TD 8865_Final

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 197.—Amortization of
Goodwill and Certain Other
Intangibles
26 CFR 1.197–2: Amortization of goodwill and
certain other intangibles.

T.D. 8865
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Amortization of Intangible
Property
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the amortization of certain intangible property. The
final regulations reflect changes to the
law made by the Omnibus Budget Reconciliation Act of 1993 (OBRA ’93) and affect taxpayers who acquired intangible
property after August 10, 1993, or made a
retroactive election to apply OBRA ’93 to
intangibles acquired after July 25, 1991.
DATES: Effective Date: January 25,
2000.
Applicability Dates: These regulations
apply to property acquired after January
25, 2000]. Regulations to implement section 197(e)(4)(D) are applicable August
11, 1993, for property acquired after August 10, 1993 (or July 26, 1991, for property acquired after July 25, 1991, if a
valid retroactive election has been made
under §1.197–1T).
FOR FURTHER INFORMATION CONTACT: John Huffman at (202) 622-3110
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been
reviewed and, pending receipt and evaluation of public comments, approved by
the Office of Management and Budget
(OMB) under 44 U.S.C. 3507 and as-

2000–7 I.R.B.

signed control number 1545-1671.
The collection of information in this
regulation is in §1.197–2(h)(9). This information is required in order to provide
guidance on the time and manner of making the election under section
197(f)(9)(B). Under this election, the
seller of a section 197 intangible may pay
a tax on the sale in order to avoid the application of the anti-churning rules of section 197(f)(9) to the purchaser. This information will be used to confirm the
parties to the transaction, calculate any
additional tax due, and notify the purchaser of the seller’s election. The likely
respondents are business or other forprofit institutions.
Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer
for the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224. Comments on the collection of information should be received
by March 27, 2000. Comments are specifically requested concerning:
Whether the collection of information is
necessary for the proper performance of
the functions of the Internal Revenue Service, including whether the information
will have practical utility;
The accuracy of the estimated burden associated with the collection of information (see below);
How the quality, utility, and clarity of the
information to be collected may be enhanced;
How the burden of complying with the collection of information may be minimized,
including through the application of automated collection techniques or other forms
of information technology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and purchase of services to provide information.
Estimated total annual reporting burden:
1500 hours.
Estimated average annual burden hours
per respondent varies from 2 to 4 hours,
depending on individual circumstances,
with an estimated average of 3 hours.
Estimated number of respondents: 500
per year.

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Estimated annual frequency of responses: 1
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it displays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to this collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On January 16, 1997, the IRS published
proposed regulations REG–209709–94,
1997–1 C.B. 731, in the Federal Register
(62 F.R. 2336) inviting comments under
sections 167(f) and 197. A public hearing
was held May 15, 1997. Numerous comments have been received. After consideration of all the comments, the proposed regulations are adopted as revised by this
Treasury decision.
Explanation of Provisions
Section 162(k) Application
Example 4 of the proposed regulation
§1.197–2(k) provided that amounts paid
for a covenant not to compete entered into
in connection with a redemption was
nondeductible under section 162(k) and
thus not subject to section 197. Commentators suggested that guidance on the application of section 162(k) to transactions
involving section 197 intangibles should
be addressed in regulations under section
162(k). No reference to section 162(k) is
made in the final regulations.
Purchase of a Trade or Business
Certain intangibles are excepted from
the application of section 197 if they are
not acquired as part of a purchase of a
trade or business. The proposed regulations provide that, for purposes of section
197, a group of assets constitutes a trade
or business if their use would constitute a
trade or business under section 1060 (that
is, if goodwill or going concern value
could, under any circumstances, attach to
the assets). In addition, the proposed regulations treat a group of assets as a trade

February 14, 2000

or business if they include any customerbased intangibles or, with certain exceptions, any franchise, trademark, or trade
name (the per se rules). The preamble of
the proposed regulations state that the IRS
intends to provide additional guidance on
the circumstances in which a group of assets is treated as a trade or business in regulations under section 1060.
Although a number of comments requested that the final regulations under
section 197 provide such additional guidance, the final regulations generally retain, without amplification, the rules in
the proposed regulations. The IRS and
Treasury Department will, however, continue to consider this issue during the development of final regulations under section 1060.
Commentators also requested modifications to the per se rules. In response to
these comments, the final regulations
limit the applicability of these rules to the
cases specifically described in the legislative history of section 197 (that is, the acquisition of a franchise, trademark, or
trade name). The final regulations retain
the proposed exceptions under which certain franchises, trademarks, and trade
names are disregarded in applying the per
se rules. In addition, the regulations clarify that a license of a trademark or trade
name is also disregarded in applying the
per se rules.
Computer Software
The final regulations contain rules that
supersede certain of the procedures set
forth in Revenue Procedure 69–21
(1969–2 C.B. 303), which provides
guidelines relating to costs incurred to develop, purchase, or lease computer software. Specifically, the final regulations
provide that purchased computer software
is amortizable over 15 years if section 197
applies and over 36 months if the software is not a section 197 intangible. In
addition, the regulations clarify that section 197 (rather than §1.162–11) applies
to certain costs incurred with respect to
leased software (that is, costs to acquire a
section 197 intangible that is a limited interest in software). Computer software
costs included, without being separately
stated, in the cost of the computer hardware (bundled software) continue to be
capitalized and depreciated as part of the
computer hardware. In addition, the final

February 14, 2000

regulations treat software costs as currently deductible (and not subject to section 197) if they are not chargeable to
capital account under the rules applicable
to licensing transactions (discussed
below) and are otherwise currently deductible. The final regulations clarify
that, for this purpose, an amount described in §1.162–11 is not currently deductible if, without regard to §1.162–11,
such amount is properly chargeable to
capital account. A proper and consistent
practice of taking software costs into account under §1.162–11 may, however, be
continued if the costs are not subject to
section 197.
A revenue procedure superseding Rev.
Proc. 69–21 and providing procedures
consistent with the rules in the final regulations will be issued in the near future.
In the meantime, taxpayers may not rely
on the procedures in Rev. Proc. 69–21 to
the extent they are inconsistent with section 167(f), section 197, or the final regulations.
Mortgage Servicing Rights
The proposed regulations treat mortgage servicing rights relating to a pool of
mortgages as a single asset under section
167(f) (relating to mortgage servicing
rights not acquired as part of a purchase
of a trade or business). Thus, if some but
not all mortgages in a pool prepay, no loss
is recognized. Commentators assert that
each right in the pool is a discrete asset,
and thus, taxpayers should be able to recognize a loss upon the prepayment of an
individual mortgage within the pool. The
Service and the Treasury Department believe this is generally inappropriate in
cases where depreciation is based on the
average useful life of the assets. See
§1.167(a)–8. Thus, the regulations retain
the rule that no loss is recognized if some
but not all mortgages in a pool prepay or
are sold or exchanged. The final regulations provide, however, that if a taxpayer
establishes multiple accounts within a
pool at the time of its acquisition, gain or
loss is recognized on the sale or exchange
of all mortgage servicing rights within
any such account.
When Section 197 Amortization Begins
The proposed regulations provide that
amortization begins the later of the first
day of the month in which the property is

590

acquired, or the first month in which the
active conduct of a trade or business begins. Commentators suggest that the literal language of section 197(a) allows
amortization beginning with the month
the intangible is acquired. Under section
197(c)(1), however, a section 197 intangible is amortizable only if it is held in connection with the conduct of a trade or
business or an activity described in section 212. Moreover, there is no suggestion in the legislative history that Congress intended to apply a rule differing
from those applicable under section 167
and former section 1253(d).
Former section 1253(d)(2) provided, in
language similar to that in section 197(a),
that the amortization of certain amounts
begins in the taxable year in which the
amounts are paid. Although section
1253(d)(2) did not contain any reference to
section 162 or to use in a trade or business,
it was nevertheless well established at the
time of the enactment of section 197 that
the provision embodied a trade or business
requirement and that amounts were not deductible thereunder unless the taxpayer
was operating or conducting a trade or
business after the amounts were paid.
Commentators suggest that it is significant that section 167 refers to “property
used in the trade or business” while property can qualify for amortization under section 197 if it is “held in connection with the
conduct of a trade or business.” Further,
commentators assert that the language
used in section 197 is closer to the “held in
connection with his trade or business” language used in section 174, which does not
require the current conduct of a trade or
business, than to the language of section
167. The different language used in these
provisions can be explained, however,
without departing from previous practice
under sections 167 and 1253(d) regarding
the time at which amortization commences. Broader language under section
197 is necessary because it applies to assets, such as goodwill, that although held
in connection with the conduct of a trade
or business are not commonly viewed as
being used in the trade or business. Further, modifying the language used in section 174 by adding the words “conduct of”
indicates that Congress did not intend to
change the longstanding trade or business
requirement for purposes of determining
when amortization commences.

2000–7 I.R.B.

Consequently, the final regulations retain the rule in the proposed regulations
that amortization begins no earlier than
the first day of the month in which the active trade or business or the activity described in section 212 begins.
Transactions Involving Partnerships
The final regulations relating to partnership transactions have been changed
from the proposed regulations in several
respects to reflect the recommendations
of commentators. Example 17 of the proposed regulation § 1.197-2(k) provided
that a partner may amortize a § 743 adjustment with respect to a section 197 intangible only if the formation of the partnership and the sale of the partnership
interest are “unrelated transactions.”
Commentators suggested that an unrelated transaction standard would create
significant confusion for taxpayers. According to the commentators, taxpayers
would have greater certainty with respect
to their transactions, and the government
still would be adequately protected, if
these transactions were analyzed under
general tax principles, including the step
transaction doctrine. The final regulations
remove the unrelated transaction requirement. However, if the transaction is
structured so that, under general principles of tax law, the transaction is not
properly characterized as a sale of a partnership interest, then section 197 will
apply to the transaction as recast to reflect
its true economic substance.
Certain commentators also requested
that Example 16 of proposed regulation §
1.197–2(k) be modified to allow a partnership to amortize an intangible contributed to the partnership under the
transferred basis rules under section
197(f)(2), even if a partner related to the
partnership under section 197(f)(9)(C)
had owned the intangible during the transition period and, as part of an integrated
transaction, had sold the intangible to an
unrelated party before forming the partnership. The commentators suggested
that because section 197(f)(9)(E) generally permits amortization for the steppedup basis in a partnership transaction
under section 743 where a section 754
election was in effect, amortization also
should be allowed in a sale of an intangible followed by a contribution of the in-

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tangible to a partnership, an economically similar transaction. This recommendation was not adopted. In general, a
partnership is treated as an entity separate
from its partners in characterizing related
party transfers. See, e.g., Section
707(b)(1) (specifically referenced in section 197(f)(9)(C)(i)(I)).
Section
197(f)(9)(E) does provide a special antichurning rule for certain partnership
transactions. However, this special rule
is not applicable in situations where a
partnership has a transferred basis in the
intangible under section 723. With respect to the analogy under section 743,
where a transferee is allowed to amortize
a section 743 basis step-up, it is only the
increase in basis that may be amortized,
and the amortization attributable to the
basis increase is segregated for use only
by the transferee partner. Neither of
these results necessarily follow from a
sale of property followed by a contribution of the property to the partnership.
The proposed regulations did not allow
partners to deduct, for federal income tax
purposes, curative or remedial amortization allocations from the partnership in
situations where the asset was a section
197(f)(9) intangible (and thus nonamortizable) in the hands of the contributing
partner. Commentators have suggested
allowing curative and remedial allocations under section 704(c). The final regulations generally permit a partnership to
make curative or remedial allocations to
its noncontributing partners of amortization relating to an asset that was amortizable (or a zero-basis intangible that otherwise would have been amortizable) in the
hands of the contributor. For assets that
were section 197(f)(9) intangibles (and
thus nonamortizable) in the hands of the
contributor, however, the partnership may
make deductible amortization allocations
to the noncontributing partners under the
remedial method only. The final regulations permit remedial allocations because,
under section 704(c), remedial allocations
treat the amortizable portion of contributed property like newly purchased
property, with a new holding period and
determinable allocation of tax items. This
result, which is similar to the result obtained for basis increases under section
743, does not follow under the curative
method because curative allocations are
not determined as if the applicable prop-

591

erty were newly purchased property. The
decision to allow amortization for remedial allocations in these regulations also is
consistent with the decisions regarding
fungibility of partnership interests that are
inherent in the recently finalized regulations under sections 743 and 755. Finally,
the rules governing section 704(c) allocations of amortization from section 197 intangibles contributed to a partnership in a
nonrecognition transaction are still subject to the anti-churning provisions. Accordingly, remedial allocations of deductible amortization expenses may not
be made to a partner who is related to a
partner that contributes an intangible subject to the anti-churning rules. Certain
problems may arise in maintaining capital
accounts where a partnership elects to
make remedial allocations, and the antichurning rules apply with respect to one
or more partners. These problems also
arise in the context of section 734(b) adjustments and are discussed in the preamble to the proposed regulations relating to
the application of the anti-churning rules
to basis adjustments under sections
732(b) and 734(b), which are being issued
at the same date as these final regulations.
Commentators requested that the final
regulations provide additional guidance
on how the special anti-churning rule of
section 197(f)(9)(E) applies to increases
in the basis of property under sections
732, 734, and 743. In accordance with
these comments, the final regulations provide rules for determining the amount of a
basis adjustment under sections 732(d)
and 743 that will be subject to the antichurning rules. The Treasury Department
and the IRS also are issuing, at the same
time as these final regulations, proposed
regulations addressing how to determine
the amount of a basis adjustment under
sections 732(b) and 734(b) that will be
subject to the anti-churning rules.
Finally, the final regulations provide
that where, for purposes of the anti-churning rules, a partner is treated as holding its
proportionate share of partnership property under section 197(f)(9)(E), the continued or subsequent use (by license or
otherwise) of an intangible by a partner
could cause the anti-churning rules to
apply with respect to that partner’s share
of the intangible in situations where a
basis step-up under section 732(d) or
743(b) otherwise would be amortizable.

February 14, 2000

This rule is necessary in order to prevent
the circumvention of section 197(f)(9)(A)
through the use of a partnership. The proposed regulations being issued in conjunction with these final regulations expand
the application of this rule to basis adjustments under sections 732(b) and 734(b).
Contracts for the Use of a Section 197
Intangible
The proposed regulations provide that
a right to use a section 197 intangible
pursuant to a license, contract, or other
arrangement is, itself, a section 197 intangible. The proposed regulations further provide that amounts paid for such a
right are chargeable to capital account,
whether or not the payments would have
been deductible (for example, as a royalty) if the right were not a section 197
intangible. Under the proposed regulations, the amount chargeable to capital
account is generally determined without
regard to sections 483 and 1274 (that is,
no part of the amount paid is recharacterized as unstated interest or original issue
discount). Finally, the proposed regulations treat the acquisition of a franchise,
trademark, or trade name as the acquisition of a trade or business, thereby preventing other intangibles acquired in the
same transaction or series of related
transactions from qualifying for any of
the exceptions applicable to separately
acquired property.
Commentators suggested that these
rules have negative consequences for
common cross-border and affiliate licenses, which frequently include, in addition to rights that would not be subject to
section 197 if not acquired as part of a
purchase of a trade or business, rights to
use a trademark or trade name. Under
prior law, amounts paid for these licenses
were generally currently deductible. The
proposed regulations, however, require
amortization over 15 years. In addition,
cost recovery over the 15-year period is
significantly backloaded because the licenses generally involve contingent payments that are not includible in basis until
the year in which they are paid or incurred and, in addition, the proposed regulations provide that sections 483 and
1274 are generally inapplicable.
After further consideration of this
issue in light of the concerns raised by

February 14, 2000

the commentators, the IRS and Treasury
Department have concluded that, particularly in the case of common licensing
transactions involving technology and
similar intangible property, a different
approach is appropriate. The clearest indication of Congressional intent on this
issue is the statement in the legislative
history to the effect that, with certain exceptions, section 197 generally does not
apply to amounts that were otherwise
currently deductible before the enactment
of section 197. Nevertheless, the IRS
and Treasury Department are also mindful that Congress directed the issuance of
such regulations as may be appropriate to
prevent avoidance of the purposes of section 197.
The final regulations generally provide
that royalty payments under a contract for
the use of section 197 intangibles unconnected with the purchase of a trade or
business are not required to be capitalized. Licensing transactions will, however, be closely scrutinized under the
principles of section 1235 for purposes of
determining whether the payments are, in
fact, deductible royalties or, instead, represent purchase price that should be
charged to capital account.
The final regulations also modify the
rule that treats the acquisition of a franchise, trademark, or trade name as the acquisition of a trade or business. Under the
final regulations, the acquisition of an interest in a trademark or trade name is disregarded in determining whether acquired
property is a trade or business if, under
the principles of section 1253, the grant of
the interest is not a transfer of all substantial rights in the trademark or trade name.
Thus, the acquisition of such an interest in
a trademark or trade name will not subject
other intangibles acquired in the same
transaction or series of related transactions to the generally less favorable rules
applicable to intangibles acquired as part
of a purchase of a trade or business.
To prevent abuses, the final regulations
provide that if the right to use a section
197 intangible is provided under a license
entered into as part of a purchase of a
trade or business, amounts paid for the
right are, as under the proposed regulations, chargeable to capital account. An
exception, not contained in the proposed
regulations, is provided for licenses of
technology, know-how, and other similar

592

items (including most types of information base). Royalties paid under these licenses are not required to be capitalized if
the taxpayer establishes that the payments
are, in fact, deductible royalties under
general tax principles and represent an
arm’s-length consideration for the transferred rights.
Finally, any amount otherwise chargeable to capital account with respect to a
section 197 intangible and payable after
the acquisition of the intangible to which
it relates is treated, in determining the tax
treatment of the purchaser, as an amount
payable under a debt instrument. Thus,
the extent to which such amounts are
treated as payments of principal and the
time at which the amount treated as principal is included in basis is determined
under generally applicable rules relating
to imputed interest and original issue discount. If, under these rules, a basis increase occurs after the beginning of the
15-year amortization period, the increase
is amortized over the remainder of the 15year period (or, in the case of an increase
occurring after the end of the amortization
period, is immediately deductible).
Anti-churning Rules
The anti-churning rules of section 197
prevent taxpayers from converting goodwill, going concern value, and similar assets held or used at any time during the
transition period into amortizable section
197 intangibles through transactions such
as transfers to related parties. The proposed regulations provide guidance on a
number of specific issues arising under
the anti-churning rules. The final regulations retain this guidance with certain
modifications and, in addition, set forth
the purpose of the anti-churning rules
(generally, to prevent the amortization of
certain intangibles that are not acquired
after the applicable effective date in a
transaction giving rise to a significant
change in ownership or use). The final
regulations further provide that the antichurning rules are to be applied in a manner that carries out their purpose. The
final regulations include a rule providing
that a transaction will be presumed to
have a principal purpose of avoiding the
anti-churning rules if it does not effect a
significant change in ownership or use.
The final regulations also provide addi-

2000–7 I.R.B.

tional guidance concerning the circumstances in which persons are treated as related for purposes of the anti-churning
rules. Section 197 provides that a relationship is tested for purposes of the antichurning rules both immediately before
and immediately after the acquisition.
The proposed regulations further provide
that, in the case of intangibles acquired in
a series of related transactions, testing begins immediately before the first acquisition and continues until immediately after
the last acquisition. Comments suggested
that momentary relationships created in
the course of the acquisition should be disregarded for purposes of the anti-churning
rules. Such relationships can arise, for example, in the course of a stock acquisition
followed by a liquidation or when assets
are contributed to a newly created subsidiary and, pursuant to a binding commitment, all stock of the subsidiary is sold to
an unrelated person or persons immediately after the contribution.
To address these and similar situations,
the final regulations provide that in the
case of a series of related transactions (or
a series of transactions that together comprise a qualified stock purchase within the
meaning of section 338(d)(3)) a person is
treated as related to another person if the
relationship exists immediately before the
earliest such transaction or immediately
after the last such transaction. In addition, any relationship created as part of a
series of related transactions in which a
person acquires stock of a corporation followed by a liquidation of the acquired
corporation under section 331 generally is
disregarded. Further, as with all other
provisions of the regulations relating to
the anti-churning rules, these provisions
are to be applied in a manner that carries
out the purpose of the anti-churning rules.
The final regulations also provide guidance on the exemption from the antichurning rules if the person from whom
the taxpayer acquires an intangible elects
to recognize gain and agrees to pay a
specified amount of tax. In general, these
rules are the same as those contained in
the proposed regulations, except that the
proposed regulations do not prescribe
procedures for making the election. The
final regulations provide guidance on the
manner of making the election, including
procedures that apply to persons not otherwise subject to Federal income tax.

2000–7 I.R.B.

Effective Dates
The regulations under sections 167(f)
and 197 were proposed to apply on the
date on which the final regulations are
published in the Federal Register (January 25, 2000). Regulations to implement
section 197(e)(4)(D) (separately acquired
contracts of fixed duration or amount)
were proposed to apply August 11, 1993,
for property acquired after August 10,
1993 (or July 26, 1991, if a valid retroactive election has been made under
§1.197–1T). Comments suggested that
the applicability date should be modified
to clarify that the regulations (other than
the implementation of section
197(e)(4)(D)) apply only to property acquired on or after the date final regulations are published. This suggestion has
been adopted. Accordingly, the final regulations generally apply only to intangible
property acquired after January 25, 2000.
The applicability date of the rules implementing section 197(e)(4)(D) is similarly clarified. Thus, the final regulations
provide that these rules apply to property
acquired after August 10, 1993 (or July
25, 1991, if a valid retroactive election
has been made under §1.197–1T). The
regulations also provide consent for
changes in method of accounting to comply with the rules and automatic procedures for making the change.
In addition, the final regulations permit
taxpayers to apply the rules in the final
regulations to property acquired before
the applicability date of the final regulations (or to rely on the proposed regulations for such property) and provide similar consent and automatic change
procedures for taxpayers that choose to
apply the final regulations to pre-effective
date acquisitions.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It is hereby certified
that these regulations do not have a significant impact on a substantial number of
small entities. This certification is based
on the fact that the time required to prepare and file the election statement and
notify acquirers is minimal and will not
have a significant impact on those few

593

small entities that choose to make the election. Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to
these regulations. Pursuant to section
7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking was submitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regulations is John Huffman, Office of Assistant
Chief Counsel (Passthroughs and Special
Industries), IRS. However, other personnel from the IRS and Treasury Department participated in their development.
* * * * *
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.197–2 also issued under 26
U.S.C. 197(g). * * *
Par. 2. Section 1.162–11 is amended
by adding a sentence at the end of paragraph (a) to read as follows:
§1.162–11 Rentals.
(a) * * * See §1.197–2 for rules governing the amortization of costs to acquire
limited interests in section 197 intangibles.
*****
Par. 3. Section 1.167(a)–3 is amended
by adding a sentence at the end to read as
follows:
§1.167(a)–3 Intangibles.
* * * See sections 197 and 167(f) and, to
the extent applicable, §§1.197–2 and
1.167(a)–14 for amortization of goodwill
and certain other intangibles acquired
after August 10, 1993, or after July 25,
1991, if a valid retroactive election under
§1.197–1T has been made.
Par. 4. Section 1.167(a)–6 is amended
by adding two sentences at the end of
paragraph (a) to read as follows:

February 14, 2000

§1.167(a)–6 Depreciation in special
cases.
(a) * * * See §1.167(a)–14(c)(4) for depreciation of a separately acquired interest in a patent or copyright described in
section 167(f)(2) acquired after January
25, 2000. See §1.197–2 for amortization
of interests in patents and copyrights that
constitute amortizable section 197 intangibles.
*****
Par. 5. Section 1.167(a)–14 is added to
read as follows:
§1.167(a)–14 Treatment of certain intangible property excluded from section 197.
(a) Overview. This section provides
rules for the amortization of certain intangibles that are excluded from section 197
(relating to the amortization of goodwill
and certain other intangibles). These excluded intangibles are specifically described in §1.197–2(c)(4), (6), (7), (11),
and (13) and include certain computer
software and certain other separately acquired rights, such as rights to receive
tangible property or services, patents and
copyrights, certain mortgage servicing
rights, and rights of fixed duration or
amount. Intangibles for which an amortization amount is determined under section 167(f) and intangibles otherwise excluded from section 197 are amortizable
only if they qualify as property subject to
the allowance for depreciation under section 167(a).
(b) Computer software—(1) In general.
The amount of the deduction for computer software described in section
167(f)(1) and §1.197–2(c)(4) is determined by amortizing the cost or other
basis of the computer software using the
straight line method described in
§1.167(b)–1 (except that its salvage value
is treated as zero) and an amortization period of 36 months beginning on the first
day of the month that the computer software is placed in service. If costs for developing computer software that the taxpayer properly elects to defer under
section 174(b) result in the development
of property subject to the allowance for
depreciation under section 167, the rules
of this paragraph (b) will apply to the unrecovered costs. In addition, this paragraph (b) applies to the cost of separately
acquired computer software where these
costs are separately stated and the costs
are required to be capitalized under sec-

February 14, 2000

tion 263(a).
(2) Exceptions. Paragraph (b)(1) of
this section does not apply to the cost of
computer software properly and consistently taken into account under
§1.162–11. The cost of acquiring an interest in computer software that is included, without being separately stated, in
the cost of the hardware or other tangible
property is treated as part of the cost of
the hardware or other tangible property
that is capitalized and depreciated under
other applicable sections of the Internal
Revenue Code.
(3) Additional rules. Rules similar to
those in §1.197–2(f)(1)(iii), (f)(1)(iv), and
(f)(2) (relating to the computation of
amortization deductions and the treatment
of contingent amounts) apply for purposes of this paragraph (b).
(c) Certain interests or rights not acquired as part of a purchase of a trade or
business—(1) Certain rights to receive
tangible property or services. The
amount of the deduction for a right (other
than a right acquired as part of a purchase
of a trade or business) to receive tangible
property or services under a contract or
from a governmental unit (as specified in
section 167(f)(2) and §1.197–2(c)(6)) is
determined as follows:
(i) Amortization of fixed amounts. The
basis of a right to receive a fixed amount
of tangible property or services is amortized for each taxable year by multiplying
the basis of the right by a fraction, the numerator of which is the amount of tangible property or services received during
the taxable year and the denominator of
which is the total amount of tangible
property or services received or to be received under the terms of the contract or
governmental grant. For example, if a
taxpayer acquires a favorable contract
right to receive a fixed amount of raw materials during an unspecified period, the
taxpayer must amortize the cost of acquiring the contract right by multiplying the
total cost by a fraction, the numerator of
which is the amount of raw materials received under the contract during the taxable year and the denominator of which is
the total amount of raw materials received
or to be received under the contract.
(ii) Amortization of unspecified amount
over fixed period. The cost or other basis
of a right to receive an unspecified
amount of tangible property or services

594

over a fixed period is amortized ratably
over the period of the right. (See paragraph (c)(3) of this section regarding renewals).
(iii) Amortization in other cases. [Reserved]
(2) Rights of fixed duration or amount.
The amount of the deduction for a right
(other than a right acquired as part of a
purchase of a trade or business) of fixed
duration or amount received under a contract or granted by a governmental unit
(specified in section 167(f)(2) and
§1.197–2(c)(13)) and not covered by
paragraph (c)(1) of this section is determined as follows:
(i) Rights to a fixed amount. The basis
of a right to a fixed amount is amortized
for each taxable year by multiplying the
basis by a fraction, the numerator of
which is the amount received during the
taxable year and the denominator of
which is the total amount received or to
be received under the terms of the contract or governmental grant.
(ii) Rights to an unspecified amount
over fixed duration of less than 15 years.
The basis of a right to an unspecified
amount over a fixed duration of less than
15 years is amortized ratably over the period of the right.
(3) Application of renewals. (i) For
purposes of paragraphs (c)(1) and (2) of
this section, the duration of a right under a
contract (or granted by a governmental
unit) includes any renewal period if,
based on all of the facts and circumstances in existence at any time during the
taxable year in which the right is acquired, the facts clearly indicate a reasonable expectancy of renewal.
(ii) The mere fact that a taxpayer will
have the opportunity to renew a contract
right or other right on the same terms as
are available to others, in a competitive
auction or similar process that is designed
to reflect fair market value and in which
the taxpayer is not contractually advantaged, will generally not be taken into account in determining the duration of such
right provided that the bidding produces a
fair market value price comparable to the
price that would be obtained if the rights
were purchased immediately after renewal from a person (other than the person granting the renewal) in an arm’slength transaction.
(iii) The cost of a renewal not included

2000–7 I.R.B.

in the terms of the contract or governmental grant is treated as the acquisition of a
separate intangible asset.
(4) Patents and copyrights. If the purchase price of a interest (other than an interest acquired as part of a purchase of a
trade or business) in a patent or copyright
described in section 167(f)(2) and
§1.197–2(c)(7) is payable on at least an
annual basis as either a fixed amount per
use or a fixed percentage of the revenue
derived from the use of the patent or
copyright, the depreciation deduction for
a taxable year is equal to the amount of
the purchase price paid or incurred during
the year. Otherwise, the basis of such
patent or copyright (or an interest therein)
is depreciated either ratably over its remaining useful life or under section
167(g) (income forecast method). If a
patent or copyright becomes valueless in
any year before its legal expiration, the
adjusted basis may be deducted in that
year.
(5) Additional rules. The period of
amortization under paragraphs (c)(1)
through (4) of this section begins when
the intangible is placed in service, and
rules similar to those in §1.197–2(f)(2)
apply for purposes of this paragraph (c).
(d) Mortgage servicing rights—(1) In
general. The amount of the deduction for
mortgage servicing rights described in
section 167(f)(3) and §1.197–2(c)(11) is
determined by using the straight line
method described in §1.167(b)–1 (except
that the salvage value is treated as zero)
and an amortization period of 108 months
beginning on the first day of the month
that the rights are placed in service.
Mortgage servicing rights are not depreciable to the extent the rights are stripped
coupons under section 1286.
(2) Treatment of rights acquired as a
pool—(i) In general. Except as provided
in paragraph (d)(2)(ii) of this section, all
mortgage servicing rights acquired in the
same transaction or in a series of related
transactions are treated as a single asset
(the pool) for purposes of determining the
depreciation deduction under this paragraph (d) and any gain or loss from the
sale, exchange, or other disposition of the
rights. Thus, if some (but not all) of the
rights in a pool become worthless as a result of prepayments, no loss is recognized
by reason of the prepayment and the adjusted basis of the pool is not affected by

2000–7 I.R.B.

the unrecognized loss. Similarly, any
amount realized from the sale or exchange of some (but not all) of the mortgage servicing rights is included in income and the adjusted basis of the pool is
not affected by the realization.
(ii) Multiple accounts. If the taxpayer
establishes multiple accounts within a
pool at the time of its acquisition, gain or
loss is recognized on the sale or exchange
of all mortgage servicing rights within
any such account.
(3) Additional rules. Rules similar to
those in §1.197–2(f)(1)(iii), (f)(1)(iv), and
(f)(2) (relating to the computation of
amortization deductions and the treatment
of contingent amounts) apply for purposes of this paragraph (d).
(e) Effective date — (1) In general.
This section applies to property acquired
after January 25, 2000, except that
§1.167(a)–14(c)(2) (depreciation of the
cost of certain separately acquired rights)
and so much of §1.167(a)–14(c)(3) as relates to §1.167(a)–14(c)(2) apply to property acquired after August 10, 1993 (or
July 25, 1991, if a valid retroactive election has been made under §1.197–1T).
(2) Change in method of accounting.
See §1.197–2(l)(4) for rules relating to
changes in method of accounting for
property to which §1.167(a)–14 applies.
Par. 6. Section 1.197–0 is added to
read as follows:
§1.197–0 Table of contents.
This section lists the headings that appear in §1.197–2.
§1.197–2 Amortization of goodwill
and certain other intangibles.
(a) Overview.
(1) In general.
(2) Section 167(f) property.
(3) Amounts otherwise deductible.
(b) Section 197 intangibles; in general.
(1) Goodwill.
(2) Going concern value.
(3) Workforce in place.
(4) Information base.
(5) Know-how, etc.
(6) Customer-based intangibles.
(7) Supplier-based intangibles.
(8) Licenses, permits, and other rights
granted by governmental units.
(9) Covenants not to compete and other
similar arrangements.
(10) Franchises, trademarks, and trade
names.
(11) Contracts for the use of, and term in-

595

terests in, other section 197 intangibles.
(12) Other similar items.
(c) Section 197 intangibles; exceptions.
(1) Interests in a corporation, partnership,
trust, or estate.
(2) Interests under certain financial contracts.
(3) Interests in land.
(4) Certain computer software.
(i) Publicly available.
(ii) Not acquired as part of trade or business.
(iii) Other exceptions.
(iv) Computer software defined.
(5) Certain interests in films, sound
recordings, video tapes, books, or other
similar property.
(6) Certain rights to receive tangible property or services.
(7) Certain interests in patents or copyrights.
(8) Interests under leases of tangible property.
(i) Interest as a lessor.
(ii) Interest as a lessee.
(9) Interests under indebtedness.
(i) In general.
(ii) Exceptions.
(10) Professional sports franchises.
(11) Mortgage servicing rights.
(12) Certain transaction costs.
(13) Rights of fixed duration or amount.
(d) Amortizable section 197 intangibles.
(1) Definition.
(2) Exception for self-created intangibles.
(i) In general.
(ii) Created by the taxpayer.
(A) Defined.
(B) Contracts for the use of intangibles.
(C) Improvements and modifications.
(iii) Exceptions.
(3) Exception for property subject to antichurning rules.
(e) Purchase of a trade or business.
(1) Goodwill or going concern value.
(2) Franchise, trademark, or trade name.
(i) In general.
(ii) Exceptions.
(3) Acquisitions to be included.
(4) Substantial portion.
(5) Deemed asset purchases under section
338.
(6) Mortgage servicing rights.
(7) Computer software acquired for internal use.
(f) Computation of amortization deduction.
(1) In general.

February 14, 2000

(2) Treatment of contingent amounts.
(i) Amounts added to basis during 15-year
period.
(ii) Amounts becoming fixed after expiration of 15-year period.
(iii) Rules for including amounts in basis.
(3) Basis determinations for certain assets.
(i) Covenants not to compete.
(ii) Contracts for the use of section 197
intangibles; acquired as part of a trade or
business.
(A) In general.
(B) Know-how and certain information
base.
(iii) Contracts for the use of section 197
intangibles; not acquired as part of a trade
or business.
(iv) Applicable rules.
(A) Franchises, trademarks, and trade
names.
(B) Certain amounts treated as payable
under a debt instrument.
(1) In general.
(2) Rights granted by governmental units.
(3) Treatment of other parties to transaction.
(4) Basis determinations in certain transactions.
(i) Certain renewal transactions.
(ii) Transactions subject to section 338 or
1060.
(iii) Certain reinsurance transactions.
(g) Special rules.
(1) Treatment of certain dispositions.
(i) Loss disallowance rules.
(A) In general.
(B) Abandonment or worthlessness.
(C) Certain nonrecognition transfers.
(ii) Separately acquired property.
(iii) Disposition of a covenant not to compete.
(iv) Taxpayers under common control.
(A) In general.
(B) Treatment of disallowed loss.
(2) Treatment of certain nonrecognition
and exchange transactions.
(i) Relationship to anti-churning rules.
(ii) Treatment of nonrecognition and exchange transactions generally.
(A) Transfer disregarded.
(B) Application of general rule.
(C) Transactions covered.
(iii) Certain exchanged-basis property.
(iv) Transfers under section 708(b)(1).
(A) In general.
(B) Termination by sale or exchange of
interest.

February 14, 2000

(C) Other terminations.
(3) Increase in the basis of partnership
property under section 732(b), 734(b),
743(b), or 732(d).
(4) Section 704(c) allocations.
(i) Allocations where the intangible is
amortizable by the contributor.
(ii) Allocations where the intangible is not
amortizable by the contributor.
(5) Treatment of certain reinsurance transactions.
(i) In general.
(ii) Determination of adjusted basis.
(A) Acquisitions (other than under section
338) of specified insurance contracts.
(B) Insolvent ceding company
(C) Other acquisitions. [Reserved]
(6) Amounts paid or incurred for a franchise, trademark, or trade name.
(7) Amounts properly taken into account
in determining the cost of property that is
not a section 197 intangible.
(8) Treatment of amortizable section 197
intangibles as depreciable property.
(h) Anti-churning rules.
(1) Scope and purpose.
(i) Scope.
(ii) Purpose.
(2) Treatment of section 197(f)(9) intangibles.
(3) Amounts deductible under section
1253(d) or §1.162–11.
(4) Transition period.
(5) Exceptions.
(6) Related person.
(i) In general.
(ii) Time for testing relationships.
(iii) Certain relationships disregarded.
(iv) De minimis rule.
(A) In general.
(B) Determination of beneficial ownership interest.
(7) Special rules for entities that owned or
used property at any time during the transition period and that are no longer in existence.
(8) Special rules for section 338 deemed
acquisitions.
(9) Gain-recognition exception.
(i) Applicability.
(ii) Effect of exception.
(iii) Time and manner of election.
(iv) Special rules for certain entities.
(v) Effect of nonconforming elections.
(vi) Notification requirements.
(vii) Revocation.
(viii) Election Statement.
(ix) Determination of highest marginal

596

rate of tax and amount of other Federal income tax on gain.
(A) Marginal rate.
(1) Noncorporate taxpayers.
(2) Corporations and tax-exempt entities.
(B) Other Federal income tax on gain.
(x) Coordination with other provisions.
(A) In general.
(B) Section 1374.
(C) Procedural and administrative provisions.
(D) Installment method.
(xi) Special rules for persons not otherwise subject to Federal income tax.
(10) Transactions subject to both antichurning and nonrecognition rules.
(11) Avoidance purpose.
(12) Additional partnership anti-churning
rules
(i) In general.
(ii) Section 732(b) adjustments. [Reserved]
(iii) Section 732(d) adjustments.
(iv) Section 734(b) adjustments. [Reserved]
(v) Section 743(b) adjustments.
(vi) Partner is or becomes a user of partnership intangible.
(A) General rule.
(B) Anti-churning partner.
(C) Effect of retroactive elections.
(vii) Section 704(c) elections.
(A) Allocations where the intangible is
amortizable by the contributor.
(B) Allocations where the intangible is
not amortizable by the contributor.
(viii) Operating rule for transfers upon
death.
(i) Reserved
(j) General anti-abuse rule.
(k) Examples.
(l) Effective dates.
(1) In general.
(2) Application to pre-effective date acquisitions.
(3) Application of regulation project
REG–209709–94 to pre-effective date acquisitions.
(4) Change in method of accounting.
(i) In general.
(ii) Application to pre-effective date
transactions.
(iii) Automatic change procedures.
Par. 7. Section 1.197–2 is added to
read as follows:
§1.197–2 Amortization of goodwill and
certain other intangibles.
(a) Overview—(1) In general. Section

2000–7 I.R.B.

197 allows an amortization deduction for
the capitalized costs of an amortizable
section 197 intangible and prohibits any
other depreciation or amortization with
respect to that property. Paragraphs (b),
(c), and (e) of this section provide rules
and definitions for determining whether
property is a section 197 intangible, and
paragraphs (d) and (e) of this section provide rules and definitions for determining
whether a section 197 intangible is an
amortizable section 197 intangible. The
amortization deduction under section 197
is determined by amortizing basis ratably
over a 15-year period under the rules of
paragraph (f) of this section. Section 197
also includes various special rules pertaining to the disposition of amortizable
section 197 intangibles, nonrecognition
transactions, anti-churning rules, and antiabuse rules. Rules relating to these provisions are contained in paragraphs (g), (h),
and (j) of this section. Examples demonstrating the application of these provisions are contained in paragraph (k) of
this section. The effective date of the
rules in this section is contained in paragraph (l) of this section.
(2) Section 167(f) property. Section
167(f) prescribes rules for computing the
depreciation deduction for certain property
to which section 197 does not apply. See
§1.167(a)–14 for rules under section 167(f)
and paragraphs (c)(4), (6), (7), (11), and
(13) of this section for a description of the
property subject to section 167(f).
(3) Amounts otherwise deductible.
Section 197 does not apply to amounts
that are not chargeable to capital account
under paragraph (f)(3) (relating to basis
determinations for covenants not to compete and certain contracts for the use of
section 197 intangibles) of this section
and are otherwise currently deductible.
For this purpose, an amount described in
§1.162–11 is not currently deductible if,
without regard to §1.162–11, such
amount is properly chargeable to capital
account.
(b) Section 197 intangibles; in general.
Except as otherwise provided in paragraph (c) of this section, the term section
197 intangible means any property described in section 197(d)(1). The following rules and definitions provide guidance
concerning property that is a section 197
intangible unless an exception applies:
(1) Goodwill. Section 197 intangibles

2000–7 I.R.B.

include goodwill. Goodwill is the value
of a trade or business attributable to the
expectancy of continued customer patronage. This expectancy may be due to the
name or reputation of a trade or business
or any other factor.
(2) Going concern value. Section 197
intangibles include going concern value.
Going concern value is the additional
value that attaches to property by reason
of its existence as an integral part of an
ongoing business activity. Going concern
value includes the value attributable to the
ability of a trade or business (or a part of a
trade or business) to continue functioning
or generating income without interruption
notwithstanding a change in ownership,
but does not include any of the intangibles
described in any other provision of this
paragraph (b). It also includes the value
that is attributable to the immediate use or
availability of an acquired trade or business, such as, for example, the use of the
revenues or net earnings that otherwise
would not be received during any period
if the acquired trade or business were not
available or operational.
(3) Workforce in place. Section 197 intangibles include workforce in place.
Workforce in place (sometimes referred
to as agency force or assembled workforce) includes the composition of a
workforce (for example, the experience,
education, or training of a workforce), the
terms and conditions of employment
whether contractual or otherwise, and any
other value placed on employees or any of
their attributes. Thus, the amount paid or
incurred for workforce in place includes,
for example, any portion of the purchase
price of an acquired trade or business attributable to the existence of a highlyskilled workforce, an existing employment contract (or contracts), or a
relationship with employees or consultants (including, but not limited to, any
key employee contract or relationship).
Workforce in place does not include any
covenant not to compete or other similar
arrangement described in paragraph
(b)(9) of this section.
(4) Information base. Section 197 intangibles include any information base,
including a customer-related information
base. For this purpose, an information
base includes business books and records,
operating systems, and any other information base (regardless of the method of

597

recording the information) and a customer-related information base is any information base that includes lists or other
information with respect to current or
prospective customers. Thus, the amount
paid or incurred for information base includes, for example, any portion of the
purchase price of an acquired trade or
business attributable to the intangible
value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. Other
examples include the cost of acquiring
customer lists, subscription lists, insurance expirations, patient or client files, or
lists of newspaper, magazine, radio, or
television advertisers.
(5) Know-how, etc. Section 197 intangibles include any patent, copyright, formula, process, design, pattern, know-how,
format, package design, computer software (as defined in paragraph (c)(4)(iv) of
this section), or interest in a film, sound
recording, video tape, book, or other similar property. (See, however, the exceptions in paragraph (c) of this section.)
(6) Customer-based intangibles. Section 197 intangibles include any customer- based intangible. A customerbased intangible is any composition of
market, market share, or other value resulting from the future provision of goods
or services pursuant to contractual or
other relationships in the ordinary course
of business with customers. Thus, the
amount paid or incurred for customerbased intangibles includes, for example,
any portion of the purchase price of an acquired trade or business attributable to the
existence of a customer base, a circulation
base, an undeveloped market or market
growth, insurance in force, the existence
of a qualification to supply goods or services to a particular customer, a mortgage
servicing contract (as defined in paragraph (c)(11) of this section), an investment management contract, or other relationship with customers involving the
future provision of goods or services.
(See, however, the exceptions in paragraph (c) of this section.) In addition,
customer-based intangibles include the
deposit base and any similar asset of a financial institution. Thus, the amount paid
or incurred for customer-based intangibles also includes any portion of the purchase price of an acquired financial institution attributable to the value represented

February 14, 2000

by existing checking accounts, savings
accounts, escrow accounts, and other similar items of the financial institution.
However, any portion of the purchase
price of an acquired trade or business attributable to accounts receivable or other
similar rights to income for goods or services provided to customers prior to the
acquisition of a trade or business is not an
amount paid or incurred for a customerbased intangible.
(7) Supplier-based intangibles. Section
197 intangibles include any supplierbased intangible. A supplier-based intangible is the value resulting from the future
acquisition, pursuant to contractual or
other relationships with suppliers in the
ordinary course of business, of goods or
services that will be sold or used by the
taxpayer. Thus, the amount paid or incurred for supplier-based intangibles includes, for example, any portion of the
purchase price of an acquired trade or
business attributable to the existence of a
favorable relationship with persons providing distribution services (such as favorable shelf or display space at a retail
outlet), the existence of a favorable credit
rating, or the existence of favorable supply contracts. The amount paid or incurred for supplier-based intangibles does
not include any amount required to be
paid for the goods or services themselves
pursuant to the terms of the agreement or
other relationship. In addition, see the exceptions in paragraph (c) of this section,
including the exception in paragraph
(c)(6) of this section for certain rights to
receive tangible property or services from
another person.
(8) Licenses, permits, and other rights
granted by governmental units. Section
197 intangibles include any license, permit, or other right granted by a governmental unit (including, for purposes of
section 197, an agency or instrumentality
thereof) even if the right is granted for an
indefinite period or is reasonably expected to be renewed for an indefinite period. These rights include, for example, a
liquor license, a taxi-cab medallion (or license), an airport landing or takeoff right
(sometimes referred to as a slot), a regulated airline route, or a television or radio
broadcasting license. The issuance or renewal of a license, permit, or other right
granted by a governmental unit is considered an acquisition of the license, permit,

February 14, 2000

or other right. (See, however, the exceptions in paragraph (c) of this section, including the exceptions in paragraph (c)(3)
of this section for an interest in land, paragraph (c)(6) of this section for certain
rights to receive tangible property or services, paragraph (c)(8) of this section for
an interest under a lease of tangible property, and paragraph (c)(13) of this section
for certain rights granted by a governmental unit. See paragraph (b)(10) of this section for the treatment of franchises.)
(9) Covenants not to compete and other
similar arrangements. Section 197 intangibles include any covenant not to compete, or agreement having substantially
the same effect, entered into in connection
with the direct or indirect acquisition of
an interest in a trade or business or a substantial portion thereof. For purposes of
this paragraph (b)(9), an acquisition may
be made in the form of an asset acquisition (including a qualified stock purchase
that is treated as a purchase of assets
under section 338), a stock acquisition or
redemption, and the acquisition or redemption of a partnership interest. An
agreement requiring the performance of
services for the acquiring taxpayer or the
provision of property or its use to the acquiring taxpayer does not have substantially the same effect as a covenant not to
compete to the extent that the amount
paid under the agreement represents reasonable compensation for the services actually rendered or for the property or use
of the property actually provided.
(10) Franchises, trademarks, and trade
names. (i) Section 197 intangibles include any franchise, trademark, or trade
name. The term franchise has the meaning given in section 1253(b)(1) and includes any agreement that provides one of
the parties to the agreement with the right
to distribute, sell, or provide goods, services, or facilities, within a specified area.
The term trademark includes any word,
name, symbol, or device, or any combination thereof, adopted and used to identify
goods or services and distinguish them
from those provided by others. The term
trade name includes any name used to
identify or designate a particular trade or
business or the name or title used by a
person or organization engaged in a trade
or business. A license, permit, or other
right granted by a governmental unit is a
franchise if it otherwise meets the defini-

598

tion of a franchise. A trademark or trade
name includes any trademark or trade
name arising under statute or applicable
common law, and any similar right
granted by contract. The renewal of a
franchise, trademark, or trade name is
treated as an acquisition of the franchise,
trademark, or trade name.
(ii) Notwithstanding the definitions
provided in paragraph (b)(10)(i) of this
section, any amount that is paid or incurred on account of a transfer, sale, or
other disposition of a franchise, trademark, or trade name and that is subject to
section 1253(d)(1) is not included in the
basis of a section 197 intangible. (See
paragraph (g)(6) of this section.)
(11) Contracts for the use of, and term
interests in, section 197 intangibles. Section 197 intangibles include any right
under a license, contract, or other arrangement providing for the use of property
that would be a section 197 intangible
under any provision of this paragraph (b)
(including this paragraph (b)(11)) after
giving effect to all of the exceptions provided in paragraph (c) of this section.
Section 197 intangibles also include any
term interest (whether outright or in trust)
in such property.
(12) Other similar items. Section 197
intangibles include any other intangible
property that is similar in all material respects to the property specifically described in section 197(d)(1)(C)(i) through
(v) and paragraphs (b)(3) through (7) of
this section. (See paragraph (g)(5) of this
section for special rules regarding certain
reinsurance transactions.)
(c) Section 197 intangibles; exceptions.
The term section 197 intangible does not
include property described in section
197(e). The following rules and definitions provide guidance concerning property to which the exceptions apply:
(1) Interests in a corporation, partnership, trust, or estate. Section 197 intangibles do not include an interest in a corporation, partnership, trust, or estate. Thus,
for example, amortization under section
197 is not available for the cost of acquiring stock, partnership interests, or interests in a trust or estate, whether or not the
interests are regularly traded on an established market. (See paragraph (g)(3) of
this section for special rules applicable to
property of a partnership when a section
754 election is in effect for the partner-

2000–7 I.R.B.

ship.)
(2) Interests under certain financial
contracts. Section 197 intangibles do not
include an interest under an existing futures contract, foreign currency contract,
notional principal contract, interest rate
swap, or other similar financial contract,
whether or not the interest is regularly
traded on an established market. However, this exception does not apply to an
interest under a mortgage servicing contract, credit card servicing contract, or
other contract to service another person’s
indebtedness, or an interest under an assumption reinsurance contract. (See paragraph (g)(5) of this section for the treatment of assumption reinsurance contracts.
See paragraph (c)(11) of this section and
§1.167(a)–14(d) for the treatment of
mortgage servicing rights.)
(3) Interests in land. Section 197 intangibles do not include any interest in land.
For this purpose, an interest in land includes a fee interest, life estate, remainder, easement, mineral right, timber right,
grazing right, riparian right, air right, zoning variance, and any other similar right,
such as a farm allotment, quota for farm
commodities, or crop acreage base. An
interest in land does not include an airport
landing or takeoff right, a regulated airline route, or a franchise to provide cable
television service. The cost of acquiring a
license, permit, or other land improvement right, such as a building construction or use permit, is taken into account in
the same manner as the underlying improvement.
(4) Certain computer software—(i)
Publicly available. Section 197 intangibles do not include any interest in computer software that is (or has been) readily
available to the general public on similar
terms, is subject to a nonexclusive license, and has not been substantially
modified. Computer software will be
treated as readily available to the general
public if the software may be obtained on
substantially the same terms by a significant number of persons that would reasonably be expected to use the software.
This requirement can be met even though
the software is not available through a
system of retail distribution. Computer
software will not be considered to have
been substantially modified if the cost of
all modifications to the version of the
software that is readily available to the

2000–7 I.R.B.

general public does not exceed the greater
of 25 percent of the price at which the unmodified version of the software is readily available to the general public or
$2,000. For the purpose of determining
whether computer software has been substantially modified—
(A) Integrated programs acquired in a
package from a single source are treated
as a single computer program; and
(B) Any cost incurred to install the
computer software on a system is not
treated as a cost of the software. However, the costs for customization, such as
tailoring to a user’s specifications (other
than embedded programming options) are
costs of modifying the software.
(ii) Not acquired as part of trade or
business. Section 197 intangibles do not
include an interest in computer software
that is not acquired as part of a purchase
of a trade or business.
(iii) Other exceptions. For other exceptions applicable to computer software, see
paragraph (a)(3) of this section (relating
to otherwise deductible amounts) and
paragraph (g)(7) of this section (relating
to amounts properly taken into account in
determining the cost of property that is
not a section 197 intangible).
(iv) Computer software defined. For
purposes of this section, computer software is any program or routine (that is,
any sequence of machine-readable code)
that is designed to cause a computer to
perform a desired function or set of functions, and the documentation required to
describe and maintain that program or
routine. It includes all forms and media
in which the software is contained,
whether written, magnetic, or otherwise.
Computer programs of all classes, for example, operating systems, executive systems, monitors, compilers and translators,
assembly routines, and utility programs as
well as application programs, are included. Computer software also includes
any incidental and ancillary rights that are
necessary to effect the acquisition of the
title to, the ownership of, or the right to
use the computer software, and that are
used only in connection with that specific
computer software. Such incidental and
ancillary rights are not included in the definition of trademark or trade name under
paragraph (b)(10)(i) of this section. For
example, a trademark or trade name that
is ancillary to the ownership or use of a

599

specific computer software program in
the taxpayer’s trade or business and is not
acquired for the purpose of marketing the
computer software is included in the definition of computer software and is not included in the definition of trademark or
trade name. Computer software does not
include any data or information base described in paragraph (b)(4) of this section
unless the data base or item is in the public domain and is incidental to a computer
program. For this purpose, a copyrighted
or proprietary data or information base is
treated as in the public domain if its availability through the computer program
does not contribute significantly to the
cost of the program. For example, if a
word-processing program includes a dictionary feature used to spell-check a document or any portion thereof, the entire
program (including the dictionary feature)
is computer software regardless of the
form in which the feature is maintained or
stored.
(5) Certain interests in films, sound
recordings, video tapes, books, or other
similar property. Section 197 intangibles
do not include any interest (including an
interest as a licensee) in a film, sound
recording, video tape, book, or other similar property (such as the right to broadcast
or transmit a live event) if the interest is
not acquired as part of a purchase of a
trade or business. A film, sound recording, video tape, book, or other similar
property includes any incidental and ancillary rights (such as a trademark or trade
name) that are necessary to effect the acquisition of title to, the ownership of, or
the right to use the property and are used
only in connection with that property.
Such incidental and ancillary rights are
not included in the definition of trademark or trade name under paragraph
(b)(10)(i) of this section. For purposes of
this paragraph (c)(5), computer software
(as defined in paragraph (c)(4)(iv) of this
section) is not treated as other property
similar to a film, sound recording, video
tape, or book. (See section 167 for amortization of excluded intangible property or
interests.)
(6) Certain rights to receive tangible
property or services.
Section 197 intangibles do not include
any right to receive tangible property or
services under a contract or from a governmental unit if the right is not acquired

February 14, 2000

as part of a purchase of a trade or business. Any right that is described in the
preceding sentence is not treated as a section 197 intangible even though the right
is also described in section 197(d)(1)(D)
and paragraph (b)(8) of this section (relating to certain governmental licenses, permits, and other rights) and even though
the right fails to meet one or more of the
requirements of paragraph (c)(13) of this
section (relating to certain rights of fixed
duration or amount).
(See
§1.167(a)–14(c)(1) and (3) for applicable
rules.)
(7) Certain interests in patents or copyrights. Section 197 intangibles do not include any interest (including an interest as
a licensee) in a patent, patent application,
or copyright that is not acquired as part of
a purchase of a trade or business. A
patent or copyright includes any incidental and ancillary rights (such as a trademark or trade name) that are necessary to
effect the acquisition of title to, the ownership of, or the right to use the property
and are used only in connection with that
property. Such incidental and ancillary
rights are not included in the definition of
trademark or trade name under paragraph
(b)(10)(i) of this section.
(See
§1.167(a)–14(c)(4) for applicable rules.)
(8) Interests under leases of tangible
property—(i) Interest as a lessor. Section
197 intangibles do not include any interest as a lessor under an existing lease or
sublease of tangible real or personal property. In addition, the cost of acquiring an
interest as a lessor in connection with the
acquisition of tangible property is taken
into account as part of the cost of the tangible property. For example, if a taxpayer
acquires a shopping center that is leased
to tenants operating retail stores, any portion of the purchase price attributable to
favorable lease terms is taken into account as part of the basis of the shopping
center and in determining the depreciation
deduction allowed with respect to the
shopping center. (See section 167(c)(2).)
(ii) Interest as a lessee. Section 197 intangibles do not include any interest as a
lessee under an existing lease of tangible
real or personal property. For this purpose, an airline lease of an airport passenger or cargo gate is a lease of tangible
property. The cost of acquiring such an
interest is taken into account under section 178 and §1.162–11(a). If an interest

February 14, 2000

as a lessee under a lease of tangible property is acquired in a transaction with any
other intangible property, a portion of the
total purchase price may be allocable to
the interest as a lessee based on all of the
relevant facts and circumstances.
(9) Interests under indebtedness—(i) In
general. Section 197 intangibles do not
include any interest (whether as a creditor
or debtor) under an indebtedness in existence when the interest was acquired.
Thus, for example, the value attributable
to the assumption of an indebtedness with
a below-market interest rate is not amortizable under section 197. In addition, the
premium paid for acquiring a debt instrument with an above-market interest rate is
not amortizable under section 197. See
section 171 for rules concerning the treatment of amortizable bond premium.
(ii) Exceptions. For purposes of this
paragraph (c)(9), an interest under an existing indebtedness does not include the
deposit base (and other similar items) of a
financial institution. An interest under an
existing indebtedness includes mortgage
servicing rights, however, to the extent
the rights are stripped coupons under section 1286.
(10) Professional sports franchises.
Section 197 intangibles do not include
any franchise to engage in professional
baseball, basketball, football, or any other
professional sport, and any item (even
though otherwise qualifying as a section
197 intangible) acquired in connection
with such a franchise.
(11) Mortgage servicing rights. Section 197 intangibles do not include any
right described in section 197(e)(7) (concerning rights to service indebtedness secured by residential real property that are
not acquired as part of a purchase of a
trade or business). (See §1.167(a)–14(d)
for applicable rules.)
(12) Certain transaction costs. Section
197 intangibles do not include any fees
for professional services and any transaction costs incurred by parties to a transaction in which all or any portion of the gain
or loss is not recognized under part III of
subchapter C of the Internal Revenue
Code.
(13) Rights of fixed duration or
amount. (i) Section 197 intangibles do
not include any right under a contract or
any license, permit, or other right granted
by a governmental unit if the right—

600

(A) Is acquired in the ordinary course
of a trade or business (or an activity described in section 212) and not as part of a
purchase of a trade or business;
(B) Is not described in section
197(d)(1)(A), (B), (E), or (F);
(C) Is not a customer-based intangible,
a customer-related information base, or
any other similar item; and
(D) Either—
(1) Has a fixed duration of less than 15
years; or
(2) Is fixed as to amount and the adjusted basis thereof is properly recoverable (without regard to this section) under
a method similar to the unit-of-production
method.
(ii) See §1.167(a)–14(c)(2) and (3) for
applicable rules.
(d) Amortizable section 197 intangibles—(1) Definition. Except as otherwise
provided in this paragraph (d), the term
amortizable section 197 intangible means
any section 197 intangible acquired after
August 10, 1993 (or after July 25, 1991, if
a valid retroactive election under
§1.197–1T has been made), and held in
connection with the conduct of a trade or
business or an activity described in section 212.
(2) Exception for self-created intangibles—(i) In general. Except as provided
in paragraph (d)(2)(iii) of this section,
amortizable section 197 intangibles do
not include any section 197 intangible
created by the taxpayer (a self-created intangible).
(ii) Created by the taxpayer—(A) Defined. A section 197 intangible is created
by the taxpayer to the extent the taxpayer
makes payments or otherwise incurs costs
for its creation, production, development,
or improvement, whether the actual work
is performed by the taxpayer or by another person under a contract with the taxpayer entered into before the contracted
creation, production, development, or improvement occurs. For example, a technological process developed specifically
for a taxpayer under an arrangement with
another person pursuant to which the taxpayer retains all rights to the process is
created by the taxpayer.
(B) Contracts for the use of
intangibles. A section 197 intangible is
not a self- created intangible to the extent
that it results from the entry into (or renewal of) a contract for the use of an ex-

2000–7 I.R.B.

isting section 197 intangible. Thus, for
example, the exception for self-created
intangibles does not apply to capitalized
costs, such as legal and other professional
fees, incurred by a licensee in connection
with the entry into (or renewal of) a contract for the use of know-how or similar
property.
(C) Improvements and modifications.
If an existing section 197 intangible is improved or otherwise modified by the taxpayer or by another person under a contract with the taxpayer, the existing
intangible and the capitalized costs (if
any) of the improvements or other modifications are each treated as a separate section 197 intangible for purposes of this
paragraph (d).
(iii) Exceptions. (A) The exception for
self-created intangibles does not apply to
any section 197 intangible described in
section 197(d)(1)(D) (relating to licenses,
permits or other rights granted by a governmental unit), 197(d)(1)(E) (relating to
covenants not to compete), or
197(d)(1)(F) (relating to franchises, trademarks, and trade names). Thus, for example, capitalized costs incurred in the development, registration, or defense of a
trademark or trade name do not qualify
for the exception and are amortized over
15 years under section 197.
(B) The exception for self-created intangibles does not apply to any section
197 intangible created in connection with
the purchase of a trade or business (as defined in paragraph (e) of this section).
(C) If a taxpayer disposes of a self-created intangible and subsequently reacquires the intangible in an acquisition described in paragraph (h)(5)(ii) of this
section, the exception for self-created intangibles does not apply to the reacquired
intangible.
(3) Exception for property subject to
anti-churning rules. Amortizable section
197 intangibles do not include any property to which the anti-churning rules of
section 197(f)(9) and paragraph (h) of this
section apply.
(e) Purchase of a trade or business.
Several of the exceptions in section 197
apply only to property that is not acquired
in (or created in connection with) a transaction or series of related transactions involving the acquisition of assets constituting a trade or business or a substantial
portion thereof. Property acquired in (or

2000–7 I.R.B.

created in connection with) such a transaction or series of related transactions is
referred to in this section as property acquired as part of (or created in connection
with) a purchase of a trade or business.
For purposes of section 197 and this section, the applicability of the limitation is
determined under the following rules:
(1) Goodwill or going concern value.
An asset or group of assets constitutes a
trade or business or a substantial portion
thereof if their use would constitute a
trade or business under section 1060 (that
is, if goodwill or going concern value
could under any circumstances attach to
the assets). See §1.1060–1T(b)(2). For
this purpose, all the facts and circumstances, including any employee relationships that continue (or covenants not to
compete that are entered into) as part of
the transfer of the assets, are taken into
account in determining whether goodwill
or going concern value could attach to the
assets.
(2) Franchise, trademark, or trade
name—(i) In general. The acquisition of
a franchise, trademark, or trade name constitutes the acquisition of a trade or business or a substantial portion thereof.
(ii) Exceptions. For purposes of this
paragraph (e)(2)—
(A) A trademark or trade name is disregarded if it is included in computer software under paragraph (c)(4) of this section or in an interest in a film, sound
recording, video tape, book, or other similar property under paragraph (c)(5) of this
section;
(B) A franchise, trademark, or trade
name is disregarded if its value is nominal
or the taxpayer irrevocably disposes of it
immediately after its acquisition; and
(C) The acquisition of a right or interest
in a trademark or trade name is disregarded if the grant of the right or interest
is not, under the principles of section
1253, a transfer of all substantial rights to
such property or of an undivided interest
in all substantial rights to such property.
(3) Acquisitions to be included. The
assets acquired in a transaction (or series
of related transactions) include only assets (including a beneficial or other indirect interest in assets where the interest is
of a type described in paragraph (c)(1) of
this section) acquired by the taxpayer and
persons related to the taxpayer from another person and persons related to that

601

other person. For purposes of this paragraph (e)(3), persons are related only if
their relationship is described in section
267(b) or 707(b) or they are engaged in
trades or businesses under common control within the meaning of section
41(f)(1).
(4) Substantial portion. The determination of whether acquired assets constitute a substantial portion of a trade or
business is to be based on all of the facts
and circumstances, including the nature
and the amount of the assets acquired as
well as the nature and amount of the assets retained by the transferor. The value
of the assets acquired relative to the value
of the assets retained by the transferor is
not determinative of whether the acquired
assets constitute a substantial portion of a
trade or business.
(5) Deemed asset purchases under section 338. A qualified stock purchase that
is treated as a purchase of assets under
section 338 is treated as a transaction involving the acquisition of assets constituting a trade or business only if the direct
acquisition of the assets of the corporation
would have been treated as the acquisition
of assets constituting a trade or business
or a substantial portion thereof.
(6) Mortgage servicing rights. Mortgage servicing rights acquired in a transaction or series of related transactions are
disregarded in determining for purposes
of paragraph (c)(11) of this section
whether the assets acquired in the transaction or transactions constitute a trade or
business or substantial portion thereof.
(7) Computer software acquired for internal use. Computer software acquired
in a transaction or series of related transactions solely for internal use in an existing trade or business is disregarded in determining for purposes of paragraph
(c)(4) of this section whether the assets
acquired in the transaction or series of related transactions constitute a trade or
business or substantial portion thereof.
(f) Computation of amortization deduction—(1) In general. Except as provided
in paragraph (f)(2) of this section, the
amortization deduction allowable under
section 197(a) is computed as follows:
(i) The basis of an amortizable section
197 intangible is amortized ratably over
the 15-year period beginning on the later
of—
(A) The first day of the month in which

February 14, 2000

the property is acquired; or
(B) In the case of property held in connection with the conduct of a trade or
business or in an activity described in section 212, the first day of the month in
which the conduct of the trade or business
or the activity begins.
(ii) Except as otherwise provided in
this section, basis is determined under
section 1011 and salvage value is disregarded.
(iii) Property is not eligible for amortization in the month of disposition.
(iv) The amortization deduction for a
short taxable year is based on the number
of months in the short taxable year.
(2) Treatment of contingent amounts—
(i) Amounts added to basis during 15year period. Any amount that is properly
included in the basis of an amortizable
section 197 intangible after the first
month of the 15-year period described in
paragraph (f)(1)(i) of this section and before the expiration of that period is amortized ratably over the remainder of the 15year period. For this purpose, the
remainder of the 15-year period begins on
the first day of the month in which the
basis increase occurs.
(ii) Amounts becoming fixed after expiration of 15-year period. Any amount
that is not properly included in the basis
of an amortizable section 197 intangible
until after the expiration of the 15-year
period described in paragraph (f)(1)(i) of
this section is amortized in full immediately upon the inclusion of the amount in
the basis of the intangible.
(iii) Rules for including amounts in
basis. See §§1.1275–4(c)(4) and
1.483–4(a) for rules governing the extent
to which contingent amounts payable
under a debt instrument given in consideration for the sale or exchange of an amortizable section 197 intangible are treated
as payments of principal and the time at
which the amount treated as principal is
included in basis. See §1.461–1(a)(1) and
(2) for rules governing the time at which
other contingent amounts are taken into
account in determining the basis of an
amortizable section 197 intangible.
(3) Basis determinations for certain assets—(i) Covenants not to compete. In
the case of a covenant not to compete or
other similar arrangement described in
paragraph (b)(9) of this section (a
covenant), the amount chargeable to capi-

February 14, 2000

tal account includes, except as provided
in this paragraph (f)(3), all amounts that
are required to be paid pursuant to the
covenant, whether or not any such
amount would be deductible under section 162 if the covenant were not a section
197 intangible.
(ii) Contracts for the use of section 197
intangibles; acquired as part of a trade or
business—(A) In general. Except as provided in this paragraph (f)(3), any amount
paid or incurred by the transferee on account of the transfer of a right or term interest described in paragraph (b)(11) of
this section (relating to contracts for the
use of, and term interests in, section 197
intangibles) by the owner of the property
to which such right or interest relates and
as part of a purchase of a trade or business
is chargeable to capital account, whether
or not such amount would be deductible
under section 162 if the property were not
a section 197 intangible.
(B) Know-how and certain information
base. The amount chargeable to capital
account with respect to a right or term interest described in paragraph (b)(11) of
this section is determined without regard
to the rule in paragraph (f)(3)(ii)(A) of
this section if the right or interest relates
to property (other than a customer-related
information base) described in paragraph
(b)(4) or (5) of this section and the acquiring taxpayer establishes that—
(1) The transfer of the right or interest
is not, under the principles of section
1235, a transfer of all substantial rights to
such property or of an undivided interest
in all substantial rights to such property;
and
(2) The right or interest was transferred
for an arm’s-length consideration.
(iii) Contracts for the use of section
197 intangibles; not acquired as part of a
trade or business. The transfer of a right
or term interest described in paragraph
(b)(11) of this section by the owner of the
property to which such right or interest relates but not as part of a purchase of a
trade or business will be closely scrutinized under the principles of section 1235
for purposes of determining whether the
transfer is a sale or exchange and, accordingly, whether amounts paid on account
of the transfer are chargeable to capital
account. If under the principles of section
1235 the transaction is not a sale or exchange, amounts paid on account of the

602

transfer are not chargeable to capital account under this paragraph (f)(3).
(iv) Applicable rules—(A) Franchises,
trademarks, and trade names. For purposes of this paragraph (f)(3), section 197
intangibles described in paragraph (b)(11)
of this section do not include any property
that is also described in paragraph (b)(10)
of this section (relating to franchises,
trademarks, and trade names).
(B) Certain amounts treated as payable
under a debt instrument—(1) In general.
For purposes of applying any provision of
the Internal Revenue Code to a person
making payments of amounts that are otherwise chargeable to capital account
under this paragraph (f)(3) and are
payable after the acquisition of the section
197 intangible to which they relate, such
amounts are treated as payable under a
debt instrument given in consideration for
the sale or exchange of the section 197 intangible.
(2) Rights granted by governmental
units. For purposes of applying any provision of the Internal Revenue Code to
any amounts that are otherwise chargeable to capital account with respect to a license, permit, or other right described in
paragraph (b)(8) of this section (relating
to rights granted by a governmental unit
or agency or instrumentality thereof) and
are payable after the acquisition of the
section 197 intangible to which they relate, such amounts are treated, except as
provided in paragraph (f)(4)(i) of this section (relating to renewal transactions), as
payable under a debt instrument given in
consideration for the sale or exchange of
the section 197 intangible.
(3) Treatment of other parties to transaction. No person shall be treated as having sold, exchanged, or otherwise disposed of property in a transaction for
purposes of any provision of the Internal
Revenue Code solely by reason of the application of this paragraph (f)(3) to any
other party to the transaction.
(4) Basis determinations in certain
transactions—(i) Certain renewal transactions. The costs paid or incurred for the
renewal of a franchise, trademark, or
trade name or any license, permit, or other
right granted by a governmental unit or an
agency or instrumentality thereof are
amortized over the 15-year period that begins with the month of renewal. Any
costs paid or incurred for the issuance, or

2000–7 I.R.B.

earlier renewal, continue to be taken into
account over the remaining portion of the
amortization period that began at the time
of the issuance, or earlier renewal. Any
amount paid or incurred for the protection, expansion, or defense of a trademark
or trade name and chargeable to capital
account is treated as an amount paid or incurred for a renewal.
(ii) Transactions subject to section 338
or 1060. In the case of a section 197 intangible deemed to have been acquired as
the result of a qualified stock purchase
within the meaning of section 338(d)(3),
the basis shall be determined pursuant to
section 338(b)(5) and the regulations
thereunder. In the case of a section 197
intangible acquired in an applicable asset
acquisition within the meaning of section
1060(c), the basis shall be determined
pursuant to section 1060(a) and the regulations thereunder.
(iii) Certain reinsurance transactions.
See paragraph (g)(5)(ii) of this section for
special rules regarding the adjusted basis
of an insurance contract acquired through
an assumption reinsurance transaction.
(g) Special rules—(1) Treatment of
certain dispositions—(i) Loss disallowance rules—(A) In general. No loss
is recognized on the disposition of an
amortizable section 197 intangible if the
taxpayer has any retained intangibles.
The retained intangibles with respect to
the disposition of any amortizable section
197 intangible (the transferred intangible)
are all amortizable section 197 intangibles, or rights to use or interests (including beneficial or other indirect interests)
in amortizable section 197 intangibles (including the transferred intangible) that
were acquired in the same transaction or
series of related transactions as the transferred intangible and are retained after its
disposition. Except as otherwise provided in paragraph (g)(1)(iv)(B) of this
section, the adjusted basis of each of the
retained intangibles is increased by the
product of—
(1) The loss that is not recognized
solely by reason of this rule; and
(2) A fraction, the numerator of which
is the adjusted basis of the retained intangible on the date of the disposition and the
denominator of which is the total adjusted
bases of all the retained intangibles on
that date.
(B) Abandonment or worthlessness.

2000–7 I.R.B.

The abandonment of an amortizable section 197 intangible, or any other event
rendering an amortizable section 197 intangible worthless, is treated as a disposition of the intangible for purposes of this
paragraph (g)(1), and the abandoned or
worthless intangible is disregarded (that
is, it is not treated as a retained intangible)
for purposes of applying this paragraph
(g)(1) to the subsequent disposition of any
other amortizable section 197 intangible.
(C) Certain nonrecognition transfers.
The loss disallowance rule in paragraph
(g)(1)(i)(A) of this section also applies
when a taxpayer transfers an amortizable
section 197 intangible from an acquired
trade or business in a transaction in which
the intangible is transferred basis property
and, after the transfer, retains other amortizable section 197 intangibles from the
trade or business. Thus, for example, the
transfer of an amortizable section 197 intangible to a corporation in exchange for
stock in the corporation in a transaction
described in section 351, or to a partnership in exchange for an interest in the
partnership in a transaction described in
section 721, when other amortizable section 197 intangibles acquired in the same
transaction are retained, followed by a
sale of the stock or partnership interest received, will not avoid the application of
the loss disallowance provision to the extent the adjusted basis of the transferred
intangible at the time of the sale exceeds
its fair market value at that time.
(ii) Separately acquired property.
Paragraph (g)(1)(i) of this section does
not apply to an amortizable section 197
intangible that is not acquired in a transaction or series of related transactions in
which the taxpayer acquires other amortizable section 197 intangibles (a separately
acquired intangible). Consequently, a
loss may be recognized upon the disposition of a separately acquired amortizable
section 197 intangible. However, the termination or worthlessness of only a portion of an amortizable section 197 intangible is not the disposition of a separately
acquired intangible. For example, neither
the loss of several customers from an acquired customer list nor the worthlessness
of only some information from an acquired data base constitutes the disposition of a separately acquired intangible.
(iii) Disposition of a covenant not to
compete. If a covenant not to compete or

603

any other arrangement having substantially the same effect is entered into in
connection with the direct or indirect acquisition of an interest in one or more
trades or businesses, the disposition or
worthlessness of the covenant or other
arrangement will not be considered to
occur until the disposition or worthlessness of all interests in those trades or businesses. For example, a covenant not to
compete entered into in connection with
the purchase of stock continues to be
amortized ratably over the 15-year recovery period (even after the covenant expires or becomes worthless) unless all the
trades or businesses in which an interest
was acquired through the stock purchase
(or all the purchaser’s interests in those
trades or businesses) also are disposed of
or become worthless.
(iv) Taxpayers under common
control—(A) In general. Except as provided in paragraph (g)(1)(iv)(B) of this
section, all persons that would be treated
as a single taxpayer under section 41(f)(1)
are treated as a single taxpayer under this
paragraph (g)(1). Thus, for example, a
loss is not recognized on the disposition
of an amortizable section 197 intangible
by a member of a controlled group of corporations (as defined in section 41(f)(5))
if, after the disposition, another member
retains other amortizable section 197 intangibles acquired in the same transaction
as the amortizable section 197 intangible
that has been disposed of.
(B) Treatment of disallowed loss. If retained intangibles are held by a person
other than the person incurring the disallowed loss, only the adjusted basis of intangibles retained by the person incurring
the disallowed loss is increased, and only
the adjusted basis of those intangibles is
included in the denominator of the fraction described in paragraph (g)(1)(i)(A) of
this section. If none of the retained intangibles are held by the person incurring the
disallowed loss, the loss is allowed ratably, as a deduction under section 197,
over the remainder of the period during
which the intangible giving rise to the loss
would have been amortizable, except that
any remaining disallowed loss is allowed
in full on the first date on which all other
retained intangibles have been disposed
of or become worthless.
(2) Treatment of certain nonrecognition
and exchange transactions—(i) Relation-

February 14, 2000

ship to anti-churning rules. This paragraph (g)(2) provides rules relating to the
treatment of section 197 intangibles acquired in certain transactions. If these
rules apply to a section 197(f)(9) intangible (within the meaning of paragraph
(h)(1)(i) of this section), the intangible is,
notwithstanding its treatment under this
paragraph (g)(2), treated as an amortizable section 197 intangible only to the extent permitted under paragraph (h) of this
section.
(ii) Treatment of nonrecognition and
exchange transactions generally—(A)
Transfer disregarded. If a section 197 intangible is transferred in a transaction described in paragraph (g)(2)(ii)(C) of this
section, the transfer is disregarded in determining—
(1) Whether, with respect to so much of
the intangible’s basis in the hands of the
transferee as does not exceed its basis in
the hands of the transferor, the intangible
is an amortizable section 197 intangible;
and
(2) The amount of the deduction under
section 197 with respect to such basis.
(B) Application of general rule. If the
intangible described in paragraph
(g)(2)(ii)(A) of this section was an amortizable section 197 intangible in the hands
of the transferor, the transferee will continue to amortize its adjusted basis, to the
extent it does not exceed the transferor’s
adjusted basis, ratably over the remainder
of the transferor’s 15-year amortization
period. If the intangible was not an amortizable section 197 intangible in the hands
of the transferor, the transferee’s adjusted
basis, to the extent it does not exceed the
transferor’s adjusted basis, cannot be
amortized under section 197. In either
event, the intangible is treated, with respect to so much of its adjusted basis in
the hands of the transferee as exceeds its
adjusted basis in the hands of the transferor, in the same manner for purposes of
section 197 as an intangible acquired
from the transferor in a transaction that is
not described in paragraph (g)(2)(ii)(C) of
this section. The rules of this paragraph
(g)(2)(ii) also apply to any subsequent
transfers of the intangible in a transaction
described in paragraph (g)(2)(ii)(C) of
this section.
(C) Transactions covered. The transactions described in this paragraph
(g)(2)(ii)(C) are—

February 14, 2000

(1) Any transaction described in section
332, 351, 361, 721, or 731; and
(2) Any transaction between corporations that are members of the same consolidated group immediately after the
transaction.
(iii) Certain exchanged-basis property.
This paragraph (g)(2)(iii) applies to property that is acquired in a transaction subject to section 1031 or 1033 and is permitted to be acquired without recognition of
gain (replacement property). Replacement property is treated as if it were the
property by reference to which its basis is
determined (the predecessor property) in
determining whether, with respect to so
much of its basis as does not exceed the
basis of the predecessor property, the replacement property is an amortizable section 197 intangible and the amortization
period under section 197 with respect to
such basis. Thus, if the predecessor property was an amortizable section 197 intangible, the taxpayer will amortize the adjusted basis of the replacement property,
to the extent it does not exceed the adjusted basis of the predecessor property,
ratably over the remainder of the 15-year
amortization period for the predecessor
property. If the predecessor property was
not an amortizable section 197 intangible,
the adjusted basis of the replacement
property, to the extent it does not exceed
the adjusted basis of the predecessor
property, may not be amortized under section 197. In either event, the replacement
property is treated, with respect to so
much of its adjusted basis as exceeds the
adjusted basis of the predecessor property, in the same manner for purposes of
section 197 as property acquired from the
transferor in a transaction that is not subject to section 1031 or 1033.
(iv) Transfers under section
708(b)(1)—(A) In general. Paragraph
(g)(2)(ii) of this section applies to transfers of section 197 intangibles that occur
or are deemed to occur by reason of the
termination of a partnership under section
708(b)(1).
(B) Termination by sale or exchange of
interest. In applying paragraph (g)(2)(ii)
of this section to a partnership that is terminated pursuant to section 708(b)(1)(B)
(relating to deemed terminations from the
sale or exchange of an interest), the terminated partnership is treated as the transferor and the new partnership is treated as

604

the transferee with respect to any section
197 intangible held by the terminated
partnership immediately preceding the
termination. (See paragraph (g)(3) of this
section for the treatment of increases in
the bases of property of the terminated
partnership under section 743(b).)
(C) Other terminations. In applying
paragraph (g)(2)(ii) of this section to a
partnership that is terminated pursuant to
section 708(b)(1)(A) (relating to cessation
of activities by a partnership), the terminated partnership is treated as the transferor and the distributee partner is treated
as the transferee with respect to any section 197 intangible held by the terminated
partnership immediately preceding the
termination.
(3) Increase in the basis of partnership
property under section 732(b), 734(b),
743(b), or 732(d). Any increase in the adjusted basis of a section 197 intangible
under sections 732(b) or 732(d) (relating
to a partner’s basis in property distributed
by a partnership), section 734(b) (relating
to the optional adjustment to the basis of
undistributed partnership property after a
distribution of property to a partner), or
section 743(b) (relating to the optional adjustment to the basis of partnership property after transfer of a partnership interest) is treated as a separate section 197
intangible. For purposes of determining
the amortization period under section 197
with respect to the basis increase, the intangible is treated as having been acquired at the time of the transaction that
causes the basis increase. The provisions
of paragraph (f)(2) of this section apply to
the extent that the amount of the basis increase is determined by reference to contingent payments. For purposes of the effective date and anti-churning provisions
(paragraphs (l)(1) and (h) of this section)
for a basis increase under section 732(d),
the intangible is treated as having been
acquired by the transferee partner at the
time of the transfer of the partnership interest described in section 732(d).
(4) Section 704(c) allocations—(i) Allocations where the intangible is amortizable by the contributor. To the extent that
the intangible was an amortizable section
197 intangible in the hands of the contributing partner, a partnership may make
allocations of amortization deductions
with respect to the intangible to all of its
partners under either the curative or reme-

2000–7 I.R.B.

dial allocation methods described in the
regulations under section 704(c). See
§1.704–3(c) and (d).
(ii) Allocations where the intangible is
not amortizable by the contributor. To the
extent that the intangible was not an
amortizable section 197 intangible in the
hands of the contributing partner, the intangible is not amortizable by the partnership. However, if a partner contributes a
section 197 intangible to a partnership
and the partnership adopts the remedial
allocation method for making section
704(c) allocations of amortization deductions, the partnership generally may make
remedial allocations of amortization deductions with respect to the contributed
section 197 intangible in accordance with
§ 1.704–3(d). See paragraph (h)(12) of
this section to determine the application
of the anti-churning rules in the context of
remedial allocations.
(5) Treatment of certain reinsurance
transactions—(i) In general. Section 197
applies to any insurance contract acquired
from another person through an assumption reinsurance transaction. For purposes of section 197, an assumption reinsurance transaction is—
(A) Any arrangement in which one insurance company (the reinsurer) becomes
solely liable to policyholders on contracts
transferred by another insurance company
(the ceding company); and
(B) Any acquisition of an insurance
contract that is treated as occurring by
reason of an election under section 338.
(ii) Determination of adjusted basis—
(A) Acquisitions (other than under section 338) of specified insurance contracts.
The amount taken into account for purposes of section 197 as the adjusted basis
of specified insurance contracts (as defined in section 848(e)(1)) acquired in an
assumption reinsurance transaction that is
not described in paragraph (g)(5)(i)(B) of
this section is equal to the excess of—
(1) The amount paid or incurred (or
treated as having been paid or incurred)
by the reinsurer for the purchase of the
contracts (as determined under
§1.817–4(d)(2)); over
(2) The amount of the specified policy
acquisition expenses that are attributable
to the reinsurer’s net positive consideration for the reinsurance agreement (as determined under §1.848–2(f)(3)).
(B) Insolvent ceding company. The re-

2000–7 I.R.B.

duction of the amount of specified policy
acquisition expenses by the reinsurer with
respect to an assumption reinsurance
transaction with an insolvent ceding company where the ceding company and reinsurer have made a valid joint election
under section 1.848–2(i)(4) is disregarded
in determining the amount of specified
policy acquisition expenses for purposes
of this paragraph (g)(5)(ii).
(C) Other acquisitions. [Reserved]
(6) Amounts paid or incurred for a
franchise, trademark, or trade name. If
an amount to which section 1253(d) (relating to the transfer, sale, or other disposition of a franchise, trademark, or trade
name) applies is described in section
1253(d)(1)(B) (relating to contingent serial payments deductible under section
162), the amount is not included in the adjusted basis of the intangible for purposes
of section 197. Any other amount,
whether fixed or contingent, to which section 1253(d) applies is chargeable to capital account under section 1253(d)(2) and
is amortizable only under section 197.
(7) Amounts properly taken into account in determining the cost of property
that is not a section 197 intangible. Section 197 does not apply to an amount that
is properly taken into account in determining the cost of property that is not a
section 197 intangible. The entire cost of
acquiring the other property is included in
its basis and recovered under other applicable Internal Revenue Code provisions.
Thus, for example, section 197 does not
apply to the cost of an interest in computer software to the extent such cost is
included, without being separately stated,
in the cost of the hardware or other tangible property and is consistently treated as
part of the cost of the hardware or other
tangible property.
(8) Treatment of amortizable section
197 intangibles as depreciable property.
An amortizable section 197 intangible is
treated as property of a character subject
to the allowance for depreciation under
section 167. Thus, for example, an amortizable section 197 intangible is not a capital asset for purposes of section 1221, but
if used in a trade or business and held for
more than one year, gain or loss on its disposition generally qualifies as section
1231 gain or loss. Also, an amortizable
section 197 intangible is section 1245
property and section 1239 applies to any

605

gain recognized upon its sale or exchange
between related persons (as defined in
section 1239(b)).
(h) Anti-churning rules—(1) Scope and
purpose—(i) Scope. This paragraph (h)
applies to section 197(f)(9) intangibles.
For this purpose, section 197(f)(9) intangibles are goodwill and going concern
value that was held or used at any time
during the transition period and any other
section 197 intangible that was held or
used at any time during the transition period and was not depreciable or amortizable under prior law.
(ii) Purpose. To qualify as an amortizable section 197 intangible, a section 197
intangible must be acquired after the applicable date (July 25, 1991, if the acquiring taxpayer has made a valid retroactive
election pursuant to §1.197–1T; August
10, 1993, in all other cases). The purpose
of the anti-churning rules of section
197(f)(9) and this paragraph (h) is to prevent the amortization of section 197(f)(9)
intangibles unless they are transferred
after the applicable effective date in a
transaction giving rise to a significant
change in ownership or use. (Special
rules apply for purposes of determining
whether transactions involving partnerships give rise to a significant change in
ownership or use. See paragraph (h)(12)
of this section.) The anti-churning rules
are to be applied in a manner that carries
out their purpose.
(2) Treatment of section 197(f)(9) intangibles. Except as otherwise provided
in this paragraph (h), a section 197(f)(9)
intangible acquired by a taxpayer after the
applicable effective date does not qualify
for amortization under section 197 if—
(i) The taxpayer or a related person
held or used the intangible or an interest
therein at any time during the transition
period;
(ii) The taxpayer acquired the intangible from a person that held the intangible
at any time during the transition period
and, as part of the transaction, the user of
the intangible does not change; or
(iii) The taxpayer grants the right to use
the intangible to a person that held or used
the intangible at any time during the transition period (or to a person related to that
person), but only if the transaction in
which the taxpayer grants the right and
the transaction in which the taxpayer acquired the intangible are part of a series of

February 14, 2000

related transactions.
(3) Amounts deductible under section
1253(d) or §1.162–11. For purposes of
this paragraph (h), deductions allowable
under section 1253(d)(2) or pursuant to an
election under section 1253(d)(3) (in either case as in effect prior to the enactment of section 197) and deductions allowable under §1.162–11 are treated as
deductions allowable for amortization
under prior law.
(4) Transition period. For purposes of
this paragraph (h), the transition period is
July 25, 1991, if the acquiring taxpayer
has made a valid retroactive election pursuant to §1.197–1T and the period beginning on July 25, 1991, and ending on August 10, 1993, in all other cases.
(5) Exceptions. The anti-churning rules
of this paragraph (h) do not apply to—
(i) The acquisition of a section
197(f)(9) intangible if the acquiring taxpayer’s basis in the intangible is determined under section 1014(a); or
(ii) The acquisition of a section
197(f)(9) intangible that was an amortizable section 197 intangible in the hands of
the seller (or transferor), but only if the
acquisition transaction and the transaction
in which the seller (or transferor) acquired
the intangible or interest therein are not
part of a series of related transactions.
(6) Related person—(i) In general.
Except as otherwise provided in paragraph (h)(6)(ii) of this section, a person is
related to another person for purposes of
this paragraph (h) if—
(A) The person bears a relationship to
that person that would be specified in section 267(b) (determined without regard to
section 267(e)) and, by substitution, section 267(f)(1), if those sections were
amended by substituting 20 percent for 50
percent; or
(B) The person bears a relationship to
that person that would be specified in section 707(b)(1) if that section were
amended by substituting 20 percent for 50
percent; or
(C) The persons are engaged in trades
or businesses under common control
(within the meaning of section
41(f)(1)(A) and (B)).
(ii) Time for testing relationships. Except as provided in paragraph (h)(6)(iii)
of this section, a person is treated as related to another person for purposes of
this paragraph (h) if the relationship ex-

February 14, 2000

ists—
(A) In the case of a single transaction,
immediately before or immediately after
the transaction in which the intangible is
acquired; and
(B) In the case of a series of related
transactions (or a series of transactions
that together comprise a qualified stock
purchase within the meaning of section
338(d)(3)), immediately before the earliest such transaction or immediately after
the last such transaction.
(iii) Certain relationships disregarded.
In applying the rules in paragraph (h)(7)
of this section, if a person acquires an intangible in a series of related transactions
in which the person acquires stock (meeting the requirements of section
1504(a)(2)) of a corporation in a fully taxable transaction followed by a liquidation
of the acquired corporation under section
331, any relationship created as part of
such series of transactions is disregarded
in determining whether any person is related to such acquired corporation immediately after the last transaction.
(iv) De minimis rule—(A) In general.
Two corporations are not treated as related persons for purposes of this paragraph (h) if—
(1) The corporations would (but for the
application of this paragraph (h)(6)(iv))
be treated as related persons solely by reason of substituting “more than 20 percent” for “more than 50 percent” in section 267(f)(1)(A); and
(2) The beneficial ownership interest of
each corporation in the stock of the other
corporation represents less than 10 percent
of the total combined voting power of all
classes of stock entitled to vote and less
than 10 percent of the total value of the
shares of all classes of stock outstanding.
(B) Determination of beneficial ownership interest. For purposes of this paragraph (h)(6)(iv), the beneficial ownership
interest of one corporation in the stock of
another corporation is determined under
the principles of section 318(a), except
that—
(1) In applying section 318(a)(2)(C),
the 50-percent limitation contained
therein is not applied; and
(2) Section 318(a)(3)(C) is applied by
substituting “20 percent” for “50 percent”.
(7) Special rules for entities that owned
or used property at any time during the

606

transition period and that are no longer
in existence. A corporation, partnership,
or trust that owned or used a section 197
intangible at any time during the transition period and that is no longer in existence is deemed, for purposes of determining whether a taxpayer acquiring the
intangible is related to such entity, to be in
existence at the time of the acquisition.
(8) Special rules for section 338
deemed acquisitions. In the case of a
qualified stock purchase that is treated as
a deemed sale and purchase of assets pursuant to section 338, the corporation
treated as purchasing assets as a result of
an election thereunder (new target) is not
considered the person that held or used
the assets during any period in which the
assets were held or used by the corporation treated as selling the assets (old target). Thus, for example, if a corporation
(the purchasing corporation) makes a
qualified stock purchase of the stock of
another corporation after the transition
period, new target will not be treated as
the owner during the transition period of
assets owned by old target during that period even if old target and new target are
treated as the same corporation for certain
other purposes of the Internal Revenue
Code or old target and new target are the
same corporation under the laws of the
State or other jurisdiction of its organization. However, the anti-churning rules of
this paragraph (h) may nevertheless apply
to a deemed asset purchase resulting from
a section 338 election if new target is related (within the meaning of paragraph
(h)(6) of this section) to old target.
(9) Gain-recognition exception—(i)
Applicability. A section 197(f)(9) intangible qualifies for the gain-recognition exception if—
(A) The taxpayer acquires the intangible from a person that would not be related to the taxpayer but for the substitution of 20 percent for 50 percent under
paragraph (h)(6)(i)(A) of this section; and
(B) That person (whether or not otherwise subject to Federal income tax) elects
to recognize gain on the disposition of the
intangible and agrees, notwithstanding
any other provision of law or treaty, to
pay for the taxable year in which the disposition occurs an amount of tax on the
gain that, when added to any other Federal income tax on such gain, equals the
gain on the disposition multiplied by the

2000–7 I.R.B.

highest marginal rate of tax for that taxable year.
(ii) Effect of exception. The anti-churning rules of this paragraph (h) apply to a
section 197(f)(9) intangible that qualifies
for the gain-recognition exception only to
the extent the acquiring taxpayer’s basis
in the intangible exceeds the gain recognized by the transferor.
(iii) Time and manner of election. The
election described in this paragraph (h)(9)
must be made by the due date (including
extensions of time) of the electing taxpayer’s Federal income tax return for the
taxable year in which the disposition occurs. The election is made by attaching
an election statement satisfying the requirements of paragraph (h)(9)(viii) of
this section to the electing taxpayer’s
original or amended income tax return for
that taxable year (or by filing the statement as a return for the taxable year under
paragraph (h)(9)(xi) of this section). In
addition, the taxpayer must satisfy the notification requirements of paragraph
(h)(9)(vi) of this section. The election is
binding on the taxpayer and all parties
whose Federal tax liability is affected by
the election.
(iv) Special rules for certain entities.
In the case of a partnership, S corporation,
estate or trust, the election under this
paragraph (h)(9) is made by the entity
rather than by its owners or beneficiaries.
If a partnership or S corporation makes an
election under this paragraph (h)(9) with
respect to the disposition of a section
197(f)(9) intangible, each of its partners
or shareholders is required to pay a tax
determined in the manner described in
paragraph (h)(9)(i)(B) of this section on
the amount of gain that is properly allocable to such partner or shareholder with respect to the disposition.
(v) Effect of nonconforming elections.
An attempted election that does not substantially comply with each of the requirements of this paragraph (h)(9) is disregarded in determining whether a section
197(f)(9) intangible qualifies for the gainrecognition exception.
(vi) Notification requirements. A taxpayer making an election under this paragraph (h)(9) with respect to the disposition of a section 197(f)(9) intangible must
provide written notification of the election on or before the due date of the return
on which the election is made to the per-

2000–7 I.R.B.

son acquiring the section 197 intangible.
In addition, a partnership or S corporation
making an election under this paragraph
(h)(9) must attach to the Schedule K-1
furnished to each partner or shareholder a
written statement containing all information necessary to determine the recipient’s
additional tax liability under this paragraph (h)(9).
(vii) Revocation. An election under
this paragraph (h)(9) may be revoked only
with the consent of the Commissioner.
(viii) Election Statement. An election
statement satisfies the requirements of
this paragraph (h)(9)(viii) if it is in writing and contains the information listed
below. The required information should
be arranged and identified in accordance
with the following order and numbering
system:
(A) The name and address of the electing taxpayer.
(B) Except in the case of a taxpayer
that is not otherwise subject to Federal income tax, the taxpayer identification
number (TIN) of the electing taxpayer.
(C) A statement that the taxpayer is
making the election under section
197(f)(9)(B).
(D) Identification of the transaction and
each person that is a party to the transaction or whose tax return is affected by the
election (including, except in the case of
persons not otherwise subject to Federal
income tax, the TIN of each such person).
(E) The calculation of the gain realized,
the applicable rate of tax, and the amount
of the taxpayer’s additional tax liability
under this paragraph (h)(9).
(F) The signature of the taxpayer or an
individual authorized to sign the taxpayer’s Federal income tax return.
(ix) Determination of highest marginal
rate of tax and amount of other Federal
income tax on gain—(A) Marginal rate.
The following rules apply for purposes of
determining the highest marginal rate of
tax applicable to an electing taxpayer:
(1) Noncorporate taxpayers. In the
case of an individual, estate, or trust, the
highest marginal rate of tax is the highest
marginal rate of tax in effect under section 1, determined without regard to section 1(h).
(2) Corporations and tax-exempt entities. In the case of a corporation or an entity that is exempt from tax under section
501(a), the highest marginal rate of tax is

607

the highest marginal rate of tax in effect
under section 11, determined without regard to any rate that is added to the otherwise applicable rate in order to offset the
effect of the graduated rate schedule.
(B) Other Federal income tax on gain.
The amount of Federal income tax (other
than the tax determined under this paragraph (h)(9)) imposed on any gain is the
lesser of—
(1) The amount by which the taxpayer’s Federal income tax liability (determined without regard to this paragraph
(h)(9)) would be reduced if the amount of
such gain were not taken into account; or
(2) The amount of the gain multiplied
by the highest marginal rate of tax for the
taxable year.
(x) Coordination with other
provisions—(A) In general. The amount
of gain subject to the tax determined
under this paragraph (h)(9) is not reduced
by any net operating loss deduction under
section 172(a), any capital loss under section 1212, or any other similar loss or deduction. In addition, the amount of tax
determined under this paragraph (h)(9) is
not reduced by any credit of the taxpayer.
In computing the amount of any net operating loss, capital loss, or other similar
loss or deduction, or any credit that may
be carried to any taxable year, any gain
subject to the tax determined under this
paragraph (h)(9) and any tax paid under
this paragraph (h)(9) is not taken into account.
(B) Section 1374. No provision of
paragraph (h)(9)(iv) of this section precludes the application of section 1374 (relating to a tax on certain built-in gains of
S corporations) to any gain with respect to
which an election under this paragraph
(h)(9) is made. In addition, neither paragraph (h)(9)(iv) nor paragraph
(h)(9)(x)(A) of this section precludes a
taxpayer from applying the provisions of
section 1366(f)(2) (relating to treatment
of the tax imposed by section 1374 as a
loss sustained by the S corporation) in determining the amount of tax payable
under paragraph (h)(9) of this section.
(C) Procedural and administrative provisions. For purposes of subtitle F, the
amount determined under this paragraph
(h)(9) is treated as a tax imposed by section 1 or 11, as appropriate.
(D) Installment method. The gain subject to the tax determined under paragraph

February 14, 2000

(h)(9)(i) of this section may not be reported under the method described in section 453(a). Any such gain that would,
but for the application of this paragraph
(h)(9)(x)(D), be taken into account under
section 453(a) shall be taken into account
in the same manner as if an election under
section 453(d) (relating to the election not
to apply section 453(a)) had been made.
(xi) Special rules for persons not otherwise subject to Federal income tax. If the
person making the election under this paragraph (h)(9) with respect to a disposition is
not otherwise subject to Federal income
tax, the election statement satisfying the requirements of paragraph (h)(9)(viii) of this
section must be filed with the Philadelphia
Service Center. For purposes of this paragraph (h)(9) and subtitle F, the statement is
treated as an income tax return for the calendar year in which the disposition occurs
and as a return due on or before March 15
of the following year.
(10) Transactions subject to both antichurning and nonrecognition rules. If a
person acquires a section 197(f)(9) intangible in a transaction described in paragraph (g)(2) of this section from a person
in whose hands the intangible was an
amortizable section 197 intangible, and
immediately after the transaction (or series of transactions described in paragraph
(h)(6)(ii)(B) of this section) in which such
intangible is acquired, the person acquiring the section 197(f)(9) intangible is related to any person described in paragraph
(h)(2) of this section, the intangible is,
notwithstanding its treatment under paragraph (g)(2) of this section, treated as an
amortizable section 197 intangible only to
the extent permitted under this paragraph
(h). (See, for example, paragraph
(h)(5)(ii) of this section.)
(11) Avoidance purpose. A section
197(f)(9) intangible acquired by a taxpayer after the applicable effective date
does not qualify for amortization under
section 197 if one of the principal purposes of the transaction in which it is acquired is to avoid the operation of the
anti-churning rules of section 197(f)(9)
and this paragraph (h). A transaction will
be presumed to have a principal purpose
of avoidance if it does not effect a significant change in the ownership or use of the
intangible. Thus, for example, if section
197(f)(9) intangibles are acquired in a
transaction (or series of related transac-

February 14, 2000

tions) in which an option to acquire stock
is issued to a party to the transaction, but
the option is not treated as having been
exercised for purposes of paragraph (h)(6)
of this section, this paragraph (h)(11) may
apply to the transaction.
(12) Additional partnership anti-churning rules—(i) In general. In determining
whether the anti-churning rules of this
paragraph (h) apply to any increase in the
basis of a section 197(f)(9) intangible
under section 732(b), 732(d), 734(b), or
743(b), the determinations are made at the
partner level and each partner is treated as
having owned and used the partner’s proportionate share of partnership property.
In determining whether the anti-churning
rules of this paragraph (h) apply to any
transaction under another section of the
Internal Revenue Code, the determinations are made at the partnership level,
unless under §1.701–2(e) the Commissioner determines that the partner level is
more appropriate.
(ii) Section 732(b) adjustments—Reserved.
(iii) Section 732(d) adjustments. The
anti-churning rules of this paragraph (h)
do not apply to an increase in the basis of
partnership property under section 732(d)
if the distributee partner was not related
(at the time of the transfer of the partnership interest) to the person who transferred the partnership interest with respect
to which the distribution is being made.
(iv) Section 734(b) adjustments— Reserved.
(v) Section 743(b) adjustments. The
anti-churning rules of this paragraph (h)
do not apply to an increase in the basis of
partnership property under section 743(b)
if the person acquiring the partnership interest is not related to the person transferring the partnership interest.
(vi) Partner is or becomes a user of
partnership intangible—(A) General
rule. If, as part of a series of related transactions that includes a transaction described in paragraph (h)(12) (iii) or (v) of
this section, an anti-churning partner or a
person related to an anti-churning partner
becomes (or remains) a user of an intangible that is treated as transferred in the
transaction (as a result of the partners
being treated as having owned their proportionate share of partnership assets), the
anti-churning rules of this paragraph (h)
apply to the proportionate share of such

608

intangible that is treated as transferred by
the anti-churning partner, notwithstanding
the application of paragraph (h)(12) (iii)
or (v) of this section.
(B) Anti-churning partner. For purposes of this paragraph (h)(12)(vi), antichurning partner means - (1) With respect to all intangibles held by
a partnership on or before August 10, 1993,
any partner, but only to the extent that
(i) The partner’s interest in the partnership was acquired on or before August 10,
1993, or
(ii) The interest was acquired from a
person related to the partner on or after
August 10, 1993, and such interest was
not held by any person other than persons
related to such partner at any time after
August 10, 1993 (disregarding, for this
purpose, a person’s holding of an interest
if the acquisition of such interest was part
of a transaction or series of related transactions in which the partner or persons related to the partner subsequently acquired
such interest),
(2) With respect to any section
197(f)(9) intangible acquired by a partnership after August 10, 1993, that is not
amortizable with respect to the partnership, any partner, but only to the extent
that
(i) The partner’s interest in the partnership was acquired on or before the date
the partnership acquired the section
197(f)(9) intangible, or
(ii) The interest was acquired from a
person related to the partner on or after
the date the partnership acquired the section 197(f)(9) intangible, and such interest was not held by any person other than
persons related to such partner at any time
after the date the partnership acquired the
section 197(f)(9) intangible (disregarding,
for this purpose, a person’s holding of an
interest if the acquisition of such interest
was part of a transaction or series of related transactions in which the partner or
persons related to the partner subsequently acquired such interest), and
(3) With respect to any intangible, a
partner who received an interest in the
partnership in exchange for such intangible (or a portion thereof) or a related person who received such interest in the partnership from such a partner, but only to
the extent that the intangible (or portion
thereof) transferred by such partner is not
an amortizable section 197 intangible

2000–7 I.R.B.

with respect to the partnership.
(C) Effect of retroactive elections. For
purposes of paragraph (h)(12)(vi)(B) of
this section, references to August 10,
1993, are treated as references to July 25,
1991, if the relevant party made a valid
retroactive election under §1.197–1T.
(vii) Section 704(c) allocations—(A)
Allocations where the intangible is amortizable by the contributor. The anti-churning
rules of this paragraph (h) do not apply to
the curative or remedial allocations of
amortization with respect to a section
197(f)(9) intangible if the intangible was an
amortizable section 197 intangible in the
hands of the contributing partner (unless
paragraph (h)(10) of this section applies so
as to cause the intangible to cease to be an
amortizable section 197 intangible in the
hands of the partnership).
(B) Allocations where the intangible is
not amortizable by the contributor.
Notwithstanding paragraph (g)(3)(ii) of this
section, where the section 197(f)(9) intangible was not an amortizable section 197
intangible in the hands of the contributing
partner, a partner may not receive remedial
allocations of amortization under section
704(c) that are deductible for Federal income tax purposes if that partner is related
to the partner that contributed the intangible. Taxpayers may use any reasonable
method to determine amortization of the
asset for book purposes, provided that the
method used does not contravene the purposes of the anti-churning rules under section 197 and this paragraph (h). A method
will be considered to contravene the purposes of the anti-churning rules if the effect
of the book adjustments resulting from the
method is such that any portion of the tax
deduction for amortization attributable to
section 704(c) is allocated, directly or indirectly, to a partner who is subject to the
anti-churning rules with respect to such adjustment.
(viii) Operating rule for transfers upon
death. For purposes of this paragraph
(h)(12), if the basis of a partner’s interest
in a partnership is determined under section 1014(a), such partner is treated as acquiring such interest from a person who is
not related to such partner, and such interest is treated as having previously been
held by a person who is not related to
such partner.
(i) [Reserved]
(j) General anti-abuse rule. The Com-

2000–7 I.R.B.

missioner will interpret and apply the
rules in this section as necessary and appropriate to prevent avoidance of the purposes of section 197. If one of the principal purposes of a transaction is to achieve
a tax result that is inconsistent with the
purposes of section 197, the Commissioner will recast the transaction for Federal tax purposes as appropriate to
achieve tax results that are consistent with
the purposes of section 197, in light of the
applicable statutory and regulatory provisions and the pertinent facts and circumstances.
(k) Examples. The following examples illustrate
the application of this section:
Example 1. Advertising costs. (i) Q manufactures
and sells consumer products through a series of wholesalers and distributors. In order to increase sales of its
products by encouraging consumer loyalty to its products and to enhance the value of the goodwill, trademarks, and trade names of the business, Q advertises
its products to the consuming public. It regularly incurs costs to develop radio, television, and print advertisements. These costs generally consist of employee
costs and amounts paid to independent advertising
agencies. Q also incurs costs to run these advertisements in the various media for which they were developed.
(ii) The advertising costs are not chargeable to capital account under paragraph (f)(3) of this section (relating to costs incurred for covenants not to compete,
rights granted by governmental units, and contracts for
the use of section 197 intangibles) and are currently
deductible as ordinary and necessary expenses under
section 162. Accordingly, under paragraph (a)(3) of
this section, section 197 does not apply to these costs.
Example 2. Computer software. (i) X purchases
all of the assets of an existing trade or business from Y.
One of the assets acquired is all of Y’s rights in certain
computer software previously used by Y under the
terms of a nonexclusive license from the software developer. The software was developed for use by manufacturers to maintain a comprehensive accounting
system, including general and subsidiary ledgers, payroll, accounts receivable and payable, cash receipts
and disbursements, fixed asset accounting, and inventory cost accounting and controls. The developer
modified the software for use by Y at a cost of $1,000
and Y made additional modifications at a cost of $500.
The developer does not maintain wholesale or retail
outlets but markets the software directly to ultimate
users. Y’s license of the software is limited to an entity that is actively engaged in business as a manufacturer.
(ii) Notwithstanding these limitations, the software
is considered to be readily available to the general
public for purposes of paragraph (c)(4)(i) of this section. In addition, the software is not substantially
modified because the cost of the modifications by the
developer and Y to the version of the software that is
readily available to the general public does not exceed
$2,000. Accordingly, the software is not a section 197
intangible.
Example 3. Acquisition of software for internal
use. (i) B, the owner and operator of a worldwide
package-delivery service, purchases from S all rights

609

to software developed by S. The software will be used
by B for the sole purpose of improving its packagetracking operations. B does not purchase any other assets in the transaction or any related transaction.
(ii) Because B acquired the software solely for internal use, it is disregarded in determining for purposes of paragraph (c)(4)(ii) of this section whether
the assets acquired in the transaction or series of related transactions constitute a trade or business or substantial portion thereof. Since no other assets were
acquired, the software is not acquired as part of a purchase of a trade or business and under paragraph
(c)(4)(ii) of this section is not a section 197 intangible.
Example 4. Governmental rights of fixed duration.
(i) City M operates a municipal water system. In order
to induce X to locate a new manufacturing business in
the city, M grants X the right to purchase water for 16
years at a specified price.
(ii) The right granted by M is a right to receive tangible property or services described in section
197(e)(4)(B) and paragraph (c)(6) of this section and,
thus, is not a section 197 intangible. This exclusion
applies even though the right does not qualify for exclusion as a right of fixed duration or amount under
section 197(e)(4)(D) and paragraph (c)(13) of this section because the duration exceeds 15 years and the
right is not fixed as to amount. It is also immaterial
that the right would not qualify for exclusion as a selfcreated intangible under section 197(c)(2) and paragraph (d)(2) of this section because it is granted by a
governmental unit.
Example 5. Separate acquisition of franchise. (i) S
is a franchiser of retail outlets for specialty coffees. G
enters into a franchise agreement (within the meaning
of section 1253(b)(1)) with S pursuant to which G is
permitted to acquire and operate a store using the S
trademark and trade name at the location specified in
the agreement. G agrees to pay S $100,000 upon execution of the agreement and also agrees to pay,
throughout the term of the franchise, additional
amounts that are deductible under section 1253(d)(1).
The agreement contains detailed specifications for the
construction and operation of the business, but G is
not required to purchase from S any of the materials
necessary to construct the improvements at the location specified in the franchise agreement.
(ii) The franchise is a section 197 intangible within
the meaning of paragraph (b)(10) of this section. The
franchise does not qualify for the exclusion relating to
self-created intangibles described in section 197(c)(2)
and paragraph (d)(2) of this section because the franchise is described in section 197(d)(1)(F). In addition,
because the acquisition of the franchise constitutes the
acquisition of an interest in a trade or business or a
substantial portion thereof, the franchise may not be
excluded under section 197(e)(4). Thus, the franchise
is an amortizable section 197 intangible, the basis of
which must be recovered over a 15-year period. However, the amounts that are deductible under section
1253(d)(1)are not subject to the provisions of section
197 by reason of section 197(f)(4)(C) and paragraph
(b)(10)(ii) of this section.
Example 6. Acquisition and amortization of
covenant not to compete. (i) As part of the acquisition
of a trade or business from C, B and C enter into an
agreement containing a covenant not to compete.
Under this agreement, C agrees that it will not compete with the business acquired by B within a prescribed geographical territory for a period of three
years after the date on which the business is sold to B.

February 14, 2000

In exchange for this agreement, B agrees to pay C
$90,000 per year for each year in the term of the agreement. The agreement further provides that, in the
event of a breach by C of his obligations under the
agreement, B may terminate the agreement, cease
making any of the payments due thereafter, and pursue
any other legal or equitable remedies available under
applicable law. The amounts payable to C under the
agreement are not contingent payments for purposes
of §1.1275–4. The present fair market value of B’s
rights under the agreement is $225,000. The aggregate consideration paid for all assets acquired in the
transaction (including the covenant not to compete)
exceeds the sum of the amount of Class I assets and
the aggregate fair market value of all Class II, Class
III, Class IV, Class V, and Class VI assets by $50,000.
See §1.338–6T(b) for rules for determining the assets
in each class.
(ii) Because the covenant is acquired in an applicable asset acquisition (within the meaning of section
1060(c)), paragraph (f)(4)(ii) of this section applies
and the basis of B in the covenant is determined pursuant to section 1060(a) and the regulations thereunder. Under §§1.1060–1T(c)(2) and 1.338–6T(c)(1),
B’s basis in the covenant cannot exceed its fair market
value. Thus, B’s basis in the covenant immediately
after the acquisition is $225,000. This basis is amortized ratably over the 15-year period beginning on the
first day of the month in which the agreement is entered into. Although the payments under the agreement ($270,000) exceed the amount allocated to the
covenant by $45,000, all of the remaining consideration ($50,000) is allocated to Class VII assets (goodwill and going concern value).
See
§§1.1060–1T(c)(2) and 1.338–6T(b).
Example 7. Stand-alone license of technology. (i)
X is a manufacturer of consumer goods that does business throughout the world through subsidiary corporations organized under the laws of each country in
which business is conducted. X licenses to Y, its subsidiary organized and conducting business in Country
K, all of the patents, formulas, designs, and know-how
necessary for Y to manufacture the same products that
X manufactures in the United States. Assume that the
license is not considered a sale or exchange under the
principles of section 1235. The license is for a term of
18 years, and there are no facts to indicate that the license does not have a fixed duration. Y agrees to pay
X a royalty equal to a specified, fixed percentage of
the revenues obtained from selling products manufactured using the licensed technology. Assume that the
royalty is reasonable and is not subject to adjustment
under section 482. The license is not entered into in
connection with any other transaction. Y incurs capitalized costs in connection with entering into the license.
(ii) The license is a contract for the use of a section
197 intangible within the meaning of paragraph
(b)(11) of this section. It does not qualify for the exception in section 197(e)(4)(D) and paragraph (c)(13)
of this section (relating to rights of fixed duration or
amount) because it does not have a term of less than
15 years, and the other exceptions in section 197(e)
and paragraph (c) of this section are also inapplicable.
Accordingly, the license is a section 197 intangible.
(iii) The license is not acquired as part of a purchase of a trade or business. Thus, under paragraph
(f)(3)(iii) of this section, the license will be closely
scrutinized under the principles of section 1235 for
purposes of determining whether the transfer is a sale

February 14, 2000

or exchange and, accordingly, whether the payments
under the license are chargeable to capital account.
Because the license is not a sale or exchange under the
principles of section 1235, the royalty payments are
not chargeable to capital account for purposes section
197. The capitalized costs of entering into the license
are not within the exception under paragraph (d)(2) of
this section for self-created intangibles, and thus are
amortized under section 197.
Example 8. License of technology and trademarks
. (i) The facts are the same as in Example 7, except
that the license also includes the use of the trademarks
and trade names that X uses to manufacture and distribute its products in the United States. Assume that
under the principles of section 1253 the transfer is not
a sale or exchange of the trademarks and trade names
or an undivided interest therein and that the royalty
payments are described in section 1253(d)(1)(B).
(ii) As in Example 7, the license is a section 197 intangible. Although the license conveys an interest in
X’s trademarks and trade names to Y, the transfer of
the interest is disregarded for purposes of paragraph
(e)(2) of this section unless the transfer is considered a
sale or exchange of the trademarks and trade names or
an undivided interest therein. Accordingly, the licensing of the technology and the trademarks and trade
names is not treated as part of a purchase of a trade or
business under paragraph (e)(2) of this section.
(iii) Because the technology license is not part of
the purchase of a trade or business, it is treated in the
manner described in Example 7. The royalty payments for the use of the trademarks and trade names
are deductible under section 1253(d)(1) and, under
section 197(f)(4)(C) and paragraph (b)(10)(ii) of this
section, are not chargeable to capital account for purposes of section 197. The capitalized costs of entering
into the license are treated in the same manner as in
example 7.
Example 9. Disguised sale. (i) The facts are the
same as in Example 7, except that Y agrees to pay X,
in addition to the contingent royalty, a fixed minimum
royalty immediately upon entering into the agreement
and there are sufficient facts present to characterize the
transaction, for federal tax purposes, as a transfer of
ownership of the intellectual property from X to Y.
(ii) The purported license of technology is, in fact,
an acquisition of an intangible described in section
197(d)(1)(C)(iii) and paragraph (b)(5) of this section
(relating to know-how, etc.). As in Example 7, the exceptions in section 197(e) and paragraph (c) of this
section do not apply to the transfer. Accordingly, the
transferred property is a section 197 intangible. Y’s
basis in the transferred intangible includes the capitalized costs of entering into the agreement and the fixed
minimum royalty payment payable at the time of the
transfer. In addition, except to the extent that a portion
of any payment will be treated as interest or original
issue discount under applicable provisions of the Internal Revenue Code, all of the contingent payments
under the purported license are properly chargeable to
capital account for purposes of section 197 and this
section. The extent to which such payments are
treated as payments of principal and the time at which
any amount treated as a payment of principal is taken
into account in determining basis are determined
under the rules of §1.1275–4(c)(4) or 1.483–4(a),
whichever is applicable. Any contingent amount that
is included in basis after the month in which the acquisition occurs is amortized under the rules of paragraph
(f)(2)(i) or (ii) of this section.

610

Example 10. License of technology and customer
list as part of sale of a trade or business. (i) X is a
computer manufacturer that produces, in separate operating divisions, personal computers, servers, and peripheral equipment. In a transaction that is the purchase of a trade or business for purposes of section
197, Y (who is unrelated to X) purchases from X all
assets of the operating division producing personal
computers, except for certain patents that are also used
in the division manufacturing servers and customer
lists that are also used in the division manufacturing
peripheral equipment. As part of the transaction, X
transfers to Y the right to use the retained patents and
customer lists solely in connection with the manufacture and sale of personal computers. The transfer
agreement requires annual royalty payments contingent on the use of the patents and also requires a payment for each use of the customer list. In addition, Y
incurs capitalized costs in connection with entering
into the licenses.
(ii) The rights to use the retained patents and customer lists are contracts for the use of section 197 intangibles within the meaning of paragraph (b)(11) of
this section. The rights do not qualify for the exception in 197(e)(4)(D) and paragraph (c)(13) of this section (relating to rights of fixed duration or amount) because they are transferred as part of a purchase of a
trade or business and the other exceptions in section
197(e) and paragraph (c) of this section are also inapplicable. Accordingly, the licenses are section 197 intangibles.
(iii) Because the right to use the retained patents is
described in paragraph (b)(11) of this section and the
right is transferred as part of a purchase of a trade or
business, the treatment of the royalty payments is determined under paragraph (f)(3)(ii) of this section. In
addition, however, the retained patents are described
in paragraph (b)(5) of this section. Thus, the annual
royalty payments are chargeable to capital account
under the general rule of paragraph (f)(3)(ii)(A) of this
section unless Y establishes that the license is not a
sale or exchange under the principles of section 1235
and the royalty payments are an arm’s length consideration for the rights transferred. If these facts are established, the exception in paragraph (f)(3)(ii)(B) of this
section applies and the royalty payments are not
chargeable to capital account for purposes of section
197. The capitalized costs of entering into the license
are treated in the same manner as in Example 7.
(iv) The right to use the retained customer list is
also described in paragraph (b)(11) of this section and
is transferred as part of a purchase of a trade or business. Thus, the treatment of the payments for use of
the customer list is also determined under paragraph
(f)(3)(ii) of this section. The customer list, although
described in paragraph (b)(6) of this section, is a customer-related information base. Thus, the exception in
paragraph (f)(3)(ii)(B) of this section does not apply.
Accordingly, payments for use of the list are chargeable to capital account under the general rule of paragraph (f)(3)(ii)(A) of this section and are amortized
under section 197. In addition, the capitalized costs of
entering into the contract for use of the customer list
are treated in the same manner as in Example 7.
Example 11. Loss disallowance rules involving related persons. (i) Assume that X and Y are treated as a
single taxpayer for purposes of paragraph (g)(1) of this
section. In a single transaction, X and Y acquired
from Z all of the assets used by Z in a trade or business. Z had operated this business at two locations,

2000–7 I.R.B.

and X and Y each acquired the assets used by Z at one
of the locations. Three years after the acquisition, X
sold all of the assets it acquired, including amortizable
section 197 intangibles, to an unrelated purchaser.
The amortizable section intangibles are sold at a loss
of $120,000.
(ii) Because X and Y are treated as a single taxpayer for purposes of the loss disallowance rules of
section 197(f)(1) and paragraph (g)(1) of this section,
X’s loss on the sale of the amortizable section 197 intangibles is not recognized. Under paragraph
(g)(1)(iv)(B) of this section, X’s disallowed loss is allowed ratably, as a deduction under section 197, over
the remainder of the 15-year period during which the
intangibles would have been amortized, and Y may
not increase the basis of the amortizable section 197
intangibles that it acquired from Z by the amount of
X’s disallowed loss.
Example 12. Disposition of retained intangibles by
related person. (i) The facts are the same as in Example 11, except that 10 years after the acquisition of the
assets by X and Y and 7 years after the sale of the assets by X, Y sells all of the assets acquired from Z, including amortizable section 197 intangibles, to an unrelated purchaser.
(ii) Under paragraph (g)(1)(iv)(B) of this section, X
may recognize, on the date of the sale by Y, any loss
that has not been allowed as a deduction under section
197. Accordingly, X recognizes a loss of $50,000, the
amount obtained by reducing the loss on the sale of the
assets at the end of the third year ($120,000) by the
amount allowed as a deduction under paragraph
(g)(1)(iv)(B) of this section during the 7 years following the sale by X ($70,000).
Example 13. Acquisition of an interest in partnership with no section 754 election. (i) A, B, and C each
contribute $1,500 for equal shares in general partnership P. On January 1, 1998, P acquires as its sole asset
an amortizable section 197 intangible for $4,500. P
still holds the intangible on January 1, 2003, at which
time the intangible has an adjusted basis to P of
$3,000, and A, B, and C each have an adjusted basis of
$1,000 in their partnership interests. D (who is not related to A) acquires A’s interest in P for $1,600. No
section 754 election is in effect for 2003.
(ii) Because there is no change in the basis of the
intangible under section 743(b), D merely steps into
the shoes of A with respect to the intangible. D’s proportionate share of P’s adjusted basis in the intangible
is $1,000, which continues to be amortized over the 10
years remaining in the original 15-year amortization
period for the intangible.
Example 14. Acquisition of an interest in partnership with a section 754 election. (i) The facts are the
same as in Example 13, except that a section 754 election is in effect for 2003.
(ii) Pursuant to paragraph (g)(3) of this section, for
purposes of section 197, D is treated as if P owns two
assets. D’s proportionate share of P’s adjusted basis in
one asset is $1,000, which continues to be amortized
over the 10 years remaining in the original 15-year
amortization period. For the other asset, D’s proportionate share of P’s adjusted basis is $600 (the amount
of the basis increase under section 743 as a result of
the section 754 election), which is amortized over a
new 15-year period beginning January 2003. With respect to B and C, P’s remaining $2,000 adjusted basis
in the intangible continues to be amortized over the 10
years remaining in the original 15-year amortization
period.

2000–7 I.R.B.

Example 15. Payment to a retiring partner by
partnership with a section 754 election. (i) The facts
are the same as in Example 13, except that a section
754 election is in effect for 2003 and, instead of D acquiring A’s interest in P, A retires from P. A, B, and C
are not related to each other within the meaning of
paragraph (h)(6) of this section. P borrows $1,600,
and A receives a payment under section 736 from P of
such amount, all of which is in exchange for A’s interest in the intangible asset owned by P. (Assume, for
purposes of this example, that the borrowing by P and
payment of such funds to A does not give rise to a disguised sale of A’s partnership interest under section
707(a)(2)(B).) P makes a positive basis adjustment of
$600 with respect to the section 197 intangible under
section 734(b).
(ii) Pursuant to paragraph (g)(3) of this section, because of the section 734 adjustment, P is treated as
having two amortizable section 197 intangibles, one
with a basis of $3,000 and a remaining amortization
period of 10 years and the other with a basis of $600
and a new amortization period of 15 years.
Example 16. Termination of partnership under
section 708(b)(1)(B). (i) A and B are partners with
equal shares in the capital and profits of general partnership P. P’s only asset is an amortizable section 197
intangible, which P had acquired on January 1, 1995.
On January 1, 2000, the asset had a fair market value
of $100 and a basis to P of $50. On that date, A sells
his entire partnership interest in P to C, who is unrelated to A, for $50. At the time of the sale, the basis of
each of A and B in their respective partnership interests is $25.
(ii) The sale causes a termination of P under section
708(b)(1)(B). Under section 708, the transaction is
treated as if P transfers its sole asset to a new partnership in exchange for the assumption of its liabilities
and the receipt of all of the interests in the new partnership. Immediately thereafter, P is treated as if it is
liquidated, with B and C each receiving their proportionate share of the interests in the new partnership.
The contribution by P of its asset to the new partnership is governed by section 721, and the liquidating
distributions by P of the interests in the new partnership are governed by section 731. C does not realize a
basis adjustment under section 743 with respect to the
amortizable section 197 intangible unless P had a section 754 election in effect for its taxable year in which
the transfer of the partnership interest to C occurred or
the taxable year in which the deemed liquidation of P
occurred.
(iii) Under section 197, if P had a section 754 election in effect, C is treated as if the new partnership had
acquired two assets from P immediately preceding its
termination. Even though the adjusted basis of the
new partnership in the two assets is determined solely
under section 723, because the transfer of assets is a
transaction described in section 721, the application of
sections 743(b) and 754 to P immediately before its
termination causes P to be treated as if it held two assets for purposes of section 197. See paragraph (g)(3)
of this section. B’s and C’s proportionate share of the
new partnership’s adjusted basis is $25 each in one
asset, which continues to be amortized over the 10
years remaining in the original 15-year amortization
period. For the other asset, C’s proportionate share of
the new partnership’s adjusted basis is $25 (the
amount of the basis increase resulting from the application of section 743 to the sale or exchange by A of
the interest in P), which is amortized over a new 15-

611

year period beginning in January 2000.
(iv) If P did not have a section 754 election in effect
for its taxable year in which the sale of the partnership
interest by A to C occurred or the taxable year in
which the deemed liquidation of P occurred, the adjusted basis of the new partnership in the amortizable
section 197 intangible is determined solely under section 723, because the transfer is a transaction described in section 721, and P does not have a basis increase in the intangible. Under section 197(f)(2) and
paragraph (g)(2)(ii) of this section, the new partnership continues to amortize the intangible over the 10
years remaining in the original 15-year amortization
period. No additional amortization is allowable with
respect to this asset.
Example 17. Disguised sale to partnership. (i) E
and F are individuals who are unrelated to each other
within the meaning of paragraph (h)(6) of this section.
E has been engaged in the active conduct of a trade or
business as a sole proprietor since 1990. E and F form
EF Partnership. E transfers all of the assets of the
business, having a fair market value of $100, to EF,
and F transfers $40 of cash to EF. E receives a 60 percent interest in EF and the $40 of cash contributed by
F, and F receives a 40 percent interest in EF, under circumstances in which the transfer by E is partially
treated as a sale of property to EF under §1.707–3(b).
(ii) Under §1.707–3(a)(1), the transaction is treated
as if E had sold to EF a 40 percent interest in each
asset for $40 and contributed the remaining 60 percent
interest in each asset to EF in exchange solely for an
interest in EF. Because E and EF are related persons
within the meaning of paragraph (h)(6) of this section,
no portion of any transferred section 197(f)(9) intangible that E held during the transition period (as defined
in paragraph (h)(4) of this section) is an amortizable
section 197 intangible pursuant to paragraph (h)(2) of
this section. Section 197(f)(9)(E) and paragraph (g)(3)
of this section do not apply to any portion of the section 197 intangible in the hands of EF because the
basis of EF in these assets was not increased under any
of sections 732, 734, or 743.
Example 18. Acquisition by related person in nonrecognition transaction. (i) A owns a nonamortizable
intangible that A acquired in 1990. In 2000, A sells a
one-half interest in the intangible to B for cash. Immediately after the sale, A and B, who are unrelated to
each other, form partnership P as equal partners. A
and B each contribute their one-half interest in the intangible to P.
(ii) P has a transferred basis in the intangible from
A and B under section 723. The nonrecognition transfer rule under paragraph (g)(2)(ii) of this section applies to A’s transfer of its one-half interest in the intangible to P, and consequently P steps into A’s shoes with
respect to A’s nonamortizable transferred basis. The
anti-churning rules of paragraph (h) of this section
apply to B’s transfer of its one-half interest in the intangible to P, because A, who is related to P under
paragraph (h)(6) of this section immediately after the
series of transactions in which the intangible was acquired by P, held B’s one-half interest in the intangible
during the transition period. Pursuant to paragraph
(h)(10) of this section, these rules apply to B’s transfer
of its one-half interest to P even though the nonrecognition transfer rule under paragraph (g)(2)(ii) of this
section would have permitted P to step into B’s shoes
with respect to B’s otherwise amortizable basis.
Therefore, P’s entire basis in the intangible is nonamortizable. However, if A (not B) elects to recognize

February 14, 2000

gain under paragraph (h)(9) of this section on the
transfer of each of the one-half interests in the intangible to B and P, then the intangible would be amortizable by P to the extent provided in section 197(f)(9)(B)
and paragraph (h)(9) of this section.
Example 19. Acquisition of partnership interest
following formation of partnership. (i) The facts are
the same as in Example 18 except that, in 2000, A
formed P with an affiliate, S, and contributed the intangible to the partnership and except that in a subsequent year, in a transaction that is properly characterized as a sale of a partnership interest for Federal tax
purposes, B purchases a 50 percent interest in P from
A. P has a section 754 election in effect and holds no
assets other than the intangible and cash.
(ii) For the reasons set forth in Example 16(iii), B is
treated as if P owns two assets. B’s proportionate
share of P’s adjusted basis in one asset is the same as
A’s proportionate share of P’s adjusted basis in that
asset, which is not amortizable under section 197. For
the other asset, B’s proportionate share of the remaining adjusted basis of P is amortized over a new 15year period.
Example 20. Acquisition by related corporation in
nonrecognition transaction. (i) The facts are the same
as Example 18, except that A and B form corporation P
as equal owners.
(ii) P has a transferred basis in the intangible from
A and B under section 362. Pursuant to paragraph
(h)(10) of this section, the application of the nonrecognition transfer rule under paragraph (g)(2)(ii) of this
section and the anti-churning rules of paragraph (h) of
this section to the facts of this Example 18 is the same
as in Example 16. Thus, P’s entire basis in the intangible is nonamortizable.
Example 21. Acquisition from corporation related
to purchaser through remote indirect interest. (i) X, Y,
and Z are each corporations that have only one class of
issued and outstanding stock. X owns 25 percent of
the stock of Y and Y owns 25 percent of the outstanding stock of Z. No other shareholder of any of these
corporations is related to any other shareholder or to
any of the corporations. On June 30, 2000, X purchases from Z section 197(f)(9) intangibles that Z
owned during the transition period (as defined in paragraph (h)(4) of this section).
(ii) Pursuant to paragraph (h)(6)(iv)(B) of this section, the beneficial ownership interest of X in Z is 6.25
percent, determined by treating X as if it owned a proportionate (25 percent) interest in the stock of Z that is
actually owned by Y. Thus, even though X is related
to Y and Y is related to Z, X and Z are not considered
to be related for purposes of the anti-churning rules of
section 197.
Example 22. Gain recognition election. (i) B owns
25 percent of the stock of S, a corporation that uses the
calendar year as its taxable year. No other shareholder
of B or S is related to each other. S is not a member of
a controlled group of corporations within the meaning
of section 1563(a). S has section 197(f)(9) intangibles
that it owned during the transition period. S has a
basis of $25,000 in the intangibles. In 2001, S sells
these intangibles to B for $75,000. S recognizes a gain
of $50,000 on the sale and has no other items of income, deduction, gain, or loss for the year, except that
S also has a net operating loss of $20,000 from prior
years that it would otherwise be entitled to use in 2001
pursuant to section 172(b). S makes a valid gain
recognition election pursuant to section 197(f)(9)(B)
and paragraph (h)(9) of this section. In 2001, the high-

February 14, 2000

est marginal tax rate applicable to S is 35 percent. But
for the election, all of S’s taxable income would be
taxed at a rate of 15 percent.
(ii) If the gain recognition election had not been
made, S would have taxable income of $30,000 for
2001 and a tax liability of $4,500. If the gain were not
taken into account, S would have no tax liability for
the taxable year. Thus, the amount of tax (other than
the tax imposed under paragraph (h)(9) of this section)
imposed on the gain is also $4,500. The gain on the
disposition multiplied by the highest marginal tax rate
is $17,500 ($50,000 x .35). Accordingly, S’s tax liability for the year is $4,500 plus an additional tax under
paragraph (h)(9) of this section of $13,000 ($17,500 $4,500).
(iii) Pursuant to paragraph (h)(9)(x)(A) of this section, S determines the amount of its net operating loss
deduction in subsequent years without regard to the
gain recognized on the sale of the section 197 intangible to B. Accordingly, the entire $20,000 net operating
loss deduction that would have been available in 2001
but for the gain recognition election may be used in
2002, subject to the limitations of section 172.
(iv) B has a basis of $75,000 in the section
197(f)(9) intangibles acquired from S. As the result of
the gain recognition election by S, B may amortize
$50,000 of its basis under section 197. Under paragraph (h)(9)(ii) of this section, the remaining basis
does not qualify for the gain-recognition exception
and may not be amortized by B.
Example 23. Section 338 election. (i) Corporation
P makes a qualified stock purchase of the stock of T
corporation from two shareholders in July 2000, and a
section 338 election is made by P. No shareholder of
either T or P owns stock in both of these corporations,
and no other shareholder is related to any other shareholder of either corporation.
(ii) Pursuant to paragraph (h)(8) of this section, in
the case of a qualified stock purchase that is treated as
a deemed sale and purchase of assets pursuant to section 338, the corporation treated as purchasing assets
as a result of an election thereunder (new target) is not
considered the person that held or used the assets during any period in which the assets were held or used
by the corporation treated as selling the assets (old target). Because there are no relationships described in
paragraph (h)(6) of this section among the parties to
the transaction, any nonamortizable section 197(f)(9)
intangible held by old target is an amortizable section
197 intangible in the hands of new target.
(iii) Assume the same facts as set forth in paragraph (i) of this Example 23, except that one of the
selling shareholders is an individual who owns 25 percent of the total value of the stock of each of the T and
P corporation.
(iv) Old target and new target (as these terms are
defined in §1.338–1(c)(13)) are members of a controlled group of corporations under section 267(b)(3),
as modified by section 197(f)(9)(C)(i), and any nonamortizable section 197(f)(9) intangible held by old
target is not an amortizable section 197 intangible in
the hands of new target. However, a gain recognition
election under paragraph (h)(9) of this section may be
made with respect to this transaction.
Example 24. Relationship created as part of public
offering. (i) On January 1, 2001, Corporation X engages in a series of related transactions to discontinue
its involvement in one line of business. X forms a new
corporation, Y, with a nominal amount of cash.
Shortly thereafter, X transfers all the stock of its sub-

612

sidiary conducting the unwanted business (Target) to
Y in exchange for 100 shares of Y common stock and
a Y promissory note. Target owns a nonamortizable
section 197(f)(9) intangible. Prior to January 1, 2001,
X and an underwriter (U) had entered into a binding
agreement pursuant to which U would purchase 85
shares of Y common stock from X and then sell those
shares in a public offering. On January 6, 2001, the
public offering closes. X and Y make a section
338(h)(10) election for Target.
(ii) Pursuant to paragraph (h)(8) of this section, in
the case of a qualified stock purchase that is treated as
a deemed sale and purchase of assets pursuant to section 338, the corporation treated as purchasing assets
as a result of an election thereunder (new target) is not
considered the person that held or used the assets during any period in which the assets were held or used
by the corporation treated as selling the assets (old target). Further, for purposes of determining whether the
nonamortizable section 197(f)(9) intangible is acquired by new target from a related person, because
the transactions are a series of related transactions, the
relationship between old target and new target must be
tested immediately before the first transaction in the
series (the formation of Y) and immediately after the
last transaction in the series (the sale to U and the public offering). See paragraph (h)(6)(ii)(B) of this section. Because there was no relationship between old
target and new target immediately before the formation of Y (because the section 338 election had not
been made) and only a 15% relationship between old
target and new target immediately after, old target is
not related to new target for purposes of applying the
anti-churning rules of paragraph (h) of this section.
Accordingly, Target may amortize the section 197 intangible.
Example 25. Other transfers to controlled corporations. (i) In 2001, Corporation A transfers a section
197(f)(9) intangible that it held during the transition
period to X, a newly formed corporation, in exchange
for 15% of X’s stock. As part of the same transaction,
B transfers property to X in exchange for the remaining 85% of X stock.
(ii) Because the acquisition of the intangible by X
is part of a qualifying section 351 exchange, under
section 197(f)(2) and paragraph (g)(2)(ii) of this section, X is treated in the same manner as the transferor
of the asset. Accordingly, X may not amortize the intangible. If, however, at the time of the exchange, B
has a binding commitment to sell 25 percent of the X
stock to C, an unrelated third party, the exchange, including A’s transfer of the section 197(f)(9) intangible, would fail to qualify as a section 351 exchange.
Because the formation of X, the transfers of property
to X, and the sale of X stock by B are part of a series
of related transactions, the relationship between A and
X must be tested immediately before the first transaction in the series (the transfer of property to X) and immediately after the last transaction in the series (the
sale of X stock to C). See paragraph (h)(6)(ii)(B) of
this section. Because there was no relationship between A and X immediately before and only a 15% relationship immediately after, A is not related to X for
purposes of applying the anti-churning rules of paragraph (h) of this section. Accordingly, X may amortize the section 197 intangible.
Example 26. Relationship created as part of stock
acquisition followed by liquidation. (i) In 2001, Partnership P purchases 100 percent of the stock of Corporation X. P and X were not related prior to the acquisi-

2000–7 I.R.B.

tion. Immediately after acquiring the X stock, and as
part of a series of related transactions, P liquidates X
under section 331. In the liquidating distribution, P receives a section 197(f)(9) intangible that was held by
X during the transition period.
(ii) Because the relationship between P and X was
created pursuant to a series of related transactions
where P acquires stock (meeting the requirements of
section 1504(a)(2)) in a fully taxable transaction followed by a liquidation under section 331, the relationship immediately after the last transaction in the series
(the liquidation) is disregarded. See paragraph
(h)(6)(iii) of this section. Accordingly, P is entitled to
amortize the section 197(f)(9) intangible.
Example 27. Section 743(b) adjustment with no
change in user. (i) On January 1, 2001, A forms a
partnership (PRS) with B in which A owns a 60-percent, and B owns a 40-percent, interest in profits and
capital. A contributes a nonamortizable section
197(f)(9) intangible with a value of $80 and an adjusted basis of $0 to PRS in exchange for its PRS interest and B contributes $120 cash. At the time of the
contribution, PRS licenses the section 197(f)(9) intangible to A. On February 1, 2001, A sells its entire interest in PRS to C, an unrelated person, for $80. PRS
has a section 754 election in effect.
(ii) The section 197(f)(9) intangible contributed to
PRS by A is not amortizable in the hands of PRS. Pursuant to section (g)(2)(ii) of this section, PRS steps
into the shoes of A with respect to A’s nonamortizable
transferred basis in the intangible.
(iii) When A sells the PRS interest to C, C will have
a basis adjustment in the PRS assets under section
743(b) equal to $80. The entire basis adjustment will
be allocated to the intangible because the only other
asset held by PRS is cash. Ordinarily, under paragraph
(h)(12)(v) of this section, the anti-churning rules will
not apply to an increase in the basis of partnership
property under section 743(b) if the person acquiring
the partnership interest is not related to the person
transferring the partnership interest. However, A is an
anti-churning
partner
under
paragraph
(h)(12)(vi)(B)(3) of this section. Because A remains a
user of the section 197(f)(9) intangible after the transfer to C, paragraph (h)(12)(vi)(A) of this section will
cause the anti-churning rules to apply to the entire
basis adjustment under section 743(b).

(l) Effective dates—(1) In general. This
section applies to property acquired after
January 25, 2000, except that paragraph
(c)(13) of this section (exception from section 197 for separately acquired rights of
fixed duration or amount) applies to property acquired after August 10, 1993 (or
July 25, 1991, if a valid retroactive election
has been made under §1.197–1T).
(2) Application to pre-effective date ac-

quisitions. A taxpayer may choose, on a
transaction-by-transaction basis, to apply
the provisions of this section and
§1.167(a)–14 to property acquired after
August 10, 1993 (or July 25, 1991, if a
valid retroactive election has been made
under §1.197–1T) and on or before January 25, 2000.
(3) Application of regulation project
REG–209709–94 to pre-effective date acquisitions. A taxpayer may rely on the
provisions of regulation project
REG–209709– 94 (1997–1 C.B. 731) for
property acquired after August 10, 1993
(or July 25, 1991, if a valid retroactive
election has been made under §1.197–1T)
and on or before January 25, 2000.
(4) Change in method of accounting—
(i) In general. For the first taxable year
ending after January 25, 2000, a taxpayer
that has acquired property to which the
exception in §1.197–2(c)(13) applies is
granted consent of the Commissioner to
change its method of accounting for such
property to comply with the provisions of
this section and §1.167(a)–14 unless the
proper treatment of such property is an
issue under consideration (within the
meaning of Rev. Proc. 97–27 (1997–21
IRB 10)(see §601.601(d)(2) of this chapter)) in an examination, before an Appeals
office, or before a Federal court.
(ii) Application to pre-effective date
acquisitions. For the first taxable year
ending after January 25, 2000, a taxpayer
is granted consent of the Commissioner to
change its method of accounting for all
property acquired in transactions described in paragraph (l)(2) of this section
to comply with the provisions of this section and §1.167(a)–14 unless the proper
treatment of any such property is an issue
under consideration (within the meaning
of Rev. Proc. 97–27 (1997–21 IRB
10)(see §601.601(d)(2) of this chapter))
in an examination, before an Appeals office, or before a Federal court.
(iii) Automatic change procedures. A
taxpayer changing its method of account-

CFR part or section where
identified and described

ing in accordance with this paragraph
(l)(4) must follow the automatic change in
accounting method provisions of Rev.
Proc. 99–49 (1999–52 IRB 725)(see
§601.601(d)(2) of this chapter) except, for
purposes of this paragraph (l)(4), the
scope limitations in section 4.02 of Rev.
Proc. 99–49 (1999–52 IRB 725) are not
applicable. However, if the taxpayer is
under examination, before an appeals office, or before a federal court, the taxpayer must provide a copy of the application to the examining agent(s), appeals
officer, or counsel for the government, as
appropriate, at the same time that it files
the copy of the application with the National Office. The application must contain the name(s) and telephone number(s)
of the examining agent(s), appeals officer,
or counsel for the government, as appropriate.
Part 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 8. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 9. In §602.101, paragraph (b) is
amended by adding an entry to the table
in numerical order to read as follows.
§602.101 OMB Control numbers.
*****
(b) * * *
David Mader,
Acting Deputy Commissioner
of Internal Revenue.
Approved January 14, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on January 20, 2000, 1:19 p.m., and published in the issue of
the Federal Register for January 25, 2000, 65 F.R.
3820)

Current OMB
control No.

*****
1.197–2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1671
*****

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February 14, 2000