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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
c. It hasn't been substantially modified. Anti-Churning Rules • The grantor and fiduciary, and the fiduciary
This requirement is considered met if and beneficiary, of any trust.
the cost of all modifications isn't more • The fiduciaries of two different trusts, and
than the greater of 25% of the price of Anti-churning rules prevent you from amortizing the fiduciaries and beneficiaries of two dif-
most section 197 intangibles if the transaction
the publicly available unmodified soft- ferent trusts, if the same person is the
ware or $2,000. in which you acquired them didn't result in a sig- grantor of both trusts.
nificant change in ownership or use. These
2. Software that isn't acquired in connection rules apply to goodwill and going concern • The executor and beneficiary of an estate.
with the acquisition of a trade or business value, and to any other section 197 intangible • A tax-exempt educational or charitable or-
or a substantial part of a trade or business. that isn't otherwise depreciable or amortizable. ganization and a person who directly or in-
directly controls the organization (or whose
Computer software defined. Computer Under the anti-churning rules, you can't use family members control it).
software includes all programs designed to 15-year amortization for the intangible if any of • A corporation and a partnership if the
cause a computer to perform a desired function. the following conditions apply. same persons own more than 20% of the
It also includes any database or similar item that value of the outstanding stock of the cor-
is in the public domain and is incidental to the 1. You or a related person (defined later) poration and more than 20% of the capital
operation of qualifying software. held or used the intangible at any time or profits interest in the partnership.
from July 25, 1991, through August 10, • Two S corporations, and an S corporation
Rights of fixed duration or amount. Section 1993. and a regular corporation, if the same per-
197 intangibles don't include any right under a 2. You acquired the intangible from a person sons own more than 20% of the value of
contract or from a governmental agency if the who held it at any time during the period in the outstanding stock of each corporation.
right is acquired in the ordinary course of a (1) and, as part of the transaction, the user • Two partnerships if the same persons own,
trade or business (or in an activity engaged in didn't change. directly or indirectly, more than 20% of the
for the production of income) but not as part of a capital or profits interests in both partner-
purchase of a trade or business and either: 3. You granted the right to use the intangible ships.
• Has a fixed life of less than 15 years; or to a person (or a person related to that • A partnership and a person who owns, di-
• Is of a fixed amount that, except for the person) who held or used it at any time rectly or indirectly, more than 20% of the
rules for section 197 intangibles, would be during the period in (1). This applies only if capital or profits interests in the partner-
recovered under a method similar to the the transaction in which you granted the ship.
unit-of-production method of cost recov- right and the transaction in which you ac- • Two persons who are engaged in trades or
ery. quired the intangible are part of a series of businesses under common control (as de-
However, this doesn't apply to the following in- related transactions. See Related person, scribed in section 41(f)(1)).
later, for more information.
tangibles. When to determine relationship. Per-
• Goodwill. Exceptions. The anti-churning rules don't ap- sons are treated as related if the relationship
• Going concern value. ply in the following situations. existed at the following time.
• A covenant not to compete. • You acquired the intangible from a dece- • In the case of a single transaction, immedi-
• A franchise, trademark, or trade name. dent and its basis was stepped up to its fair ately before or immediately after the trans-
• A customer-related information base, cus- market value. action in which the intangible was ac-
tomer-based intangible, or similar item. • The intangible was amortizable as a sec- quired.
Safe Harbor for Creative tion 197 intangible by the seller or trans- • In the case of a series of related transac-
tions (or a series of transactions that com-
feror you acquired it from. This exception
Property Costs doesn't apply if the transaction in which prise a qualified stock purchase under sec-
you acquired the intangible and the trans- tion 338(d)(3)), immediately before the
If you are engaged in the trade or business of action in which the seller or transferor ac- earliest transaction or immediately after the
last transaction.
film production, you may be able to amortize the quired it are part of a series of related
creative property costs for properties not set for transactions. Ownership of stock. In determining
production within 3 years of the first capitalized • The gain-recognition exception, discussed whether an individual directly or indirectly owns
transaction. You may amortize these costs rata- later, applies. any of the outstanding stock of a corporation,
bly over a 15-year period beginning on the first the following rules apply.
day of the second half of the tax year in which Related person. For purposes of the
you properly write off the costs for financial ac- anti-churning rules, the following are related Rule 1. Stock directly or indirectly owned
counting purposes. If, during the 15-year pe- persons. by or for a corporation, partnership, estate, or
riod, you dispose of the creative property rights, • An individual and his or her brothers, sis- trust is considered owned proportionately by or
you must continue to amortize the costs over ters, half brothers, half sisters, spouse, an- for its shareholders, partners, or beneficiaries.
the remainder of the 15-year period. cestors (parents, grandparents, etc.), and Rule 2. An individual is considered to own
lineal descendants (children, grandchil-
Creative property costs include costs paid or dren, etc.). the stock directly or indirectly owned by or for
incurred to acquire and develop screenplays, • A corporation and an individual who owns, his or her family. Family includes only brothers
scripts, story outlines, motion picture production directly or indirectly, more than 20% of the and sisters, half brothers and half sisters,
rights to books and plays, and other similar value of the corporation's outstanding spouse, ancestors, and lineal descendants.
properties for purposes of potential future film stock. Rule 3. An individual owning (other than by
development, production, and exploitation. • Two corporations that are members of the applying Rule 2) any stock in a corporation is
Amortize these costs using the rules of Rev- same controlled group as defined in sec- considered to own the stock directly or indi-
tion 1563(a), except that “more than 20%”
enue Procedure 2004-36. For more information, is substituted for “at least 80%” in that defi- rectly owned by or for their partner.
see Revenue Procedure 2004-36, 2004-24 nition and the determination is made with- Rule 4. For purposes of applying Rule 1, 2,
I.R.B. 1063, available at IRS.gov/irb/ out regard to subsections (a)(4) and (e)(3) or 3, treat stock constructively owned by a per-
2004-24_IRB#RP-2004-36. (C) of section 1563. For an exception, see son under Rule 1 as actually owned by that per-
A change in the treatment of creative section 1.197-2(h)(6)(iv) of the regulations. son. Don't treat stock constructively owned by
! property costs is a change in method of • A trust fiduciary and a corporation if more an individual under Rule 2 or 3 as owned by the
CAUTION accounting. than 20% of the value of the corporation's individual for reapplying Rule 2 or 3 to make an-
outstanding stock is owned, directly or in- other person the constructive owner of the
directly, by or for the trust or grantor of the stock.
trust.
Chapter 8 Amortization Page 33