Sec. 197 antichurning rules - application of election to recognize gain on a sale of goodwill between related partnerships.

• Author: Blumenreich, Richard G.

The Sec. 197(f)(9) antichurning rules prevent taxpayers from transferring otherwise nonamortizable intangibles (i.e., goodwill, going concern value or any other Sec. 197 intangible for which depreciation or amortization would not have been allowable but for Sec. 197) to a related person to obtain amortization under See. 197. Specifically, the antichurning rules apply to a transfer of such an intangible to a taxpayer, if the intangible was held or used at any time on or after July 25, 1991, and on or before Aug. 10, 1993, by the taxpayer or a related person. The antichurning rules also apply in certain cases in which the user did not change or in which the taxpayer granted the right to use the intangible to a person who held or used the intangible during this period.)

Generally, persons are related if they bear a relationship described in Sec. 267(b) or 707(b)(1), determined by substituting "20 percent" for "50 percent." Under Sec. 707(b)(1), two partnerships are related if the same persons own, directly or indirectly, more than 50% of the capital interests or profits interests in each partnership. Thus, if the same persons own more than 20% of the capital interests or profits interests in each partnership, the partnerships are related for Sec. 197 antichurning purposes.

Partnerships that receive goodwill and going concern value in connection with a transfer of a business from another partnership will find themselves subject to the Sec. 197 antichurning rules if the same persons own more than 20% of the capital interests or profits interests in each partnership (when there was the reqiuisite ownership or use on or before Aug. 10, 1993). In such a case, the transferee partnership generally will not be able to amortize the goodwill and going concern value under Sec. 197.

However, where the overlapping ownership does not exceed 50%, the transferee partnership may amortize the goodwill and going concern value if the transferor partnership elects under Sec. 197(f)(9)(B) to recognize gain on the disposition of the goodwill and going concern value and to pay a tax on such gain which, when added to any other income tax on such gain, equals such gain multiplied by the highest rate of income tax applicable to such person under the Code. The amount of the goodwill and going concern value that may be amortized under this election, however, is limited. The transferee may not amortize its adjusted basis in the goodwill or going concern value to the extent...