription. But I have always run with just the opposite assumption, that is, that new customers are attracted by costs incurred by the firm. For the newspaper, the primary way to attract new customers is by the operating costs of running a quality newspaper that new customers want to read. New customers last for a long time (14.7 to 23 years according to Newark Morning Ledger), but the costs of getting them are nonetheless expensed immediately. In a world in which the investment costs for new customers are expensed, it is possible to clearly reflect the income of the newspaper only by denying amortization for the initial customer base. If the very real costs of new customers are expensed, then depreciation drops out of the formulas that make the effective tax rate come out right. /2/

Printing presses are different because the acquisition cost of a printing press is capitalized. If the newspaper's costs for new customers were capitalized, then customer base would be outside the scope of appropriate application of the mass asset rule. Both capitalizing the costs of new customers and denying amortization for the departing customers would soon overstate the newspaper's capital investment. Tax basis would be higher than value of the customer base. But Newark Morning Ledger has been deducting the costs of new customers and will continue to do so, and thus it is comfortably within the scope of the mass asset rule.

I hope that this letter is reassuring: The mass asset rule does not apply to everything and mass assets properly subject to the rule are not necessarily threatening or self-generating.

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Calvin Johnson

Professor of Law

The University of Texas

at Austin

Austin, Texas

December 3, 1992

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FOOTNOTES

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/1/ Long, 'Shattering the Myth of Customer Self-Generation,' 57 Tax Notes 1316 (November 30, 1992) (Accusing Calvin Johnson's several monographs of the terminal illness of conclusum assumptus).

/2/ Johnson, 'The Mass Asset Rule Reflects Income and Amortization Does Not,' 56 Tax Notes 629 (August 3, 1992).

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