This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

3903

Vol. 65, No. 16

Tuesday, January 25, 2000

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–100163–00]

RIN 1545–AX73

Applying Section 197 To Partnerships

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations relating to the

amortization of certain intangible

property to partnership transactions

involving sections 732(b) and 734(b).

The proposed regulations interpret the

provisions of section 197(f)(9), reflecting

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.

This document also provides a notice of

public hearing on these proposed

regulations.

DATES: Written comments must be

received by April 24, 2000. Outlines of

topics to be discussed at the public

hearing scheduled for May 24, 2000, at

10 a.m. must be received by May 3,

2000.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–100163–00),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions

may be hand delivered Monday through

Friday between the hours of 8 a.m. and

5 p.m. to: CC:DOM:CORP:R (REG–

100163–00), Courier’s desk, Internal

Revenue Service, 1111 Constitution

Avenue, NW, Washington, DC.

Alternatively, taxpayers may submit

comments electronically via the Internet

by selecting the ‘‘Tax Regs’’ option on

the IRS Home Page, or by submitting

comments directly to the IRS Internet

site at http://www.irs.ustreas.gov/prod/

taxlregs/regslist.html. The public

hearing will be held in Room 2615,

Internal Revenue Building, 1111

Constitution Avenue, NW., Washington,

DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations,

Robert G. Honigman, (202) 622–3050;

concerning submissions of comments,

the hearing, and/or to be placed on the

building access list to attend the

hearing, Guy Traynor, (202) 622–7180

(not toll-free numbers).

SUPPLEMENTARY INFORMATION: This

document proposes to amend section

197 of the Income Tax Regulations (26

CFR Part 1) to provide additional rules

regarding the application of section

197(f)(9) to partnership transactions

under sections 732(b) and 734(b).

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, including the

anti-churning rules in section 197(f)(9).

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 partnership property

under sections 732, 734, and 743. In

accordance with these comments, these

proposed regulations provide rules for

determining the amount of a basis

adjustment under sections 732(b) and

734(b) that will be subject to the antichurning rules. Final regulations being

issued at the same time as these

proposed regulations provide rules for

determining the amount of a basis

adjustment under sections 732(d) and

743(b) that will be subject to the antichurning rules.

Explanation of Provisions

A. In General

Section 197(f)(9)(E) provides that, in

applying the anti-churning rules for

basis adjustments under sections 732,

734, and 743, determinations are made

at the partner level, and each partner is

treated as having owned and used such

partner’s proportionate share of the

partnership’s assets. With respect to

basis adjustments under sections 732(b)

and 734(b), this rule requires taxpayers

and the IRS to analyze transactions that

actually involve a distribution of

property from the partnership to a

partner as deemed transactions

involving transfers of property directly

among the partners.

B. Two-Step Analysis

The proposed regulations embody a

two-step analysis in determining

whether the anti-churning rules apply to

the deemed transfer of intangibles in

transactions giving rise to basis

adjustments under sections 732(b) and

734(b). First, it is necessary to determine

whether the portion of an intangible that

a partner is deemed to transfer is

treated, immediately prior to the

deemed transfer, as being subject to the

anti-churning rules for purposes of

applying these provisions. Second, if

the partner’s share of the intangible is

treated, immediately prior to the

deemed transfer, as being subject to the

anti-churning rules for purposes of

applying these provisions, it is

necessary to determine whether the

deemed transferor and transferee are

related so that the anti-churning rules

will continue to apply to the intangible

after the deemed transfer.

For purposes of applying the first

prong of the analysis, when a partner

acquires an interest in a partnership, the

proposed regulations treat the partner as

acquiring an undivided interest in all

section 197(f)(9) intangibles held by a

partnership at the time that the partner

acquires an interest in the partnership.

If a partner acquires an interest in a

partnership from an unrelated person

after August 10, 1993 (or, in certain

cases, after July 25, 1991), the partner’s

share of any intangible held by the

partnership as of August 10, 1993 (or, in

certain cases, after July 25, 1991) is

treated as no longer subject to the antichurning rules for purposes of analyzing

subsequent deemed transfers of

intangibles in transactions that give rise

to the basis adjustments under sections

732(b) and 734(b). With respect to

intangibles acquired by the partnership

after August 10, 1993, that are subject to

the anti-churning rules in the hands of

the partnership, a partner’s share of the

intangible is treated as not subject to the

anti-churning rules for purposes of

analyzing these basis adjustments if the

partner acquired the interest in the

partnership from an unrelated person

after the partnership acquired the

tainted intangible. Once a partner’s

3904 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Proposed Rules

share of an intangible is treated as no

longer subject to the anti-churning rules

for purposes of analyzing subsequent

deemed transfers, that share of the

intangible will remain untainted even if

the partner transfers the interest to the

original transferor or a person who is

related to the original transferor, so long

as the transfers are not part of the same

transaction or series of related

transactions. Special rules are provided

where a partner acquires a partnership

interest in exchange for property

contributed to a partnership.

For purposes of applying the antichurning rules to basis adjustments

under section 732(b), the distributee

partner is deemed to acquire the

distributed intangible directly from the

continuing partners of the distributing

partnership. The proposed regulations

contain a favorable stacking rule that

treats the distributee partner as

acquiring the intangible first from the

continuing partners for whom transfers

would not be subject to the antichurning rules (either because the

continuing partner’s share of the

intangible is treated, for purposes of this

rule, as not being subject to the antichurning rules or the distributee partner

is not related to the continuing partner)

to the extent of such partners’ share of

appreciation in the intangible.

The proposed regulations contain a

special rule to ensure that, in analyzing

subsequent transfers, a partner cannot

treat the entire intangible as no longer

subject to the anti-churning rules simply

because the full basis of the intangible

(which may be significantly less than

the intangible’s fair market value)

becomes amortizable as a result of the

favorable stacking rule that applies to

section 732(b) basis adjustments.

For purposes of applying the antichurning rules to basis adjustments

under section 734(b), the continuing

partners are deemed to acquire interests

in the intangible that remains in the

partnership from the partner who

received a distribution (giving rise to the

section 734(b) basis adjustment) of

property other than the intangible. To

the extent that the distributee partner

could transfer the intangible directly to

a continuing partner (who may be the

distributee partner) and the transfer

would not be subject to the antichurning rules (either because the

distributee partner’s share of the

intangible is treated (for purposes of this

rule) as not being subject to the antichurning rules or the continuing partner

is not related to the distributee (except

in certain circumstances)), the basis

adjustment will be amortizable with

respect to the continuing partner.

The proposed regulations contain a

special rule which provides that if a

distribution that gives rise to an increase

in the basis under section 734(b) of a

section 197(f)(9) intangible held by the

partnership is undertaken as part of a

series of related transactions that

include a contribution of the intangible

to the partnership by a continuing

partner, the continuing partner is

treated as related to the distributee

partner to the extent that the continuing

partner’s partnership interest was

received in exchange for the intangible.

In addition to issues relating to

determining the amount of a basis

adjustment that is subject to the antichurning rules, the Treasury

Department and the IRS also recognize

that certain problems may arise in

maintaining capital accounts where a

portion of a section 734(b) adjustment is

allocated to an intangible that is subject

to the anti-churning rules with respect

to one or more partners. In some

situations, the failure to allocate

deductions for amortization to any

partner whose allocable share of a

section 734(b) adjustment is subject to

the anti-churning rules will distort the

partners’ economic agreement. For

example, where partners agree to share

depreciation and amortization

deductions equally, if one partner’s

share of a section 734(b) adjustment

allocable to an intangible asset is subject

to the anti-churning rules, the capital

accounts of the partners will not reflect

an equivalent sharing of the economic

amortization from the asset absent

special adjustments to account for the

disparity between the allocation of tax

amortization and the intended

allocation of economic amortization.

Furthermore, divergence of book and tax

accounts with respect to an intangible

that may result from such special

adjustments can cause problems in

allocating the correct amount of taxable

gain or loss to the appropriate parties

upon disposition of the intangible.

Similar problems may arise as a result

of allowing remedial allocations for

intangibles that otherwise are subject to

the anti-churning rules and are

addressed in § 1.197–2(h)(12)(vii)(B).

These regulations are not intended to

create such distortions. Nevertheless, a

general rule that resolves these

distortions in all situations (including

different allocations of gain and

depreciation or amortization) would be

extremely complicated and, perhaps,

unduly narrow.

Therefore, the proposed regulations

provide that taxpayers may use any

reasonable method to determine

amortization for book purposes in these

situations, provided that the method

used does not contravene the purposes

of the anti-churning rules under section

197 (i.e., the effect of the book

adjustments will not be such that a

partner who is subject to the antichurning rules will receive, directly or

indirectly, deductions for amortization,

for Federal income tax purposes,

attributable to the section 734(b)

adjustment). The Treasury Department

and IRS may consider providing

guidance with respect to this issue in

the future and request comments

relating thereto.

C. Effective Date

These regulations are proposed to

apply to distributions occurring on or

after the date final regulations are

published in the Federal Register.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in EO 12866. It also has been

determined that section 533(b) of the

Administrative Procedures Act (5 U.S.C.

chapter 5) does not apply to these

regulations, and because these

regulations do not impose a collection

of information on small entities, the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed

rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

written comments (a signed original and

eight (8) copies) that are submitted

timely to the IRS. All comments will be

available for public inspection and

copying. The Treasury Department and

IRS specifically request comments on

the clarity of the proposed regulations

and how they may be made easier to

understand.

A public hearing has been scheduled

for May 24, 2000, at 10 a.m. in Room

2615, Internal Revenue Building, 1111

Constitution Avenue, NW., Washington,

DC. Due to building security

procedures, visitors must enter at the

10th Street entrance, located between

Constitution and Pennsylvania

Avenues, NW. In addition, all visitors

must present photo identification to

enter the building. Because of access

restrictions, visitors will not be

admitted beyond the immediate

entrance area more than 15 minutes

before the hearing starts. For

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Proposed Rules 3905

information about having your name

placed on the building access list to

attend the hearing, see the FOR FURTHER

INFORMATION CONTACT section of this

preamble.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons that wish to present oral

comments at the hearing must submit

written comments and an outline of the

topics to be discussed and the time

devoted to each topic (signed original

and eight (8) copies) by April 24, 2000.

A period of 10 minutes will be

allotted to each person for making

comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information

The principal author of these

proposed regulations is Robert G.

Honigman, Office of the Assistant Chief

Counsel (Passthroughs & Special

Industries). However, other personnel

from the Treasury Department and IRS

participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.197–2 is amended

by:

1. Revising paragraphs (h)(12)(ii),

(h)(12)(iv), and (h)(12)(vi).

2. Adding Examples 28, 29, and 30 to

paragraph (k).

3. Adding a sentence at the end of

paragraph (l)(1).

The additions and revisions read as

follows:

§ 1.197–2 Amortization of goodwill and

other intangibles.

* * * * *

(h) * * *

(12) * * *

(ii) Section 732(b) adjustments—(A)

In general. The anti-churning rules of

this paragraph (h) apply to any increase

in the adjusted basis of a section

197(f)(9) intangible under section 732(b)

to the extent that the basis increase

exceeds the total unrealized

appreciation from the intangible

allocable to—

(1) Partners other than the distributee

partner or persons related to the

distributee partner;

(2) If the distributed intangible is a

section 197(f)(9) intangible acquired by

the partnership on or before August 10,

1993, the distributee partner and

persons related to the distributee

partner to the extent that—

(i) They acquired an interest or

interests in the partnership after August

10, 1993; and

(ii) Such interest or interests were

held after August 10, 1993, by a person

or persons other than the distributee

partner or persons who were related to

the distributee partner, and the

acquisition of such interest or interests

by such person or persons was not part

of a transaction or series of related

transactions in which the distributee

partner or persons related to the

distributee partner subsequently

acquired such interest or interests; and

(3) If the distributed intangible is a

section 197(f)(9) intangible that is

acquired by the partnership after August

10, 1993, and that is not amortizable

with respect to the partnership, the

distributee partner and persons related

to the distributee partner to the extent

that—

(i) They acquired an interest or

interests in the partnership after the

partnership acquired the distributed

intangible; and

(ii) Such interest or interests were

held after the partnership acquired the

distributed intangible, by a person or

persons other than the distributee

partner or persons who were related to

the distributee partner, and the

acquisition of such interest or interests

by such person or persons was not part

of a transaction or series of related

transactions in which the distributee

partner or persons related to the

distributee partner subsequently

acquired such interest or interests.

(B) Effect of retroactive elections. For

purposes of paragraph (h)(12)(ii)(A) 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.

(C) Intangible still subject to antichurning rules. Notwithstanding

paragraph (h)(12)(ii) of this section, in

applying the provisions of this

paragraph (h) with respect to

subsequent transfers, the distributed

intangible remains subject to the

provisions of this paragraph (h) in a

percentage (determined at the time of

the distribution) equal to—

(1) The sum of—

(i) The amount of the distributed

intangible’s basis that is nonamortizable

under paragraph (g)(2)(ii)(B) of this

section; and

(ii) The total unrealized appreciation

inherent in the intangible reduced by

the amount of the increase in the

adjusted basis of the distributed

intangible under section 732(b) to which

the anti-churning rules do not apply;

over—

(2) The fair market value of such

intangible.

(D) Partner’s allocable share of

unrealized appreciation from the

intangible. The amount of unrealized

appreciation from an intangible that is

allocable to a partner is the amount of

taxable gain that would have been

allocated to that partner if the

partnership had sold the intangible

immediately before the distribution for

its fair market value in a fully taxable

transaction.

(E) Acquisition of partnership interest

by contribution. Solely for purposes of

paragraphs (h)(12)(ii)(A)(2) and (3) of

this section, a partner who acquires an

interest in a partnership in exchange for

a contribution of property to the

partnership is deemed to acquire a pro

rata portion of that interest in the

partnership from each person who is a

partner in the partnership at the time of

the contribution based on each such

partner’s proportionate interest in the

partnership. However, if the partner

contributed the distributed section

197(f)(9) intangible to the partnership,

the interest acquired by such partner in

exchange for the intangible is treated as

not being described in paragraphs

(h)(12)(ii)(A)(2) or (3) of this section.

* * * * *

(iv) Section 734(b) adjustments—(A)

In general. The anti-churning rules of

this paragraph (h) do not apply to a

continuing partner’s share of an increase

in the basis of a section 197(f)(9)

intangible held by a partnership under

section 734(b) to the extent that the

continuing partner is an eligible partner.

(B) Eligible partner. For purposes of

this paragraph (h)(12)(iv), eligible

partner means—

(1) A continuing partner that is not

the distributee partner or a person

related to the distributee partner;

(2) With respect to any section

197(f)(9) intangible acquired by the

partnership on or before August 10,

1993, a continuing partner that is the

distributee partner or a person related to

the distributee partner to the extent

that—

(i) The distributee partner’s interest in

the partnership was acquired after

August 10, 1993; and

3906 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Proposed Rules

(ii) Such interest was held after

August 10, 1993 by a person or persons

who were not related to the distributee

partner, and the acquisition of such

interest by such person or persons was

not part of a transaction or series of

related transactions in which the

distributee partner or persons related to

the distributee partner subsequently

acquired such interest; or

(3) With respect to any section

197(f)(9) intangible acquired by the

partnership after August 10, 1993, that

is not amortizable with respect to the

partnership, a continuing partner that is

the distributee partner or a person

related to the distributee partner to the

extent that—

(i) The distributee partner’s interest in

the partnership was acquired after the

partnership acquired the relevant

intangible; and

(ii) Such interest was held after the

partnership acquired the relevant

intangible by a person or persons who

were not related to the distributee

partner, and the acquisition of such

interest by such person or persons was

not part of a transaction or series of

related transactions in which the

distributee partner or persons related to

the distributee partner subsequently

acquired such interest.

(C) Effect of retroactive elections. For

purposes of paragraph (h)(12)(iv)(A) of

this section, references to August 10,

1993, are treated as references to July

25, 1991, if the distributee partner made

a valid retroactive election under

§ 1.197–1T.

(D) Partner’s share of basis increase.

For purposes of this paragraph

(h)(12)(iv), a continuing partner’s share

of a basis increase is equal to—

(1) The total basis increase allocable

to the intangible; multiplied by

(2) A fraction equal to—

(i) The unrealized appreciation from

the intangible that would have been

allocated to the continuing partner if the

partnership had sold the intangible

immediately before the distribution for

its fair market value in a fully taxable

transaction; over

(ii) The total unrealized appreciation

from the intangible that would have

been realized by the partnership if the

partnership had sold the intangible

immediately before the distribution for

its fair market value in a fully taxable

transaction.

(E) Interests acquired by

contribution—(1) Application of

paragraphs (h)(12)(iv)(B)(2) and (3) of

this section. Solely for purposes of

paragraphs (h)(12)(iv)(B)(2) and (3) of

this section, a partner who acquires an

interest in a partnership in exchange for

a contribution of property to the

partnership is deemed to acquire a pro

rata portion of that interest in the

partnership from each person who is a

partner in the partnership at the time of

the contribution based on each such

partner’s proportionate interest in the

partnership. However, if the partner

contributed the distributed section

197(f)(9) intangible to the partnership,

the interest acquired by such partner in

exchange for the intangible is treated as

not being described in paragraphs

(h)(12)(iv)(B)(2) or (3) of this section.

(2) Special rule with respect to

paragraph (h)(12)(iv)(B)(1) of this

section. Solely for purposes of

paragraph (h)(12)(iv)(B)(1) of this

section, if a distribution that gives rise

to an increase in the basis under section

734(b) of a section 197(f)(9) intangible

held by the partnership is undertaken as

part of a series of related transactions

that include a contribution of the

intangible to the partnership by a

continuing partner, the continuing

partner is treated as related to the

distributee partner to the extent that the

continuing partner’s partnership interest

was received in exchange for the

intangible.

(F) Effect of section 734(b) adjustment

on partners’ capital accounts. If one or

more partners are subject to the antichurning rules under this paragraph (h)

with respect to a section 734(b)

adjustment allocable to an intangible

asset, 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 the section 734 adjustment is

allocated, directly or indirectly, to a

partner who is subject to the antichurning rules with respect to such

adjustment.

* * * * *

(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)(ii), (iii),

(iv), or (v) of this section, an antichurning 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 shall apply to the proportionate

share of such intangible that is treated

as transferred by the anti-churning

partner, notwithstanding the application

of paragraph (h)(12)(ii), (iii), (iv), or (v)

of this section.

* * * * *

(k) * * *

Example 28. Distribution of section

197(f)(9) intangible to partner who acquired

partnership interest prior to the effective

date.

(i) In 1990, A, B, and C each contribute

$150 cash to form general partnership ABC

for the purpose of engaging in a consulting

business and a software manufacturing

business. The partners agree to share

partnership profits and losses equally. In

2000, the partnership distributes the

consulting business to A in liquidation of A’s

entire interest in ABC. The only asset of the

consulting business is a nonamortizable

intangible, which has a fair market value of

$180 and a basis of $0. At the time of the

distribution, the adjusted basis of A’s interest

in ABC is $150. A is not related to B or C.

(ii) Under section 732(b), A’s adjusted basis

in the intangible distributed by ABC is $150,

a $150 increase over the basis of the

intangible in ABC’s hands. In determining

whether the anti-churning rules apply to any

portion of the basis increase, A is treated as

having owned and used A’s proportionate

share of partnership property. Thus, A is

treated as holding an interest in the

intangible during the transition period.

Because the intangible was not amortizable

prior to the enactment of section 197, the

section 732(b) increase in the basis of the

intangible may be subject to the antichurning provisions. Paragraph (h)(12)(ii) of

this section provides that the anti-churning

provisions apply to the extent that the

section 732(b) adjustment exceeds the total

unrealized appreciation from the intangible

allocable to partners other than A or persons

related to A, as well as certain other partners

whose purchase of their interests meet

certain criteria. Because B and C are not

related to A, and A’s acquisition of its

partnership interest does not satisfy the

necessary criteria, the section 732(b) basis

increase is subject to the anti-churning

provisions to the extent that it exceeds B and

C’s proportionate share of the unrealized

appreciation from the intangible. B and C’s

proportionate shares of the unrealized

appreciation from the intangible is $120 (2/

3 of $180). This is the amount of gain that

would be allocated to B and C if the

partnership sold the intangible immediately

before the distribution for its fair market

value of $180. Therefore, $120 of the section

732(b) basis increase is not subject to the

anti-churning rules. The remaining $30 of the

section 732(b) basis increase is subject to the

anti-churning rules. Accordingly, A is

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Proposed Rules 3907

treated as having two intangibles, an

amortizable section 197 intangible with an

adjusted basis of $120 and a new

amortization period of 15 years and a

nonamortizable intangible with an adjusted

basis of $30.

(iii) In applying the anti-churning rules to

future transfers of the distributed intangible,

under paragraph (h)(12)(ii)(C) of this section,

one-third of the intangible will continue to be

subject to the anti-churning rules,

determined as follows: The sum of the

amount of the distributed intangible’s basis

that is nonamortizable under paragraph

(g)(2)(ii)(B) of this section ($0) and the total

unrealized appreciation inherent in the

intangible reduced by the amount of the

increase in the adjusted basis of the

distributed intangible under section 732(b) to

which the anti-churning rules do not apply

($180 ¥$120 = $60), over the fair market

value of the distributed intangible ($180).

Example 29. Distribution of section

197(f)(9) intangible to partner who acquired

partnership interest after the effective date.

(i) The facts are the same as in example 28,

except that B and C form ABC in 1990. A

does not acquire an interest in ABC until

1995. In 1995, A contributes $150 to ABC in

exchange for a one-third interest in ABC. At

the time of the distribution, the adjusted

basis of A’s interest in ABC is $150.

(ii) As in Example 28, the anti-churning

rules do not apply to the increase in the basis

of the intangible distributed to A under

section 732(b) to the extent that it does not

exceed the unrealized appreciation from the

intangible allocable to B and C. Under

paragraph (h)(12)(ii) of this section, the antichurning provisions also do not apply to the

section 732(b) basis increase to the extent of

A’s allocable share of the unrealized

appreciation from the intangible because A

acquired the ABC interest from an unrelated

person after August 10, 1993, and the

intangible was acquired by the partnership

before A acquired the ABC interest. Under

paragraph (h)(12)(ii)(E) of this section, A is

deemed to acquire the ABC partnership

interest from an unrelated person because A

acquired the ABC partnership interest in

exchange for a contribution to the

partnership of property other than the

distributed intangible and, at the time of the

contribution, no partner in the partnership

was related to A. Consequently, the increase

in the basis of the intangible under section

732(b) is not subject to the anti-churning

rules to the extent of the total unrealized

appreciation from the intangible allocable to

A, B, and C. The total unrealized

appreciation from the intangible allocable to

A, B, and C is $180 (the gain the partnership

would have recognized if it had sold the

intangible for its fair market value

immediately before the distribution). Because

this amount exceeds the section 732(b) basis

increase of $150, the entire section 732(b)

basis increase is amortizable.

(iii) In applying the anti-churning rules to

future transfers of the distributed intangible,

under paragraph (h)(12)(ii)(C) of this section,

one-sixth of the intangible will continue to be

subject to the anti-churning rules,

determined as follows: The sum of the

amount of the distributed intangible’s basis

that is nonamortizable under paragraph

(g)(2)(ii)(B) of this section ($0) and the total

unrealized appreciation inherent in the

intangible reduced by the amount of the

increase in the adjusted basis of the

distributed intangible under section 732(b) to

which the anti-churning rules do not apply

($180 ¥$150 = $30), over the fair market

value of the distributed intangible ($180).

Example 30. Distribution of section

197(f)(9) intangible contributed to the

partnership by a partner. (i) The facts are the

same as in Example 29, except that C

purchased the intangible used in the

consulting business in 1988 for $60 and

contributed the intangible to ABC in 1990. At

that time, the intangible had a fair market

value of $150 and an adjusted tax basis of

$60. When ABC distributes the intangible to

A in 2000, the intangible has a fair market

value of $180 and a basis of $60.

(ii) As in Examples 28 and 29, the adjusted

basis of the intangible in A’s hands is $150

under section 732(b). However, the increase

in the adjusted basis of the intangible under

section 732(b) is only $90 ($150 adjusted

basis after the distribution compared to $60

basis before the distribution). Pursuant to

paragraph (g)(2)(ii)(B) of this section, A steps

into the shoes of ABC with respect to the $60

of A’s adjusted basis in the intangible that

corresponds to ABC’s basis in the intangible

and this portion of the basis is

nonamortizable. B and C are not related to A,

A acquired the ABC interest from an

unrelated person after August 10, 1993, and

the intangible was acquired by ABC before A

acquired the ABC interest. Therefore, under

paragraph (h)(12)(ii) of this section, the

section 732(b) basis increase is amortizable to

the extent of A, B, and C’s allocable share of

the unrealized appreciation from the

intangible. The total unrealized appreciation

from the intangible that is allocable to A, B,

and C is $120. If ABC had sold the intangible

immediately before the distribution to A for

its fair market value of $180, it would have

recognized gain of $120, which would have

been allocated $10 to A, $10 to B, and $100

to C under section 704(c). Because A, B, and

C’s allocable share of the unrealized

appreciation from the intangible exceeds the

section 732(b) basis increase in the

intangible, the entire $90 of basis increase is

amortizable by A. Accordingly, after the

distribution, A will be treated as having two

intangibles, an amortizable section 197

intangible with an adjusted basis of $90 and

a new amortization period of 15 years and a

nonamortizable intangible with an adjusted

basis of $60.

(iii) In applying the anti-churning rules to

future transfers of the distributed intangible,

under paragraph (h)(12)(ii)(C) of this section,

one-half of the intangible will continue to be

subject to the anti-churning rules,

determined as follows: The sum of the

amount of the distributed intangible’s basis

that is nonamortizable under paragraph

(g)(2)(ii)(B) of this section ($60) and the total

unrealized appreciation inherent in the

intangible reduced by the amount of the

increase in the adjusted basis of the

distributed intangible under section 732(b) to

which the anti-churning rules do not apply

($120 ¥ $90 = $30), over the fair market

value of the distributed intangible ($180).

* * * * *

(l) * * *

(1) In general. * * * Paragraphs (h)(12)(ii),

(iv) and (vi) of this section apply to

partnership distributions occurring on or

after the date final regulations are published

in the Federal Register.

* * * * *

David Mader,

Acting Deputy Commissioner of Internal

Revenue Service.

[FR Doc. 00–1381 Filed 1–20–00; 1:19 pm]

BILLING CODE 4830–01–U

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 63

[AD–FRL–6523–8]

RIN 2060–AH74

National Emission Standards for

Hazardous Air Pollutants for Source

Category: Pulp and Paper Production

AGENCY: Environmental Protection

Agency (EPA).

ACTION: Proposed rule amendments and

notice of public hearing.

SUMMARY: Under the Clean Air Act

(Act), EPA issued a final rule (63 FR

18504, April 15, 1998) to reduce

hazardous air pollutant (HAP) emissions

from the pulp and paper production

source category. That rule (known as the

Pulp and Paper national emission

standard for hazardous air pollutants

(NESHAP) or pulp and paper NESHAP)

is the air component of the integrated

air and water rules for the pulp and

paper industry (known as the Pulp and

Paper Cluster Rules). In this action, we

are proposing to amend certain passages