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  1. Investigate the nature of the intangible assets whether leases, patents, licenses, trademarks, goodwill, copyright, franchise and others.
  2. Costs of acquiring the intangible should be capitalized when useful lives can be estimated. If not, no amortization is allowable for tax purposes.
  3. Determine if the recorded cost and cost of current additions includes proper elements such as legal fees, application fees and other costs of acquisition. Examine contracts and other legal documents.
  4. Verify correctness of deductions claimed as amortization of intangible assets as follows:
  • Leasehold costs are subject to amortization over the term of the lease.
  • Goodwill cannot be amortized if it is for an indefinite period of time.
  • Research and development expenditures may either be capitalized or treated as outright deductible expense.
  • Patents sold with the exclusive right to make, use and sell an article constitutes ordinary income.
  • Organization expenses are subject to amortization and are not deductible in full on the year incurred. Check the reasonableness of the taxpayer’s amortization policy on organization expenses.
  • Determine if there have been transactions with related taxpayers. If so, verify if these are made at arms-length.
  • Determine if income applicable to intangibles has been included as income, (e.g. subleases, overriding royalties, franchise and other sources).
  • Analyze any transaction involving transfer of foreign rights to any foreign entity for an equity interest or for nominal consideration.
  • Be alert to transactions which could have given rise to intangibles classifiable as asset account which may have been recorded as expense.

    Reference: RAMO 1-2000