Sec. 197 anti-churning rules for partnerships.

• Author: Packard, Pamela

Final regulations amended Nov. 20, 2000 apply the Sec. 197 anti-churning rules to a partnership basis step-up under Sec. 732(b) or 734(b). Practitioners have had time to digest and use these regulations, and determine what (if anything) is missing from them.

Sec. 197 was enacted in 1993 to reduce the' controversy between taxpayers and the IRS over amortizing intangibles. Sec. 197(f)(9) contains anti-churning rules that in general prevent amortizing previously nonamortizable assets held or used by a related party at any time between July 25, 1991-Aug. 10, 1993 (i.e., the transition period).

Under Sec. 197(f)(9)(E) and Regs. Sec. 1.197-2(h)(12), determinations on whether the anti-churning rules apply are made at the partner level, with each partner treated as having owned and used the partner's proportionate share of partnership property. The regulations specifically apply the anti-churning rules to Secs. 732(b) and 734(b) step-up transactions, using Regs. Sec. 1.197-2(h)(12)'s approach.

For a Sec. 732(b) step-up, the related-party determination is made by examining the partners' relationships. Generally, the anti-churning rules involving a transition-period intangible apply to the distributee partner to the extent of that partner's (and any related partner's) deemed proportionate interest in the intangible. The proportionate share of the transition-period intangible deemed owned by nonrelated partners is not subject to the anti-churning rules in the distributee's hands. The regulations essentially bifurcate a transition-period intangible. The portion deemed owned by the distributee and any related partner is not amortizable by that distributee; the portion attributable to the nonrelated partners' deemed ownership, immediately before the intangible was distributed, is amortizable in the distributee's hands.

The application of the anti-churning rules to Sec. 734(b) step-ups is somewhat different, as that step-up applies only to partnership property and (in a number of Sec. 734(b) situations) the distributee continues as a partner after the transaction. One similarity is the bifurcation of the step-up pertaining to the intangible. The partnership can amortize the step-up amount attributable to the nondistributee partner; the portion related to the distributee partner and a partner related to that partner may be amortizable by the partnership.

Generally, if the partnership acquired the transition-period intangible before Aug. 11,1993 and the...