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For federal income tax purposes, owners of intangible property generally must capitalize the costs of creating or acquiring that property. In the past, the tax rules for recovering these capitalized costs through depreciation deductions varied greatly according to the nature of the intangible. Certain types of acquired intangibles--notably, goodwill and going concern value--were nondepreciable. In contrast, taxpayers purchasing interests in copyrights or patents could depreciate those assets under the straight-line method or, in most cases, could opt for more rapid cost recovery under the income forecast method.

In the Omnibus Budget Reconciliation Act of 1993, Congress greatly enlarged the class of depreciable intangibles. The new rules, which are codified in section 197 of the Internal Revenue Code, allow taxpayers to depreciate virtually any intangible. Under certain circumstances, however, the new depreciation rules also apply to copyrights, patents, and other forms of intellectual property that were already depreciable under prior law. The effects of this change are particularly acute when the intangible in question was previously eligible for the income forecast method of depreciation, because the method prescribed by section 197 spreads depreciation deductions over a fixed, continuous recovery period, whereas the income forecast method allocates depreciation according to the actual income produced by the asset. Motion pictures and sound recordings are two notable examples of assets affected by these changes, although virtually any intangible property that derives its value from a copyright or patent may feel the impact.

This Article explores the effect of section 197 on the depreciation of property that was previously eligible for income forecast depreciation.

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24 Hofstra L. Rev. 317 (1995).