Personal intangibles: the antichurning rules.

• Author: Brecht, Thomas J.

Although the sale of many closely held corporations generally involves the sale of an S corporation, closely held C corporations still exist. In the process of selling the business of a closely held C corporation, the concept of the sale of personal intangibles should be considered in structuring the transaction.

What Are Personal Intangibles?

Personal intangibles consist of intangible assets owned by an individual shareholder that are held separate from the corporate business. The ability to sell these separate intangibles was addressed in Martin Ice Cream Co., 110 T.C. 189 (1998), in which the Tax Court ruled that the shareholder held distribution agreements, supermarket personal relationships, and ice cream distribution expertise separately from the shareholder's wholly owned corporation. As a result, at the time when both the assets of the corporation and the personal intangibles were sold, the individual was able to report the gain on the sale of these intangible assets outside of the corporate return and therefore avoid double taxation. It is important to note that in Martin, the Tax Court noted that there was no agreement between the corporation and the individual that "would have caused those relationships to become the corporation's property." This is an important issue in the establishment of the existence of personal intangibles, but it is beyond the scope of this item.

Antichurning Regulations

The Sec. 197(f)(9) antichurning rules provide that in certain circumstances goodwill, going concern value, and other intangible assets for which depreciation or amortization previously would not have been allowable and that were held or used by the taxpayer or a related party at any time during the transition period (July 25, 1991-August 10, 1993) cannot be converted into Sec. 197 amortizable intangible assets. Regs. Sec. 1.197-2(h)(2) outlines three scenarios where intangible assets acquired after the effective date of the antichurning rules do not qualify for amortization:

* The taxpayer or related person held or used the intangible or an interest therein at any time during the transition period;

* 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

* 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...