[Federal Register Volume 65, Number 16 (Tuesday, January 25, 2000)]
[Proposed Rules]
[Pages 3903-3907]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1381]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / 
Proposed Rules  

[[Page 3903]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-100163-00]
RIN 1545-AX73


Applying Section 197 To Partnerships

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations relating to the 
amortization of certain intangible property to partnership transactions 
involving sections 732(b) and 734(b). The proposed regulations 
interpret the provisions of section 197(f)(9), reflecting changes to 
the law made by the Omnibus Budget Reconciliation Act of 1993 (OBRA 
'93) and affect taxpayers who acquired intangible property after August 
10, 1993, or made a retroactive election to apply OBRA '93 to 
intangibles acquired after July 25, 1991. This document also provides a 
notice of public hearing on these proposed regulations.

DATES: Written comments must be received by April 24, 2000. Outlines of 
topics to be discussed at the public hearing scheduled for May 24, 
2000, at 10 a.m. must be received by May 3, 2000.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-100163-00), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
100163-00), Courier's desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW, Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Internet by selecting the ``Tax Regs'' 
option on the IRS Home Page, or by submitting comments directly to the 
IRS Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
regslist.html. The public hearing will be held in Room 2615, Internal 
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Robert G. Honigman, (202) 622-3050; concerning submissions of comments, 
the hearing, and/or to be placed on the building access list to attend 
the hearing, Guy Traynor, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: This document proposes to amend section 197 
of the Income Tax Regulations (26 CFR Part 1) to provide additional 
rules regarding the application of section 197(f)(9) to partnership 
transactions under sections 732(b) and 734(b).

Background

    On January 16, 1997, the IRS published proposed regulations (REG-
209709-94) in the Federal Register (62 FR 2336) inviting comments under 
sections 167(f) and 197, including the anti-churning rules in section 
197(f)(9). Commentators requested that the final regulations provide 
additional guidance on how the special anti-churning rule of section 
197(f)(9)(E) applies to increases in the basis of partnership property 
under sections 732, 734, and 743. In accordance with these comments, 
these proposed regulations provide rules for determining the amount of 
a basis adjustment under sections 732(b) and 734(b) that will be 
subject to the anti-churning rules. Final regulations being issued at 
the same time as these proposed regulations provide rules for 
determining the amount of a basis adjustment under sections 732(d) and 
743(b) that will be subject to the anti-churning rules.

Explanation of Provisions

A. In General

    Section 197(f)(9)(E) provides that, in applying the anti-churning 
rules for basis adjustments under sections 732, 734, and 743, 
determinations are made at the partner level, and each partner is 
treated as having owned and used such partner's proportionate share of 
the partnership's assets. With respect to basis adjustments under 
sections 732(b) and 734(b), this rule requires taxpayers and the IRS to 
analyze transactions that actually involve a distribution of property 
from the partnership to a partner as deemed transactions involving 
transfers of property directly among the partners.

B. Two-Step Analysis

    The proposed regulations embody a two-step analysis in determining 
whether the anti-churning rules apply to the deemed transfer of 
intangibles in transactions giving rise to basis adjustments under 
sections 732(b) and 734(b). First, it is necessary to determine whether 
the portion of an intangible that a partner is deemed to transfer is 
treated, immediately prior to the deemed transfer, as being subject to 
the anti-churning rules for purposes of applying these provisions. 
Second, if the partner's share of the intangible is treated, 
immediately prior to the deemed transfer, as being subject to the anti-
churning rules for purposes of applying these provisions, it is 
necessary to determine whether the deemed transferor and transferee are 
related so that the anti-churning rules will continue to apply to the 
intangible after the deemed transfer.
    For purposes of applying the first prong of the analysis, when a 
partner acquires an interest in a partnership, the proposed regulations 
treat the partner as acquiring an undivided interest in all section 
197(f)(9) intangibles held by a partnership at the time that the 
partner acquires an interest in the partnership. If a partner acquires 
an interest in a partnership from an unrelated person after August 10, 
1993 (or, in certain cases, after July 25, 1991), the partner's share 
of any intangible held by the partnership as of August 10, 1993 (or, in 
certain cases, after July 25, 1991) is treated as no longer subject to 
the anti-churning rules for purposes of analyzing subsequent deemed 
transfers of intangibles in transactions that give rise to the basis 
adjustments under sections 732(b) and 734(b). With respect to 
intangibles acquired by the partnership after August 10, 1993, that are 
subject to the anti-churning rules in the hands of the partnership, a 
partner's share of the intangible is treated as not subject to the 
anti-churning rules for purposes of analyzing these basis adjustments 
if the partner acquired the interest in the partnership from an 
unrelated person after the partnership acquired the tainted intangible. 
Once a partner's

[[Page 3904]]

share of an intangible is treated as no longer subject to the anti-
churning rules for purposes of analyzing subsequent deemed transfers, 
that share of the intangible will remain untainted even if the partner 
transfers the interest to the original transferor or a person who is 
related to the original transferor, so long as the transfers are not 
part of the same transaction or series of related transactions. Special 
rules are provided where a partner acquires a partnership interest in 
exchange for property contributed to a partnership.
    For purposes of applying the anti-churning rules to basis 
adjustments under section 732(b), the distributee partner is deemed to 
acquire the distributed intangible directly from the continuing 
partners of the distributing partnership. The proposed regulations 
contain a favorable stacking rule that treats the distributee partner 
as acquiring the intangible first from the continuing partners for whom 
transfers would not be subject to the anti-churning rules (either 
because the continuing partner's share of the intangible is treated, 
for purposes of this rule, as not being subject to the anti-churning 
rules or the distributee partner is not related to the continuing 
partner) to the extent of such partners' share of appreciation in the 
intangible.
    The proposed regulations contain a special rule to ensure that, in 
analyzing subsequent transfers, a partner cannot treat the entire 
intangible as no longer subject to the anti-churning rules simply 
because the full basis of the intangible (which may be significantly 
less than the intangible's fair market value) becomes amortizable as a 
result of the favorable stacking rule that applies to section 732(b) 
basis adjustments.
    For purposes of applying the anti-churning rules to basis 
adjustments under section 734(b), the continuing partners are deemed to 
acquire interests in the intangible that remains in the partnership 
from the partner who received a distribution (giving rise to the 
section 734(b) basis adjustment) of property other than the intangible. 
To the extent that the distributee partner could transfer the 
intangible directly to a continuing partner (who may be the distributee 
partner) and the transfer would not be subject to the anti-churning 
rules (either because the distributee partner's share of the intangible 
is treated (for purposes of this rule) as not being subject to the 
anti-churning rules or the continuing partner is not related to the 
distributee (except in certain circumstances)), the basis adjustment 
will be amortizable with respect to the continuing partner.
    The proposed regulations contain a special rule which provides that 
if a distribution that gives rise to an increase in the basis under 
section 734(b) of a section 197(f)(9) intangible held by the 
partnership is undertaken as part of a series of related transactions 
that include a contribution of the intangible to the partnership by a 
continuing partner, the continuing partner is treated as related to the 
distributee partner to the extent that the continuing partner's 
partnership interest was received in exchange for the intangible.
    In addition to issues relating to determining the amount of a basis 
adjustment that is subject to the anti-churning rules, the Treasury 
Department and the IRS also recognize that certain problems may arise 
in maintaining capital accounts where a portion of a section 734(b) 
adjustment is allocated to an intangible that is subject to the anti-
churning rules with respect to one or more partners. In some 
situations, the failure to allocate deductions for amortization to any 
partner whose allocable share of a section 734(b) adjustment is subject 
to the anti-churning rules will distort the partners' economic 
agreement. For example, where partners agree to share depreciation and 
amortization deductions equally, if one partner's share of a section 
734(b) adjustment allocable to an intangible asset is subject to the 
anti-churning rules, the capital accounts of the partners will not 
reflect an equivalent sharing of the economic amortization from the 
asset absent special adjustments to account for the disparity between 
the allocation of tax amortization and the intended allocation of 
economic amortization. Furthermore, divergence of book and tax accounts 
with respect to an intangible that may result from such special 
adjustments can cause problems in allocating the correct amount of 
taxable gain or loss to the appropriate parties upon disposition of the 
intangible. Similar problems may arise as a result of allowing remedial 
allocations for intangibles that otherwise are subject to the anti-
churning rules and are addressed in Sec. 1.197-2(h)(12)(vii)(B). These 
regulations are not intended to create such distortions. Nevertheless, 
a general rule that resolves these distortions in all situations 
(including different allocations of gain and depreciation or 
amortization) would be extremely complicated and, perhaps, unduly 
narrow.
    Therefore, the proposed regulations provide that taxpayers may use 
any reasonable method to determine amortization for book purposes in 
these situations, provided that the method used does not contravene the 
purposes of the anti-churning rules under section 197 (i.e., the effect 
of the book adjustments will not be such that a partner who is subject 
to the anti-churning rules will receive, directly or indirectly, 
deductions for amortization, for Federal income tax purposes, 
attributable to the section 734(b) adjustment). The Treasury Department 
and IRS may consider providing guidance with respect to this issue in 
the future and request comments relating thereto.

C. Effective Date

    These regulations are proposed to apply to distributions occurring 
on or after the date final regulations are published in the Federal 
Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. It also has 
been determined that section 533(b) of the Administrative Procedures 
Act (5 U.S.C. chapter 5) does not apply to these regulations, and 
because these regulations do not impose a collection of information on 
small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
does not apply. Pursuant to section 7805(f) of the Internal Revenue 
Code, this notice of proposed rulemaking will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying. The 
Treasury Department and IRS specifically request comments on the 
clarity of the proposed regulations and how they may be made easier to 
understand.
    A public hearing has been scheduled for May 24, 2000, at 10 a.m. in 
Room 2615, Internal Revenue Building, 1111 Constitution Avenue, NW., 
Washington, DC. Due to building security procedures, visitors must 
enter at the 10th Street entrance, located between Constitution and 
Pennsylvania Avenues, NW. In addition, all visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 15 minutes before the hearing starts. For

[[Page 3905]]

information about having your name placed on the building access list 
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section 
of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit written comments and an outline of the topics to be discussed 
and the time devoted to each topic (signed original and eight (8) 
copies) by April 24, 2000.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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

    Par. 2. Section 1.197-2 is amended by:
    1. Revising paragraphs (h)(12)(ii), (h)(12)(iv), and (h)(12)(vi).
    2. Adding Examples 28, 29, and 30 to paragraph (k).
    3. Adding a sentence at the end of paragraph (l)(1).
    The additions and revisions read as follows:


Sec. 1.197-2  Amortization of goodwill and other intangibles.

* * * * *
    (h) * * *
    (12) * * *
    (ii) Section 732(b) adjustments--(A) In general. The anti-churning 
rules of this paragraph (h) apply to any increase in the adjusted basis 
of a section 197(f)(9) intangible under section 732(b) to the extent 
that the basis increase exceeds the total unrealized appreciation from 
the intangible allocable to--
    (1) Partners other than the distributee partner or persons related 
to the distributee partner;
    (2) If the distributed intangible is a section 197(f)(9) intangible 
acquired by the partnership on or before August 10, 1993, the 
distributee partner and persons related to the distributee partner to 
the extent that--
    (i) They acquired an interest or interests in the partnership after 
August 10, 1993; and
    (ii) Such interest or interests were held after August 10, 1993, by 
a person or persons other than the distributee partner or persons who 
were related to the distributee partner, and the acquisition of such 
interest or interests by such person or persons was not part of a 
transaction or series of related transactions in which the distributee 
partner or persons related to the distributee partner subsequently 
acquired such interest or interests; and
    (3) If the distributed intangible is a section 197(f)(9) intangible 
that is acquired by the partnership after August 10, 1993, and that is 
not amortizable with respect to the partnership, the distributee 
partner and persons related to the distributee partner to the extent 
that--
    (i) They acquired an interest or interests in the partnership after 
the partnership acquired the distributed intangible; and
    (ii) Such interest or interests were held after the partnership 
acquired the distributed intangible, by a person or persons other than 
the distributee partner or persons who were related to the distributee 
partner, and the acquisition of such interest or interests by such 
person or persons was not part of a transaction or series of related 
transactions in which the distributee partner or persons related to the 
distributee partner subsequently acquired such interest or interests.
    (B) Effect of retroactive elections. For purposes of paragraph 
(h)(12)(ii)(A) of this section, references to August 10, 1993, are 
treated as references to July 25, 1991, if the relevant party made a 
valid retroactive election under Sec. 1.197-1T.
    (C) Intangible still subject to anti-churning rules. 
Notwithstanding paragraph (h)(12)(ii) of this section, in applying the 
provisions of this paragraph (h) with respect to subsequent transfers, 
the distributed intangible remains subject to the provisions of this 
paragraph (h) in a percentage (determined at the time of the 
distribution) equal to--
    (1) The sum of--
    (i) The amount of the distributed intangible's basis that is 
nonamortizable under paragraph (g)(2)(ii)(B) of this section; and
    (ii) The total unrealized appreciation inherent in the intangible 
reduced by the amount of the increase in the adjusted basis of the 
distributed intangible under section 732(b) to which the anti-churning 
rules do not apply; over--
    (2) The fair market value of such intangible.
    (D) Partner's allocable share of unrealized appreciation from the 
intangible. The amount of unrealized appreciation from an intangible 
that is allocable to a partner is the amount of taxable gain that would 
have been allocated to that partner if the partnership had sold the 
intangible immediately before the distribution for its fair market 
value in a fully taxable transaction.
    (E) Acquisition of partnership interest by contribution. Solely for 
purposes of paragraphs (h)(12)(ii)(A)(2) and (3) of this section, a 
partner who acquires an interest in a partnership in exchange for a 
contribution of property to the partnership is deemed to acquire a pro 
rata portion of that interest in the partnership from each person who 
is a partner in the partnership at the time of the contribution based 
on each such partner's proportionate interest in the partnership. 
However, if the partner contributed the distributed section 197(f)(9) 
intangible to the partnership, the interest acquired by such partner in 
exchange for the intangible is treated as not being described in 
paragraphs (h)(12)(ii)(A)(2) or (3) of this section.
* * * * *
    (iv) Section 734(b) adjustments--(A) In general. The anti-churning 
rules of this paragraph (h) do not apply to a continuing partner's 
share of an increase in the basis of a section 197(f)(9) intangible 
held by a partnership under section 734(b) to the extent that the 
continuing partner is an eligible partner.
    (B) Eligible partner. For purposes of this paragraph (h)(12)(iv), 
eligible partner means--
    (1) A continuing partner that is not the distributee partner or a 
person related to the distributee partner;
    (2) With respect to any section 197(f)(9) intangible acquired by 
the partnership on or before August 10, 1993, a continuing partner that 
is the distributee partner or a person related to the distributee 
partner to the extent that--
    (i) The distributee partner's interest in the partnership was 
acquired after August 10, 1993; and

[[Page 3906]]

    (ii) Such interest was held after August 10, 1993 by a person or 
persons who were not related to the distributee partner, and the 
acquisition of such interest by such person or persons was not part of 
a transaction or series of related transactions in which the 
distributee partner or persons related to the distributee partner 
subsequently acquired such interest; or
    (3) With respect to any section 197(f)(9) intangible acquired by 
the partnership after August 10, 1993, that is not amortizable with 
respect to the partnership, a continuing partner that is the 
distributee partner or a person related to the distributee partner to 
the extent that--
    (i) The distributee partner's interest in the partnership was 
acquired after the partnership acquired the relevant intangible; and
    (ii) Such interest was held after the partnership acquired the 
relevant intangible by a person or persons who were not related to the 
distributee partner, and the acquisition of such interest by such 
person or persons was not part of a transaction or series of related 
transactions in which the distributee partner or persons related to the 
distributee partner subsequently acquired such interest.
    (C) Effect of retroactive elections. For purposes of paragraph 
(h)(12)(iv)(A) of this section, references to August 10, 1993, are 
treated as references to July 25, 1991, if the distributee partner made 
a valid retroactive election under Sec. 1.197-1T.
    (D) Partner's share of basis increase. For purposes of this 
paragraph (h)(12)(iv), a continuing partner's share of a basis increase 
is equal to--
    (1) The total basis increase allocable to the intangible; 
multiplied by
    (2) A fraction equal to--
    (i) The unrealized appreciation from the intangible that would have 
been allocated to the continuing partner if the partnership had sold 
the intangible immediately before the distribution for its fair market 
value in a fully taxable transaction; over
    (ii) The total unrealized appreciation from the intangible that 
would have been realized by the partnership if the partnership had sold 
the intangible immediately before the distribution for its fair market 
value in a fully taxable transaction.
    (E) Interests acquired by contribution--(1) Application of 
paragraphs (h)(12)(iv)(B)(2) and (3) of this section. Solely for 
purposes of paragraphs (h)(12)(iv)(B)(2) and (3) of this section, a 
partner who acquires an interest in a partnership in exchange for a 
contribution of property to the partnership is deemed to acquire a pro 
rata portion of that interest in the partnership from each person who 
is a partner in the partnership at the time of the contribution based 
on each such partner's proportionate interest in the partnership. 
However, if the partner contributed the distributed section 197(f)(9) 
intangible to the partnership, the interest acquired by such partner in 
exchange for the intangible is treated as not being described in 
paragraphs (h)(12)(iv)(B)(2) or (3) of this section.
    (2) Special rule with respect to paragraph (h)(12)(iv)(B)(1) of 
this section. Solely for purposes of paragraph (h)(12)(iv)(B)(1) of 
this section, if a distribution that gives rise to an increase in the 
basis under section 734(b) of a section 197(f)(9) intangible held by 
the partnership is undertaken as part of a series of related 
transactions that include a contribution of the intangible to the 
partnership by a continuing partner, the continuing partner is treated 
as related to the distributee partner to the extent that the continuing 
partner's partnership interest was received in exchange for the 
intangible.
    (F) Effect of section 734(b) adjustment on partners' capital 
accounts. If one or more partners are subject to the anti-churning 
rules under this paragraph (h) with respect to a section 734(b) 
adjustment allocable to an intangible asset, taxpayers may use any 
reasonable method to determine amortization of the asset for book 
purposes, provided that the method used does not contravene the 
purposes of the anti-churning rules under section 197 and this 
paragraph (h). A method will be considered to contravene the purposes 
of the anti-churning rules if the effect of the book adjustments 
resulting from the method is such that any portion of the tax deduction 
for amortization attributable to the section 734 adjustment is 
allocated, directly or indirectly, to a partner who is subject to the 
anti-churning rules with respect to such adjustment.
* * * * *
    (vi) Partner is or becomes a user of partnership intangible-- (A) 
General rule. If, as part of a series of related transactions that 
includes a transaction described in paragraph (h)(12)(ii), (iii), (iv), 
or (v) of this section, an anti-churning partner becomes (or remains) a 
user of an intangible that is treated as transferred in the transaction 
(as a result of the partners being treated as having owned their 
proportionate share of partnership assets), the anti-churning rules 
shall apply to the proportionate share of such intangible that is 
treated as transferred by the anti-churning partner, notwithstanding 
the application of paragraph (h)(12)(ii), (iii), (iv), or (v) of this 
section.
* * * * *
    (k) * * *
    Example 28. Distribution of section 197(f)(9) intangible to 
partner who acquired partnership interest prior to the effective 
date.
    (i) In 1990, A, B, and C each contribute $150 cash to form 
general partnership ABC for the purpose of engaging in a consulting 
business and a software manufacturing business. The partners agree 
to share partnership profits and losses equally. In 2000, the 
partnership distributes the consulting business to A in liquidation 
of A's entire interest in ABC. The only asset of the consulting 
business is a nonamortizable intangible, which has a fair market 
value of $180 and a basis of $0. At the time of the distribution, 
the adjusted basis of A's interest in ABC is $150. A is not related 
to B or C.
    (ii) Under section 732(b), A's adjusted basis in the intangible 
distributed by ABC is $150, a $150 increase over the basis of the 
intangible in ABC's hands. In determining whether the anti-churning 
rules apply to any portion of the basis increase, A is treated as 
having owned and used A's proportionate share of partnership 
property. Thus, A is treated as holding an interest in the 
intangible during the transition period. Because the intangible was 
not amortizable prior to the enactment of section 197, the section 
732(b) increase in the basis of the intangible may be subject to the 
anti-churning provisions. Paragraph (h)(12)(ii) of this section 
provides that the anti-churning provisions apply to the extent that 
the section 732(b) adjustment exceeds the total unrealized 
appreciation from the intangible allocable to partners other than A 
or persons related to A, as well as certain other partners whose 
purchase of their interests meet certain criteria. Because B and C 
are not related to A, and A's acquisition of its partnership 
interest does not satisfy the necessary criteria, the section 732(b) 
basis increase is subject to the anti-churning provisions to the 
extent that it exceeds B and C's proportionate share of the 
unrealized appreciation from the intangible. B and C's proportionate 
shares of the unrealized appreciation from the intangible is $120 
(2/3 of $180). This is the amount of gain that would be allocated to 
B and C if the partnership sold the intangible immediately before 
the distribution for its fair market value of $180. Therefore, $120 
of the section 732(b) basis increase is not subject to the anti-
churning rules. The remaining $30 of the section 732(b) basis 
increase is subject to the anti-churning rules. Accordingly, A is

[[Page 3907]]

treated as having two intangibles, an amortizable section 197 
intangible with an adjusted basis of $120 and a new amortization 
period of 15 years and a nonamortizable intangible with an adjusted 
basis of $30.
    (iii) In applying the anti-churning rules to future transfers of 
the distributed intangible, under paragraph (h)(12)(ii)(C) of this 
section, one-third of the intangible will continue to be subject to 
the anti-churning rules, determined as follows: The sum of the 
amount of the distributed intangible's basis that is nonamortizable 
under paragraph (g)(2)(ii)(B) of this section ($0) and the total 
unrealized appreciation inherent in the intangible reduced by the 
amount of the increase in the adjusted basis of the distributed 
intangible under section 732(b) to which the anti-churning rules do 
not apply ($180 -$120 = $60), over the fair market value of the 
distributed intangible ($180).
    Example 29. Distribution of section 197(f)(9) intangible to 
partner who acquired partnership interest after the effective date.
    (i) The facts are the same as in example 28, except that B and C 
form ABC in 1990. A does not acquire an interest in ABC until 1995. 
In 1995, A contributes $150 to ABC in exchange for a one-third 
interest in ABC. At the time of the distribution, the adjusted basis 
of A's interest in ABC is $150.
    (ii) As in Example 28, the anti-churning rules do not apply to 
the increase in the basis of the intangible distributed to A under 
section 732(b) to the extent that it does not exceed the unrealized 
appreciation from the intangible allocable to B and C. Under 
paragraph (h)(12)(ii) of this section, the anti-churning provisions 
also do not apply to the section 732(b) basis increase to the extent 
of A's allocable share of the unrealized appreciation from the 
intangible because A acquired the ABC interest from an unrelated 
person after August 10, 1993, and the intangible was acquired by the 
partnership before A acquired the ABC interest. Under paragraph 
(h)(12)(ii)(E) of this section, A is deemed to acquire the ABC 
partnership interest from an unrelated person because A acquired the 
ABC partnership interest in exchange for a contribution to the 
partnership of property other than the distributed intangible and, 
at the time of the contribution, no partner in the partnership was 
related to A. Consequently, the increase in the basis of the 
intangible under section 732(b) is not subject to the anti-churning 
rules to the extent of the total unrealized appreciation from the 
intangible allocable to A, B, and C. The total unrealized 
appreciation from the intangible allocable to A, B, and C is $180 
(the gain the partnership would have recognized if it had sold the 
intangible for its fair market value immediately before the 
distribution). Because this amount exceeds the section 732(b) basis 
increase of $150, the entire section 732(b) basis increase is 
amortizable.
    (iii) In applying the anti-churning rules to future transfers of 
the distributed intangible, under paragraph (h)(12)(ii)(C) of this 
section, one-sixth of the intangible will continue to be subject to 
the anti-churning rules, determined as follows: The sum of the 
amount of the distributed intangible's basis that is nonamortizable 
under paragraph (g)(2)(ii)(B) of this section ($0) and the total 
unrealized appreciation inherent in the intangible reduced by the 
amount of the increase in the adjusted basis of the distributed 
intangible under section 732(b) to which the anti-churning rules do 
not apply ($180 -$150 = $30), over the fair market value of the 
distributed intangible ($180).
    Example 30. Distribution of section 197(f)(9) intangible 
contributed to the partnership by a partner. (i) The facts are the 
same as in Example 29, except that C purchased the intangible used 
in the consulting business in 1988 for $60 and contributed the 
intangible to ABC in 1990. At that time, the intangible had a fair 
market value of $150 and an adjusted tax basis of $60. When ABC 
distributes the intangible to A in 2000, the intangible has a fair 
market value of $180 and a basis of $60.
    (ii) As in Examples 28 and 29, the adjusted basis of the 
intangible in A's hands is $150 under section 732(b). However, the 
increase in the adjusted basis of the intangible under section 
732(b) is only $90 ($150 adjusted basis after the distribution 
compared to $60 basis before the distribution). Pursuant to 
paragraph (g)(2)(ii)(B) of this section, A steps into the shoes of 
ABC with respect to the $60 of A's adjusted basis in the intangible 
that corresponds to ABC's basis in the intangible and this portion 
of the basis is nonamortizable. B and C are not related to A, A 
acquired the ABC interest from an unrelated person after August 10, 
1993, and the intangible was acquired by ABC before A acquired the 
ABC interest. Therefore, under paragraph (h)(12)(ii) of this 
section, the section 732(b) basis increase is amortizable to the 
extent of A, B, and C's allocable share of the unrealized 
appreciation from the intangible. The total unrealized appreciation 
from the intangible that is allocable to A, B, and C is $120. If ABC 
had sold the intangible immediately before the distribution to A for 
its fair market value of $180, it would have recognized gain of 
$120, which would have been allocated $10 to A, $10 to B, and $100 
to C under section 704(c). Because A, B, and C's allocable share of 
the unrealized appreciation from the intangible exceeds the section 
732(b) basis increase in the intangible, the entire $90 of basis 
increase is amortizable by A. Accordingly, after the distribution, A 
will be treated as having two intangibles, an amortizable section 
197 intangible with an adjusted basis of $90 and a new amortization 
period of 15 years and a nonamortizable intangible with an adjusted 
basis of $60.
    (iii) In applying the anti-churning rules to future transfers of 
the distributed intangible, under paragraph (h)(12)(ii)(C) of this 
section, one-half of the intangible will continue to be subject to 
the anti-churning rules, determined as follows: The sum of the 
amount of the distributed intangible's basis that is nonamortizable 
under paragraph (g)(2)(ii)(B) of this section ($60) and the total 
unrealized appreciation inherent in the intangible reduced by the 
amount of the increase in the adjusted basis of the distributed 
intangible under section 732(b) to which the anti-churning rules do 
not apply ($120 - $90 = $30), over the fair market value of the 
distributed intangible ($180).
* * * * *
    (l) * * *
    (1) In general. * * * Paragraphs (h)(12)(ii), (iv) and (vi) of 
this section apply to partnership distributions occurring on or 
after the date final regulations are published in the Federal 
Register.
* * * * *

David Mader,
Acting Deputy Commissioner of Internal Revenue Service.
[FR Doc. 00-1381 Filed 1-20-00; 1:19 pm]
BILLING CODE 4830-01-U