Amortization of Intangible Property

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

TITLE: Amortization of Intangible Property

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to the
amortization of certain intangible property. The final regulations
reflect changes to the law made by the Omnibus Budget Reconciliation
Act of 1993 (OBRA '93) and affect taxpayers who acquired intangible
property after August 10, 1993, or made a retroactive election to
apply OBRA '93 to intangibles acquired after July 25, 1991.

DATES: Effective Date: January 25, 2000.

Applicability Dates: These regulations apply to property acquired
after January 25, 2000..... Regulations to implement section 197(e)
(4)(D) are applicable August 11, 1993, for property acquired after
August 10, 1993 (or July 26, 1991, for property acquired after July
25, 1991, if a valid retroactive election has been made under
�1.197-1T).

FOR FURTHER INFORMATION CONTACT: John Huffman at (202) 622-3110 (not
a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations
has been reviewed and, pending receipt and evaluation of public
comments, approved by the Office of Management and Budget (OMB)
under 44 U.S.C. 3507 and assigned control number 1545-1671.

The collection of information in this regulation is in �1.197-2(h)
(9). This information is required in order to provide guidance on
the time and manner of making the election under section 197(f)(9)
(B). Under this election, the seller of a section 197 intangible may
pay a tax on the sale in order to avoid the application of the anti-
churning rules of section 197(f)(9) to the purchaser. This
information will be used to confirm the parties to the transaction,
calculate any additional tax due, and notify the purchaser of the
seller's election. The likely respondents are business or other for-
profit institutions.

Comments on the collection of information should be sent to the
Office of Management and Budget,Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Reven e
Service,Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington,
DC 20224. Comments on the collection of information should be
received by March 27, 2000. Comments are specifically requested
concerning: Whether the collection of information is necessary for
the proper performance of the functions of the Internal Revenue
Service, including whether the information will have practical
utility;

The accuracy of the estimated burden associated with the collection
of information (see below);

How the quality, utility, and clarity of the information to be
collected may be enhanced; How the burden of complying with the
collection of information may be minimized, including through the
application of automated collection techniques or other forms of
information technology; and Estimates of capital or start-up costs
and costs of operation, maintenance, and purchase of services to
provide information.

Estimated total annual reporting burden: 1500 hours.

Estimated average annual burden hours per respondent varies from 2
to 4 hours, depending on individual circumstances, with an estimated
average of 3 hours.

Estimated number of respondents: 500 per year.

Estimated annual frequency of responses: 1 An agency may not conduct
or sponsor, and a person is not required to respond to, a collection
of information unless it displays a valid control number assigned by
the Office of Management and Budget.

Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background

On January 16, 1997, the IRS published proposed regulations
(REG-209709-94) in the Federal Register (62 FR 2336) inviting
comments under sections 167(f) and 197.

A public hearing was held May 15, 1997. Numerous comments have been
received.

After consideration of all the comments, the proposed regulations
are adopted as revised by this Treasury decision.

Explanation of Provisions

Section 162(k) Application

Example 4 of the proposed regulation �1.197-2(k) provided that
amounts paid for a covenant not to compete entered into in
connection with a redemption was nondeductible under section 162(k)
and thus not subject to section 197. Commentators suggested that
guidance on the application of section 162(k) to transactions
involving section 197 intangibles should be addressed in regulations
under section 162(k). No reference to section 162(k) is made in the
final regulations.

Purchase of a Trade or Business

Certain intangibles are excepted from the application of section 197
if they are not acquired as part of a purchase of a trade or
business. The proposed regulations provide that, for purposes of
section 197, a group of assets constitutes a trade or business if
their use would constitute a trade or business under section 1060
(that is, if goodwill or going concern value could, under any
circumstances, attach to the assets).

In addition, the proposed regulations treat a group of assets as a
trade or business if they include any customer-based intangibles or,
with certain exceptions, any franchise, trademark, or trade name
(the per se rules). The preamble of the proposed regulations state
that the IRS intends to provide additional guidance on the
circumstances in which a group of assets is treated as a trade or
business in regulations under section 1060.

Although a number of comments requested that the final regulations
under section 197 provide such additional guidance, the final
regulations generally retain, without amplification, the rules in
the proposed regulations. The IRS and Treasury Department will,
however, continue to consider this issue during the development of
final regulations under section 1060.

Commentators also requested modifications to the per se rules. In
response to these comments, the final regulations limit the
applicability of these rules to the cases specifically described in
the legislative history of section 197 (that is, the acquisition of
a franchise, trademark, or trade name). The final regulations retain
the proposed exceptions under which certain franchises, trademarks,
and trade names are disregarded in applying the per se rules. In
addition, the regulations clarify that a license of a trademark or
trade name is also disregarded in applying the per se rules.

Computer Software The final regulations contain rules that supersede
certain of the procedures set forth in Revenue Procedure 69-21
(1969-2 C.B. 303), which provides guidelines relating to costs
incurred to develop, purchase, or lease computer software.
Specifically, the final regulations provide that purchased computer
software is amortizable over 15 years if section 197 applies and
over 36 months if the software is not a section 197 intangible.

In addition, the regulations clarify that section 197 (rather than
�1.162-11) applies to certain costs incurred with respect to leased
software (that is, costs to acquire a section 197 intangible that is
a limited interest in software). Computer software costs included,
without being separately stated, in the cost of the computer
hardware (bundled software) continue to be capitalized and
depreciated as part of the computer hardware.

In addition, the final regulations treat software costs as currently
deductible (and not subject to section 197) if they are not
chargeable to capital account under the rules applicable to
licensing transactions (discussed below) and are otherwise currently
deductible. The final regulations clarify that, for this purpose, an
amount described in �1.162-11 is not currently deductible if,
without regard to �1.162-11, such amount is properly chargeable to
capital account. A proper and consistent practice of taking software
costs into account under �1.162-11 may, however, be continued if the
costs are not subject to section 197.

A revenue procedure superseding Rev. Proc. 69-21 and providing
procedures consistent with the rules in the final regulations will
be issued in the near future. In the meantime, taxpayers may not
rely on the procedures in Rev. Proc. 69-21 to the extent they are
inconsistent with section 167(f), section 197, or the final
regulations.

Mortgage Servicing Rights

The proposed regulations treat mortgage servicing rights relating to
a pool of mortgages as a single asset under section 167(f) (relating
to mortgage servicing rights not acquired as part of a purchase of a
trade or business). Thus, if some but not all mortgages in a pool
prepay, no loss is recognized. Commentators assert that each right
in the pool is a discrete asset, and thus, taxpayers should be able
to recognize a loss upon the prepayment of an individual mortgage
within the pool. The Service and the Treasury Department believe
this is generally inappropriate in cases where depreciation is based
on the average useful life of the assets. See �1.167(a)-8. Thus, the
regulations retain the rule that no loss is recognized if some but
not all mortgages in a pool prepay or are sold or exchanged. The
final regulations provide, however, that if a taxpayer establishes
multiple accounts within a pool at the time of its acquisition, gain
or loss is recognized on the sale or exchange of all mortgage
servicing rights within any such account.

When Section 197 Amortization Begins

The proposed regulations provide that amortization begins the later
of the first day of the month in which the property is acquired, or
the first month in which the active conduct of a trade or business
begins. Commentators suggest that the literal language of section
197(a) allows amortization beginning with the month the intangible
is acquired. Under section 197(c)(1), however, a section 197
intangible is amortizable only if it is held in connection with the
conduct of a trade or business or an activity described in section
212. Moreover, there is no suggestion in the legislative history
that Congress intended to apply a rule differing from those
applicable under section 167 and former section 1253(d).

Former section 1253(d)(2) provided, in language similar to that in
section 197(a), that the amortization of certain amounts begins in
the taxable year in which the amounts are paid. Although section
1253(d)(2) did not contain any reference to section 162 or to use in
a trade or business, it was nevertheless well established at the
time of the enactment of section 197 that the provision embodied a
trade or business requirement and that amounts were not deductible
thereunder unless the taxpayer was operating or conducting a trade
or business after the amounts were paid.

Commentators suggest that it is significant that section 167 refers
to "property used in the trade or business" while property can
qualify for amortization under section 197 if it is "held in
connection with the conduct of a trade or business." Further,
commentators assert that the language used in section 197 is closer
to the "held in connection with his trade or business" language used
in section 174, which does not require the current conduct of a
trade or business, than to the language of section 167.

The different language used in these provisions can be explained,
however, without departing from previous practice under sections 167
and 1253(d) regarding the time at which amortization commences.
Broader language under section 197 is necessary because it applies
to assets, such as goodwill, that although held in connection with
the conduct of a trade or business are not commonly viewed as being
used in the trade or business. Further, modifying the language used
in section 174 by adding the words "conduct of" indicates that
Congress did not intend to change the longstanding trade or business
requirement for purposes of determining when amortization commences.

Consequently, the final regulations retain the rule in the proposed
regulations that amortization begins no earlier than the first day
of the month in which the active trade or business or the activity
described in section 212 begins.

Transactions Involving Partnerships

The final regulations relating to partnership transactions have been
changed from the proposed regulations in several respects to reflect
the recommendations of commentators. Example 17 of the proposed
regulation � 1.197-2(k) provided that a partner may amortize a � 743
adjustment with respect to a section 197 intangible only if the
formation of the partnership and the sale of the partnership
interest are "unrelated transactions." Commentators suggested that
an unrelated transaction standard would create significant confusion
for taxpayers. According to the commentators, taxpayers would have
greater certainty with respect to their transactions, and the
government still would be adequately protected, if these
transactions were analyzed under general tax principles, including
the step transaction doctrine. The final regulations remove the
unrelated transaction requirement. However, if the transaction is
structured so that, under general principles of tax law, the
transaction is not properly characterized as a sale of a partnership
interest, then section 197 will apply to the transaction as recast
to reflect its true economic substance.

Certain commentators also requested that Example 16 of proposed
regulation � 1.197-2(k) be modified to allow a partnership to
amortize an intangible contributed to the partnership under the
transferred basis rules under section 197(f)(2), even if a partner
related to the partnership under section 197(f)(9)(C) had owned the
intangible during the transition period and, as part of an
integrated transaction, had sold the intangible to an unrelated
party before forming the partnership. The commentators suggested
that because section 197(f)(9)(E) generally permits amortization for
the stepped-up basis in a partnership transaction under section 743
where a section 754 election was in effect, amortization also should
be allowed in a sale of an intangible followed by a contribution of
the intangible to a partnership, an economically similar
transaction. This recommendation was not adopted. In general, a
partnership is treated as an entity separate from its partners in
characterizing related party transfers. See, e.g., Section 707(b)(1)
(specifically referenced in section 197(f)(9)(C)(i)(I)). Section
197(f)(9)(E) does provide a special anti-churning rule for certain
partnership transactions. However, this special rule is not
applicable in situations where a partnership has a transferred basis
in the intangible under section 723. With respect to the analogy
under section 743, where a transferee is allowed to amortize a
section 743 basis step-up, it is only the increase in basis that may
be amortized, and the amortization attributable to the basis
increase is segregated for use only by the transferee partner.
Neither of these results necessarily follow from a sale of property
followed by a contribution of the property to the partnership.

The proposed regulations did not allow partners to deduct, for
federal income tax purposes, curative or remedial amortization
allocations from the partnership in situations where the asset was a
section 197(f)(9) intangible (and thus nonamortizable) in the hands
of the contributing partner. Commentators have suggested allowing
curative and remedial allocations under section 704(c). The final
regulations generally permit a partnership to make curative or
remedial allocations to its noncontributing partners of amortization
relating to an asset that was amortizable (or a zero-basis
intangible that otherwise would have been amortizable) in the hands
of the contributor. For assets that were section 197(f)(9)
intangibles (and thus nonamortizable) in the hands of the
contributor, however, the partnership may make deductible
amortization allocations to the noncontributing partners under the
remedial method only. The final regulations permit remedial
allocations because, under section 704(c), remedial allocations
treat the amortizable portion of contributed property like newly
purchased property, with a new holding period and determinable
allocation of tax items. This result, which is similar to the result
obtained for basis increases under section 743, does not follow
under the curative method because curative allocations are not
determined as if the applicable property were newly purchased
property. The decision to allow amortization for remedial
allocations in these regulations also is consistent with the
decisions regarding fungibility of partnership interests that are
inherent in the recently finalized regulations under sections 743
and 755. Finally, the rules governing section 704(c) allocations of
amortization from section 197 intangibles contributed to a
partnership in a nonrecognition transaction are still subject to the
anti-churning provisions. Accordingly, remedial allocations of
deductible amortization expenses may not be made to a partner who is
related to a partner that contributes an intangible subject to the
anti-churning rules. Certain problems may arise in maintaining
capital accounts where a partnership elects to make remedial
allocations, and the anti-churning rules apply with respect to one
or more partners. These problems also arise in the context of
section 734(b) adjustments and are discussed in the preamble to the
proposed regulations relating to the application of the anti-
churning rules to basis adjustments under sections 732(b) and
734(b), which are being issued at the same date as these final
regulations.

Commentators requested that the final regulations provide additional
guidance on how the special anti-churning rule of section 197(f)(9)
(E) applies to increases in the basis of property under sections
732, 734, and 743. In accordance with these comments, the final
regulations provide rules for determining the amount of a basis
adjustment under sections 732(d) and 743 that will be subject to the
anti-churning rules.

The Treasury Department and the IRS also are issuing, at the same
time as these final regulations, proposed regulations addressing how
to determine the amount of a basis adjustment under sections 732(b)
and 734(b) that will be subject to the anti-churning rules.

Finally, the final regulations provide that where, for purposes of
the anti-churning rules, a partner is treated as holding its
proportionate share of partnership property under section 197(f)(9)
(E), the continued or subsequent use (by license or otherwise) of an
intangible by a partner could cause the anti-churning rules to apply
with respect to that partner's share of the intangible in situations
where a basis step-up under section 732(d) or 743(b) otherwise would
be amortizable. This rule is necessary in order to prevent the
circumvention of section 197(f)(9)(A) through the use of a
partnership. The proposed regulations being issued in conjunction
with these final regulations expand the application of this rule to
basis adjustments under sections 732(b) and 734(b). Contracts for
the Use of a Section 197 Intangible The proposed regulations provide
that a right to use a section 197 intangible pursuant to a license,
contract, or other arrangement is, itself, a section 197 intangible.

The proposed regulations further provide that amounts paid for such
a right are chargeable to capital account, whether or not the
payments would have been deductible (for example, as a royalty) if
the right were not a section 197 intangible. Under the proposed
regulations, the amount chargeable to capital account is generally
determined without regard to sections 483 and 1274 (that is, no part
of the amount paid is recharacterized as unstated interest or
original issue discount). Finally, the proposed regulations treat
the acquisition of a franchise, trademark, or trade name as the
acquisition of a trade or business, thereby preventing other
intangibles acquired in the same transaction or series of related
transactions from qualifying for any of the exceptions applicable to
separately acquired property.

Commentators suggested that these rules have negative consequences
for common cross-border and affiliate licenses, which frequently
include, in addition to rights that would not be subject to section
197 if not acquired as part of a purchase of a trade or business,
rights to use a trademark or trade name. Under prior law, amounts
paid for these licenses were generally currently deductible. The
proposed regulations, however, require amortization over 15 years.
In addition, cost recovery over the 15-year period is significantly
backloaded because the licenses generally involve contingent
payments that are not includible in basis until the year in which
they are paid or incurred and, in addition, the proposed regulations
provide that sections 483 and 1274 are generally inapplicable.

After further consideration of this issue in light of the concerns
raised by the commentators, the IRS and Treasury Department have
concluded that, particularly in the case of common licensing
transactions involving technology and similar intangible property, a
different approach is appropriate. The clearest indication of
Congressional intent on this issue is the statement in the
legislative history to the effect that, with certain exceptions,
section 197 generally does not apply to amounts that were otherwise
currently deductible before the enactment of section 197.
Nevertheless, the IRS and Treasury Department are also mindful that
Congress directed the issuance of such regulations as may be
appropriate to prevent avoidance of the purposes of section 197.

The final regulations generally provide that royalty payments under
a contract for the use of section 197 intangibles unconnected with
the purchase of a trade or business are not required to be
capitalized. Licensing transactions will, however, be closely
scrutinized under the principles of section 1235 for purposes of
determining whether the payments are, in fact, deductible royalties
or, instead, represent purchase price that should be charged to
capital account.

The final regulations also modify the rule that treats the
acquisition of a franchise, trademark, or trade name as the
acquisition of a trade or business. Under the final regulations, the
acquisition of an interest in a trademark or trade name is
disregarded in determining whether acquired property is a trade or
business if, under the principles of section 1253, the grant of the
interest is not a transfer of all substantial rights in the
trademark or trade name. Thus, the acquisition of such an interest
in a trademark or trade name will not subject other intangibles
acquired in the same transaction or series of related transactions
to the generally less favorable rules applicable to intangibles
acquired as part of a purchase of a trade or business.

To prevent abuses, the final regulations provide that if the right
to use a section 197 intangible is provided under a license entered
into as part of a purchase of a trade or business, amounts paid for
the right are, as under the proposed regulations, chargeable to
capital account. An exception, not contained in the proposed
regulations, is provided for licenses of technology, know-how, and
other similar items (including most types of information base).
Royalties paid under these licenses are not required to be
capitalized if the taxpayer establishes that the payments are, in
fact, deductible royalties under general tax principles and
represent an arm's-length consideration for the transferred rights.

Finally, any amount otherwise chargeable to capital account with
respect to a section 197 intangible and payable after the
acquisition of the intangible to which it relates is treated, in
determining the tax treatment of the purchaser, as an amount payable
under a debt instrument. Thus, the extent to which such amounts are
treated as payments of principal and the time at which the amount
treated as principal is included in basis is determined under
generally applicable rules relating to imputed interest and original
issue discount. If, under these rules, a basis increase occurs after
the beginning of the 15-year amortization period, the increase is
amortized over the remainder of the 15-year period (or, in the case
of an increase occurring after the end of the amortization period,
is immediately deductible).

Anti-churning Rules

The anti-churning rules of section 197 prevent taxpayers from
converting goodwill, going concern value, and similar assets held or
used at any time during the transition period into amortizable
section 197 intangibles through transactions such as transfers to
related parties. The proposed regulations provide guidance on a
number of specific issues arising under the anti-churning rules. The
final regulations retain this guidance with certain modifications
and, in addition, set forth the purpose of the anti-churning rules
(generally, to prevent the amortization of certain intangibles that
are not acquired after the applicable effective date in a
transaction giving rise to a significant change in ownership or
use). The final regulations further provide that the anti-churning
rules are to be applied in a manner that carries out their purpose.
The final regulations include a rule providing that a transaction
will be presumed to have a principal purpose of avoiding the anti-
churning rules if it does not effect a significant change in
ownership or use.

The final regulations also provide additional guidance concerning
the circumstances in which persons are treated as related for
purposes of the anti-churning rules. Section 197 provides that a
relationship is tested for purposes of the anti-churning rules both
immediately before and immediately after the acquisition. The
proposed regulations further provide that, in the case of
intangibles acquired in a series of related transactions, testing
begins immediately before the first acquisition and continues until
immediately after the last acquisition. Comments suggested that
momentary relationships created in the course of the acquisition
should be disregarded for purposes of the anti-churning rules. Such
relationships can arise, for example, in the course of a stock
acquisition followed by a liquidation or when assets are contributed
to a newly created subsidiary and, pursuant to a binding commitment,
all stock of the subsidiary is sold to an unrelated person or
persons immediately after the contribution.

To address these and similar situations, the final regulations
provide that in the case of a series of related transactions (or a
series of transactions that together comprise a qualified stock
purchase within the meaning of section 338(d)(3)) a person is
treated as related to another person if the relationship exists
immediately before the earliest such transaction or immediately
after the last such transaction. In addition, any relationship
created as part of a series of related transactions in which a
person acquires stock of a corporation followed by a liquidation of
the acquired corporation under section 331 generally is disregarded.
Further, as with all other provisions of the regulations relating to
the anti-churning rules, these provisions are to be applied in a
manner that carries out the purpose of the anti-churning rules.

The final regulations also provide guidance on the exemption from
the anti-churning rules if the person from whom the taxpayer
acquires an intangible elects to recognize gain and agrees to pay a
specified amount of tax. In general, these rules are the same as
those contained in the proposed regulations, except that the
proposed regulations do not prescribe procedures for making the
election. The final regulations provide guidance on the manner of
making the election, including procedures that apply to persons not
otherwise subject to Federal income tax.

Effective Dates

The regulations under sections 167(f) and 197 were proposed to apply
on the date on which the final regulations are published in the
Federal Register . Regulations to implement section 197(e)(4)(D)
(separately acquired contracts of fixed duration or amount) were
proposed to apply August 11, 1993, for property acquired after
August 10, 1993 (or July 26, 1991, if a valid retroactive election
has been made under �1.197-1T).

Comments suggested that the applicability date should be modified to
clarify that the regulations (other than the implementation of
section 197(e)(4)(D)) apply only to property acquired on or after
the date final regulations are published. This suggestion has been
adopted. Accordingly, the final regulations generally apply only to
intangible property acquired after the date they are published in
the Federal Register .

The applicability date of the rules implementing section 197(e)(4)
(D) is similarly clarified. Thus, the final regulations provide that
these rules apply to property acquired after August 10, 1993 (or
July 25, 1991, if a valid retroactive election has been made under
�1.197-1T). The regulations also provide consent for changes in
method of accounting to comply with the rules and automatic
procedures for making the change.

In addition, the final regulations permit taxpayers to apply the
rules in the final regulations to property acquired before the
applicability date of the final regulations (or to rely on the
proposed regulations for such property) and provide similar consent
and automatic change procedures for taxpayers that choose to apply
the final regulations to pre-effective date acquisitions.

Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It is hereby
certified that these regulations do not have a significant impact on
a substantial number of small entities. This certification is based
on the fact that the time required to prepare and file the election
statement and notify acquirers is minimal and will not have a
significant impact on those few small entities that choose to make
the election. Therefore, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. It
also has been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these
regulations. Pursuant to section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking was submitted to the Chief
Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.

Drafting Information

The principal author of these regulations is John Huffman, Office of
Assistant Chief Counsel (Passthroughs and Special Industries), IRS.
However, other personnel from the IRS and Treasury Department
participated in their development.

List of S bjects

26 CFR Part 1 Income taxes, Reporting and recordkeeping
requirements.

26 CFR Part 602 Reporting and recordkeeping requirements.

Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES Paragraph

1. The authority citation for part 1 is amended by adding an entry
in numerical order to read as follows:

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

Section 1.197-2 also issued under 26 U.S.C. 197(g). * * *

Par. 2. Section 1.162-11 is amended by adding a sentence at the end
of paragraph (a) to read as follows: �1.162-11 Rentals.

(a) * * * See �1.197-2 for rules governing the amortization of costs
to acquire limited interests in section 197 intangibles.

* * * * *

Par. 3. Section 1.167(a)-3 is amended by adding a sentence at the
end to read as follows:

�1.167(a)-3 Intangibles.

* * * See sections 197 and 167(f) and, to the extent applicable,
��1.197-2 and 1.167(a)-14 for amortization of goodwill and certain
other intangibles acquired after August 10, 1993, or after July 25,
1991, if a valid retroactive election under �1.197-1T has been made.

Par. 4. Section 1.167(a)-6 is amended by adding two sentences at the
end of paragraph (a) to read as follows:

�1.167(a)-6 Depreciation in special cases.

(a) * * * See �1.167(a)-14(c)(4) for depreciation of a separately
acquired interest in a patent or copyright described in section
167(f)(2) acquired after January 25, 2000.

See �1.197-2 for amortization of interests in patents and copyrights
that constitute amortizable section 197 intangibles.

* * * * *

Par. 5. Section 1.167(a)-14 is added to read as follows: �
1.167(a)-14 Treatment of certain intangible property excluded from
section 197.

(a) Overview. This section provides rules for the amortization of
certain intangibles that are excluded from section 197 (relating to
the amortization of goodwill and certain other intangibles). These
excluded intangibles are specifically described in �1.197-2(c)(4),
(6), (7), (11), and (13) and include certain computer software and
certain other separately acquired rights, such as rights to receive
tangible property or services, patents and copyrights, certain
mortgage servicing rights, and rights of fixed duration or amount.
Intangibles for which an amortization amount is determined under
section 167(f) and intangibles otherwise excluded from section 197
are amortizable only if they qualify as property subject to the
allowance for depreciation under section 167(a).

(b) Computer software--(1) In general. The amount of the deduction
for computer software described in section 167(f)(1) and �1.197-2(c)
(4) is determined by amortizing the cost or other basis of the
computer software using the straight line method described in
�1.167(b)-1 (except that its salvage value is treated as zero) and
an amortization period of 36 months beginning on the first day of
the month that the computer software is placed in service. If costs
for developing computer software that the taxpayer properly elects
to defer under section 174(b) result in the development of property
subject to the allowance for depreciation under section 167, the
rules of this paragraph (b) will apply to the unrecovered costs. In
addition, this paragraph (b) applies to the cost of separately
acquired computer software where these costs are separately stated
and the costs are required to be capitalized under section 263(a).

(2) Exceptions. Paragraph (b)(1) of this section does not apply to
the cost of computer software properly and consistently taken into
account under �1.162-11. The cost of acquiring an interest in
computer software that is included, without being separately stated,
in the cost of the hardware or other tangible property is treated as
part of the cost of the hardware or other tangible property that is
capitalized and depreciated under other applicable sections of the
Internal Revenue Code.

(3) Additional rules. Rules similar to those in �1.197-2(f)(1)(iii),
(f)(1)(iv), and (f)(2) (relating to the computation of amortization
deductions and the treatment of contingent amounts) apply for
purposes of this paragraph (b).

(c) Certain interests or rights not acquired as part of a purchase
of a trade or business--(1) Certain rights to receive tangible
property or services. The amount of the deduction for a right (other
than a right acquired as part of a purchase of a trade or business)
to receive tangible property or services under a contract or from a
governmental unit (as specified in section 167(f)(2) and �1.197-2(c)
(6)) is determined as follows:

(i) Amortization of fixed amounts. The basis of a right to receive a
fixed amount of tangible property or services is amortized for each
taxable year by multiplying the basis of the right by a fraction,
the numerator of which is the amount of tangible property or
services received during the taxable year and the denominator of
which is the total amount of tangible property or services received
or to be received under the terms of the contract or governmental
grant. For example, if a taxpayer acquires a favorable contract
right to receive a fixed amount of raw materials during an
unspecified period, the taxpayer must amortize the cost of acquiring
the contract right by multiplying the total cost by a fraction, the
numerator of which is the amount of raw materials received under the
contract during the taxable year and the denominator of which is the
total amount of raw materials received or to be received under the
contract.

(ii) Amortization of unspecified amount over fixed period. The cost
or other basis of a right to receive an unspecified amount of
tangible property or services over a fixed period is amortized
ratably over the period of the right. (See paragraph (c)(3) of this
section regarding renewals).

(iii) Amortization in other cases. [Reserved]

(2) Rights of fixed duration or amount. The amount of the deduction
for a right (other than a right acquired as part of a purchase of a
trade or business) of fixed duration or amount received under a
contract or granted by a governmental unit (specified in section
167(f)(2) and �1.197-2(c)(13)) and not covered by paragraph (c)(1)
of this section is determined as follows:

(i) Rights to a fixed amount. The basis of a right to a fixed amount
is amortized for each taxable year by multiplying the basis by a
fraction, the numerator of which is the amount received during the
taxable year and the denominator of which is the total amount
received or to be received under the terms of the contract or
governmental grant.

(ii) Rights to an unspecified amount over fixed duration of less
than 15 years.

The basis of a right to an unspecified amount over a fixed duration
of less than 15 years is amortized ratably over the period of the
right.

(3) Application of renewals. (i) For purposes of paragraphs (c)(1)
and (2) of this section, the duration of a right under a contract
(or granted by a governmental unit) includes any renewal period if,
based on all of the facts and circumstances in existence at any time
during the taxable year in which the right is acquired, the facts
clearly indicate a reasonable expectancy of renewal.

(ii) The mere fact that a taxpayer will have the opportunity to
renew a contract right or other right on the same terms as are
available to others, in a competitive auction or similar process
that is designed to reflect fair market value and in which the
taxpayer is not contractually advantaged, will generally not be
taken into account in determining the duration of such right
provided that the bidding produces a fair market value price
comparable to the price that would be obtained if the rights were
purchased immediately after renewal from a person (other than the
person granting the renewal) in an arm's-length transaction.

(iii) The cost of a renewal not included in the terms of the
contract or governmental grant is treated as the acquisition of a
separate intangible asset.

(4) Patents and copyrights. If the purchase price of a interest
(other than an interest acquired as part of a purchase of a trade or
business) in a patent or copyright described in section 167(f)(2)
and �1.197-2(c)(7) is payable on at least an annual basis as either
a fixed amount per use or a fixed percentage of the revenue derived
from the use of the patent or copyright, the depreciation deduction
for a taxable year is equal to the amount of the purchase price paid
or incurred during the year. Otherwise, the basis of such patent or
copyright (or an interest therein) is depreciated either ratably
over its remaining useful life or under section 167(g) (income
forecast method). If a patent or copyright becomes valueless in any
year before its legal expiration, the adjusted basis may be deducted
in that year.

(5) Additional rules. The period of amortization under paragraphs
(c)(1) through (4) of this section begins when the intangible is
placed in service, and rules similar to those in �1.197-2(f)(2)
apply for purposes of this paragraph (c).

(d) Mortgage servicing rights--(1) In general. The amount of the
deduction for mortgage servicing rights described in section 167(f)
(3) and �1.197-2(c)(11) is determined by using the straight line
method described in �1.167(b)-1 (except that the salvage value is
treated as zero) and an amortization period of 108 months beginning
on the first day of the month that the rights are placed in service.
Mortgage servicing rights are not depreciable to the extent the
rights are stripped coupons under section 1286.

(2) Treatment of rights acquired as a pool--(i) In general. Except
as provided in paragraph (d)(2)(ii) of this section, all mortgage
servicing rights acquired in the same transaction or in a series of
related transactions are treated as a single asset (the pool) for
purposes of determining the depreciation deduction under this
paragraph (d) and any gain or loss from the sale, exchange, or other
disposition of the rights. Thus, if some (but not all) of the rights
in a pool become worthless as a result of prepayments, no loss is
recognized by reason of the prepayment and the adjusted basis of the
pool is not affected by the unrecognized loss. Similarly, any amount
realized from the sale or exchange of some (but not all) of the
mortgage servicing rights is included in income and the adjusted
basis of the pool is not affected by the realization.

(ii) Multiple accounts. If the taxpayer establishes multiple
accounts within a pool at the time of its acquisition, gain or loss
is recognized on the sale or exchange of all mortgage servicing
rights within any such account.

(3) Additional rules. Rules similar to those in �1.197-2(f)(1)(iii),
(f)(1)(iv), and (f)(2) (relating to the computation of amortization
deductions and the treatment of contingent amounts) apply for
purposes of this paragraph (d).

(e) Effective date -- (1) In general. This section applies to
property acquired after January 25, 2000, except that
�1.167(a)-14(c)(2) (depreciation of the cost of certain separately
acquired rights) and so much of �1.167(a)-14(c)(3) as relates to
�1.167(a)-14( c)(2) apply to property acquired after August 10, 1993
(or July 25, 1991, if a valid retroactive election has been made
under �1.197-1T).

(2) Change in method of accounting. See �1.197-2(l)(4) for rules
relating to changes in method of accounting for property to which
�1.167(a)-14 applies.

Par. 6. Section 1.197-0 is added to read as follows: �1.197-0 Table
of contents.

This section lists the headings that appear in �1.197-2.

�1.197-2 Amortization of goodwill and certain other intangibles.

(a) Overview.

(1) In general.

(2) Section 167(f) property.

(3) Amounts otherwise deductible.

(b) Section 197 intangibles; in general.

(1) Goodwill.

(2) Going concern value.

(3) Workforce in place.

(4) Information base.

(5) Know-how, etc.

(6) Customer-based intangibles.

(7) Supplier-based intangibles.

(8) Licenses, permits, and other rights granted by governmental
units.

(9) Covenants not to compete and other similar arrangements.

(10) Franchises, trademarks, and trade names.

(11) Contracts for the use of, and term interests in, other section
197 intangibles.

(12) Other similar items.

(c) Section 197 intangibles; exceptions.

(1) Interests in a corporation, partnership, trust, or estate.

(2) Interests under certain financial contracts.

(3) Interests in land.

(4) Certain computer software.

(i) Publicly available.

(ii) Not acquired as part of trade or business.

(iii) Other exceptions.

(iv) Computer software defined.

(5) Certain interests in films, sound recordings, video tapes,
books, or other similar property.

(6) Certain rights to receive tangible property or services.

(7) Certain interests in patents or copyrights.

(8) Interests under leases of tangible property.

(i) Interest as a lessor.

(ii) Interest as a lessee.

(9) Interests under indebtedness.

(i) In general.

(ii) Exceptions.

(10) Professional sports franchises.

(11) Mortgage servicing rights.

(12) Certain transaction costs.

(13) Rights of fixed duration or amount.

(d) Amortizable section 197 intangibles.

(1) Definition.

(2) Exception for self-created intangibles.

(i) In general.

(ii) Created by the taxpayer.

(A) Defined.

(B) Contracts for the use of intangibles.

(C) Improvements and modifications.

(iii) Exceptions.

(3) Exception for property subject to anti-churning rules.

(e) Purchase of a trade or business.

(1) Goodwill or going concern value.

(2) Franchise, trademark, or trade name.

(i) In general.

(ii) Exceptions.

(3) Acquisitions to be included.

(4) Substantial portion.

(5) Deemed asset purchases under section 338.

(6) Mortgage servicing rights.

(7) Computer software acquired for internal use.

(f) Computation of amortization deduction.

(1) In general.

(2) Treatment of contingent amounts.

(i) Amounts added to basis during 15-year period.

(ii) Amounts becoming fixed after expiration of 15-year period.

(iii) Rules for including amounts in basis.

(3) Basis determinations for certain assets.

(i) Covenants not to compete.

(ii) Contracts for the use of section 197 intangibles; acquired as
part of a trade or business.

(A) In general.

(B) Know-how and certain information base.

(iii) Contracts for the use of section 197 intangibles; not acquired
as part of a trade or business.

(iv) Applicable rules.

(A) Franchises, trademarks, and trade names.

(B) Certain amounts treated as payable under a debt instrument.

(1) In general.

(2) Rights granted by governmental units.

(3) Treatment of other parties to transaction.

(4) Basis determinations in certain transactions.

(i) Certain renewal transactions.

(ii) Transactions subject to section 338 or 1060.

(iii) Certain reinsurance transactions.

(g) Special rules.

(1) Treatment of certain dispositions.

(i) Loss disallowance rules.

(A) In general.

(B) Abandonment or worthlessness.

(C) Certain nonrecognition transfers.

(ii) Separately acquired property.

(iii) Disposition of a covenant not to compete.

(iv) Taxpayers under common control.

(A) In general.

(B) Treatment of disallowed loss.

(2) Treatment of certain nonrecognition and exchange transactions.

(i) Relationship to anti-churning rules.

(ii) Treatment of nonrecognition and exchange transactions
generally.

(A) Transfer disregarded.

(B) Application of general rule.

(C) Transactions covered.

(iii) Certain exchanged-basis property.

(iv) Transfers under section 708(b)(1).

(A) In general.

(B) Termination by sale or exchange of interest.

(C) Other terminations.

(3) Increase in the basis of partnership property under section
732(b), 734(b), 743(b), or 732(d).

(4) Section 704(c) allocations.

(i) Allocations where the intangible is amortizable by the
contributor.

(ii) Allocations where the intangible is not amortizable by the
contributor.

(5) Treatment of certain reinsurance transactions.

(i) In general.

(ii) Determination of adjusted basis.

(A) Acquisitions (other than under section 338) of specified
insurance contracts.

(B) Insolvent ceding company

(C) Other acquisitions. [Reserved]

(6) Amounts paid or incurred for a franchise, trademark, or trade
name.

(7) Amounts properly taken into account in determining the cost of
property that is not a section 197 intangible.

(8) Treatment of amortizable section 197 intangibles as depreciable
property.

(h) Anti-churning rules.

(1) Scope and purpose.

(i) Scope.

(ii) Purpose.

(2) Treatment of section 197(f)(9) intangibles.

(3) Amounts deductible under section 1253(d) or �1.162-11.

(4) Transition period.

(5) Exceptions.

(6) Related person.

(i) In general.

(ii) Time for testing relationships.

(iii) Certain relationships disregarded.

(iv) De minimis rule.

(A) In general.

(B) Determination of beneficial ownership interest.

(7) Special rules for entities that owned or used property at any
time during the transition period and that are no longer in
existence.

(8) Special rules for section 338 deemed acquisitions.

(9) Gain-recognition exception.

(i) Applicability.

(ii) Effect of exception.

(iii) Time and manner of election.

(iv) Special rules for certain entities.

(v) Effect of nonconforming elections.

(vi) Notification requirements.

(vii) Revocation.

(viii) Election Statement.

(ix) Determination of highest marginal rate of tax and amount of
other Federal income tax on gain.

(A) Marginal rate.

(1) Noncorporate taxpayers.

(2) Corporations and tax-exempt entities.

(B) Other Federal income tax on gain.

(x) Coordination with other provisions.

(A) In general.

(B) Section 1374.

(C) Procedural and administrative provisions.

(D) Installment method.

(xi) Special rules for persons not otherwise subject to Federal
income tax.

(10) Transactions subject to both anti-churning and nonrecognition
rules.

(11) Avoidance purpose.

(12) Additional partnership anti-churning rules

(i) In general.

(ii) Section 732(b) adjustments. [Reserved]

(iii) Section 732(d) adjustments.

(iv) Section 734(b) adjustments. [Reserved]

(v) Section 743(b) adjustments.

(vi) Partner is or becomes a user of partnership intangible.

(A) General rule.

(B) Anti-churning partner.

(C) Effect of retroactive elections.

(vii) Section 704(c) elections.

(A) Allocations where the intangible is amortizable by the
contributor.

(B) Allocations where the intangible is not amortizable by the
contributor.

(viii) Operating rule for transfers upon death.

(i) Reserved

(j) General anti-abuse rule.

(k) Examples.

(l) Effective dates.

(1) In general.

(2) Application to pre-effective date acquisitions.

(3) Application of regulation project REG-209709-94 to pre-effective
date acquisitions.

(4) Change in method of accounting.

(i) In general.

(ii) Application to pre-effective date transactions.

(iii) Automatic change procedures.

Par. 7. Section 1.197-2 is added to read as follows: �1.197-2
Amortization of goodwill and certain other intangibles.

(a) Overview--(1) In general. Section 197 allows an amortization
deduction for the capitalized costs of an amortizable section 197
intangible and prohibits any other depreciation or amortization with
respect to that property. Paragraphs (b), (c), and (e) of this
section provide rules and definitions for determining whether
property is a section 197 intangible, and paragraphs (d) and (e) of
this section provide rules and definitions for determining whether a
section 197 intangible is an amortizable section 197 intangible. The
amortization deduction under section 197 is determined by amortizing
basis ratably over a 15-year period under the rules of paragraph (f)
of this section.

Section 197 also includes various special rules pertaining to the
disposition of amortizable section 197 intangibles, nonrecognition
transactions, anti-churning rules, and anti-abuse rules. Rules
relating to these provisions are contained in paragraphs (g), (h),
and (j) of this section. Examples demonstrating the application of
these provisions are contained in paragraph (k) of this section. The
effective date of the rules in this section is contained in
paragraph (l) of this section.

(2) Section 167(f) property. Section 167(f) prescribes rules for
computing the depreciation deduction for certain property to which
section 197 does not apply. See �1.167(a)-14 for rules under section
167(f) and paragraphs (c)(4), (6), (7), (11), and (13) of this
section for a description of the property subject to section 167(f).

(3) Amounts otherwise deductible. Section 197 does not apply to
amounts that are not chargeable to capital account under paragraph
(f)(3) (relating to basis determinations for covenants not to
compete and certain contracts for the use of section 197
intangibles) of this section and are otherwise currently deductible.
For this purpose, an amount described in �1.162-11 is not currently
deductible if, without regard to �1.162-11, such amount is properly
chargeable to capital account.

(b) Section 197 intangibles; in general. Except as otherwise
provided in paragraph (c) of this section, the term section 197
intangible means any property described in section 197(d)(1). The
following rules and definitions provide guidance concerning property
that is a section 197 intangible unless an exception applies: (1)
Goodwill. Section 197 intangibles include goodwill. Goodwill is the
value of a trade or business attributable to the expectancy of
continued customer patronage. This expectancy may be due to the name
or reputation of a trade or business or any other factor.

(2) Going concern value. Section 197 intangibles include going
concern value.

Going concern value is the additional value that attaches to
property by reason of its existence as an integral part of an
ongoing business activity. Going concern value includes the value
attributable to the ability of a trade or business (or a part of a
trade or business) to continue functioning or generating income
without interruption notwithstanding a change in ownership, but does
not include any of the intangibles described in any other provision
of this paragraph (b). It also includes the value that is
attributable to the immediate use or availability of an acquired
trade or business, such as, for example, the use of the revenues or
net earnings that otherwise would not be received during any period
if the acquired trade or business were not available or operational.

(3) Workforce in place. Section 197 intangibles include workforce in
place.

Workforce in place (sometimes referred to as agency force or
assembled workforce) includes the composition of a workforce (for
example, the experience, education, or training of a workforce), the
terms and conditions of employment whether contractual or otherwise,
and any other value placed on employees or any of their attributes.
Thus, the amount paid or incurred for workforce in place includes,
for example, any portion of the purchase price of an acquired trade
or business attributable to the existence of a highly-skilled
workforce, an existing employment contract (or contracts), or a
relationship with employees or consultants (including, but not
limited to, any key employee contract or relationship). Workforce in
place does not include any covenant not to compete or other similar
arrangement described in paragraph (b)(9) of this section.

(4) Information base. Section 197 intangibles include any
information base, including a customer-related information base. For
this purpose, an information base includes business books and
records, operating systems, and any other information base
(regardless of the method of recording the information) and a
customer-related information base is any information base that
includes lists or other information with respect to current or
prospective customers. Thus, the amount paid or incurred for
information base includes, for example, any portion of the purchase
price of an acquired trade or business attributable to the
intangible value of technical manuals, training manuals or programs,
data files, and accounting or inventory control systems. Other
examples include the cost of acquiring customer lists, subscription
lists, insurance expirations, patient or client files, or lists of
newspaper, magazine, radio, or television advertisers.

(5) Know-how, etc. Section 197 intangibles include any patent,
copyright, formula, process, design, pattern, know-how, format,
package design, computer software (as defined in paragraph (c)(4)
(iv) of this section), or interest in a film, sound recording, video
tape, book, or other similar property. (See, however, the exceptions
in paragraph (c) of this section.)

(6) Customer-based intangibles. Section 197 intangibles include any
customer-based intangible. A customer-based intangible is any
composition of market, market share, or other value resulting from
the future provision of goods or services pursuant to contractual or
other relationships in the ordinary course of business with
customers.

Thus, the amount paid or incurred for customer-based intangibles
includes, for example, any portion of the purchase price of an
acquired trade or business attributable to the existence of a
customer base, a circulation base, an undeveloped market or market
growth, insurance in force, the existence of a qualification to
supply goods or services to a particular customer, a mortgage
servicing contract (as defined in paragraph (c)(11) of this
section), an investment management contract, or other relationship
with customers involving the future provision of goods or services.
(See, however, the exceptions in paragraph (c) of this section.) In
addition, customer-based intangibles include the deposit base and
any similar asset of a financial institution. Thus, the amount paid
or incurred for customer-based intangibles also includes any portion
of the purchase price of an acquired financial institution
attributable to the value represented by existing checking accounts,
savings accounts, escrow accounts, and other similar items of the
financial institution. However, any portion of the purchase price of
an acquired trade or business attributable to accounts receivable or
other similar rights to income for goods or services provided to
customers prior to the acquisition of a trade or business is not an
amount paid or incurred for a customer-based intangible.

(7) Supplier-based intangibles. Section 197 intangibles include any
supplier-based intangible. A supplier-based intangible is the value
resulting from the future acquisition, pursuant to contractual or
other relationships with suppliers in the ordinary course of
business, of goods or services that will be sold or used by the
taxpayer. Thus, the amount paid or incurred for supplier-based
intangibles includes, for example, any portion of the purchase price
of an acquired trade or business attributable to the existence of a
favorable relationship with persons providing distribution services
(such as favorable shelf or display space at a retail outlet), the
existence of a favorable credit rating, or the existence of
favorable supply contracts. The amount paid or incurred for
supplier-based intangibles does not include any amount required to
be paid for the goods or services themselves pursuant to the terms
of the agreement or other relationship. In addition, see the
exceptions in paragraph (c) of this section, including the exception
in paragraph (c)(6) of this section for certain rights to receive
tangible property or services from another person.

(8) Licenses, permits, and other rights granted by governmental
units. Section 197 intangibles include any license, permit, or other
right granted by a governmental unit (including, for purposes of
section 197, an agency or instrumentality thereof) even if the right
is granted for an indefinite period or is reasonably expected to be
renewed for an indefinite period. These rights include, for example,
a liquor license, a taxi-cab medallion (or license), an airport
landing or takeoff right (sometimes referred to as a slot), a
regulated airline route, or a television or radio broadcasting
license. The issuance or renewal of a license, permit, or other
right granted by a governmental unit is considered an acquisition of
the license, permit, or other right. (See, however, the exceptions
in paragraph (c) of this section, including the exceptions in
paragraph (c)(3) of this section for an interest in land, paragraph
(c)(6) of this section for certain rights to receive tangible
property or services, paragraph (c)(8) of this section for an
interest under a lease of tangible property, and paragraph (c)(13)
of this section for certain rights granted by a governmental unit.
See paragraph (b)(10) of this section for the treatment of
franchises.)

(9) Covenants not to compete and other similar arrangements. Section
197 intangibles include any covenant not to compete, or agreement
having substantially the same effect, entered into in connection
with the direct or indirect acquisition of an interest in a trade or
business or a substantial portion thereof. For purposes of this
paragraph (b)(9), an acquisition may be made in the form of an asset
acquisition (including a qualified stock purchase that is treated as
a purchase of assets under section 338), a stock acquisition or
redemption, and the acquisition or redemption of a partnership
interest. An agreement requiring the performance of services for the
acquiring taxpayer or the provision of property or its use to the
acquiring taxpayer does not have substantially the same effect as a
covenant not to compete to the extent that the amount paid under the
agreement represents reasonable compensation for the services
actually rendered or for the property or use of the property
actually provided.

(10) Franchises, trademarks, and trade names. (i) Section 197
intangibles include any franchise, trademark, or trade name. The
term franchise has the meaning given in section 1253(b)(1) and
includes any agreement that provides one of the parties to the
agreement with the right to distribute, sell, or provide goods,
services, or facilities, within a specified area. The term trademark
includes any word, name, symbol, or device, or any combination
thereof, adopted and used to identify goods or services and
distinguish them from those provided by others. The term trade name
includes any name used to identify or designate a particular trade
or business or the name or title used by a person or organization
engaged in a trade or business. A license, permit, or other right
granted by a governmental unit is a franchise if it otherwise meets
the definition of a franchise. A trademark or trade name includes
any trademark or trade name arising under statute or applicable
common law, and any similar right granted by contract. The renewal
of a franchise, trademark, or trade name is treated as an
acquisition of the franchise, trademark, or trade name.

(ii) Notwithstanding the definitions provided in paragraph (b)(10)
(i) of this section, any amount that is paid or incurred on account
of a transfer, sale, or other disposition of a franchise, trademark,
or trade name and that is subject to section 1253(d)(1) is not
included in the basis of a section 197 intangible. (See paragraph
(g)(6) of this section.)

(11) Contracts for the use of, and term interests in, section 197
intangibles.

Section 197 intangibles include any right under a license, contract,
or other arrangement providing for the use of property that would be
a section 197 intangible under any provision of this paragraph (b)
(including this paragraph (b)(11)) after giving effect to all of the
exceptions provided in paragraph (c) of this section. Section 197
intangibles also include any term interest (whether outright or in
trust) in such property.

(12) Other similar items. Section 197 intangibles include any other
intangible property that is similar in all material respects to the
property specifically described in section 197(d)(1)(C)(i) through
(v) and paragraphs (b)(3) through (7) of this section.

(See paragraph (g)(5) of this section for special rules regarding
certain reinsurance transactions.)

(c) Section 197 intangibles; exceptions. The term section 197
intangible does not include property described in section 197(e).
The following rules and definitions provide guidance concerning
property to which the exceptions apply:

(1) Interests in a corporation, partnership, trust, or estate.
Section 197 intangibles do not include an interest in a corporation,
partnership, trust, or estate.

Thus, for example, amortization under section 197 is not available
for the cost of acquiring stock, partnership interests, or interests
in a trust or estate, whether or not the interests are regularly
traded on an established market. (See paragraph (g)(3) of this
section for special rules applicable to property of a partnership
when a section 754 election is in effect for the partnership.)

(2) Interests under certain financial contracts. Section 197
intangibles do not include an interest under an existing futures
contract, foreign currency contract, notional principal contract,
interest rate swap, or other similar financial contract, whether or
not the interest is regularly traded on an established market.
However, this exception does not apply to an interest under a
mortgage servicing contract, credit card servicing contract, or
other contract to service another person's indebtedness, or an
interest under an assumption reinsurance contract. (See paragraph
(g)(5) of this section for the treatment of assumption reinsurance
contracts. See paragraph (c)(11) of this section and �1.167(a)-14(d)
for the treatment of mortgage servicing rights.)

(3) Interests in land. Section 197 intangibles do not include any
interest in land.

For this purpose, an interest in land includes a fee interest, life
estate, remainder, easement, mineral right, timber right, grazing
right, riparian right, air right, zoning variance, and any other
similar right, such as a farm allotment, quota for farm commodities,
or crop acreage base. An interest in land does not include an
airport landing or takeoff right, a regulated airline route, or a
franchise to provide cable television service. The cost of acquiring
a license, permit, or other land improvement right, such as a
building construction or use permit, is taken into account in the
same manner as the underlying improvement.

(4) Certain computer software--(i) Publicly available. Section 197
intangibles do not include any interest in computer software that is
(or has been) readily available to the general public on similar
terms, is subject to a nonexclusive license, and has not been
substantially modified. Computer software will be treated as readily
available to the general public if the software may be obtained on
substantially the same terms by a significant number of persons that
would reasonably be expected to use the software.

This requirement can be met even though the software is not
available through a system of retail distribution. Computer software
will not be considered to have been substantially modified if the
cost of all modifications to the version of the software that is
readily available to the general public does not exceed the greater
of 25 percent of the price at which the unmodified version of the
software is readily available to the general public or $2,000. For
the purpose of determining whether computer software has been
substantially modified--

(A) Integrated programs acquired in a package from a single source
are treated as a single computer program; and

(B) Any cost incurred to install the computer software on a system
is not treated as a cost of the software. However, the costs for
customization, such as tailoring to a user's specifications (other
than embedded programming options) are costs of modifying the
software.

(ii) Not acquired as part of trade or business. Section 197
intangibles do not include an interest in computer software that is
not acquired as part of a purchase of a trade or business.

(iii) Other exceptions. For other exceptions applicable to computer
software, see paragraph (a)(3) of this section (relating to
otherwise deductible amounts) and paragraph (g)(7) of this section
(relating to amounts properly taken into account in determining the
cost of property that is not a section 197 intangible).

(iv) Computer software defined. For purposes of this section,
computer software is any program or routine (that is, any sequence
of machine-readable code) that is designed to cause a computer to
perform a desired function or set of functions, and the
documentation required to describe and maintain that program or
routine. It includes all forms and media in which the software is
contained, whether written, magnetic, or otherwise. Computer
programs of all classes, for example, operating systems, executive
systems, monitors, compilers and translators, assembly routines, and
utility programs as well as application programs, are included.
Computer software also includes any incidental and ancillary rights
that are necessary to effect the acquisition of the title to, the
ownership of, or the right to use the computer software, and that
are used only in connection with that specific computer software.
Such incidental and ancillary rights are not included in the
definition of trademark or trade name under paragraph (b)(10)(i) of
this section. For example, a trademark or trade name that is
ancillary to the ownership or use of a specific computer software
program in the taxpayer's trade or business and is not acquired for
the purpose of marketing the computer software is included in the
definition of computer software and is not included in the
definition of trademark or trade name. Computer software does not
include any data or information base described in paragraph (b)(4)
of this section unless the data base or item is in the public domain
and is incidental to a computer program. For this purpose, a
copyrighted or proprietary data or information base is treated as in
the public domain if its availability through the computer program
does not contribute significantly to the cost of the program. For
example, if a word-processing program includes a dictionary feature
used to spell-check a document or any portion thereof, the entire
program (including the dictionary feature) is computer software
regardless of the form in which the feature is maintained or stored.

(5) Certain interests in films, sound recordings, video tapes,
books, or other similar property. Section 197 intangibles do not
include any interest (including an interest as a licensee) in a
film, sound recording, video tape, book, or other similar property
(such as the right to broadcast or transmit a live event) if the
interest is not acquired as part of a purchase of a trade or
business. A film, sound recording, video tape, book, or other
similar property includes any incidental and ancillary rights (such
as a trademark or trade name) that are necessary to effect the
acquisition of title to, the ownership of, or the right to use the
property and are used only in connection with that property. Such
incidental and ancillary rights are not included in the definition
of trademark or trade name under paragraph (b)(10)(i) of this
section. For purposes of this paragraph (c)(5), computer software
(as defined in paragraph (c)(4)(iv) of this section) is not treated
as other property similar to a film, sound recording, video tape, or
book.

(See section 167 for amortization of excluded intangible property or
interests.)

(6) Certain rights to receive tangible property or services.

Section 197 intangibles do not include any right to receive tangible
property or services under a contract or from a governmental unit if
the right is not acquired as part of a purchase of a trade or
business. Any right that is described in the preceding sentence is
not treated as a section 197 intangible even though the right is
also described in section 197(d)(1)(D) and paragraph (b)(8) of this
section (relating to certain governmental licenses, permits, and
other rights) and even though the right fails to meet one or more of
the requirements of paragraph (c)(13) of this section (relating to
certain rights of fixed duration or amount). (See �1.167(a)-14(c)(1)
and (3) for applicable rules.)

(7) Certain interests in patents or copyrights. Section 197
intangibles do not include any interest (including an interest as a
licensee) in a patent, patent application, or copyright that is not
acquired as part of a purchase of a trade or business. A patent or
copyright includes any incidental and ancillary rights (such as a
trademark or trade name) that are necessary to effect the
acquisition of title to, the ownership of, or the right to use the
property and are used only in connection with that property. Such
incidental and ancillary rights are not included in the definition
of trademark or trade name under paragraph (b)(10)(i) of this
section. (See �1.167(a)-14(c)(4) for applicable rules.)

(8) Interests under leases of tangible property--(i) Interest as a
lessor. Section 197 intangibles do not include any interest as a
lessor under an existing lease or sublease of tangible real or
personal property. In addition, the cost of acquiring an interest as
a lessor in connection with the acquisition of tangible property is
taken into account as part of the cost of the tangible property. For
example, if a taxpayer acquires a shopping center that is leased to
tenants operating retail stores, any portion of the purchase price
attributable to favorable lease terms is taken into account as part
of the basis of the shopping center and in determining the
depreciation deduction allowed with respect to the shopping center.
(See section 167(c)(2).) (ii) Interest as a lessee. Section 197
intangibles do not include any interest as a lessee under an
existing lease of tangible real or personal property. For this
purpose, an airline lease of an airport passenger or cargo gate is a
lease of tangible property.

The cost of acquiring such an interest is taken into account under
section 178 and �1.162-11(a). If an interest as a lessee under a
lease of tangible property is acquired in a transaction with any
other intangible property, a portion of the total purchase price may
be allocable to the interest as a lessee based on all of the
relevant facts and circumstances.

(9) Interests under indebtedness--(i) In general. Section 197
intangibles do not include any interest (whether as a creditor or
debtor) under an indebtedness in existence when the interest was
acquired. Thus, for example, the value attributable to the
assumption of an indebtedness with a below-market interest rate is
not amortizable under section 197. In addition, the premium paid for
acquiring a debt instrument with an above-market interest rate is
not amortizable under section 197. See section 171 for rules
concerning the treatment of amortizable bond premium.

(ii) Exceptions. For purposes of this paragraph (c)(9), an interest
under an existing indebtedness does not include the deposit base
(and other similar items) of a financial institution. An interest
under an existing indebtedness includes mortgage servicing rights,
however, to the extent the rights are stripped coupons under section
1286.

(10) Professional sports franchises. Section 197 intangibles do not
include any franchise to engage in professional baseball,
basketball, football, or any other professional sport, and any item
(even though otherwise qualifying as a section 197 intangible)
acquired in connection with such a franchise.

(11) Mortgage servicing rights. Section 197 intangibles do not
include any right described in section 197(e)(7) (concerning rights
to service indebtedness secured by residential real property that
are not acquired as part of a purchase of a trade or business). (See
�1.167(a)-14(d) for applicable rules.)

(12) Certain transaction costs. Section 197 intangibles do not
include any fees for professional services and any transaction costs
incurred by parties to a transaction in which all or any portion of
the gain or loss is not recognized under part III of subchapter C of
the Internal Revenue Code.

(13) Rights of fixed duration or amount. (i) Section 197 intangibles
do not include any right under a contract or any license, permit, or
other right granted by a governmental unit if the right--

(A) Is acquired in the ordinary course of a trade or business (or an
activity described in section 212) and not as part of a purchase of
a trade or business;

(B) Is not described in section 197(d)(1)(A), (B), (E), or (F);

(C) Is not a customer-based intangible, a customer-related
information base, or any other similar item; and

(D) Either--

(1) Has a fixed duration of less than 15 years; or

(2) Is fixed as to amount and the adjusted basis thereof is properly
recoverable (without regard to this section) under a method similar
to the unit-of-production method.

(ii) See �1.167(a)-14(c)(2) and (3) for applicable rules.

(d) Amortizable section 197 intangibles--(1) Definition. Except as
otherwise provided in this paragraph (d), the term amortizable
section 197 intangible means any section 197 intangible acquired
after August 10, 1993 (or after July 25, 1991, if a valid
retroactive election under �1.197-1T has been made), and held in
connection with the conduct of a trade or business or an activity
described in section 212.

(2) Exception for self-created intangibles--(i) In general. Except
as provided in paragraph (d)(2)(iii) of this section, amortizable
section 197 intangibles do not include any section 197 intangible
created by the taxpayer (a self-created intangible).

(ii) Created by the taxpayer--(A) Defined. A section 197 intangible
is created by the taxpayer to the extent the taxpayer makes payments
or otherwise incurs costs for its creation, production, development,
or improvement, whether the actual work is performed by the taxpayer
or by another person under a contract with the taxpayer entered into
before the contracted creation, production, development, or
improvement occurs.

For example, a technological process developed specifically for a
taxpayer under an arrangement with another person pursuant to which
the taxpayer retains all rights to the process is created by the
taxpayer.

(B) Contracts for the use of intangibles. A section 197 intangible
is not a self-created intangible to the extent that it results from
the entry into (or renewal of) a contract for the use of an existing
section 197 intangible. Thus, for example, the exception for self-
created intangibles does not apply to capitalized costs, such as
legal and other professional fees, incurred by a licensee in
connection with the entry into (or renewal of) a contract for the
use of know-how or similar property.

(C) Improvements and modifications. If an existing section 197
intangible is improved or otherwise modified by the taxpayer or by
another person under a contract with the taxpayer, the existing
intangible and the capitalized costs (if any) of the improvements or
other modifications are each treated as a separate section 197
intangible for purposes of this paragraph (d).

(iii) Exceptions. (A) The exception for self-created intangibles
does not apply to any section 197 intangible described in section
197(d)(1)(D) (relating to licenses, permits or other rights granted
by a governmental unit), 197(d)(1)(E) (relating to covenants not to
compete), or 197(d)(1)(F) (relating to franchises, trademarks, and
trade names). Thus, for example, capitalized costs incurred in the
development, registration, or defense of a trademark or trade name
do not qualify for the exception and are amortized over 15 years
under section 197.

(B) The exception for self-created intangibles does not apply to any
section 197 intangible created in connection with the purchase of a
trade or business (as defined in paragraph (e) of this section).

(C) If a taxpayer disposes of a self-created intangible and
subsequently reacquires the intangible in an acquisition described
in paragraph (h)(5)(ii) of this section, the exception for self-
created intangibles does not apply to the reacquired intangible.

(3) Exception for property subject to anti-churning rules.
Amortizable section 197 intangibles do not include any property to
which the anti-churning rules of section 197(f)(9) and paragraph (h)
of this section apply.

(e) Purchase of a trade or business. Several of the exceptions in
section 197 apply only to property that is not acquired in (or
created in connection with) a transaction or series of related
transactions involving the acquisition of assets constituting a
trade or business or a substantial portion thereof. Property
acquired in (or created in connection with) such a transaction or
series of related transactions is referred to in this section as
property acquired as part of (or created in connection with) a
purchase of a trade or business. For purposes of section 197 and
this section, the applicability of the limitation is determined
under the following rules:

(1) Goodwill or going concern value. An asset or group of assets
constitutes a trade or business or a substantial portion thereof if
their use would constitute a trade or business under section 1060
(that is, if goodwill or going concern value could under any
circumstances attach to the assets). See �1.1060-1T(b)(2). For this
purpose, all the facts and circumstances, including any employee
relationships that continue (or covenants not to compete that are
entered into) as part of the transfer of the assets, are taken into
account in determining whether goodwill or going concern value could
attach to the assets.

(2) Franchise, trademark, or trade name--(i) In general. The
acquisition of a franchise, trademark, or trade name constitutes the
acquisition of a trade or business or a substantial portion thereof.

(ii) Exceptions. For purposes of this paragraph (e)(2)--

(A) A trademark or trade name is disregarded if it is included in
computer software under paragraph (c)(4) of this section or in an
interest in a film, sound recording, video tape, book, or other
similar property under paragraph (c)(5) of this section;

(B) A franchise, trademark, or trade name is disregarded if its
value is nominal or the taxpayer irrevocably disposes of it
immediately after its acquisition; and

(C) The acquisition of a right or interest in a trademark or trade
name is disregarded if the grant of the right or interest is not,
under the principles of section 1253, a transfer of all substantial
rights to such property or of an undivided interest in all
substantial rights to such property.

(3) Acquisitions to be included. The assets acquired in a
transaction (or series of related transactions) include only assets
(including a beneficial or other indirect interest in assets where
the interest is of a type described in paragraph (c)(1) of this
section) acquired by the taxpayer and persons related to the
taxpayer from another person and persons related to that other
person. For purposes of this paragraph (e)(3), persons are related
only if their relationship is described in section 267(b) or 707(b)
or they are engaged in trades or businesses under common control
within the meaning of section 41(f)(1).

(4) Substantial portion. The determination of whether acquired
assets constitute a substantial portion of a trade or business is to
be based on all of the facts and circumstances, including the nature
and the amount of the assets acquired as well as the nature and
amount of the assets retained by the transferor. The value of the
assets acquired relative to the value of the assets retained by the
transferor is not determinative of whether the acquired assets
constitute a substantial portion of a trade or business.

(5) Deemed asset purchases under section 338. A qualified stock
purchase that is treated as a purchase of assets under section 338
is treated as a transaction involving the acquisition of assets
constituting a trade or business only if the direct acquisition of
the assets of the corporation would have been treated as the
acquisition of assets constituting a trade or business or a
substantial portion thereof.

(6) Mortgage servicing rights. Mortgage servicing rights acquired in
a transaction or series of related transactions are disregarded in
determining for purposes of paragraph (c)(11) of this section
whether the assets acquired in the transaction or transactions
constitute a trade or business or substantial portion thereof.

(7) Computer software acquired for internal use. Computer software
acquired in a transaction or series of related transactions solely
for internal use in an existing trade or business is disregarded in
determining for purposes of paragraph (c)(4) of this section whether
the assets acquired in the transaction or series of related
transactions constitute a trade or business or substantial portion
thereof.

(f) Computation of amortization deduction--(1) In general. Except as
provided in paragraph (f)(2) of this section, the amortization
deduction allowable under section 197(a) is computed as follows:

(i) The basis of an amortizable section 197 intangible is amortized
ratably over the 15-year period beginning on the later of--

(A) The first day of the month in which the property is acquired; or

(B) In the case of property held in connection with the conduct of a
trade or business or in an activity described in section 212, the
first day of the month in which the conduct of the trade or business
or the activity begins.

(ii) Except as otherwise provided in this section, basis is
determined under section 1011 and salvage value is disregarded.

(iii) Property is not eligible for amortization in the month of
disposition.

(iv) The amortization deduction for a short taxable year is based on
the number of months in the short taxable year.

(2) Treatment of contingent amounts--(i) Amounts added to basis
during 15-year period. Any amount that is properly included in the
basis of an amortizable section 197 intangible after the first month
of the 15-year period described in paragraph (f)(1)(i) of this
section and before the expiration of that period is amortized
ratably over the remainder of the 15-year period. For this purpose,
the remainder of the 15-year period begins on the first day of the
month in which the basis increase occurs.

(ii) Amounts becoming fixed after expiration of 15-year period. Any
amount that is not properly included in the basis of an amortizable
section 197 intangible until after the expiration of the 15-year
period described in paragraph (f)(1)(i) of this section is amortized
in full immediately upon the inclusion of the amount in the basis of
the intangible.

(iii) Rules for including amounts in basis. See ��1.1275-4(c)(4) and
1.483-4(a) for rules governing the extent to which contingent
amounts payable under a debt instrument given in consideration for
the sale or exchange of an amortizable section 197 intangible are
treated as payments of principal and the time at which the amount
treated as principal is included in basis. See �1.461-1(a)(1) and
(2) for rules governing the time at which other contingent amounts
are taken into account in determining the basis of an amortizable
section 197 intangible.

(3) Basis determinations for certain assets--(i) Covenants not to
compete. In the case of a covenant not to compete or other similar
arrangement described in paragraph

(b)(9) of this section (a covenant), the amount chargeable to
capital account includes, except as provided in this paragraph (f)
(3), all amounts that are required to be paid pursuant to the
covenant, whether or not any such amount would be deductible under
section 162 if the covenant were not a section 197 intangible.

(ii) Contracts for the use of section 197 intangibles; acquired as
part of a trade or business--(A) In general. Except as provided in
this paragraph (f)(3), any amount paid or incurred by the transferee
on account of the transfer of a right or term interest described in
paragraph (b)(11) of this section (relating to contracts for the use
of, and term interests in, section 197 intangibles) by the owner of
the property to which such right or interest relates and as part of
a purchase of a trade or business is chargeable to capital account,
whether or not such amount would be deductible under section 162 if
the property were not a section 197 intangible.

(B) Know-how and certain information base. The amount chargeable to
capital account with respect to a right or term interest described
in paragraph (b)(11) of this section is determined without regard to
the rule in paragraph (f)(3)(ii)(A) of this section if the right or
interest relates to property (other than a customer-related
information base) described in paragraph (b)(4) or (5) of this
section and the acquiring taxpayer establishes that--

(1) The transfer of the right or interest is not, under the
principles of section 1235, a transfer of all substantial rights to
such property or of an undivided interest in all substantial rights
to such property; and

(2) The right or interest was transferred for an arm's-length
consideration.

(iii) Contracts for the use of section 197 intangibles; not acquired
as part of a trade or business. The transfer of a right or term
interest described in paragraph (b)(11) of this section by the owner
of the property to which such right or interest relates but not as
part of a purchase of a trade or business will be closely
scrutinized under the principles of section 1235 for purposes of
determining whether the transfer is a sale or exchange and,
accordingly, whether amounts paid on account of the transfer are
chargeable to capital account. If under the principles of section
1235 the transaction is not a sale or exchange, amounts paid on
account of the transfer are not chargeable to capital account under
this paragraph (f)(3).

(iv) Applicable rules--(A) Franchises, trademarks, and trade names.
For purposes of this paragraph (f)(3), section 197 intangibles
described in paragraph (b)(11) of this section do not include any
property that is also described in paragraph (b)(10) of this section
(relating to franchises, trademarks, and trade names).

(B) Certain amounts treated as payable under a debt instrument--(1)
In general.

For purposes of applying any provision of the Internal Revenue Code
to a person making payments of amounts that are otherwise chargeable
to capital account under this paragraph (f)(3) and are payable after
the acquisition of the section 197 intangible to which they relate,
such amounts are treated as payable under a debt instrument given in
consideration for the sale or exchange of the section 197
intangible.

(2) Rights granted by governmental units. For purposes of applying
any provision of the Internal Revenue Code to any amounts that are
otherwise chargeable to capital account with respect to a license,
permit, or other right described in paragraph (b)(8) of this section
(relating to rights granted by a governmental unit or agency or
instrumentality thereof) and are payable after the acquisition of
the section 197 intangible to which they relate, such amounts are
treated, except as provided in paragraph (f)(4)(i) of this section
(relating to renewal transactions), as payable under a debt
instrument given in consideration for the sale or exchange of the
section 197 intangible.

(3) Treatment of other parties to transaction. No person shall be
treated as having sold, exchanged, or otherwise disposed of property
in a transaction for purposes of any provision of the Internal
Revenue Code solely by reason of the application of this paragraph
(f)(3) to any other party to the transaction.

(4) Basis determinations in certain transactions--(i) Certain
renewal transactions.

The costs paid or incurred for the renewal of a franchise,
trademark, or trade name or any license, permit, or other right
granted by a governmental unit or an agency or instrumentality
thereof are amortized over the 15-year period that begins with the
month of renewal. Any costs paid or incurred for the issuance, or
earlier renewal, continue to be taken into account over the
remaining portion of the amortization period that began at the time
of the issuance, or earlier renewal. Any amount paid or incurred for
the protection, expansion, or defense of a trademark or trade name
and chargeable to capital account is treated as an amount paid or
incurred for a renewal.

(ii) Transactions subject to section 338 or 1060. In the case of a
section 197 intangible deemed to have been acquired as the result of
a qualified stock purchase within the meaning of section 338(d)(3),
the basis shall be determined pursuant to section 338(b)(5) and the
regulations thereunder. In the case of a section 197 intangible
acquired in an applicable asset acquisition within the meaning of
section 1060(c), the basis shall be determined pursuant to section
1060(a) and the regulations thereunder.

(iii) Certain reinsurance transactions. See paragraph (g)(5)(ii) of
this section for special rules regarding the adjusted basis of an
insurance contract acquired through an assumption reinsurance
transaction.

(g) Special rules--(1) Treatment of certain dispositions--(i) Loss
disallowance rules--(A) In general. No loss is recognized on the
disposition of an amortizable section 197 intangible if the taxpayer
has any retained intangibles. The retained intangibles with respect
to the disposition of any amortizable section 197 intangible (the
transferred intangible) are all amortizable section 197 intangibles,
or rights to use or interests (including beneficial or other
indirect interests) in amortizable section 197 intangibles
(including the transferred intangible) that were acquired in the
same transaction or series of related transactions as the
transferred intangible and are retained after its disposition.
Except as otherwise provided in paragraph (g)(1)(iv)(B) of this
section, the adjusted basis of each of the retained intangibles is
increased by the product of--

(1) The loss that is not recognized solely by reason of this rule;
and

(2) A fraction, the numerator of which is the adjusted basis of the
retained intangible on the date of the disposition and the
denominator of which is the total adjusted bases of all the retained
intangibles on that date.

(B) Abandonment or worthlessness. The abandonment of an amortizable
section 197 intangible, or any other event rendering an amortizable
section 197 intangible worthless, is treated as a disposition of the
intangible for purposes of this paragraph (g)(1), and the abandoned
or worthless intangible is disregarded (that is, it is not treated
as a retained intangible) for purposes of applying this paragraph
(g)(1) to the subsequent disposition of any other amortizable
section 197 intangible.

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

(iii) Disposition of a covenant not to compete. If a covenant not to
compete or any other arrangement having substantially the same
effect is entered into in connection with the direct or indirect
acquisition of an interest in one or more trades or businesses, the
disposition or worthlessness of the covenant or other arrangement
will not be considered to occur until the disposition or
worthlessness of all interests in those trades or businesses. For
example, a covenant not to compete entered into in connection with
the purchase of stock continues to be amortized ratably over the 15-
year recovery period (even after the covenant expires or becomes
worthless) unless all the trades or businesses in which an interest
was acquired through the stock purchase (or all the purchaser's
interests in those trades or businesses) also are disposed of or
become worthless.

(iv) Taxpayers under common control--(A) In general. Except as
provided in paragraph (g)(1)(iv)(B) of this section, all persons
that would be treated as a single taxpayer under section 41(f)(1)
are treated as a single taxpayer under this paragraph (g)(1). Thus,
for example, a loss is not recognized on the disposition of an
amortizable section 197 intangible by a member of a controlled group
of corporations (as defined in section 41(f)(5)) if, after the
disposition, another member retains other amortizable section 197
intangibles acquired in the same transaction as the amortizable
section 197 intangible that has been disposed of.

(B) Treatment of disallowed loss. If retained intangibles are held
by a person other than the person incurring the disallowed loss,
only the adjusted basis of intangibles retained by the person
incurring the disallowed loss is increased, and only the adjusted
basis of those intangibles is included in the denominator of the
fraction described in paragraph (g)(1)(i)(A) of this section. If
none of the retained intangibles are held by the person incurring
the disallowed loss, the loss is allowed ratably, as a deduction
under section 197, over the remainder of the period during which the
intangible giving rise to the loss would have been amortizable,
except that any remaining disallowed loss is allowed in full on the
first date on which all other retained intangibles have been
disposed of or become worthless.

(2) Treatment of certain nonrecognition and exchange
transactions--(i) Relationship to anti-churning rules. This
paragraph (g)(2) provides rules relating to the treatment of section
197 intangibles acquired in certain transactions. If these rules
apply to a section 197(f)(9) intangible (within the meaning of
paragraph (h)(1)(i) of this section), the intangible is,
notwithstanding its treatment under this paragraph (g)(2), treated
as an amortizable section 197 intangible only to the extent
permitted under paragraph (h) of this section.

(ii) Treatment of nonrecognition and exchange transactions
generally--(A) Transfer disregarded. If a section 197 intangible is
transferred in a transaction described in paragraph (g)(2)(ii)(C) of
this section, the transfer is disregarded in determining--

(1) Whether, with respect to so much of the intangible's basis in
the hands of the transferee as does not exceed its basis in the
hands of the transferor, the intangible is an amortizable section
197 intangible; and

(2) The amount of the deduction under section 197 with respect to
such basis.

(B) Application of general rule. If the intangible described in
paragraph (g)(2)(ii)(A) of this section was an amortizable section
197 intangible in the hands of the transferor, the transferee will
continue to amortize its adjusted basis, to the extent it does not
exceed the transferor's adjusted basis, ratably over the remainder
of the transferor's 15-year amortization period. If the intangible
was not an amortizable section 197 intangible in the hands of the
transferor, the transferee's adjusted basis, to the extent it does
not exceed the transferor's adjusted basis, cannot be amortized
under section 197. In either event, the intangible is treated, with
respect to so much of its adjusted basis in the hands of the
transferee as exceeds its adjusted basis in the hands of the
transferor, in the same manner for purposes of section 197 as an
intangible acquired from the transferor in a transaction that is not
described in paragraph (g)(2)(ii)(C) of this section. The rules of
this paragraph (g)(2)(ii) also apply to any subsequent transfers of
the intangible in a transaction described in paragraph (g)(2)(ii)(C)
of this section.

(C) Transactions covered. The transactions described in this
paragraph (g)(2)(ii)(C) are--

(1) Any transaction described in section 332, 351, 361, 721, or 731;
and

(2) Any transaction between corporations that are members of the
same consolidated group immediately after the transaction.

(iii) Certain exchanged-basis property. This paragraph (g)(2)(iii)
applies to property that is acquired in a transaction subject to
section 1031 or 1033 and is permitted to be acquired without
recognition of gain (replacement property). Replacement property is
treated as if it were the property by reference to which its basis
is determined (the predecessor property) in determining whether,
with respect to so much of its basis as does not exceed the basis of
the predecessor property, the replacement property is an amortizable
section 197 intangible and the amortization period under section 197
with respect to such basis. Thus, if the predecessor property was an
amortizable section 197 intangible, the taxpayer will amortize the
adjusted basis of the replacement property, to the extent it does
not exceed the adjusted basis of the predecessor property, ratably
over the remainder of the 15-year amortization period for the
predecessor property. If the predecessor property was not an
amortizable section 197 intangible, the adjusted basis of the
replacement property, to the extent it does not exceed the adjusted
basis of the predecessor property, may not be amortized under
section 197. In either event, the replacement property is treated,
with respect to so much of its adjusted basis as exceeds the
adjusted basis of the predecessor property, in the same manner for
purposes of section 197 as property acquired from the transferor in
a transaction that is not subject to section 1031 or 1033.

(iv) Transfers under section 708(b)(1)--(A) In general. Paragraph
(g)(2)(ii) of this section applies to transfers of section 197
intangibles that occur or are deemed to occur by reason of the
termination of a partnership under section 708(b)(1).

(B) Termination by sale or exchange of interest. In applying
paragraph (g)(2)(ii) of this section to a partnership that is
terminated pursuant to section 708(b)(1)(B) (relating to deemed
terminations from the sale or exchange of an interest), the
terminated partnership is treated as the transferor and the new
partnership is treated as the transferee with respect to any section
197 intangible held by the terminated partnership immediately
preceding the termination. (See paragraph (g)(3) of this section for
the treatment of increases in the bases of property of the
terminated partnership under section 743(b).)

(C) Other terminations. In applying paragraph (g)(2)(ii) of this
section to a partnership that is terminated pursuant to section
708(b)(1)(A) (relating to cessation of activities by a partnership),
the terminated partnership is treated as the transferor and the
distributee partner is treated as the transferee with respect to any
section 197 intangible held by the terminated partnership
immediately preceding the termination.

(3) Increase in the basis of partnership property under section
732(b), 734(b), 743(b), or 732(d). Any increase in the adjusted
basis of a section 197 intangible under sections 732(b) or 732(d)
(relating to a partner's basis in property distributed by a
partnership), section 734(b) (relating to the optional adjustment to
the basis of undistributed partnership property after a distribution
of property to a partner), or section 743(b) (relating to the
optional adjustment to the basis of partnership property after
transfer of a partnership interest) is treated as a separate section
197 intangible. For purposes of determining the amortization period
under section 197 with respect to the basis increase, the intangible
is treated as having been acquired at the time of the transaction
that causes the basis increase. The provisions of paragraph (f)(2)
of this section apply to the extent that the amount of the basis
increase is determined by reference to contingent payments. For
purposes of the effective date and anti-churning provisions
(paragraphs (l)(1) and (h) of this section) for a basis increase
under section 732(d), the intangible is treated as having been
acquired by the transferee partner at the time of the transfer of
the partnership interest described in section 732(d).

(4) Section 704(c) allocations--(i) Allocations where the intangible
is amortizable by the contributor. To the extent that the intangible
was an amortizable section 197 intangible in the hands of the
contributing partner, a partnership may make allocations of
amortization deductions with respect to the intangible to all of its
partners under either the curative or remedial allocation methods
described in the regulations under section 704(c). See �1.704-3(c)
and (d).

(ii) Allocations where the intangible is not amortizable by the
contributor. To the extent that the intangible was not an
amortizable section 197 intangible in the hands of the contributing
partner, the intangible is not amortizable by the partnership.
However, if a partner contributes a section 197 intangible to a
partnership and the partnership adopts the remedial allocation
method for making section 704(c) allocations of amortization
deductions, the partnership generally may make remedial allocations
of amortization deductions with respect to the contributed section
197 intangible in accordance with � 1.704-3(d). See paragraph (h)
(12) of this section to determine the application of the anti-
churning rules in the context of remedial allocations.

(5) Treatment of certain reinsurance transactions--(i) In general.
Section 197 applies to any insurance contract acquired from another
person through an assumption reinsurance transaction. For purposes
of section 197, an assumption reinsurance transaction is--

(A) Any arrangement in which one insurance company (the reinsurer)
becomes solely liable to policyholders on contracts transferred by
another insurance company (the ceding company); and

(B) Any acquisition of an insurance contract that is treated as
occurring by reason of an election under section 338.

(ii) Determination of adjusted basis--(A) Acquisitions (other than
under section 338) of specified insurance contracts. The amount
taken into account for purposes of section 197 as the adjusted basis
of specified insurance contracts (as defined in section 848(e)(1))
acquired in an assumption reinsurance transaction that is not
described in paragraph (g)(5)(i)(B) of this section is equal to the
excess of--

(1) The amount paid or incurred (or treated as having been paid or
incurred) by the reinsurer for the purchase of the contracts (as
determined under �1.817-4(d)(2)); over

(2) The amount of the specified policy acquisition expenses that are
attributable to the reinsurer's net positive consideration for the
reinsurance agreement (as determined under �1.848-2(f)(3)).

(B) Insolvent ceding company. The reduction of the amount of
specified policy acquisition expenses by the reinsurer with respect
to an assumption reinsurance transaction with an insolvent ceding
company where the ceding company and reinsurer have made a valid
joint election under section 1.848-2(i)(4) is disregarded in
determining the amount of specified policy acquisition expenses for
purposes of this paragraph (g)(5)(ii).

(C) Other acquisitions. [Reserved]

(6) Amounts paid or incurred for a franchise, trademark, or trade
name. If an amount to which section 1253(d) (relating to the
transfer, sale, or other disposition of a franchise, trademark, or
trade name) applies is described in section 1253(d)(1)(B) (relating
to contingent serial payments deductible under section 162), the
amount is not included in the adjusted basis of the intangible for
purposes of section 197. Any other amount, whether fixed or
contingent, to which section 1253(d) applies is chargeable to
capital account under section 1253(d)(2) and is amortizable only
under section 197.

(7) Amounts properly taken into account in determining the cost of
property that is not a section 197 intangible. Section 197 does not
apply to an amount that is properly taken into account in
determining the cost of property that is not a section 197
intangible. The entire cost of acquiring the other property is
included in its basis and recovered under other applicable Internal
Revenue Code provisions. Thus, for example, section 197 does not
apply to the cost of an interest in computer software to the extent
such cost is included, without being separately stated, in the cost
of the hardware or other tangible property and is consistently
treated as part of the cost of the hardware or other tangible
property.

(8) Treatment of amortizable section 197 intangibles as depreciable
property. An amortizable section 197 intangible is treated as
property of a character subject to the allowance for depreciation
under section 167. Thus, for example, an amortizable section 197
intangible is not a capital asset for purposes of section 1221, but
if used in a trade or business and held for more than one year, gain
or loss on its disposition generally qualifies as section 1231 gain
or loss. Also, an amortizable section 197 intangible is section 1245
property and section 1239 applies to any gain recognized upon its
sale or exchange between related persons (as defined in section
1239(b)).

(h) Anti-churning rules--(1) Scope and purpose--(i) Scope. This
paragraph (h) applies to section 197(f)(9) intangibles. For this
purpose, section 197(f)(9) intangibles are goodwill and going
concern value that was held or used at any time during the
transition period and any other section 197 intangible that was held
or used at any time during the transition period and was not
depreciable or amortizable under prior law.

(ii) Purpose. To qualify as an amortizable section 197 intangible, a
section 197 intangible must be acquired after the applicable date
(July 25, 1991, if the acquiring taxpayer has made a valid
retroactive election pursuant to �1.197-1T; August 10, 1993, in all
other cases). The purpose of the anti-churning rules of section
197(f)(9) and this paragraph (h) is to prevent the amortization of
section 197(f)(9) intangibles unless they are transferred after the
applicable effective date in a transaction giving rise to a
significant change in ownership or use. (Special rules apply for
purposes of determining whether transactions involving partnerships
give rise to a significant change in ownership or use. See paragraph
(h)(12) of this section.) The anti-churning rules are to be applied
in a manner that carries out their purpose.

(2) Treatment of section 197(f)(9) intangibles. Except as otherwise
provided in this paragraph (h), a section 197(f)(9) intangible
acquired by a taxpayer after the applicable effective date does not
qualify for amortization under section 197 if-- (

(i) The taxpayer or a related person held or used the intangible or
an interest therein at any time during the transition period;

(ii) The taxpayer acquired the intangible from a person that held
the intangible at any time during the transition period and, as part
of the transaction, the user of the intangible does not change; or

(iii) The taxpayer grants the right to use the intangible to a
person that held or used the intangible at any time during the
transition period (or to a person related to that person), but only
if the transaction in which the taxpayer grants the right and the
transaction in which the taxpayer acquired the intangible are part
of a series of related transactions.

(3) Amounts deductible under section 1253(d) or �1.162-11. For
purposes of this paragraph (h), deductions allowable under section
1253(d)(2) or pursuant to an election under section 1253(d)(3) (in
either case as in effect prior to the enactment of section 197) and
deductions allowable under �1.162-11 are treated as deductions
allowable for amortization under prior law.

(4) Transition period. For purposes of this paragraph (h), the
transition period is July 25, 1991, if the acquiring taxpayer has
made a valid retroactive election pursuant to �1.197-1T and the
period beginning on July 25, 1991, and ending on August 10, 1993, in
all other cases.

(5) Exceptions. The anti-churning rules of this paragraph (h) do not
apply to--

(i) The acquisition of a section 197(f)(9) intangible if the
acquiring taxpayer's basis in the intangible is determined under
section 1014(a); or

(ii) The acquisition of a section 197(f)(9) intangible that was an
amortizable section 197 intangible in the hands of the seller (or
transferor), but only if the acquisition transaction and the
transaction in which the seller (or transferor) acquired the
intangible or interest therein are not part of a series of related
transactions.

(6) Related person--(i) In general. Except as otherwise provided in
paragraph (h)(6)(ii) of this section, a person is related to another
person for purposes of this paragraph (h) if--

(A) The person bears a relationship to that person that would be
specified in section 267(b) (determined without regard to section
267(e)) and, by substitution, section 267(f)(1), if those sections
were amended by substituting 20 percent for 50 percent; or

(B) The person bears a relationship to that person that would be
specified in section 707(b)(1) if that section were amended by
substituting 20 percent for 50 percent; or

(C) The persons are engaged in trades or businesses under common
control (within the meaning of section 41(f)(1)(A) and (B)).

(ii) Time for testing relationships. Except as provided in paragraph
(h)(6)(iii) of this section, a person is treated as related to
another person for purposes of this paragraph (h) if the
relationship exists--

(A) In the case of a single transaction, immediately before or
immediately after the transaction in which the intangible is
acquired; and

(B) In the case of a series of related transactions (or a series of
transactions that together comprise a qualified stock purchase
within the meaning of section 338(d)(3)), immediately before the
earliest such transaction or immediately after the last such
transaction.

(iii) Certain relationships disregarded. In applying the rules in
paragraph (h)(7) of this section, if a person acquires an intangible
in a series of related transactions in which the person acquires
stock (meeting the requirements of section 1504(a)(2)) of a
corporation in a fully taxable transaction followed by a liquidation
of the acquired corporation under section 331, any relationship
created as part of such series of transactions is disregarded in
determining whether any person is related to such acquired
corporation immediately after the last transaction.

(iv) De mini mis rul e--(A) In general. Two corporations are not
treated as related persons for purposes of this paragraph (h) if--

(1) The corporations would (but for the application of this
paragraph (h)(6)(iv)) be treated as related persons solely by reason
of substituting "more than 20 percent" for "more than 50 percent" in
section 267(f)(1)(A); and

(2) The beneficial ownership interest of each corporation in the
stock of the other corporation represents less than 10 percent of
the total combined voting power of all classes of stock entitled to
vote and less than 10 percent of the total value of the shares of
all classes of stock outstanding.

(B) Determination of beneficial ownership interest. For purposes of
this paragraph (h)(6)(iv), the beneficial ownership interest of one
corporation in the stock of another corporation is determined under
the principles of section 318(a), except that--

(1) In applying section 318(a)(2)(C), the 50-percent limitation
contained therein is not applied; and

(2) Section 318(a)(3)(C) is applied by substituting "20 percent" for
"50 percent".

(7) Special rules for entities that owned or used property at any
time during the transition period and that are no longer in
existence. A corporation, partnership, or trust that owned or used a
section 197 intangible at any time during the transition period and
that is no longer in existence is deemed, for purposes of
determining whether a taxpayer acquiring the intangible is related
to such entity, to be in existence at the time of the acquisition.

(8) Special rules for section 338 deemed acquisitions. In the case
of a qualified stock purchase that is treated as a deemed sale and
purchase of assets pursuant to section 338, the corporation treated
as purchasing assets as a result of an election thereunder (new
target) is not considered the person that held or used the assets
during any period in which the assets were held or used by the
corporation treated as selling the assets (old target). Thus, for
example, if a corporation (the purchasing corporation) makes a
qualified stock purchase of the stock of another corporation after
the transition period, new target will not be treated as the owner
during the transition period of assets owned by old target during
that period even if old target and new target are treated as the
same corporation for certain other purposes of the Internal Revenue
Code or old target and new target are the same corporation under the
laws of the State or other jurisdiction of its organization.
However, the anti-churning rules of this paragraph (h) may
nevertheless apply to a deemed asset purchase resulting from a
section 338 election if new target is related (within the meaning of
paragraph (h)(6) of this section) to old target.

(9) Gain-recognition exception--(i) Applicability. A section 197(f)
(9) intangible qualifies for the gain-recognition exception if--

(A) The taxpayer acquires the intangible from a person that would
not be related to the taxpayer but for the substitution of 20
percent for 50 percent under paragraph (h)(6)(i)(A) of this section;
and

(B) That person (whether or not otherwise subject to Federal income
tax) elects to recognize gain on the disposition of the intangible
and agrees, notwithstanding any other provision of law or treaty, to
pay for the taxable year in which the disposition occurs an amount
of tax on the gain that, when added to any other Federal income tax
on such gain, equals the gain on the disposition multiplied by the
highest marginal rate of tax for that taxable year.

(ii) Effect of exception. The anti-churning rules of this paragraph
(h) apply to a section 197(f)(9) intangible that qualifies for the
gain-recognition exception only to the extent the acquiring
taxpayer's basis in the intangible exceeds the gain recognized by
the transferor.

(iii) Time and manner of election. The election described in this
paragraph (h)(9) must be made by the due date (including extensions
of time) of the electing taxpayer's Federal income tax return for
the taxable year in which the disposition occurs. The election is
made by attaching an election statement satisfying the requirements
of paragraph (h)(9)(viii) of this section to the electing taxpayer's
original or amended income tax return for that taxable year (or by
filing the statement as a return for the taxable year under
paragraph (h)(9)(xi) of this section). In addition, the taxpayer
must satisfy the notification requirements of paragraph (h)(9)(vi)
of this section. The election is binding on the taxpayer and all
parties whose Federal tax liability is affected by the election.

(iv) Special rules for certain entities. In the case of a
partnership, S corporation, estate or trust, the election under this
paragraph (h)(9) is made by the entity rather than by its owners or
beneficiaries. If a partnership or S corporation makes an election
under this paragraph (h)(9) with respect to the disposition of a
section 197(f)(9) intangible, each of its partners or shareholders
is required to pay a tax determined in the manner described in
paragraph (h)(9)(i)(B) of this section on the amount of gain that is
properly allocable to such partner or shareholder with respect to
the disposition.

(v) Effect of nonconforming elections. An attempted election that
does not substantially comply with each of the requirements of this
paragraph (h)(9) is disregarded in determining whether a section
197(f)(9) intangible qualifies for the gain-recognition exception.

(vi) Notification requirements. A taxpayer making an election under
this paragraph (h)(9) with respect to the disposition of a section
197(f)(9) intangible must provide written notification of the
election on or before the due date of the return on which the
election is made to the person acquiring the section 197 intangible.
In addition, a partnership or S corporation making an election under
this paragraph (h)(9) must attach to the Schedule K-1 furnished to
each partner or shareholder a written statement containing all
information necessary to determine the recipient's additional tax
liability under this paragraph (h)(9).

(vii) Revocation. An election under this paragraph (h)(9) may be
revoked only with the consent of the Commissioner.

(viii) Election Statement. An election statement satisfies the
requirements of this paragraph (h)(9)(viii) if it is in writing and
contains the information listed below. The required information
should be arranged and identified in accordance with the following
order and numbering system: (A) The name and address of the electing
taxpayer.

(B) Except in the case of a taxpayer that is not otherwise subject
to Federal income tax, the taxpayer identification number (TIN) of
the electing taxpayer.

(C) A statement that the taxpayer is making the election under
section 197(f)(9)(B).

(D) Identification of the transaction and each person that is a
party to the transaction or whose tax return is affected by the
election (including, except in the case of persons not otherwise
subject to Federal income tax, the TIN of each such person).

(E) The calculation of the gain realized, the applicable rate of
tax, and the amount of the taxpayer's additional tax liability under
this paragraph (h)(9).

(F) The signature of the taxpayer or an individual authorized to
sign the taxpayer's Federal income tax return.

(ix) Determination of highest marginal rate of tax and amount of
other Federal income tax on gain--(A) Marginal rate. The following
rules apply for purposes of determining the highest marginal rate of
tax applicable to an electing taxpayer:

(1) Noncorporate taxpayers. In the case of an individual, estate, or
trust, the highest marginal rate of tax is the highest marginal rate
of tax in effect under section 1, determined without regard to
section 1(h).

(2) Corporations and tax-exempt entities. In the case of a
corporation or an entity that is exempt from tax under section
501(a), the highest marginal rate of tax is the highest marginal
rate of tax in effect under section 11, determined without regard to
any rate that is added to the otherwise applicable rate in order to
offset the effect of the graduated rate schedule.

(B) Other Federal income tax on gain. The amount of Federal income
tax (other than the tax determined under this paragraph (h)(9))
imposed on any gain is the lesser of--

(1) The amount by which the taxpayer's Federal income tax liability
(determined without regard to this paragraph (h)(9)) would be
reduced if the amount of such gain were not taken into account; or

(2) The amount of the gain multiplied by the highest marginal rate
of tax for the taxable year.

(x) Coordination with other provisions--(A) In general. The amount
of gain subject to the tax determined under this paragraph (h)(9) is
not reduced by any net operating loss deduction under section
172(a), any capital loss under section 1212, or any other similar
loss or deduction. In addition, the amount of tax determined under
this paragraph (h)(9) is not reduced by any credit of the taxpayer.
In computing the amount of any net operating loss, capital loss, or
other similar loss or deduction, or any credit that may be carried
to any taxable year, any gain subject to the tax determined under
this paragraph (h)(9) and any tax paid under this paragraph (h)(9)
is not taken into account.

(B) Section 1374. No provision of paragraph (h)(9)(iv) of this
section precludes the application of section 1374 (relating to a tax
on certain built-in gains of S corporations) to any gain with
respect to which an election under this paragraph (h)(9) is made. In
addition, neither paragraph (h)(9)(iv) nor paragraph (h)(9)(x)(A) of
this section precludes a taxpayer from applying the provisions of
section 1366(f)(2) (relating to treatment of the tax imposed by
section 1374 as a loss sustained by the S corporation) in
determining the amount of tax payable under paragraph (h)(9) of this
section.

(C) Procedural and administrative provisions. For purposes of
subtitle F, the amount determined under this paragraph (h)(9) is
treated as a tax imposed by section 1 or 11, as appropriate.

(D) Installment method. The gain subject to the tax determined under
paragraph (h)(9)(i) of this section may not be reported under the
method described in section 453(a). Any such gain that would, but
for the application of this paragraph (h)(9)(x)(D), be taken into
account under section 453(a) shall be taken into account in the same
manner as if an election under section 453(d) (relating to the
election not to apply section 453(a)) had been made.

(xi) Special rules for persons not otherwise subject to Federal
income tax. If the person making the election under this paragraph
(h)(9) with respect to a disposition is not otherwise subject to
Federal income tax, the election statement satisfying the
requirements of paragraph (h)(9)(viii) of this section must be filed
with the Philadelphia Service Center. For purposes of this paragraph
(h)(9) and subtitle F, the statement is treated as an income tax
return for the calendar year in which the disposition occurs and as
a return due on or before March 15 of the following year.

(10) Transactions subject to both anti-churning and nonrecognition
rules. If a person acquires a section 197(f)(9) intangible in a
transaction described in paragraph (g)(2) of this section from a
person in whose hands the intangible was an amortizable section 197
intangible, and immediately after the transaction (or series of
transactions described in paragraph (h)(6)(ii)(B) of this section)
in which such intangible is acquired, the person acquiring the
section 197(f)(9) intangible is related to any person described in
paragraph (h)(2) of this section, the intangible is, notwithstanding
its treatment under paragraph (g)(2) of this section, treated as an
amortizable section 197 intangible only to the extent permitted
under this paragraph (h). (See, for example, paragraph (h)(5)(ii) of
this section.)

(11) Avoidance purpose. A section 197(f)(9) intangible acquired by a
taxpayer after the applicable effective date does not qualify for
amortization under section 197 if one of the principal purposes of
the transaction in which it is acquired is to avoid the operation of
the anti-churning rules of section 197(f)(9) and this paragraph (h).
A transaction will be presumed to have a principal purpose of
avoidance if it does not effect a significant change in the
ownership or use of the intangible. Thus, for example, if section
197(f)(9) intangibles are acquired in a transaction (or series of
related transactions) in which an option to acquire stock is issued
to a party to the transaction, but the option is not treated as
having been exercised for purposes of paragraph (h)(6) of this
section, this paragraph (h)(11) may apply to the transaction.

(12) Additional partnership anti-churning rules--(i) In general. In
determining whether the anti-churning rules of this paragraph (h)
apply to any increase in the basis of a section 197(f)(9) intangible
under section 732(b), 732(d), 734(b), or 743(b), the determinations
are made at the partner level and each partner is treated as having
owned and used the partner's proportionate share of partnership
property. In determining whether the anti-churning rules of this
paragraph (h) apply to any transaction under another section of the
Internal Revenue Code, the determinations are made at the
partnership level, unless under �1.701-2(e) the Commissioner
determines that the partner level is more appropriate.

(ii) Section 732(b) adjustments--Reserved.

(iii) Section 732(d) adjustments. The anti-churning rules of this
paragraph (h) do not apply to an increase in the basis of
partnership property under section 732(d) if the distributee partner
was not related (at the time of the transfer of the partnership
interest) to the person who transferred the partnership interest
with respect to which the distribution is being made.

(iv) Section 734(b) adjustments-- Reserved.

(v) Section 743(b) adjustments. The anti-churning rules of this
paragraph (h) do not apply to an increase in the basis of
partnership property under section 743(b) if the person acquiring
the partnership interest is not related to the person transferring
the partnership interest.

(vi) Partner is or becomes a user of partnership intangible--(A)
General rule. If, as part of a series of related transactions that
includes a transaction described in paragraph (h)(12) (iii) or (v)
of this section, an anti-churning partner or a person related to an
anti-churning partner becomes (or remains) a user of an intangible
that is treated as transferred in the transaction (as a result of
the partners being treated as having owned their proportionate share
of partnership assets), the anti-churning rules of this paragraph
(h) apply to the proportionate share of such intangible that is
treated as transferred by the anti-churning partner, notwithstanding
the application of paragraph (h)(12) (iii) or (v) of this section.

(B) Anti-churning partner. For purposes of this paragraph (h)(12)
(vi), anti-churning partner means - -

(1) With respect to all intangibles held by a partnership on or
before August 10, 1993, any partner, but only to the extent that (i)
The partner's interest in the partnership was acquired on or before
August 10, 1993, or

(ii) The interest was acquired from a person related to the partner
on or after August 10, 1993, and such interest was not held by any
person other than persons related to such partner at any time after
August 10, 1993 (disregarding, for this purpose, a person's holding
of an interest if the acquisition of such interest was part of a
transaction or series of related transactions in which the partner
or persons related to the partner subsequently acquired such
interest),

(2) With respect to any section 197(f)(9) intangible acquired by a
partnership after August 10, 1993, that is not amortizable with
respect to the partnership, any partner, but only to the extent that

(i) The partner's interest in the partnership was acquired on or
before the date the partnership acquired the section 197(f)(9)
intangible, or

(ii) The interest was acquired from a person related to the partner
on or after the date the partnership acquired the section 197(f)(9)
intangible, and such interest was not held by any person other than
persons related to such partner at any time after the date the
partnership acquired the section 197(f)(9) intangible (disregarding,
for this purpose, a person's holding of an interest if the
acquisition of such interest was part of a transaction or series of
related transactions in which the partner or persons related to the
partner subsequently acquired such interest), and

(3) With respect to any intangible, a partner who received an
interest in the partnership in exchange for such intangible (or a
portion thereof) or a related person who received such interest in
the partnership from such a partner, but only to the extent that the
intangible (or portion thereof) transferred by such partner is not
an amortizable section 197 intangible with respect to the
partnership.

(C) Effect of retroactive elections. For purposes of paragraph (h)
(12)(vi)(B) of this section, references to August 10, 1993, are
treated as references to July 25, 1991, if the relevant party made a
valid retroactive election under �1.197-1T. ( vii) Section 704(c)
allocations--(A) Allocations where the intangible is amortizable by
the contributor. The anti-churning rules of this paragraph (h) do
not apply to the curative or remedial allocations of amortization
with respect to a section 197(f)(9) intangible if the intangible was
an amortizable section 197 intangible in the hands of the
contributing partner (unless paragraph (h)(10) of this section
applies so as to cause the intangible to cease to be an amortizable
section 197 intangible in the hands of the partnership).

(B) Allocations where the intangible is not amortizable by the
contributor.

Notwithstanding paragraph (g)(3)(ii) of this section, where the
section 197(f)(9) intangible was not an amortizable section 197
intangible in the hands of the contributing partner, a partner may
not receive remedial allocations of amortization under section
704(c) that are deductible for Federal income tax purposes if that
partner is related to the partner that contributed the intangible.
Taxpayers may use any reasonable method to determine amortization of
the asset for book purposes, provided that the method used does not
contravene the purposes of the anti-churning rules under section 197
and this paragraph (h). A method will be considered to contravene
the purposes of the anti-churning rules if the effect of the book
adjustments resulting from the method is such that any portion of
the tax deduction for amortization attributable to section 704(c) is
allocated, directly or indirectly, to a partner who is subject to
the anti-churning rules with respect to such adjustment.

(viii) Operating rule for transfers upon death. For purposes of this
paragraph (h)(12), if the basis of a partner's interest in a
partnership is determined under section 1014(a), such partner is
treated as acquiring such interest from a person who is not related
to such partner, and such interest is treated as having previously
been held by a person who is not related to such partner.

(i) [Reserved]

(j) General anti-abuse rule. The Commissioner will interpret and
apply the rules in this section as necessary and appropriate to
prevent avoidance of the purposes of section 197. If one of the
principal purposes of a transaction is to achieve a tax result that
is inconsistent with the purposes of section 197, the Commissioner
will recast the transaction for Federal tax purposes as appropriate
to achieve tax results that are consistent with the purposes of
section 197, in light of the applicable statutory and regulatory
provisions and the pertinent facts and circumstances.

(k) Examples. The following examples illustrate the application of
this section:

Example 1. Advertising costs. (i) Q manufactures and sells consumer
products through a series of wholesalers and distributors. In order
to increase sales of its products by encouraging consumer loyalty to
its products and to enhance the value of the goodwill, trademarks,
and trade names of the business, Q advertises its products to the
consuming public. It regularly incurs costs to develop radio,
television, and print advertisements. These costs generally consist
of employee costs and amounts paid to independent advertising
agencies. Q also incurs costs to run these advertisements in the
various media for which they were developed.

(ii) The advertising costs are not chargeable to capital account
under paragraph (f)(3) of this section (relating to costs incurred
for covenants not to compete, rights granted by governmental units,
and contracts for the use of section 197 intangibles) and are
currently deductible as ordinary and necessary expenses under
section 162.

Accordingly, under paragraph (a)(3) of this section, section 197
does not apply to these costs.

Example 2. Computer software. (i) X purchases all of the assets of
an existing trade or business from Y. One of the assets acquired is
all of Y's rights in certain computer software previously used by Y
under the terms of a nonexclusive license from the software
developer. The software was developed for use by manufacturers to
maintain a comprehensive accounting system, including general and
subsidiary ledgers, payroll, accounts receivable and payable, cash
receipts and disbursements, fixed asset accounting, and inventory
cost accounting and controls. The developer modified the software
for use by Y at a cost of $1,000 and Y made additional modifications
at a cost of $500. The developer does not maintain wholesale or
retail outlets but markets the software directly to ultimate users.
Y's license of the software is limited to an entity that is actively
engaged in business as a manufacturer.

(ii) Notwithstanding these limitations, the software is considered
to be readily available to the general public for purposes of
paragraph (c)(4)(i) of this section. In addition, the software is
not substantially modified because the cost of the modifications by
the developer and Y to the version of the software that is readily
available to the general public does not exceed $2,000. Accordingly,
the software is not a section 197 intangible.

Example

3. Acquisition of software for internal use. (i) B, the owner and
operator of a worldwide package-delivery service, purchases from S
all rights to software developed by S. The software will be used by
B for the sole purpose of improving its package-tracking operations.
B does not purchase any other assets in the transaction or any
related transaction.

(ii) Because B acquired the software solely for internal use, it is
disregarded in determining for purposes of paragraph (c)(4)(ii) of
this section whether the assets acquired in the transaction or
series of related transactions constitute a trade or business or
substantial portion thereof. Since no other assets were acquired,
the software is not acquired as part of a purchase of a trade or
business and under paragraph (c)(4)(ii) of this section is not a
section 197 intangible.

Example 4. Governmental rights of fixed duration. (i) City M
operates a municipal water system. In order to induce X to locate a
new manufacturing business in the city, M grants X the right to
purchase water for 16 years at a specified price.

(ii) The right granted by M is a right to receive tangible property
or services described in section 197(e)(4)(B) and paragraph (c)(6)
of this section and, thus, is not a section 197 intangible. This
exclusion applies even though the right does not qualify for
exclusion as a right of fixed duration or amount under section
197(e)(4)(D) and paragraph (c)(13) of this section because the
duration exceeds 15 years and the right is not fixed as to amount.
It is also immaterial that the right would not qualify for exclusion
as a self-created intangible under section 197(c)(2) and paragraph
(d)(2) of this section because it is granted by a governmental unit.

Example 5. Separate acquisition of franchise. (i) S is a franchiser
of retail outlets for specialty coffees. G enters into a franchise
agreement (within the meaning of section 1253(b)(1)) with S pursuant
to which G is permitted to acquire and operate a store using the S
trademark and trade name at the location specified in the agreement.

G agrees to pay S $100,000 upon execution of the agreement and also
agrees to pay, throughout the term of the franchise, additional
amounts that are deductible under section 1253(d)(1). The agreement
contains detailed specifications for the construction and operation
of the business, but G is not required to purchase from S any of the
materials necessary to construct the improvements at the location
specified in the franchise agreement.

(ii) The franchise is a section 197 intangible within the meaning of
paragraph (b)(10) of this section. The franchise does not qualify
for the exclusion relating to self-created intangibles described in
section 197(c)(2) and paragraph (d)(2) of this section because the
franchise is described in section 197(d)(1)(F). In addition, because
the acquisition of the franchise constitutes the acquisition of an
interest in a trade or business or a substantial portion thereof,
the franchise may not be excluded under section 197(e)(4). Thus, the
franchise is an amortizable section 197 intangible, the basis of
which must be recovered over a 15-year period. However, the amounts
that are deductible under section 1253(d)(1)are not subject to the
provisions of section 197 by reason of section 197(f)(4)(C) and
paragraph (b)(10)(ii) of this section.

Example 6. Acquisition and amortization of covenant not to compete.
(i) As part of the acquisition of a trade or business from C, B and
C enter into an agreement containing a covenant not to compete.
Under this agreement, C agrees that it will not compete with the
business acquired by B within a prescribed geographical territory
for a period of three years after the date on which the
business is sold to B. In exchange for this agreement, B agrees to
pay C $90,000 per year for each year in the term of the agreement.
The agreement further provides that, in the event of a breach by C
of his obligations under the agreement, B may terminate the
agreement, cease making any of the payments due thereafter, and
pursue any other legal or equitable remedies available under
applicable law. The amounts payable to C under the agreement are not
contingent payments for purposes of �1.1275-4. The present fair
market value of B's rights under the agreement is $225,000. The
aggregate consideration paid for all assets acquired in the
transaction (including the covenant not to compete) exceeds the sum
of the amount of Class I assets and the aggregate fair market value
of all Class II, Class III, Class IV, Class V, and Class VI assets
by $50,000. See �1.338-6T(b) for rules for determining the assets in
each class.

(ii) Because the covenant is acquired in an applicable asset
acquisition (within the meaning of section 1060(c)), paragraph (f)
(4)(ii) of this section applies and the basis of B in the covenant
is determined pursuant to section 1060(a) and the regulations
thereunder. Under ��1.1060-1T(c)(2) and 1.338-6T(c)(1), B's basis in
the covenant cannot exceed its fair market value. Thus, B's basis in
the covenant immediately after the acquisition is $225,000. This
basis is amortized ratably over the 15-year period beginning on the
first day of the month in which the agreement is entered into.
Although the payments under the agreement ($270,000) exceed the
amount allocated to the covenant by $45,000, all of the remaining
consideration ($50,000) is allocated to Class VII assets (goodwill
and going concern value). See ��1.1060-1T(c)(2) and 1.338-6T(b).

Example 7. Stand-alone license of technology. (i) X is a
manufacturer of consumer goods that does business throughout the
world through subsidiary corporations organized under the laws of
each country in which business is conducted.

X licenses to Y, its subsidiary organized and conducting business in
Country K, all of the patents, formulas, designs, and know-how
necessary for Y to manufacture the same products that X manufactures
in the United States. Assume that the license is not considered a
sale or exchange under the principles of section 1235. The license
is for a term of 18 years, and there are no facts to indicate that
the license does not have a fixed duration. Y agrees to pay X a
royalty equal to a specified, fixed percentage of the revenues
obtained from selling products manufactured using the licensed
technology.

Assume that the royalty is reasonable and is not subject to
adjustment under section 482. The license is not entered into in
connection with any other transaction. Y incurs capitalized costs in
connection with entering into the license.

(ii) The license is a contract for the use of a section 197
intangible within the meaning of paragraph (b)(11) of this section.
It does not qualify for the exception in section 197(e)(4)(D) and
paragraph (c)(13) of this section (relating to rights of fixed
duration or amount) because it does not have a term of less than 15
years, and the other exceptions in section 197(e) and paragraph (c)
of this section are also inapplicable. Accordingly, the license is a
section 197 intangible.

(iii) The license is not acquired as part of a purchase of a trade
or business.

Thus, under paragraph (f)(3)(iii) of this section, the license will
be closely scrutinized under the principles of section 1235 for
purposes of determining whether the transfer is a sale or exchange
and, accordingly, whether the payments under the license are
chargeable to capital account. Because the license is not a sale or
exchange under the principles of section 1235, the royalty payments
are not chargeable to capital account for purposes section 197. The
capitalized costs of entering into the license are not within
the exception under paragraph (d)(2) of this section for self-
created intangibles, and thus are amortized under section 197.

Example 8. License of technology and trademarks . (i) The facts are
the same as in Example 7, except that the license also includes the
use of the trademarks and trade names that X uses to manufacture and
distribute its products in the United States.

Assume that under the principles of section 1253 the transfer is not
a sale or exchange of the trademarks and trade names or an undivided
interest therein and that the royalty payments are described in
section 1253(d)(1)(B).

(ii) As in Example 7, the license is a section 197 intangible.
Although the license conveys an interest in X's trademarks and trade
names to Y, the transfer of the interest is disregarded for purposes
of paragraph (e)(2) of this section unless the transfer is
considered a sale or exchange of the trademarks and trade names or
an undivided interest therein. Accordingly, the licensing of the
technology and the trademarks and trade names is not treated as part
of a purchase of a trade or business under paragraph (e)(2) of this
section.

(iii) Because the technology license is not part of the purchase of
a trade or business, it is treated in the manner described in
Example 7. The royalty payments for the use of the trademarks and
trade names are deductible under section 1253(d)(1) and, under
section 197(f)(4)(C) and paragraph (b)(10)(ii) of this section, are
not chargeable to capital account for purposes of section 197. The
capitalized costs of entering into the license are treated in the
same manner as in example 7.

Example 9. Disguised sale. (i) The facts are the same as in Example
7, except that Y agrees to pay X, in addition to the contingent
royalty, a fixed minimum royalty immediately upon entering into the
agreement and there are sufficient facts present to characterize the
transaction, for federal tax purposes, as a transfer of ownership of
the intellectual property from X to Y.

(ii) The purported license of technology is, in fact, an acquisition
of an intangible described in section 197(d)(1)(C)(iii) and
paragraph (b)(5) of this section (relating to know-how, etc.). As in
Example 7, the exceptions in section 197(e) and paragraph (c) of
this section do not apply to the transfer. Accordingly, the
transferred property is a section 197 intangible. Y's basis in the
transferred intangible includes the capitalized costs of entering
into the agreement and the fixed minimum royalty payment payable at
the time of the transfer. In addition, except to the extent that a
portion of any payment will be treated as interest or original issue
discount under applicable provisions of the Internal Revenue Code,
all of the contingent payments under the purported license are
properly chargeable to capital account for purposes of section 197
and this section.

The extent to which such payments are treated as payments of
principal and the time at which any amount treated as a payment of
principal is taken into account in determining basis are determined
under the rules of �1.1275-4(c)(4) or 1.483-4(a), whichever is
applicable. Any contingent amount that is included in basis after
the month in which the acquisition occurs is amortized under the
rules of paragraph (f)(2)(i) or (ii) of this section.

Example 10. License of technology and customer list as part of sale
of a trade or business. (i) X is a computer manufacturer that
produces, in separate operating divisions, personal computers,
servers, and peripheral equipment. In a transaction that is the
purchase of a trade or business for purposes of section 197, Y (who
is unrelated to X) purchases from X all assets of the operating
division producing personal computers, except for certain patents
that are also used in the division manufacturing servers and
customer lists that are also used in the division manufacturing
peripheral equipment. As part of the transaction, X transfers to Y
the right to use the retained patents and customer lists solely in
connection with the manufacture and sale of personal computers. The
transfer agreement requires annual royalty payments contingent on
the use of the patents and also requires a payment for each use of
the customer list. In addition, Y incurs capitalized costs in
connection with entering into the licenses.

(ii) The rights to use the retained patents and customer lists are
contracts for the use of section 197 intangibles within the meaning
of paragraph (b)(11) of this section.

The rights do not qualify for the exception in 197(e)(4)(D) and
paragraph (c)(13) of this section (relating to rights of fixed
duration or amount) because they are transferred as part of a
purchase of a trade or business and the other exceptions in section
197(e) and paragraph (c) of this section are also inapplicable.
Accordingly, the licenses are section 197 intangibles.

(iii) Because the right to use the retained patents is described in
paragraph (b)(11) of this section and the right is transferred as
part of a purchase of a trade or business, the treatment of the
royalty payments is determined under paragraph (f)(3)(ii) of this
section. In addition, however, the retained patents are described in
paragraph (b)(5) of this section. Thus, the annual royalty payments
are chargeable to capital account under the general rule of
paragraph (f)(3)(ii)(A) of this section unless Y establishes that
the license is not a sale or exchange under the principles of
section 1235 and the royalty payments are an arm's length
consideration for the rights transferred. If these facts are
established, the exception in paragraph (f)(3)(ii)(B) of this
section applies and the royalty payments are not chargeable to
capital account for purposes of section 197. The capitalized costs
of entering into the license are treated in the same manner as in
Example 7.

(iv) The right to use the retained customer list is also described
in paragraph (b)(11) of this section and is transferred as part of a
purchase of a trade or business.

Thus, the treatment of the payments for use of the customer list is
also determined under paragraph (f)(3)(ii) of this section. The
customer list, although described in paragraph (b)(6) of this
section, is a customer-related information base. Thus, the exception
in paragraph (f)(3)(ii)(B) of this section does not apply.
Accordingly, payments for use of the list are chargeable to capital
account under the general rule of paragraph (f)(3)(ii)(A) of this
section and are amortized under section 197. In addition, the
capitalized costs of entering into the contract for use of the
customer list are treated in the same manner as in Example 7.

Example 11. Loss disallowance rules involving related persons. (i)
Assume that X and Y are treated as a single taxpayer for purposes of
paragraph (g)(1) of this section.

In a single transaction, X and Y acquired from Z all of the assets
used by Z in a trade or business. Z had operated this business at
two locations, and X and Y each acquired the assets used by Z at one
of the locations. Three years after the acquisition, X sold all of
the assets it acquired, including amortizable section 197
intangibles, to an unrelated purchaser. The amortizable section
intangibles are sold at a loss of $120,000. ( ii) Because X
and Y are treated as a single taxpayer for purposes of the loss
disallowance rules of section 197(f)(1) and paragraph (g)(1) of this
section, X's loss on the sale of the amortizable section 197
intangibles is not recognized. Under paragraph (g)(1)(iv)(B) of this
section, X's disallowed loss is allowed ratably, as a deduction
under section 197, over the remainder of the 15-year period during
which the intangibles would have been amortized, and Y may not
increase the basis of the amortizable section 197 intangibles that
it acquired from Z by the amount of X's disallowed loss.

Example 12. Disposition of retained intangibles by related person.
(i) The facts are the same as in Example 11, except that 10 years
after the acquisition of the assets by X and Y and 7 years after the
sale of the assets by X, Y sells all of the assets acquired from Z,
including amortizable section 197 intangibles, to an unrelated
purchaser.

(ii) Under paragraph (g)(1)(iv)(B) of this section, X may recognize,
on the date of the sale by Y, any loss that has not been allowed as
a deduction under section 197.

Accordingly, X recognizes a loss of $50,000, the amount obtained by
reducing the loss on the sale of the assets at the end of the third
year ($120,000) by the amount allowed as a deduction under paragraph
(g)(1)(iv)(B) of this section during the 7 years following the sale
by X ($70,000).

Example 13. Acquisition of an interest in partnership with no
section 754 election. (i) A, B, and C each contribute $1,500 for
equal shares in general partnership P. On January 1, 1998, P
acquires as its sole asset an amortizable section 197 intangible for
$4,500. P still holds the intangible on January 1, 2003, at which
time the intangible has an adjusted basis to P of $3,000, and A, B,
and C each have an adjusted basis of $1,000 in their partnership
interests. D (who is not related to A) acquires A's interest in P
for $1,600. No section 754 election is in effect for 2003.

(ii) Because there is no change in the basis of the intangible under
section 743(b), D merely steps into the shoes of A with respect to
the intangible. D's proportionate share of P's adjusted basis in the
intangible is $1,000, which continues to be amortized over the 10
years remaining in the original 15-year amortization period for the
intangible.

Example 14. Acquisition of an interest in partnership with a section
754 election.

(i) The facts are the same as in Example 13, except that a section
754 election is in effect for 2003.

(ii) Pursuant to paragraph (g)(3) of this section, for purposes of
section 197, D is treated as if P owns two assets. D's proportionate
share of P's adjusted basis in one asset is $1,000, which continues
to be amortized over the 10 years remaining in the original 15-year
amortization period. For the other asset, D's proportionate share of
P's adjusted basis is $600 (the amount of the basis increase under
section 743 as a result of the section 754 election), which is
amortized over a new 15-year period beginning January 2003. With
respect to B and C, P's remaining $2,000 adjusted basis in the
intangible continues to be amortized over the 10 years remaining in
the original 15-year amortization period.

Example 15. Payment to a retiring partner by partnership with a
section 754 election. (i) The facts are the same as in Example 13,
except that a section 754 election is in effect for 2003 and,
instead of D acquiring A's interest in P, A retires from P. A, B,
and C are not related to each other within the meaning of paragraph
(h)(6) of this section. P borrows $1,600, and A receives a payment
under section 736 from P of such amount, all of which is in exchange
for A's interest in the intangible asset owned by P.

(Assume, for purposes of this example, that the borrowing by P and
payment of such funds to A does not give rise to a disguised sale of
A's partnership interest under section 707(a)(2)(B).) P makes a
positive basis adjustment of $600 with respect to the section 197
intangible under section 734(b).

(ii) Pursuant to paragraph (g)(3) of this section, because of the
section 734 adjustment, P is treated as having two amortizable
section 197 intangibles, one with a basis of $3,000 and a remaining
amortization period of 10 years and the other with a basis of $600
and a new amortization period of 15 years.

Example 16. Termination of partnership under section 708(b)(1)(B).
(i) A and B are partners with equal shares in the capital and
profits of general partnership P. P's only asset is an amortizable
section 197 intangible, which P had acquired on January 1, 1995. On
January 1, 2000, the asset had a fair market value of $100 and a
basis to P of $50. On that date, A sells his entire partnership
interest in P to C, who is unrelated to A, for $50. At the time of
the sale, the basis of each of A and B in their respective
partnership interests is $25.

(ii) The sale causes a termination of P under section 708(b)(1)(B).
Under section 708, the transaction is treated as if P transfers its
sole asset to a new partnership in exchange for the assumption of
its liabilities and the receipt of all of the interests in the new
partnership. Immediately thereafter, P is treated as if it is
liquidated, with B and C each receiving their proportionate share of
the interests in the new partnership. The contribution by P of its
asset to the new partnership is governed by section 721, and the
liquidating distributions by P of the interests in the new
partnership are governed by section 731. C does not realize a basis
adjustment under section 743 with respect to the amortizable section
197 intangible unless P had a section 754 election in effect for its
taxable year in which the transfer of the partnership interest to C
occurred or the taxable year in which the deemed liquidation of P
occurred.

(iii) Under section 197, if P had a section 754 election in effect,
C is treated as if the new partnership had acquired two assets from
P immediately preceding its termination. Even though the adjusted
basis of the new partnership in the two assets is determined solely
under section 723, because the transfer of assets is a transaction
described in section 721, the application of sections 743(b) and 754
to P immediately before its termination causes P to be treated as if
it held two assets for purposes of section 197. See paragraph (g)(3)
of this section. B's and C's proportionate share of the new
partnership's adjusted basis is $25 each in one asset, which
continues to be amortized over the 10 years remaining in the
original 15-year amortization period. For the other asset, C's
proportionate share of the new partnership's adjusted basis is $25
(the amount of the basis increase resulting from the application of
section 743 to the sale or exchange by A of the interest in P),
which is amortized over a new 15-year period beginning in January
2000.

(iv) If P did not have a section 754 election in effect for its
taxable year in which the sale of the partnership interest by A to C
occurred or the taxable year in which the deemed liquidation of P
occurred, the adjusted basis of the new partnership in the
amortizable section 197 intangible is determined solely under
section 723, because the transfer is a transaction described in
section 721, and P does not have a basis increase in the intangible.
Under section 197(f)(2) and paragraph (g)(2)(ii) of this section,
the new partnership continues to amortize the intangible over the 10
years remaining in the original 15-year amortization period. No
additional amortization is allowable with respect to this asset.

Example 17. Disguised sale to partnership. (i) E and F are
individuals who are unrelated to each other within the meaning of
paragraph (h)(6) of this section. E has been engaged in the active
conduct of a trade or business as a sole proprietor since 1990. E
and F form EF Partnership. E transfers all of the assets of the
business, having a fair market value of $100, to EF, and F transfers
$40 of cash to EF. E receives a 60 percent interest in EF and the
$40 of cash contributed by F, and F receives a 40 percent interest
in EF, under circumstances in which the transfer by E is partially
treated as a sale of property to EF under �1.707-3(b).

(ii) Under �1.707-3(a)(1), the transaction is treated as if E had
sold to EF a 40 percent interest in each asset for $40 and
contributed the remaining 60 percent interest in each asset to EF in
exchange solely for an interest in EF. Because E and EF are related
persons within the meaning of paragraph (h)(6) of this section, no
portion of any transferred section 197(f)(9) intangible that E held
during the transition period (as defined in paragraph (h)(4) of this
section) is an amortizable section 197 intangible pursuant to
paragraph (h)(2) of this section. Section 197(f)(9)(E) and paragraph
(g)(3) of this section do not apply to any portion of the section
197 intangible in the hands of EF because the basis of EF in these
assets was not increased under any of sections 732, 734, or 743.

Example 18. Acquisition by related person in nonrecognition
transaction. (i) A owns a nonamortizable intangible that A acquired
in 1990. In 2000, A sells a one-half interest in the intangible to B
for cash. Immediately after the sale, A and B, who are unrelated to
each other, form partnership P as equal partners. A and B each
contribute their one-half interest in the intangible to P.

(ii) P has a transferred basis in the intangible from A and B under
section 723.

The nonrecognition transfer rule under paragraph (g)(2)(ii) of this
section applies to A's transfer of its one-half interest in the
intangible to P, and consequently P steps into A's shoes with
respect to A's nonamortizable transferred basis. The anti-churning
rules of paragraph (h) of this section apply to B's transfer of its
one-half interest in the intangible to P, because A, who is related
to P under paragraph (h)(6) of this section immediately after the
series of transactions in which the intangible was acquired by P,
held B's one-half interest in the intangible during the transition
period. Pursuant to paragraph (h)(10) of this section, these rules
apply to B's transfer of its one-half interest to P even though the
nonrecognition transfer rule under paragraph (g)(2)(ii) of this
section would have permitted P to step into B's shoes with respect
to B's otherwise amortizable basis.

Therefore, P's entire basis in the intangible is nonamortizable.
However, if A (not B) elects to recognize gain under paragraph (h)
(9) of this section on the transfer of each of the one-half
interests in the intangible to B and P, then the intangible would be
amortizable by P to the extent provided in section 197(f)(9)(B) and
paragraph (h)(9) of this section.

Example 19. Acquisition of partnership interest following formation
of partnership. (i) The facts are the same as in Example 18 except
that, in 2000, A formed P with an affiliate, S, and contributed the
intangible to the partnership and except that in a subsequent year,
in a transaction that is properly characterized as a sale of a
partnership interest for Federal tax purposes, B purchases a 50
percent interest in P from A. P has a section 754 election in effect
and holds no assets other than the intangible and cash.

(ii) For the reasons set forth in Example 16(iii), B is treated as
if P owns two assets. B's proportionate share of P's adjusted basis
in one asset is the same as A's proportionate share of P's adjusted
basis in that asset, which is not amortizable under section 197. For
the other asset, B's proportionate share of the remaining adjusted
basis of P is amortized over a new 15-year period.

Example 20. Acquisition by related corporation in nonrecognition
transaction. (i) The facts are the same as Example 18, except that A
and B form corporation P as equal owners.

(ii) P has a transferred basis in the intangible from A and B under
section 362.

Pursuant to paragraph (h)(10) of this section, the application of
the nonrecognition transfer rule under paragraph (g)(2)(ii) of this
section and the anti-churning rules of paragraph (h) of this section
to the facts of this Example 18 is the same as in Example 16. Thus,
P's entire basis in the intangible is nonamortizable.

Example 21. Acquisition from corporation related to purchaser
through remote indirect interest. (i) X, Y, and Z are each
corporations that have only one class of issued and outstanding
stock. X owns 25 percent of the stock of Y and Y owns 25 percent of
the outstanding stock of Z. No other shareholder of any of these
corporations is related to any other shareholder or to any of the
corporations. On June 30, 2000, X purchases from Z section 197(f)(9)
intangibles that Z owned during the transition period (as defined in
paragraph (h)(4) of this section).

(ii) Pursuant to paragraph (h)(6)(iv)(B) of this section, the
beneficial ownership interest of X in Z is 6.25 percent, determined
by treating X as if it owned a proportionate (25 percent) interest
in the stock of Z that is actually owned by Y. Thus, even though X
is related to Y and Y is related to Z, X and Z are not considered to
be related for purposes of the anti-churning rules of section 197.

Example 22. Gain recognition election. (i) B owns 25 percent of the
stock of S, a corporation that uses the calendar year as its taxable
year. No other shareholder of B or S is related to each other. S is
not a member of a controlled group of corporations within the
meaning of section 1563(a). S has section 197(f)(9) intangibles that
it owned during the transition period. S has a basis of $25,000 in
the intangibles. In 2001, S sells these intangibles to B for
$75,000. S recognizes a gain of $50,000 on the sale and has no other
items of income, deduction, gain, or loss for the year, except that
S also has a net operating loss of $20,000 from prior years that it
would otherwise be entitled to use in 2001 pursuant to section
172(b). S makes a valid gain recognition election pursuant to
section 197(f)(9)(B) and paragraph (h)(9) of this section. In 2001,
the highest marginal tax rate applicable to S is 35 percent. But for
the election, all of S's taxable income would be taxed at a rate of
15 percent.

(ii) If the gain recognition election had not been made, S would
have taxable income of $30,000 for 2001 and a tax liability of
$4,500. If the gain were not taken into account, S would have no tax
liability for the taxable year. Thus, the amount of tax (other than
the tax imposed under paragraph (h)(9) of this section) imposed on
the gain is also $4,500. The gain on the disposition multiplied by
the highest marginal tax rate is $17,500 ($50,000 x .35).
Accordingly, S's tax liability for the year is $4,500 plus an
additional tax under paragraph (h)(9) of this section of $13,000
($17,500 - $4,500).

(iii) Pursuant to paragraph (h)(9)(x)(A) of this section, S
determines the amount of its net operating loss deduction in
subsequent years without regard to the gain recognized on the sale
of the section 197 intangible to B. Accordingly, the entire $20,000
net operating loss deduction that would have been available in 2001
but for the gain recognition election may be used in 2002, subject
to the limitations of section 172.

(iv) B has a basis of $75,000 in the section 197(f)(9) intangibles
acquired from S.

As the result of the gain recognition election by S, B may amortize
$50,000 of its basis under section 197. Under paragraph (h)(9)(ii)
of this section, the remaining basis does not qualify for the gain-
recognition exception and may not be amortized by B.

Example 23. Section 338 election. (i) Corporation P makes a
qualified stock purchase of the stock of T corporation from two
shareholders in July 2000, and a section 338 election is made by P.
No shareholder of either T or P owns stock in both of these
corporations, and no other shareholder is related to any other
shareholder of either corporation.

(ii) Pursuant to paragraph (h)(8) of this section, in the case of a
qualified stock purchase that is treated as a deemed sale and
purchase of assets pursuant to section 338, the corporation treated
as purchasing assets as a result of an election thereunder (new
target) is not considered the person that held or used the assets
during any period in which the assets were held or used by the
corporation treated as selling the assets (old target). Because
there are no relationships described in paragraph (h)(6) of this
section among the parties to the transaction, any nonamortizable
section 197(f)(9) intangible held by old target is an amortizable
section 197 intangible in the hands of new target.

(iii) Assume the same facts as set forth in paragraph (i) of this
Example 23, except that one of the selling shareholders is an
individual who owns 25 percent of the total value of the stock of
each of the T and P corporation.

(iv) Old target and new target (as these terms are defined in
�1.338-1(c)(13)) are members of a controlled group of corporations
under section 267(b)(3), as modified by section 197(f)(9)(C)(i), and
any nonamortizable section 197(f)(9) intangible held by old target
is not an amortizable section 197 intangible in the hands of new
target. However, a gain recognition election under paragraph (h)(9)
of this section may be made with respect to this transaction.

Example 24. Relationship created as part of public offering. (i) On
January 1, 2001, Corporation X engages in a series of related
transactions to discontinue its involvement in one line of business.
X forms a new corporation, Y, with a nominal amount of cash. Shortly
thereafter, X transfers all the stock of its subsidiary conducting
the unwanted business (Target) to Y in exchange for 100 shares of Y
common stock and a Y promissory note. Target owns a nonamortizable
section 197(f)(9) intangible. Prior to January 1, 2001, X and an
underwriter (U) had entered into a binding agreement pursuant to
which U would purchase 85 shares of Y common stock from X and then
sell those shares in a public offering. On January 6, 2001, the
public offering closes. X and Y make a section 338(h)(10) election
for Target. ( ii) Pursuant to paragraph (h)(8) of this
section, in the case of a qualified stock purchase that is treated
as a deemed sale and purchase of assets pursuant to section 338, the
corporation treated as purchasing assets as a result of an election
thereunder (new target) is not considered the person that held or
used the assets during any period in which the assets were held or
used by the corporation treated as selling the assets (old target).
Further, for purposes of determining whether the nonamortizable
section 197(f)(9) intangible is acquired by new target from a
related person, because the transactions are a series of related
transactions, the relationship between old target and new target
must be tested immediately before the first transaction in the
series (the formation of Y) and immediately after the last
transaction in the series (the sale to U and the public offering).
See paragraph (h)(6)(ii)(B) of this section. Because there was no
relationship between old target and new target immediately before
the formation of Y (because the section 338 election had not been
made) and only a 15% relationship between old target and new target
immediately after, old target is not related to new target for
purposes of applying the anti-churning rules of paragraph (h) of
this section.

Accordingly, Target may amortize the section 197 intangible.

Example 25. Other transfers to controlled corporations. (i) In 2001,
Corporation A transfers a section 197(f)(9) intangible that it held
during the transition period to X, a newly formed corporation, in
exchange for 15% of X's stock. As part of the same transaction, B
transfers property to X in exchange for the remaining 85% of X
stock.

(ii) Because the acquisition of the intangible by X is part of a
qualifying section 351 exchange, under section 197(f)(2) and
paragraph (g)(2)(ii) of this section, X is treated in the same
manner as the transferor of the asset. Accordingly, X may not
amortize the intangible. If, however, at the time of the exchange, B
has a binding commitment to sell 25 percent of the X stock to C, an
unrelated third party, the exchange, including A's transfer of the
section 197(f)(9) intangible, would fail to qualify as a section 351
exchange. Because the formation of X, the transfers of property to
X, and the sale of X stock by B are part of a series of related
transactions, the relationship between A and X must be tested
immediately before the first transaction in the series (the transfer
of property to X) and immediately after the last transaction in the
series (the sale of X stock to C). See paragraph (h)(6)(ii)(B) of
this section. Because there was no relationship between A and X
immediately before and only a 15% relationship immediately after, A
is not related to X for purposes of applying the anti-churning rules
of paragraph (h) of this section. Accordingly, X may amortize the
section 197 intangible.

Example 26. Relationship created as part of stock acquisition
followed by liquidation. (i) In 2001, Partnership P purchases 100
percent of the stock of Corporation X. P and X were not related
prior to the acquisition. Immediately after acquiring the X stock,
and as part of a series of related transactions, P liquidates X
under section 331.

In the liquidating distribution, P receives a section 197(f)(9)
intangible that was held by X during the transition period.

(ii) Because the relationship between P and X was created pursuant
to a series of related transactions where P acquires stock (meeting
the requirements of section 1504(a)(2)) in a fully taxable
transaction followed by a liquidation under section 331, the
relationship immediately after the last transaction in the series
(the liquidation) is disregarded. See paragraph (h)(6)(iii) of this
section. Accordingly, P is entitled to amortize the section 197(f)
(9) intangible. Example 27. Section 743(b) adjustment with no
change in user. (i) On January 1, 2001, A forms a partnership (PRS)
with B in which A owns a 60-percent, and B owns a 40-percent,
interest in profits and capital. A contributes a nonamortizable
section 197(f)(9) intangible with a value of $80 and an adjusted
basis of $0 to PRS in exchange for its PRS interest and B
contributes $120 cash. At the time of the contribution, PRS licenses
the section 197(f)(9) intangible to A. On February 1, 2001, A sells
its entire interest in PRS to C, an unrelated person, for $80. PRS
has a section 754 election in effect.

(ii) The section 197(f)(9) intangible contributed to PRS by A is not
amortizable in the hands of PRS. Pursuant to section (g)(2)(ii) of
this section, PRS steps into the shoes of A with respect to A's
nonamortizable transferred basis in the intangible.

(iii) When A sells the PRS interest to C, C will have a basis
adjustment in the PRS assets under section 743(b) equal to $80. The
entire basis adjustment will be allocated to the intangible because
the only other asset held by PRS is cash.

Ordinarily, under paragraph (h)(12)(v) of this section, the anti-
churning rules will not apply to an increase in the basis of
partnership property under section 743(b) if the person acquiring
the partnership interest is not related to the person transferring
the partnership interest. However, A is an anti-churning partner
under paragraph (h)(12)(vi)(B)(3) of this section. Because A remains
a user of the section 197(f)(9) intangible after the transfer to C,
paragraph (h)(12)(vi)(A) of this section will cause the anti-
churning rules to apply to the entire basis adjustment under section
743(b).

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

(2) Application to pre-effective date acquisitions. A taxpayer may
choose, on a transaction-by-transaction basis, to apply the
provisions of this section and �1.167(a)-14 to property acquired
after August 10, 1993 (or July 25, 1991, if a valid retroactive
election has been made under �1.197-1T) and on or before January 25,
2000.

(3) Application of regulation project REG-209709-94 to pre-effective
date acquisitions. A taxpayer may rely on the provisions of
regulation project REG-209709- 94 (1997-1 C.B. 731) for property
acquired after August 10, 1993 (or July 25, 1991, if a valid
retroactive election has been made under �1.197-1T) and on or before
January 25, 2000.

(4) Change in method of accounting--(i) In general. For the first
taxable year ending after January 25, 2000, a taxpayer that has
acquired property to which the exception in �1.197-2(c)(13) applies
is granted consent of the Commissioner to change its method of
accounting for such property to comply with the provisions of this
section and �1.167(a)-14 unless the proper treatment of such
property is an issue under consideration (within the meaning of Rev.
Proc. 97-27 (1997-21 IRB 10)(see �601.601(d)(2) of this chapter)) in
an examination, before an Appeals office, or before a Federal court.

(ii) Application to pre-effective date acquisitions. For the first
taxable year ending after January 25, 2000, a taxpayer is granted
consent of the Commissioner to change its method of accounting for
all property acquired in transactions described in paragraph (l)(2)
of this section to comply with the provisions of this section and
�1.167(a)-14 unless the proper treatment of any such property is an
issue under consideration (within the meaning of Rev. Proc. 97-27
(1997-21 IRB 10)(see �601.601(d)(2) of this chapter)) in an
examination, before an Appeals office, or before a Federal court.

(iii) Automatic change procedures. A taxpayer changing its method of
accounting in accordance with this paragraph (l)(4) must follow the
automatic change in accounting method provisions of Rev. Proc. 99-49
(1999-52 IRB 725)(see �601.601(d)(2) of this chapter) except, for
purposes of this paragraph (l)(4), the scope limitations in section
4.02 of Rev. Proc. 99-49 (1999-52 IRB 725) are not applicable.
However, if the taxpayer is under examination, before an appeals
office, or before a federal court, the taxpayer must provide a copy
of the application to the examining agent(s), appeals officer, or
counsel for the government, as appropriate, at the same time that it
files the copy of the application with the National Office. The
application must contain the name

(s) and telephone number(s) of the examining agent(s), appeals
officer, or counsel for the government, as appropriate.

Part 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 8. The authority citation for part 602 continues to read as
follows: Authority: 26 U.S.C. 7805.

Par. 9. In �602.101, paragraph (b) is amended by adding an entry to
the table in numerical order to read as follows.

�602.101 OMB Control numbers.

* * * * *

(b) * * *

____________________________________________________________________


CFR part or section Current OMB identified and described control No.

* * * * *

1.197-2 .................................1545-1671

* * * * *
____________________________________________________________________


David Mader
Acting Deputy Commissioner of Internal Revenue
Approved: 1/14/00
Jonathan Talisman
Acting Assistant Secretary of the Treasury

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