Example 12. (D) Examples. 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. The anti-churning rules of this paragraph (h) do not apply to an increase in the basis of a section 197 intangible under section 743(b) if the person acquiring the partnership interest is not related to the person transferring the partnership interest. Under 1.8482(g), this capitalization shortfall would cause old T to reduce the net negative consideration taken into account with respect to the assumption reinsurance transaction by $6,809,519 ($524,333 .077) unless the parties make the election under 1.8482(g)(8) to capitalize specified policy acquisition expenses in connection with the assumption reinsurance transaction without regard to the general deductions limitation. Notwithstanding paragraph (h)(12)(ii) of this section, in applying the provisions of this paragraph (h) with respect to subsequent transfers, the distributed intangible remains subject to the provisions of this paragraph (h) in proportion to a fraction (determined at the time of the distribution), as follows, (1) The numerator of which is equal to the sum of, (i) The amount of the distributed intangible's basis that is nonamortizable under paragraph (g)(2)(ii)(B) of this section; and, (ii) The total unrealized appreciation inherent in the intangible reduced by the amount of the increase in the adjusted basis of the distributed intangible under section 732(b) to which the anti-churning rules do not apply; and. Instructions for Form 4562 (2022) | Internal Revenue Service Proc. to such person) World Intellectual Property Organization. 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). 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. (iv) The amortization deduction for a short taxable year is based on the number of months in the short taxable year. Application of the provisions described in paragraph (l)(5)(i)(A) of this section retroactively. Businesses can deduct the cost of these assets as expenses over several years using a process called amortization. Example 19. (Special rules apply for purposes of determining whether transactions involving partnerships give rise to a significant change in ownership or use. 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). The following rules and definitions provide guidance concerning property that is a section 197 intangible unless an exception applies: (1) Goodwill. Any fees for professional services, and any transaction costs, incurred by parties 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), or the existence of favorable supply contracts. is subject to a nonexclusive license, and has not been substantially modified, and. With respect to any increase in the basis of partnership property under section, The term amortizable section 197 intangible (i) The distributee partner's interest in the partnership was acquired after August 10, 1993; (ii) Such interest was held after August 10, 1993 by a person or persons who were not related to the distributee partner; and, (iii) The acquisition of such interest by such person or persons was not part of a transaction or series of related transactions in which the distributee partner or persons related to the distributee partner subsequently acquired such interest; or, (3) A continuing partner that is the distributee partner or a person related to the distributee partner, with respect to any section 197(f)(9) intangible acquired by the partnership after August 10, 1993, that is not amortizable with respect to the partnership, to the extent that. 9727 (199721 IRB 10)(see 601.601(d)(2) of this chapter)) in an examination, before an Appeals office, or before a Federal court. 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. The customer list, although described in paragraph (b)(6) of this section, is a customer-related information base. any other provision of this title, to recognize gain on the disposition of the intangible, and. (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 section, the person from whom the taxpayer acquired the intangible elects, notwithstanding 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. (D) Partner's share of basis increase(1) In general. 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. (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. Special rules for entities that owned or used property at any time during the transition period and that are no longer in existence. 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. The capital accounts of A and C are equal immediately after the distribution, so, pursuant to paragraph (h)(12)(iv)(D)(1) of this section, each partner's share of the basis increase is equal to $75. If you continue browsing, you agree to this sites use of cookies. means. For purposes of applying the loss disallowance rules of section 197(f)(1) and paragraph (g) of this section, new T's loss is $2 (new T's adjusted basis in the section 197(f)(5) intangible immediately before the disposition ($12) less the ceding commission ($10)). 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. The transfer of a reinsurance contract by a reinsurer (transferor) to another reinsurer (acquirer) is treated as an assumption reinsurance transaction if the transferor's obligations are extinguished as a result of the transaction. Example 14. 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. 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. Increase in the basis of partnership property under section 732(b), 734(b), 743(b), or 732(d). Accordingly, for the year of the assumption reinsurance transaction, new T is treated as having general deductions under section 848(c)(2) of $91,667 ($75,000 + $250,000 / 15). (6) Customer-based intangibles. 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. 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. (iv) Taxpayers under common control(A) In general. 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. Acquisition of partnership interest following formation of partnership. Such incidental and ancillary rights are not included in the definition of trademark or trade name under paragraph (b)(10)(i) of this section. (5) Exceptions. The processes of depreciating and amortizingare basically the same. (8) Licenses, permits, and other rights granted by governmental units. 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. Section 197(f)(9)(F) 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. 9727 (199721 IRB 10)(see 601.601(d)(2) of this chapter)) in an examination, before an Appeals office, or before a Federal court. of property by the taxpayer if-. Proc. (1) In a deemed asset sale resulting from an election under section 338, the amount of the adjusted grossed-up basis (AGUB) allocable thereto (see 1.3386 and 1.33811(b)(2)); (2) In an applicable asset acquisition within the meaning of section 1060, the amount of the consideration allocable thereto (see 1.3386, 1.33811(b)(2), and 1.10601(c)(5)); and. See paragraph (h)(12) of this section.) under this title, equals such gain multiplied by the highest rate of income tax applicable (5) Applicability dates for section 721(c) partnerships(i) In general. (ii) Exceptions. 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. (ii) Analysis. Because the general deductions allocable to the assumption reinsurance transaction ($43,000) are less than the required capitalization amount for the transaction ($130,900), new T has a capitalization shortfall of $87,900 ($130,900 $43,000) with regard to the transaction. The capitalized costs of entering into the license are treated in the same manner as in example 7. (g) Special rules(1) Treatment of certain dispositions(i) Loss disallowance rules(A) In general. which such election was made., No Other Depreciation Or Amortization Deduction Allowable. 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. ), (8) Interests under leases of tangible property(i) Interest as a lessor. (7) Supplier-based intangibles(i) In general. 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. Page 16. (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. a lease of the underlying property involved. (ii) P has a transferred basis in the intangible from A and B under section 723. However, this . (ii) Determination of adjusted basis of amortizable section 197 intangible resulting from an assumption reinsurance transaction(A) In general. (4) Section 704(c) allocations(i) Allocations where the intangible is amortizable by the contributor. 197 intangibles acquired in such transaction or series of related transactions are Each partner then will compare its share of the amount realized with its remaining basis in the intangible to arrive at the gain or loss to be allocated to such partner. 432); and, 601.601(d)(2) of this chapter), except, for purposes of this paragraph (g)(5)(iv)(C)(3), any limitations in such administrative procedures for obtaining the automatic consent of the Commissioner shall not apply. 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. (ii) See 1.167(a)14(c)(2) and (3) for applicable rules. 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. (4) Treatment of a capitalization shortfall allocable to the reinsurance agreement(i) In general. Proc. A taxpayer may rely on the provisions of regulation project REG20970994 (19971 C.B. Refer to Anti-Churning Rules in Publication 535, Business Expenses. 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. For rules applicable to acquisitions and dispositions before that date, see 1.1972 in effect before that date (see 26 CFR part 1, revised April 1, 2001). Accessed June 14, 2021. Thus, A is treated as holding an interest in the intangible during the transition period. Read our, How To Claim Amortization on Your Tax Return. Sec. 197. Amortization Of Goodwill And Certain Other Intangibles "Instructions for Form 4562 Depreciation and Amortization." (See, however, the exceptions in paragraph (c) of this section.). (h) Anti-churning rules(1) Scope and purpose(i) Scope. 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. Avoiding Ordinary Income Recapture on the Sale of Certain 197 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. Therefore, new T may not recover its basis in the section 197(f)(5) intangible to which the contracts relate and must continue to amortize ratably the adjusted basis of the section 197(f)(5) intangible over the remainder of the 15-year recovery period and cannot apply any portion of this adjusted basis to offset the ceding commission received from R in the indemnity reinsurance transaction. Accessed June 22, 2021. (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. described in section, The term amortizable section 197 intangible (or series of related transactions) involving the acquisition of assets (other than Accordingly, the transferred property is a section 197 intangible. The following rules apply for purposes of determining the highest marginal rate of tax applicable to an electing taxpayer: (1) Noncorporate taxpayers. We use cookies to give you the best experience. You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income. Include in the sale of a business to increase its value. 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. The $130,900 capitalized by new T under section 848 would reduce new T's adjusted basis of the amortizable section 197 intangible with respect to the specified insurance contracts acquired in the assumption reinsurance 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. 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). Example 8. (C) A statement that the taxpayer is making the election under section 197(f)(9)(B). 1.197-2 Amortization of goodwill and certain other intangibles. Example 26. 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. 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. 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. the intangible was held or used at any time on or after July 25, 1991, and on or (2) The denominator of which is the fair market value of such intangible. In addition, the amount of tax determined under this paragraph (h)(9) is not reduced by any credit of the taxpayer. For purposes of this subparagraph, the determination of whether the user of property principal purposes of which is to avoid the requirement of subsection (c)(1) that 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. (B) Other Federal income tax on gain. 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. Distribution of section 197(f)(9) intangible contributed to the partnership by a partner. (B) Contracts for the use of intangibles. (iv) Applicable rules(A) Franchises, trademarks, and trade names. 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). How do you set a value on a going concern or even on a patent? General deductions allocable to the assumption reinsurance transaction. 561), modified and amplified by Rev. Example 28. The indemnity reinsurance agreement constitutes a disposition of the section 197(f)(5) intangible because it involves the transfer of sufficient economic rights attributable to the insurance contracts to which the section 197(f)(5) intangible relates such that recovery of basis is allowed. New T's actual amortization deduction under section 197(a) with respect to the amortizable section 197 intangible for insurance contracts acquired in the assumption reinsurance transaction would be $11,273 ($169,100 15). (ii) The section 197(f)(9) intangible contributed to PRS by A is not amortizable in the hands of PRS. (2) Acquisitions and dispositions on or after effective date. 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. (B) Treatment of disallowed loss. 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). Allocations where the intangible is amortizable by the contributor. (i) The distributee partner and persons related to the distributee partner acquired an interest or interests in the partnership after the partnership acquired the distributed intangible; (ii) Such interest or interests were held after the partnership acquired the distributed intangible, by a person or persons other than either the distributee partner or persons who were related to the distributee partner; and. the taxpayer grants the right to use such intangible to a person (or a person related (i) such acquisition is pursuant to a written binding contract in effect on the date (3) Acquisitions and dispositions before the effective date. Solely for purposes of paragraph (h)(12)(iv)(B)(1) of this section, if a distribution that gives rise to an increase in the basis under section 734(b) of a section 197(f)(9) intangible held by the partnership is undertaken as part of a series of related transactions that include a contribution of the intangible to the partnership by a continuing partner, the continuing partner is treated as related to the distributee partner in analyzing the basis adjustment with respect to the contributed section 197(f)(9) intangible. Rules relating to these provisions are contained in paragraphs (g), (h), and (j) of this section. License of technology and trademarks. Example 7. (See paragraph (g)(5) of this section for special rules regarding certain reinsurance transactions.). 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). To deduct amortization expenses for the year on your business tax return, use Form 4562 Depreciation and Amortization, Part VI. 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 1.1971T; August 10, 1993, in all other cases). Transactions subject to both anti-churning and nonrecognition rules. 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 1.1971T has been made), and held in connection with the conduct of a trade or business or an activity described in section 212. (iii) Section 732(d) adjustments. Except as otherwise provided in paragraph (c) of this section, the term section 197 intangible means any property described in section 197(d)(1). (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). The basic calculation for depreciation or amortization in a year is: One difference between amortization and depreciation is that intangible assets don't have a useful life in the sense that they become unusable or become obsolete. (3) Application of regulation project REG20970994 to pre-effective date acquisitions. (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. Amortization of property Description of property (b) Date placed in service (mm/dd/yyyy) (c) Cost or other basis (d) (e) (f) (g) (h) Method Life or of figuring rate depreciation Depreciation for this year Code section Period or percentage Amortization for this year
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