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

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8907] RIN 1545-AX73

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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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 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 §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 §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 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
§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, §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.

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 §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 §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 §1.704-1(b)(2)(iv), the fraction is
determined by reference to the partner's overall interest in the
partnership under §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 §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 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 §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 §1.197-2(h)(12)(vi).

Consistent with this comment, §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
A if a partner contributes a section 197 intangible to a partnership
and the partnership adopts the remedial allocation method for making
section 704(c) allocations of amortization deductions, the
partnership generally may make remedial allocations of amortization
deductions with respect to the contributed section 197 intangible in
accordance with §1.704-3(d) @ 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
§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 §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 §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, §§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:

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 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: §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 §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;

(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
§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 §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 §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 §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 §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 §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 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 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 §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 §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 -31a- 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 §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 §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
§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.

* * * * *

Deputy Commissioner of Internal Revenue Service
Robert E. Wenzel
Approved: 11/09/00
Acting Assistant Secretary of the Treasury
Jonathan Talisman

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