[Federal Register Volume 65, Number 224 (Monday, November 20, 2000)]
[Rules and Regulations]
[Pages 69667-69674]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29524]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8907]
RIN 1545-AX73


Application of the Anti-Churning Rules for Amortization of 
Intangibles in Partnerships

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the 
amortization of certain intangible property under section 197. 
Specifically, the regulations apply the anti-churning rules under 
section 197(f)(9) to partnership distributions resulting in basis 
adjustments under sections 732(b) and 734(b). This document also amends 
certain parts of the previously issued

[[Page 69668]]

final regulations (TD 8865), including those parts that relate to the 
amount of a basis adjustment under sections 732(d) and 743(b) that is 
subject to the anti-churning rules under section 197(f)(9). The final 
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.

DATES: Effective Date: These regulations are effective November 20, 
2000.
    Applicability Date: These regulations apply to distributions or 
transfers occurring on or after November 20, 2000. However, a taxpayer 
may choose, on a transaction-by-transaction basis, to apply these 
regulations to property acquired (or partnership transactions 
occurring) after August 10, 1993 (or July 25, 1991, if a valid 
retroactive election has been made under Sec. 1.197-1T) and before 
November 20, 2000.

FOR FURTHER INFORMATION CONTACT: David J. Sotos or Robert G. Honigman 
at (202) 622-3050 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document amends Sec. 1.197-2 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). This document also amends certain provisions of the final 
regulations under section 197 issued on January 25, 2000 (TD 8865, 65 
FR 3820).
    On January 16, 1997, the IRS published proposed regulations (REG-
209709-94) in the Federal Register (62 FR 2336) under sections 167(f) 
and 197, including the anti-churning rules in section 197(f)(9). In 
commenting on the proposed regulations, some practitioners noted that 
additional guidance was needed regarding how the special anti-churning 
rule of section 197(f)(9)(E) should apply to increases in the basis of 
partnership property under sections 732, 734, and 743. In response to 
these comments, the IRS published proposed regulations (REG-100163-00) 
in the Federal Register (65 FR 3903) on January 25, 2000, providing 
rules for determining the portion of a basis adjustment under sections 
732(b) and 734(b) that will be subject to the anti-churning rules. 
Final regulations (TD 8865, 65 FR 3820) (referred to herein as the 
``existing regulations'') were issued at the same time as the proposed 
regulations. The existing regulations provide guidance regarding the 
application of the anti-churning rules to basis adjustments under 
sections 732(d) and 743(b) and to remedial allocations of deductions 
for amortization of section 197(f)(9) intangibles (i.e., goodwill and 
going concern value that was held or used at any time during the period 
beginning on July 25, 1991, and ending on August 10, 1993 (unless an 
election was made under Sec. 1.197-1T) and any other section 197 
intangible that was held or used during such period and was not 
depreciable or amortizable under prior law).
    The IRS received no requests to speak at a public hearing that was 
scheduled for May 24, 2000, and consequently the IRS canceled the 
hearing. Written comments were received in response to the notice of 
proposed rulemaking. The comments received and revisions made are 
discussed below.

Explanation of Provisions and Summary of Comments

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. In applying the 
anti-churning 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. 
Similarly, in applying the anti-churning 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.
    Consistent with this view of the transactions, Sec. 1.197-2(g)(3) 
of the existing regulations provides that the increase in the basis of 
a distributed section 197(f)(9) intangible under section 732(b) or the 
increase in the partnership's basis of an undistributed section 
197(f)(9) intangible under section 734(b) is treated as a new 
intangible acquired as a result of the distribution. The rules for 
determining whether such basis adjustments are subject to the anti-
churning rules under section 197(f)(9) operate by reference to the 
facts surrounding each partner's acquisition of its interest in the 
partnership, the relation of the distributee partner and the continuing 
partners, and the portion of the intangible that is allocable to such 
partners. Although the specific rules are not phrased in terms of 
analyzing a deemed transfer of a portion of an intangible between the 
distributee partner and the continuing partners, the effect of the 
rules is to analyze such a deemed transfer.
    Under the proposed regulations, it first is necessary to determine 
whether the portion of an intangible that a partner is deemed to 
acquire as a result of the distribution was subject to the anti-
churning rules immediately prior to the deemed transfer. Even if the 
intangible is a section 197(f)(9) intangible with respect to the 
partnership, for purposes of analyzing a deemed transfer, the partner's 
share of the intangible is treated as not being subject to the anti-
churning rules if the intangible was held by the partnership at the 
time that the partner (or predecessor partner) acquired the partnership 
interest, and the partner (or predecessor partner) would have been able 
to amortize the intangible had the partner (or predecessor partner) 
directly acquired the intangible under the same circumstances that the 
partner (or predecessor partner) acquired the partnership interest. If 
a partner's share of the intangible is treated as not being subject to 
the anti-churning rules for this purpose, then the anti-churning rules 
would not apply to the portion of the basis adjustment that is 
attributable to the deemed transfer.
    If the partner's share of the intangible was treated as being 
subject to the anti-churning rules immediately prior to the deemed 
transfer, it is necessary, as a further step, to determine whether the 
deemed transferor and transferee are related. If the partners are not 
related, the anti-churning rules would not apply to the basis 
adjustment that gives rise to the deemed transfer.
    The proposed regulations also contain rules for measuring the 
portion of the intangible that is deemed to be transferred by the 
relevant partners in the deemed transactions together with certain 
additional rules designed to prevent circumvention of the anti-churning 
rules through the use of partnerships.

[[Page 69669]]

B. Continuing Partner's Share of Basis Adjustment Under Section 734(b)

    The proposed regulations provide that, for purposes of analyzing 
basis adjustments under section 734(b), 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 (A) 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 (B) 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.
    One commentator stated that, under the proposed regulations, the 
fraction for determining a continuing partner's share of the basis 
adjustment under section 734(b) could lead to inappropriate results in 
some circumstances. For example, if a partner contributes to a 
partnership a section 197(f)(9) intangible which has a fair market 
value that exceeds its tax basis at the time of the contribution, and, 
at some later date, in an unrelated transaction, the contributing 
partner is redeemed from the partnership resulting in a section 734(b) 
adjustment to the intangible, the proposed regulations could determine 
that the entire adjustment under section 734(b) is allocable to the 
contributing partner (assuming that the basis adjustment does not 
exceed the section 704(c) gain attributable to the property), even 
though the contributing partner is no longer a partner in the 
partnership.
    Treasury and the IRS agree that the fraction used in the proposed 
regulations can lead to inappropriate results. Furthermore, as 
discussed below, particularly in situations involving intangibles with 
built-in gain that are contributed to a partnership, an approach 
relying on a partner's share of appreciation in an intangible (whether 
measured before or after a distribution) to determine the partner's 
share of a basis increase under section 734(b) appears to be 
inconsistent with the purpose of section 197(f)(9)(E).
    Positive basis adjustments under section 734(b) can be analyzed 
from two different perspectives: gain eliminated or deductions created. 
Under Sec. 1.755-1(c)(2)(i), positive section 734(b) basis adjustments 
are allocated first to appreciated properties within a class so as to 
eliminate the built-in gain (and hence section 704(c) gain) with 
respect to such properties. In analyzing gain on disposition of the 
asset, the basis adjustment inures first to the benefit of the 
contributing partner since it will reduce the section 704(c) gain 
recognized by the partner upon the disposition of the asset by the 
partnership. However, in analyzing depreciation or amortization 
deductions attributable to the asset, the basis will inure first to the 
non-contributing partners to the extent that they were being denied 
such deductions as a result of the ceiling rule. In determining the 
portion of an intangible that a partner is deemed to receive from the 
distributee partner for purposes of applying the anti-churning rules, 
it seems that a rule focused on who would receive a deduction as a 
result of a section 734(b) basis adjustment, rather than who would 
avoid gain, is more appropriate.
    A partner's proportionate share of partnership capital generally 
serves as a good proxy for estimating a partner's share of deductions. 
Accordingly, for purposes of determining a continuing partner's share 
of a section 734(b) basis adjustment, the fraction utilized in the 
final regulations compares a continuing partner's post-distribution 
capital account as determined under section 704(b) and Sec. 1.704-
1(b)(2)(iv) to the aggregate of all of the continuing partners' post-
distribution capital accounts (or if the partnership does not maintain 
capital accounts in accordance with Sec. 1.704-1(b)(2)(iv), the 
fraction is determined by reference to the partner's overall interest 
in the partnership under Sec. 1.704-1(b)(3)). Treasury and the IRS 
believe this change best reflects how deductions are likely to flow 
from the intangible asset in a typical partnership arrangement.

C. Amortization of Section 197(f)(9) Intangible Where Some But Not All 
of the Basis Adjustment Under Section 734(b) Is Amortizable

    The proposed regulations provide that taxpayers may use any 
reasonable method to determine amortization of a section 734(b) 
adjustment with respect to an intangible for book purposes, provided 
that the method does not permit any portion of the tax deduction for 
amortization attributable to the adjustment to be allocated to a 
partner who is subject to the anti-churning rules. Several commentators 
requested guidance as to what methods would be considered reasonable in 
situations where part, but not all, of a section 734(b) basis 
adjustment is attributable to an intangible that is subject to the 
anti-churning rules.
    In response to the comments, the final regulations contain an 
example illustrating one method for determining book amortization that 
will be considered reasonable under the regulations.

D. Adjustments Under Sections 743(b) and 732(d) Where the Transferor of 
the Partnership Interest Is Related to the Transferee

    The existing regulations provide that the anti-churning rules apply 
with respect to positive basis adjustments under section 743(b) only if 
the person acquiring the partnership interest is related to the person 
transferring the partnership interest. One commentator pointed out 
that, even if the transferor partner is related to the transferee 
partner, there still may be situations where the section 743(b) 
adjustment should be amortizable by the transferee.
    To illustrate the commentator's point, consider the following 
example: A partnership (PRS) with two partners, A and B, held an 
intangible subject to the anti-churning rules on August 10, 1993. The 
partnership has made a section 754 election. On June 1, 1995, A 
transfers his entire interest in PRS to C, an unrelated person. C has a 
positive section 743(b) basis adjustment with respect to the intangible 
that is not subject to the anti-churning rules. On April 30, 2000, C 
transfers his entire interest in PRS to D, a person related to C. C's 
section 743(b) basis adjustment disappears as a result of the transfer, 
and D obtains a new section 743(b) basis adjustment with respect to the 
intangible. According to the commentator, the ownership of the interest 
in PRS by C (a party unrelated to A) should permanently purge any taint 
with respect to a section 743(b) basis adjustment attributable to C's 
interest. The fact that D is related to C should not prevent D from 
amortizing the basis adjustment.
    The commentator's suggestion is consistent with the aggregate 
approach in the regulations for adjustments under sections 732(b) and 
734(b). Under Sec. 1.197-2(h)(12)(ii) and (iv) of these final 
regulations, if a partner acquires an interest in a partnership from an 
unrelated partner after August 10, 1993, and after the partnership has 
acquired the section 197(f)(9) intangible, the partner will be treated 
as holding a portion of the intangible that is not subject to the anti-
churning rules for purposes of analyzing subsequent deemed transfers 
relating to basis adjustments under sections 732(b) and 734(b). The 
existing regulations are amended to include similar provisions for 
purposes of analyzing the

[[Page 69670]]

application of the anti-churning rules with respect to basis 
adjustments under section 743(b).
    The existing regulations pertaining to section 732(d) adjustments 
also are amended to coordinate those provisions with the change 
discussed above for section 743(b) adjustments. The amendment provides 
that the anti-churning rules do not apply to an increase in the basis 
of a section 197(f)(9) intangible under section 732(d) if, had an 
election been in effect under section 754 at the time of the transfer 
of the partnership interest, the distributee partner would have been 
able to amortize the basis adjustment made pursuant to section 743(b).

E. Modification of Rule Where a Partner Is or Becomes a User of a 
Partnership Intangible

    Section 1.197-2(h)(12)(vi) of the proposed regulations provides a 
rule to prevent avoidance of the anti-churning rules where a partner 
subject to the anti-churning rules becomes or remains a user of the 
intangible after the basis of the intangible is adjusted with respect 
to another partner under section 732, 734, or 743. One commentator 
noted that Sec. 1.197-2(h)(12)(vi) could apply if the partnership 
itself continues to use the intangible, at least where the deemed 
transferor of the intangible continues to own more than a 20 percent 
interest in the partnership, because the partner would be treated under 
the attribution rules as continuing to use the intangible by virtue of 
the partnership's use of the intangible. The commentator stated that 
such a result appears inconsistent with the policies underlying section 
197(f)(9)(E), which ignore the existence of the partnership for 
purposes of anti-churning determinations with respect to basis 
adjustments under sections 732, 734, and 743. The commentator requested 
that the final regulations make clear that a partnership's continued 
use of an intangible would not invoke the rule of Sec. 1.197-
2(h)(12)(vi).
    Consistent with this comment, Sec. 1.197-2(h)(12)(vi) of these 
final regulations makes clear that the proscribed use must be by an 
anti-churning partner or related person other than the partnership. 
Attributed use of the intangible from the partnership to a partner will 
not cause this rule to apply.

F. Clarification With Respect to Remedial Allocations

    Section 1.197-2(g)(4)(ii) of the existing regulations provides that 
``if a partner contributes a section 197 intangible to a partnership 
and the partnership adopts the remedial allocation method for making 
section 704(c) allocations of amortization deductions, the partnership 
generally may make remedial allocations of amortization deductions with 
respect to the contributed section 197 intangible in accordance with 
Sec. 1.704-3(d).'' Comments have been received expressing concern that, 
because no similar affirmative rule is contained in the anti-churning 
section of the regulations, if a contributing partner owns a greater 
than 20 percent interest in the partnership (and thus is considered 
related to the partnership), the rule allowing remedial allocations 
will not be available. While Treasury and the IRS believe that it was 
clear under the existing regulations that remedial allocations of 
amortization deductions could be made where the contributing partner is 
related to the partnership (as opposed to the non-contributing 
partners), an affirmative rule has been added to the anti-churning 
rules at Sec. 1.197-2(h)(12)(vii)(B) in order to eliminate any doubt 
with respect to this issue.
    In addition, the rule regarding the disallowance of remedials where 
a non-contributing partner is related to the contributing partner is 
amended in these final regulations to also cover situations where, as 
part of a series of related transactions that includes the contribution 
of the section 197(f)(9) intangible to the partnership, the 
contributing partner (or a related person) becomes or remains a direct 
user of the contributed intangible. Consistent with the analysis of 
remedials as being akin to a section 743(b) basis adjustment for the 
non-contributing partners, Treasury and the IRS believe that it is 
inappropriate for a non-contributing partner to obtain amortization 
deductions with respect to a portion of a contributed section 197(f)(9) 
intangible where the prior owner of the intangible becomes or remains a 
direct user of the intangible in connection with the contribution. See 
also section 197(f)(9)(A)(iii) and Sec. 1.197-2(h)(12)(vi).

G. Rules for Determining When a Partnership Interest Is Treated as 
Being Acquired From a Related Person for Purposes of Analyzing Basis 
Adjustments Under Sections 732(b) and 734(b)

    For purposes of analyzing deemed transfers resulting from basis 
adjustments under sections 732(b) and 734(b) in applying the anti-
churning rules, the proposed regulations provide that if a partner 
contributed the distributed section 197(f)(9) intangible to the 
partnership, the partnership interest acquired by such partner is 
treated as not being described in Sec. 1.197-2(h)(12)(ii)(A)(2) and (3) 
(for section 732(b) adjustments) or 1.197-2(h)(12)(iv)(A)(2) and (3) 
(for section 734(b) adjustments) (i.e., the rules that allow a prior 
purchase of a partnership interest from an unrelated person to purge 
the partner's anti-churning taint in analyzing subsequent deemed 
transfers relating to basis adjustments). Accordingly, in order for a 
basis adjustment to a section 197(f)(9) intangible under section 732(b) 
or 734(b) to be amortizable, the deemed transfer (as a result of the 
basis adjustment) from the contributing partner must be to an unrelated 
partner.
    Commentators indicated that this rule is unnecessary. According to 
the commentators, Secs. 1.197-2(h)(12)(ii)(A)(2) and (3) and 1.197-
2(h)(12)(iv)(A)(2) and (3), by their terms, cannot apply where the 
deemed transferor contributed the section 197(f)(9) intangible to the 
partnership. Treasury and the IRS agree with this comment. Accordingly, 
the final regulations omit the rule regarding a partner who contributes 
the distributed section 197(f)(9) intangible.

Special Analyses

    It has been determined that the final regulations are not a 
significant regulatory action as defined in Executive Order 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, the final regulations will be submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Drafting Information

    The principal authors of these regulations are David J. Sotos and 
Robert G. Honigman of Associate 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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

[[Page 69671]]

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)(iii), (h)(12)(iv), 
(h)(12)(v), and paragraph (h)(12)(vi)(A).
    2. Removing ``, and'' at the end of paragraph (h)(12)(vi)(B)(2)(ii) 
and adding a period in its place.
    3. Removing paragraph (h)(12)(vi)(B)(3).
    4. Removing the first sentence of paragraph (h)(12)(vii)(B) and 
adding two new sentences in its place.
    5. Removing the last two sentences of paragraph (iii) of Example 27 
in paragraph (k) and adding three sentences in their place.
    6. Adding Examples 28, 29, 30, and 31 to paragraph (k).
    7. Revising paragraphs (l)(1) and (l)(2).
    The additions and revisions read as follows:


Sec. 1.197-2  Amortization of goodwill and certain 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) The distributee partner and persons related to the distributee 
partner if the distributed intangible is a section 197(f)(9) intangible 
acquired by the partnership on or before August 10, 1993, to the extent 
that--
    (i) The distributee partner and related persons acquired an 
interest or interests in the partnership after August 10, 1993;
    (ii) Such interest or interests were held after August 10, 1993, by 
a person or persons other than either the distributee partner or 
persons who were related to the distributee partner; and
    (iii) 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) The distributee partner and persons related to the distributee 
partner if the distributed intangible is a section 197(f)(9) intangible 
acquired by the partnership after August 10, 1993, that is not 
amortizable with respect to the partnership, to the extent that--
    (i) The distributee partner and persons related to the distributee 
partner acquired an interest or interests in the partnership after the 
partnership acquired the distributed intangible;
    (ii) Such interest or interests were held after the partnership 
acquired the distributed intangible, by a person or persons other than 
either the distributee partner or persons who were related to the 
distributee partner; and
    (iii) 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 Sec. 1.197-1T.
    (C) Intangible still subject to anti-churning 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 proportion to a fraction (determined at the time of 
the distribution), as follows--
    (1) The numerator of which is equal to 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; and
    (2) The denominator of which is 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 partner's respective proportionate interest in the partnership.
    (iii) Section 732(d) adjustments. The anti-churning rules of this 
paragraph (h) do not apply to an increase in the basis of a section 
197(f)(9) intangible under section 732(d) if, had an election been in 
effect under section 754 at the time of the transfer of the partnership 
interest, the distributee partner would have been able to amortize the 
basis adjustment made pursuant to section 743(b).
    (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) A continuing partner that is the distributee partner or a 
person related to the distributee partner, with respect to any section 
197(f)(9) intangible acquired by the partnership on or before August 
10, 1993, to the extent that--
    (i) The distributee partner's interest in the partnership was 
acquired after August 10, 1993;
    (ii) Such interest was held after August 10, 1993 by a person or 
persons who were not related to the distributee partner; and
    (iii) 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) A continuing partner that is the distributee partner or a 
person related to the distributee partner, 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, to the extent 
that--
    (i) The distributee partner's interest in the partnership was 
acquired after the partnership acquired the relevant intangible;

[[Page 69672]]

    (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
    (iii) 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 Sec. 1.197-1T.
    (D) Partner's share of basis increase-- (1) In general. Except as 
provided in paragraph (h)(12)(iv)(D)(2) of this section, for purposes 
of this paragraph (h)(12)(iv), a continuing partner's share of a basis 
increase under section 734(b) is equal to--
    (i) The total basis increase allocable to the intangible; 
multiplied by
    (ii) A fraction the numerator of which is the amount of the 
continuing partner's post-distribution capital account (determined 
immediately after the distribution in accordance with the capital 
accounting rules of Sec. 1.704-1(b)(2)(iv)), and the denominator of 
which is the total amount of the post-distribution capital accounts 
(determined immediately after the distribution in accordance with the 
capital accounting rules of Sec. 1.704-1(b)(2)(iv)) of all continuing 
partners.
    (2) Exception where partnership does not maintain capital accounts. 
If a partnership does not maintain capital accounts in accordance with 
Sec. 1.704-1(b)(2)(iv), then for purposes of this paragraph 
(h)(12)(iv), a continuing partner's share of a basis increase is equal 
to--
    (i) The total basis increase allocable to the intangible; 
multiplied by
    (ii) The partner's overall interest in the partnership as 
determined under Sec. 1.704-1(b)(3) immediately after the distribution.
    (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.
    (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 in analyzing the basis adjustment 
with respect to the contributed section 197(f)(9) intangible.
    (F) Effect of section 734(b) adjustments on partners' capital 
accounts. If one or more partners are subject to the anti-churning 
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 anti-churning rules if the effect of the book adjustments 
resulting from the method is such that any portion of the tax deduction 
for amortization attributable to the section 734 adjustment is 
allocated, directly or indirectly, to a partner who is subject to the 
anti-churning rules with respect to such adjustment.
    (v) Section 743(b) adjustments--(A) General rule. The anti-churning 
rules of this paragraph (h) do not apply to an increase in the basis of 
a section 197 intangible under section 743(b) if the person acquiring 
the partnership interest is not related to the person transferring the 
partnership interest. In addition, the anti-churning rules of this 
paragraph (h) do not apply to an increase in the basis of a section 197 
intangible under section 743(b) to the extent that--
    (1) The partnership interest being transferred was acquired after 
August 10, 1993, provided--
    (i) The section 197(f)(9) intangible was acquired by the 
partnership on or before August 10, 1993;
    (ii) The partnership interest being transferred was held after 
August 10, 1993, by a person or persons (the post-1993 person or 
persons) other than the person transferring the partnership interest or 
persons who were related to the person transferring the partnership 
interest; and
    (iii) The acquisition of such interest by the post-1993 person or 
persons was not part of a transaction or series of related transactions 
in which the person transferring the partnership interest or persons 
related to the person transferring the partnership interest acquired 
such interest; or
    (2) The partnership interest being transferred was acquired after 
the partnership acquired the section 197(f)(9) intangible, provided--
    (i) The section 197(f)(9) intangible was acquired by the 
partnership after August 10, 1993, and is not amortizable with respect 
to the partnership;
    (ii) The partnership interest being transferred was held after the 
partnership acquired the section 197(f)(9) intangible by a person or 
persons (the post-contribution person or persons) other than the person 
transferring the partnership interest or persons who were related to 
the person transferring the partnership interest; and
    (iii) The acquisition of such interest by the post-contribution 
person or persons was not part of a transaction or series of related 
transactions in which the person transferring the partnership interest 
or persons related to the person transferring the partnership interest 
acquired such interest.
    (B) Acquisition of partnership interest by contribution. Solely for 
purposes of paragraph (h)(12)(v)(A) (1) and (2) 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.
    (C) Effect of retroactive elections. For purposes of paragraph 
(h)(12)(v)(A) of this section, references to August 10, 1993, are 
treated as references to July 25, 1991, if the transferee partner made 
a valid retroactive election under Sec. 1.197-1T.
    (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 anti-churning partner or related person 
(other than the partnership) becomes (or remains) a direct 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

[[Page 69673]]

as transferred by such anti-churning partner, notwithstanding the 
application of paragraph (h)(12)(ii), (iii), (iv), or (v) of this 
section.
* * * * *
    (vii) * * *
    (B) Allocations where the intangible is not amortizable by the 
contributor. If a section 197(f)(9) intangible was not an amortizable 
section 197 intangible in the hands of the contributing partner, a non-
contributing partner generally may receive remedial allocations of 
amortization under section 704(c) that are deductible for Federal 
income tax purposes. However, such a partner may not receive remedial 
allocations of amortization under section 704(c) if that partner is 
related to the partner that contributed the intangible or if, as part 
of a series of related transactions that includes the contribution of 
the section 197(f)(9) intangible to the partnership, the contributing 
partner or related person (other than the partnership) becomes (or 
remains) a direct user of the contributed intangible. * * *
* * * * *
    (k) * * *

    Example 27. * * *
    (iii) * * * However, A is an anti-churning partner under 
paragraph (h)(12)(vi)(B)(2)(i) of this section. As a result of the 
license agreement, A remains a direct user of the section 197(f)(9) 
intangible after the transfer to C. Accordingly, 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).
    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. ABC does not have a section 754 election in effect.
    (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 
anti-churning 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 
share 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 
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 anti-churning 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

[[Page 69674]]

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).
    Example 31. Partnership distribution causing section 734(b) 
basis adjustment to section 197(f)(9) intangible.
    (i) On January 1, 2001, A, B, and C form a partnership (ABC) in 
which each partner shares equally in capital and income, gain, loss, 
and deductions. On that date, A contributes a section 197(f)(9) 
intangible with a zero basis and a value of $150, and B and C each 
contribute $150 cash. A and B are related, but neither A nor B is 
related to C. ABC does not adopt the remedial allocation method for 
making section 704(c) allocations of amortization expenses with 
respect to the intangible. On December 1, 2004, when the value of 
the intangible has increased to $600, ABC distributes $300 to B in 
complete redemption of B's interest in the partnership. ABC has an 
election under section 754 in effect for the taxable year that 
includes December 1, 2004. (Assume that, at the time of the 
distribution, the basis of A's partnership interest remains zero, 
and the basis of each of B's and C's partnership interest remains 
$150.)
    (ii) Immediately prior to the distribution, the assets of the 
partnership are revalued pursuant to Sec. 1.704-1(b)(2)(iv)(f), so 
that the section 197(f)(9) intangible is reflected on the books of 
the partnership at a value of $600. B recognizes $150 of gain under 
section 731(a)(1) upon the distribution of $300 in redemption of B's 
partnership interest. As a result, the adjusted basis of the 
intangible held by ABC increases by $150 under section 734(b). A 
does not satisfy any of the tests set forth under paragraph 
(h)(12)(iv)(B) and thus is not an eligible partner. C is not related 
to B and thus is an eligible partner under paragraph 
(h)(12)(iv)(B)(1) of this section. The capital accounts of A and C 
are equal immediately after the distribution, so, pursuant to 
paragraph (h)(12)(iv)(D)(1) of this section, each partner's share of 
the basis increase is equal to $75. Because A is not an eligible 
partner, the anti-churning rules apply to A's share of the basis 
increase. The anti-churning rules do not apply to C's share of the 
basis increase.
    (iii) For book purposes, ABC determines the amortization of the 
asset as follows: First, the intangible that is subject to 
adjustment under section 734(b) will be divided into three assets: 
the first, with a basis and value of $75 will be amortizable for 
both book and tax purposes; the second, with a basis and value of 
$75 will be amortizable for book, but not tax purposes; and a third 
asset with a basis of zero and a value of $450 will not be 
amortizable for book or tax purposes. Any subsequent revaluation of 
the intangible pursuant to Sec. 1.704-1(b)(2)(iv)(f) will be made 
solely with respect to the third asset (which is not amortizable for 
book purposes). The book and tax attributes from the first asset 
(i.e., book and tax amortization) will be specially allocated to C. 
The book and tax attributes from the second asset (i.e., book 
amortization and non-amortizable tax basis) will be specially 
allocated to A. Upon disposition of the intangible, each partner's 
share of gain or loss will be determined first by allocating among 
the partners an amount realized equal to the book value of the 
intangible attributable to such partner, with any remaining amount 
realized being allocated in accordance with the partnership 
agreement. Each partner then will compare its share of the amount 
realized with its remaining basis in the intangible to arrive at the 
gain or loss to be allocated to such partner. This is a reasonable 
method for amortizing the intangible for book purposes, and the 
results in allocating the income, gain, loss, and deductions 
attributable to the intangible do not contravene the purposes of the 
anti-churning rules under section 197 or paragraph (h) of this 
section.
    (l) * * * (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 
Sec. 1.197-1T), and paragraphs (h)(12)(ii), (iii), (iv), (v), (vi)(A), 
and (vii)(B) of this section (anti-churning rules applicable to 
partnerships) apply to partnership transactions occurring on or after 
November 20, 2000.
    (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 Sec. 1.167(a)-14 to property acquired (or 
partnership transactions occurring) after August 10, 1993 (or July 25, 
1991, if a valid retroactive election has been made under Sec. 1.197-
1T) and--
    (i) On or before January 25, 2000; or
    (ii) With respect to paragraphs (h)(12)(ii), (iii), (iv), (v), 
(vi)(A), and (vii)(B) of this section, before November 20, 2000.
* * * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: November 9, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 00-29524 Filed 11-17-00; 8:45 am]
BILLING CODE 4830-01-U