Final Reg

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Exchange Commission or the national
market system established pursuant to
section 11A of the Securities Exchange
Act of 1934 (15 U.S.C. 78f); or
(ii) A foreign securities exchange that
is regulated or supervised by a
governmental authority of the country
in which the market is located and
which has the following
characteristics—
(A) The exchange has trading volume,
listing, financial disclosure,
surveillance, and other requirements
designed to prevent fraudulent and
manipulative acts and practices, to
remove impediments to and perfect the
mechanism of a free and open, fair and
orderly, market, and to protect
investors; and the laws of the country in
which the exchange is located and the
rules of the exchange ensure that such
requirements are actually enforced; and
(B) The rules of the exchange
effectively promote active trading of
listed stocks.
(2) Exchange with multiple tiers. If an
exchange in a foreign country has more
than one tier or market level on which
stock may be separately listed or traded,
each such tier shall be treated as a
separate exchange.
(d) Stock in certain PFICs—(1)
General rule. Except as provided in
paragraph (d)(2) of this section, a foreign
corporation is a corporation described
in section 1296(e)(1)(B), and paragraph
(a)(2) of this section, if the foreign
corporation offers for sale or has
outstanding stock of which it is the
issuer and which is redeemable at its
net asset value and if the foreign
corporation satisfies the following
conditions with respect to the class of
shares held by the electing taxpayer—
(i) At all times during the calendar
year, the foreign corporation has more
than one hundred shareholders with
respect to the class, other than
shareholders who are related under
section 267(b);
(ii) At all times during the calendar
year, the class of shares of the foreign
corporation is readily available for
purchase by the general public at its net
asset value and the foreign corporation
does not require a minimum initial
investment of greater than $10,000
(U.S.);
(iii) At all times during the calendar
year, quotations for the class of shares
of the foreign corporation are
determined and published no less
frequently than on a weekly basis in a
widely-available permanent medium
not controlled by the issuer of the
shares, such as a newspaper of general
circulation or a trade publication;
(iv) No less frequently than annually,
independent auditors prepare financial

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statements of the foreign corporation
that include balance sheets (statements
of assets, liabilities, and net assets) and
statements of income and expenses, and
those statements are made available to
the public;
(v) The foreign corporation is
supervised or regulated as an
investment company by a foreign
government or an agency or
instrumentality thereof that has broad
inspection and enforcement authority
and effective oversight over investment
companies;
(vi) At all times during the calendar
year, the foreign corporation has no
senior securities authorized or
outstanding, including any debt other
than in de minimis amounts;
(vii) Ninety percent or more of the
gross income of the foreign corporation
for its taxable year is passive income, as
defined in section 1297(a)(1) and the
regulations thereunder; and
(viii) The average percentage of assets
held by the foreign corporation during
its taxable year which produce passive
income or which are held for the
production of passive income, as
defined in section 1297(a)(2) and the
regulations thereunder, is at least 90
percent.
(2) Anti-abuse rule. If a foreign
corporation undertakes any actions that
have as one of their principal purposes
the manipulation of the net asset value
of a class of its shares, for the calendar
year in which the manipulation occurs,
the shares are not marketable stock for
purposes of paragraph (d)(1) of this
section.
(e) [Reserved]
(f) Special rules for regulated
investment companies (RICs)—(1)
General rule. In the case of any RIC that
is offering for sale, or has outstanding,
any stock of which it is the issuer and
which is redeemable at net asset value,
if the RIC owns directly or indirectly, as
defined in sections 958(a)(1) and (2),
stock in any passive foreign investment
company, that stock will be treated as
marketable stock owned by that RIC for
purposes of section 1296. Except as
provided in paragraph (f)(2) of this
section, in the case of any other RIC that
publishes net asset valuations at least
annually, if the RIC owns directly or
indirectly, as defined in sections
958(a)(1) and (2), stock in any passive
foreign investment company, that stock
will be treated as marketable stock
owned by that RIC for purposes of
section 1296.
(2) [Reserved]
(g) Effective date. This section applies
to shareholders whose taxable year ends
on or after January 25, 2000 for stock in
a foreign corporation whose taxable year

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ends with or within the shareholder’s
taxable year. In addition, shareholders
may elect to apply these regulations to
any taxable year beginning after
December 31, 1997, for stock in a
foreign corporation whose taxable year
ends with or within the shareholder’s
taxable year.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: January 12, 2000.
Jonathan Talisman,
Assistant Secretary of the Treasury.
[FR Doc. 00–1530 Filed 1–21–00; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8865]
RIN 1545–AS77

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.

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 tollfree number).
SUPPLEMENTARY INFORMATION:
DATES:

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 assigned control number 1545–
1671.

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Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations
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 antichurning 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 for-profit
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.
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.

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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) in the Federal Register (62
FR 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 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

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3821

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 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

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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 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

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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.
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

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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 stepped-up 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
intangible 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 anti-churning 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

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Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations
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 property 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 antichurning 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 anti-churning 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 anti-churning 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

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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 antichurning 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. 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

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3823

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
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,

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know-how, and other similar 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 15-year 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 antichurning 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 anti-churning 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 antichurning rules if it does not effect a
significant change in ownership or use.
The final regulations also provide
additional 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 anti-churning rules both
immediately before and immediately

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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
anti-churning 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.
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.
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

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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 the date they are
published in the Federal Register.
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 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.

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Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations
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.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
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:
§ 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.
*
*
*
*
*

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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 section 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

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3825

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 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.

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Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations

(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’s-length transaction.
(iii) The cost of a renewal not
included 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

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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 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.

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§ 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
interests 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.
(2) Treatment of contingent amounts.
(i) Amounts added to basis during 15-year
period.

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Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations
(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.
(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.

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(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 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.

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(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
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
anti-abuse 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

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that is a section 197 intangible unless an
exception applies:
(1) Goodwill. Section 197 intangibles
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 recording
the information) and a customer-related
information base is any information
base that includes lists or other

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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 customer-based 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 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

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an amount paid or incurred for a
customer-based intangible.
(7) Supplier-based intangibles.
Section 197 intangibles include any
supplier-based intangible. A supplierbased 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, 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

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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 definition 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

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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
partnership.)
(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

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3829

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 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

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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 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 wordprocessing 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
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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 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

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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 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

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not include any right under a contract
or any license, permit, or other right
granted by a governmental unit if the
right—
(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 existing section 197 intangible. Thus,
for example, the exception for selfcreated intangibles does not apply to
capitalized costs, such as legal and other
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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 selfcreated 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 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

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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 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

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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 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 15-year 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

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section and before the expiration of that
period is amortized ratably over the
remainder of the 15-year 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
capital 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

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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 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

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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 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

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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.
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

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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 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

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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) Relationship to antichurning 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.

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(C) Transactions covered. The
transactions described in this paragraph
(g)(2)(ii)(C) are—
( 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 15year 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
the transferee with respect to any
section 197 intangible held by the
terminated partnership immediately
preceding the termination. (See

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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 remedial
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

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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 antichurning 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
reduction 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

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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 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

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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 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

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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 exists—
(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

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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 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.

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(9) Gain-recognition exception—(i)
Applicability. A section 197(f)(9)
intangible qualifies for the gainrecognition 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 highest
marginal rate of tax for that taxable year.
(ii) Effect of exception. The antichurning 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

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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 gain-recognition 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 person 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).

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(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 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 builtin 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 (h)(9)(i) of this section may
not be reported under the method

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3837

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 transactions) 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 antichurning rules—(i) In general. In

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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 intangible
that is treated as transferred by the antichurning 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),
anti-churning 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

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(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 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 antichurning 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

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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 antichurning 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
Commissioner 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

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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 to software
developed by S. The software will be used by
B for the sole purpose of improving its
package-tracking 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.

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(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 self-created
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 selfcreated 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. 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

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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
amecause 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 or
exchange and, accordingly, whether the
payments under the license are chargeable to

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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 selfcreated 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

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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.
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

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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 customerrelated 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, 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.

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(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.
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

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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-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

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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)(F) 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 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 15-year period.

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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 highest 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
× .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

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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 subsidiary 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

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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 antichurning 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 acquisition.
Immediately after acquiring the X stock, and

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Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations
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 antichurning 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
acquisitions. 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

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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
accounting 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.

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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) * * *

*

*

CFR part or section identified
and described

Current
OMB Control
No.

*
*
*
1.197–2 .................................

*

*

*

*

*
1545–1671

*

*

David Mader,
Acting Deputy Commissioner of Internal
Revenue.
Approved: January 14, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 00–1380 Filed 1–20–00; 1:19 pm]
BILLING CODE 4830–01–U

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and 602
[TD 8869]
RIN 1545–AU77

Subchapter S Subsidiaries
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations that relate to the treatment
of corporate subsidiaries of S
corporations and interpret the rules
added to the Internal Revenue Code by
section 1308 of the Small Business Job
Protection Act of 1996. These
regulations provide the public with
guidance needed to comply with
applicable law and will affect S
corporations and their shareholders.
DATES: Effective Date: These regulations
are effective January 20, 2000.
Applicability Date: For dates of
applicability, see §§ 1.1361–4(a)(3)(iii),
1.1361–4(a)(5)(i), 1.1361–5(c)(2),
1.1361–6, 1.1362–8(e), and 301.6109–
1(i)(4).
FOR FURTHER INFORMATION CONTACT:
Jeanne M. Sullivan (202) 622–3050 (not

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