# Bulletin No. 1997–13

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- **Document type:** Agency decision

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Bulletin No. 1997–13
March 31, 1997

HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be relied
upon as authoritative interpretations.

INCOME TAX

EXCISE TAXES

Rev. Rul. 97–16, page 4.
Low-income housing credit; satisfactory bond; ‘‘bond
factor’’ amounts for the period January through
March 1997. This ruling announces the monthly bond
factor amounts to be used by taxpayers who dispose of
qualified low-income buildings or interests therein during
the period January through March 1997.

Notice 97–22, page 9.
A determination has been made to add diglycidyl ether
of bisphenol-A to the list of taxable substances in
section 4672(a)(3) of the Code.

T.D. 8710, page 4.
Final regulations relate to the consistency rules under
section 338 of the Code that apply to certain cases
involving controlled foreign corporations.
REG–209709–94, page 12.
Proposed regulations under sections 167 and 197 of
the Code relate to the amortization of certain intangible
property. A public hearing will be held on May 15, 1997.

EXEMPT ORGANIZATIONS
Announcement 97–27, page 30.
A list is given of organizations now classified as private
foundations.

Finding Lists begin on page 35.
Announcement of Disbarments and Suspensions begins on page 33.

ADMINISTRATIVE
Rev. Proc. 97–22, page 9.
Books and records; electronic storage; imaging. Guidance is provided for taxpayers that use an electronic
storage system (such as an imaging system) to maintain
books and records for purposes of section 6001 of the
Code.
Page 32.
Scenarios of disciplinary actions. The Office of Director of Practice sets forth scenarios of disciplinary
actions involving individuals who represent taxpayers
before the Internal Revenue Service. The Service invites
comments.

Mission of the Service
The purpose of the Internal Revenue Service is to
collect the proper amount of tax revenue at the least
cost; serve the public by continually improving the

quality of our products and services; and perform in a
manner warranting the highest degree of public
confidence in our integrity, efficiency and fairness.

Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying
and administering the law in a reasonable,
practical manner. Issues should only be raised by
examining of ficers when they have merit, never
arbitrarily or for trading purposes. At the same
time, the examining officer should never hesitate
to raise a meritorious issue. It is also important
that care be exercised not to raise an issue or to
ask a court to adopt a position inconsistent with
an established Service position.

The function of the Internal Revenue Service is to
administer the Internal Revenue Code. Tax policy
for raising revenue is determined by Congress.
With this in mind, it is the duty of the Service to
carry out that policy by correctly applying the laws
enacted by Congress; to determine the reasonable
meaning of various Code provisions in light of the
Congressional purpose in enacting them; and to
perform this work in a fair and impartial manner,
with neither a government nor a taxpayer point of view.

Administration should be both reasonable and
vigorous. It should be conducted with as little
delay as possible and with great cour tesy and
considerateness. It should never try to overreach,
and should be reasonable within the bounds of law
and sound administration. It should, however, be
vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax
devices and fraud.

At the heart of administration is interpretation of the
Code. It is the responsibility of each person in the
Service, charged with the duty of interpreting the
law, to try to find the true meaning of the statutory
provision and not to adopt a strained construction in
the belief that he or she is ‘‘protecting the revenue.’’
The revenue is properly protected only when we ascertain and apply the true meaning of the statute.

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Introduction
The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for
announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation,
court decisions, and other items of general interest. It is
published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin
contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold on a
single-copy basis.

court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are
cautioned against reaching the same conclusions in
other cases unless the facts and circumstances are
substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on
provisions of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform
application of the tax laws, including all rulings that
supersede, revoke, modify, or amend any of those
previously published in the Bulletin. All published rulings
apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management
are not published; however, statements of internal
practices and procedures that affect the rights and
duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows:
Subpart A, Tax Conventions, and Subpart B, Legislation
and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and
Subparts. Also included in this part are Bank Secrecy
Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the
Treasury’s Office of the Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts
stated in the revenue ruling. In those based on positions
taken in rulings to taxpayers or technical advice to
Service field offices, identifying details and information
of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory
requirements.

Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking and the disbarment and suspension list included in
this part, none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not
have the force and effect of Treasury Department
Regulations, but they may be used as precedents.
Unpublished rulings will not be relied on, used, or cited
as precedents by Service personnel in the disposition of
other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations,

The first Bulletin for each month includes an index for
the matters published during the preceding month.
These monthly indexes are cumulated on a quarterly and
semiannual basis, and are published in the first Bulletin
of the succeeding quarterly and semi-annual period,
respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income Housing
Credit

Rev. Rul. 97–16

Low-income housing credit; satisfactory bond; ‘‘bond factor’’ amount
for the period January through
March 1997. This ruling announces the
monthly bond factor amounts to be used
by taxpayers who dispose of qualified
low-income buildings or interests therein
during the period January through
March 1997.

In Rev. Rul. 90–60, 1990–2 C.B. 3,
the Internal Revenue Service provided
guidance to taxpayers concerning the
general methodology used by the Treasury Department in computing the bond
factor amounts used in calculating the
amount of bond considered satisfactory
by the Secretary under § 42(j)(6) of the
Internal Revenue Code. It further announced that the Secretary would pub-

lish in the Internal Revenue Bulletin a
table of ‘‘bond factor’’ amounts for
dispositions occurring during each calendar month.
This revenue ruling provides in Table
1 the bond factor amounts for calculating the amount of bond considered
satisfactory under § 42(j)(6) for dispositions of qualified low-income buildings
or interests therein during the period
January through March 1997.

Table 1
Rev. Rul. 97–16
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

Jan ’97
Feb ’97
Mar ’97

79.70
79.46
79.23

82.08
81.83
81.59

84.67
84.41
84.15

87.70
87.43
87.16

91.25
90.96
90.67

95.32
95.00
94.69

99.53
99.17
98.83

103.58
103.18
102.81

107.56
107.11
106.69

111.85
111.28
110.79

112.52
112.52
112.52

For a list of bond factor amounts
applicable to dispositions occurring during other calendar years, see the following revenue rulings: Rev. Rul. 90–60,
1990–2 C.B. 3, for dispositions occurring during calendar years 1987, 1988,
and 1989; Rev. Rul. 90–88, 1990–2 C.B.
7, for dispositions occurring during calendar year 1990; Rev. Rul. 91–67,
1991–2 C.B. 13, for dispositions occurring during calendar year 1991; Rev.
Rul. 92–101, 1992–2 C.B. 9, for dispositions occurring during calendar year
1992; Rev. Rul 93–83, 1993–2 C.B. 6,
for dispositions occurring during calendar year 1993; Rev. Rul. 94–71, 1994–2
C.B. 4, for dispositions occurring during
calendar year 1994; Rev. Rul. 95–83,
1995–2 C.B. 8, for dispositions occurring during calendar year 1995; Rev.
Rul. 96–16, 1996–1 C.B. 3, for dispositions occurring during the period January through March 1996; Rev. Rul.
96–33, 1996–27 I.R.B. 4, for dispositions occurring during the period April
through June 1996; Rev. Rul. 96–45,
1996–39 I.R.B. 5, for dispositions occurring during the period July through
September 1996; and Rev. Rul. 96–59,
1996–50 I.R.B. 4, for dispositions occurring during the period October
through December 1996.

DRAFTING INFORMATION
The principal author of this revenue
ruling is Jack Malgeri of the Office of
Assistant Chief Counsel (Passthroughs
and Special Industries). For further information regarding this revenue ruling,
contact Mr. Malgeri at (202) 622–3040
(not a toll-free call).
Section 338.—Certain Stock
Purchase Treated as Asset
Acquisitions
26 CFR 1.338–4: Asset and stock consistency.

T.D. 8710
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Revisions of the Section 338
Consistency Rules With Respect to
Target Affiliates That Are Controlled
Foreign Corporations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the consis-

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tency rules under section 338 of the
Internal Revenue Code of 1986 that are
applicable to certain cases involving
controlled foreign corporations. The final regulations substantially revise and
simplify the stock and asset consistency
rules. The final regulations include the
provisions of the consistency rules applicable to controlled foreign corporations contained in recent proposed and
temporary regulations. The final regulations would affect taxpayers that own
controlled foreign corporations.
EFFECTIVE DATE: These regulations
are effective January 20, 1997.
FOR FURTHER INFORMATION CONTACT: Kenneth D. Allison at (202)
622–3860 (not a toll-free number).
SUPPLEMENTARY
INFORMATION:
Background
This document contains final Income
Tax Regulations (26 CFR part 1) under
section 338 of the Internal Revenue
Code.
On January 20, 1994, temporary regulations (T.D. 8516) were published in
the Federal Register (59 FR 2956)
under section 338 of the Internal Rev-

enue Code. See 1994–1 C.B. 119. A
notice of proposed rulemaking (INTL–
0177–90) cross-referencing the temporary regulations was published in the
Federal Register for the same day (59
FR 3045). See 1994–1 C.B. 818. The
temporary regulations provided rules to
replace the asset and stock consistency
rules of §§ 1.338–4T and 1.338–5T.
The temporary regulations included consistency rules applicable to certain cases
involving controlled foreign corporations
(CFCs).
No written comments responding to
the notice were received. No public
hearing was requested or held. The
proposed regulations under section 338
are adopted as revised by this Treasury
decision, and the corresponding temporary regulations are removed.
Explanation of Provisions
The preamble to the temporary and
proposed regulations (1994–1 C.B. 119)
contains a discussion of the provisions.
Changes to the temporary and proposed
regulations are noted below.
Section 1.338–4T(h)(3) of the temporary regulations is clarified by stating
that the basis of the stock of a controlled foreign corporate target affiliate
is not increased by section 1248 earnings attributable to the disposition of an
asset in which a carryover basis is taken
under this section.
Section 1.338–4T(h)(4) of the temporary regulations addresses a situation in
which the income or gain from the
disposition of a controlled foreign corporation target affiliate (CFC T affiliate)
asset is not subject to the consistency
rules of paragraph (h)(2). The regulation
states that if a CFC T affiliate pays a
dividend to a target (T) or a domestic T
affiliate wholly or partially out of the
earnings generated by the disposition of
that asset, and the dividend increases the
basis of the T stock under § 1.1502–32,
then the basis of the stock of the CFC T
affiliate is reduced by the amount of the
dividend that was paid from the earnings and profits resulting from the asset
disposition. This rule applies to any
actual dividend, amount treated as a
dividend under section 1248 (or that
would have been so treated but for
section 1291) or amount included in
income under section 951(a)(1)(B).
The final regulations retain this rule.
The final regulations also add a special
ordering rule, in § 1.338–4(h)(4)(ii),
clarifying that any such dividend is first

considered attributable to earnings and
profits resulting from the disposition of
the asset.
Section 1.338–4(h)(4)(ii) is clarified
to state that the basis of the stock of a
controlled foreign corporation may not
be reduced below zero under the carryover basis rules of § 1.338–4.
Section 1.338–4(h)(2)(iv)(A) and
§ 1.338–4(h)(4)(iii)(A) are added to allow the purchasing group in certain
instances to increase the basis of the
CFC T stock by the amount of either the
basis increase denied under § 1.338–
4(h)(2)(ii) or the basis reduction required under § 1.338–4(h)(4)(ii). The
rule applies when the purchasing group
disposes of an asset acquired from CFC
T that is subject to the consistency rules
to an unrelated party in a taxable transaction and includes in U.S. gross income the greater of (i) the income or
gain equal to the basis amount denied to
the asset under either § 1.338–4(h)(2)(i)
or § 1.338–4(g) and § 1.338–4(h)(4)(i),
respectively, or (ii) the gain recognized
on the asset.
Similarly, § 1.338–4(h)(2)(iv)(B) and
§ 1.338–4(h)(4)(iii)(B) are added to allow the purchasing group to increase the
basis of an asset acquired from CFC T
that is subject to the consistency rules
by the basis amount denied to the asset
under either § 1.338–4(h)(2)(i) or
§ 1.338–4(g) and § 1.338–4(h)(4)(i).
The rule applies when the purchasing
group disposes of the stock of CFC T to
an unrelated party in a taxable transaction and includes in U.S. gross income
the greater of (i) the gain equal to the
basis increase denied under § 1.338–
4(h)(2)(ii) or the basis reduction required under § 1.338–4(h)(4)(ii), respectively, or (ii) the gain recognized in the
stock.
Special Analyses
It has been determined that this final
regulation is not a significant regulatory
action as defined in EO 12866. Therefore, a regulatory assessment is not
required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and because the notice of proposed rulemaking
preceding the regulations was issued
prior to March 29, 1996 the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Therefore, a regulatory flexibility analysis is not required. Pursuant
to section 7805(f) of the Internal Revenue Code, the notice of proposed

5

rulemaking preceding these regulations
was submitted to the Small Business
Administration for comment on its impact on small businesses.
Drafting Information
The principal author of these regulations is Kenneth D. Allison of the Office
of Associate Chief Counsel (International), IRS. However, other personnel
from the IRS and Treasury Department
participated in their development.
*

*

*

*

*

Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is
amended as follows: PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entry
for Section 1.338–4T(h) to read as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In § 1.338–0, the outline of
topics is amended by revising the entry
for § 1.338–4(h) and removing the entry
for § 1.338–4T to read as follows:
§ 1.338–0 Outline of topics.
*

*

*

*

*

§ 1.338–4 Asset and stock consistency.
*

*

*

*

*

(h) Consistency for target affiliates
that are controlled foreign corporations.
(1) In general.
(2) Income or gain resulting from
asset dispositions.
(i) General rule.
(ii) Basis of controlled foreign corporation stock.
(iii) Operating rule.
(iv) Increase in asset or stock basis.
(3) Stock issued by target affiliate
that is a controlled foreign corporation.
(4) Certain distributions.
(i) General rule.
(ii) Basis of controlled foreign corporation stock.
(iii) Increase in asset or stock basis.
(5) Examples.
*

*

*

*

*

Par. 3. Section 1.338–4 is amended as
follows:
1. Paragraph (a)(5) is amended by
removing the language ‘‘Section 1.338–
4T(h)’’ and adding ‘‘Paragraph (h) of
this section’’ in its place.
2. Paragraph (c)(4) is amended by
removing the language ‘‘§ 1.338–
4T(h)(2)’’ and adding ‘‘paragraph (h)(2)
of this section’’ in its place.

3. Paragraph (d)(2)(iii) is amended by
removing the language ‘‘§ 1.338–
4T(h)(3)’’ and adding ‘‘paragraph (h)(3)
of this section’’ in its place.
4. Paragraph (g)(2) is amended by
removing the language ‘‘§ 1.338–
4T(h)(4)’’ and adding ‘‘paragraph (h)(4)
of this section’’ in its place.
5. Paragraph (h) is revised.
6. Paragraph (j)(3)9i)(A)(2) is
amended by removing the language
‘‘§ 1.338–4T(h)’’ and adding ‘‘paragraph (h) of this section’’ in its place.
The revision reads as follows:
§ 1.338–4 Asset and stock consistency.
*

*

*

*

*

(h) Consistency for target affiliates
that are controlled foreign corporations—(1) In general. This paragraph
(h) applies only if target is a domestic
corporation. For additional rules that
may apply with respect to controlled
foreign corporations, see paragraph (g)
of this section. The definitions and nomenclature of § 1.338–1(b) and (c) and
paragraph (e) of this section apply for
purposes of this section.
(2) Income or gain resulting from
asset dispositions—(i) General rule. Income or gain of a target affiliate that is
a controlled foreign corporation from
the disposition of an asset is not reflected in the basis of target stock under
paragraph (c) of this section unless the
income or gain results in an inclusion
under section 951(a)(1)(A), 951(a)(1)(C), 1291 or 1293.
(ii) Basis of controlled foreign corporation stock. If, by reason of paragraph
(h)(2)(i) of this section, the carryover
basis rules of this section apply to an
asset, no increase in basis in the stock
of a controlled foreign corporation under
section 961(a) or 1293(d)(1), or under
regulations issued pursuant to section
1297(b)(5), is allowed to target or a
target affiliate to the extent the increase
is attributable to income or gain described in paragraph (h)(2)(i) of this
section. A similar rule applies to the
basis of any property by reason of
which the stock of the controlled foreign
corporation is considered owned under
section 958(a)(2) or 1297(a).
(iii) Operating rule. For purposes of
this paragraph (h)(2)—
(A) If there is an income inclusion
under section 951 (a)(1)(A) or (C), the
shareholder’s income inclusion is first
attributed to the income or gain of the
controlled foreign corporation from the

disposition of the asset to the extent of
the shareholder’s pro rata share of such
income or gain; and
(B) Any income or gain under section 1293 is first attributed to the income or gain from the disposition of the
asset to the extent of the shareholder’s
pro rata share of the income or gain.
(iv) Increase in asset or stock basis—
(A) If the carryover basis rules under
paragraph (h)(2)(i) of this section apply
to an asset, and the purchasing corporation disposes of the asset to an unrelated
party in a taxable transaction and recognizes and includes in its U.S. gross
income or the U.S. gross income of its
shareholders the greater of the income
or gain from the disposition of the asset
by the selling controlled foreign corporation that was reflected in the basis of
the target stock under paragraph (c) of
this section, or the gain recognized on
the asset by the purchasing corporation
on the disposition of the asset, then the
purchasing corporation or the target or a
target affiliate, as appropriate, shall increase the basis of the selling controlled
foreign corporation stock subject to
paragraph (h)(2)(ii) of this section, as of
the date of the disposition of the asset
by the purchasing corporation, by the
amount of the basis increase that was
denied under paragraph (h)(2)(ii) of this
section. The preceding sentence shall
apply only to the extent that the controlled foreign corporation stock is
owned (within the meaning of section
958(a)) by a member of the purchasing
corporation’s affiliated group.
(B) If the carryover basis rules under
paragraph (h)(2)(i) of this section apply
to an asset, and the purchasing corporation or the target or a target affiliate, as
appropriate, disposes of the stock of the
selling controlled foreign corporation to
an unrelated party in a taxable transaction and recognizes and includes in its
U.S. gross income or the U.S. gross
income of its shareholders the greater of
the gain equal to the basis increase that
was denied under paragraph (h)(2)(ii) of
this section, or the gain recognized in
the stock by the purchasing corporation
or by the target or a target affiliate, as
appropriate, on the disposition of the
stock, then the purchasing corporation
shall increase the basis of the asset, as
of the date of the disposition of the
stock of the selling controlled foreign
corporation by the purchasing corporation or by the target or a target affiliate,
as appropriate, by the amount of the
basis increase that was denied pursuant
to paragraph (h)(2)(i) of this section.

6

The preceding sentence shall apply only
to the extent that the asset is owned
(within the meaning of section 958(a))
by a member of the purchasing corporation’s affiliated group.
(3) Stock issued by target affiliate
that is a controlled foreign corporation.
The exception to the carryover basis
rules of this section provided in paragraph (d)(2)(iii) of this section does not
apply to stock issued by a target affiliate
that is a controlled foreign corporation.
After applying the carryover basis rules
of this section to the stock, the basis in
the stock is increased by the amount
treated as a dividend under section 1248
on the disposition of the stock (or that
would have been so treated but for
section 1291), except to the extent the
basis increase is attributable to the disposition of an asset in which a carryover
basis is taken under this section.
(4) Certain distributions—(i) General
rule. In the case of a target affiliate that
is a controlled foreign corporation, paragraph (g) of this section applies with
respect to the target affiliate by treating
any reference to a dividend to which
section 243(a)(3) applies as a reference
to any amount taken into account under
§ 1.1502–32 in determining the basis of
target stock that is—
(A) A dividend;
(B) An amount treated as a dividend
under section 1248 (or that would have
been so treated but for section 1291); or
(C) An amount included in income
under section 951(a)(1)(B).
(ii) Basis of controlled foreign corporation stock. If the carryover basis rules
of this section apply to an asset, the
basis in the stock of the controlled
foreign corporation (or any property by
reason of which the stock is considered
owned under section 958(a)(2)) is reduced (but not below zero) by the sum
of any amounts that are treated, solely
by reason of the disposition of the asset,
as a dividend, amount treated as a
dividend under section 1248 (or that
would have been so treated but for
section 1291), or amount included in
income under section 951(a)(1)(B). For
this purpose, any dividend, amount
treated as a dividend under section 1248
(or that would have been so treated but
for section 1291), or amount included in
income under section 951(a)(1)(B) is
considered attributable first to earnings
and profits resulting from the disposition
of the asset.
(iii) Increase in asset or stock basis—(A) If the carryover basis rules
under paragraphs (g) and (h)(4)(i) of

this section apply to an asset, and the
purchasing corporation disposes of the
asset to an unrelated party in a taxable
transaction and recognizes and includes
in its U.S. gross income or the U.S.
gross income of its shareholders the
greater of the gain equal to the basis
increase denied in the asset pursuant to
paragraphs (g) and (h)(4)(i) of this section, or the gain recognized on the asset
by the purchasing corporation on the
disposition of the asset, then the purchasing corporation or the target or a
target affiliate, as appropriate, shall increase the basis of the selling controlled
foreign corporation stock subject to
paragraph (h)(4)(ii) of this section, as of
the date of the disposition of the asset
by the purchasing corporation, by the
amount of the basis reduction under
paragraph (h)(4)(ii) of this section. The
preceding sentence shall apply only to
the extent that the controlled foreign
corporation stock is owned (within the
meaning of section 958(a)) by a member
of the purchasing corporation’s affiliated
group.
(B) If the carryover basis rules under
paragraphs (g) and (h)(4)(i) of this section apply to an asset, and the purchasing corporation or the target or a target
affiliate, as appropriate, disposes of the
stock of the selling controlled foreign
corporation to an unrelated party in a
taxable transaction and recognizes and
includes in its U.S. gross income or the
U.S. gross income of its shareholders
the greater of the amount of the basis
reduction under paragraph (h)(4)(ii) of
this section, or the gain recognized in
the stock by the purchasing corporation
or by the target or a target affiliate, as
appropriate, on the disposition of the
stock, then the purchasing corporation
shall increase the basis of the asset, as
of the date of the disposition of the
stock of the selling controlled foreign
corporation by the purchasing corporation or by the target or a target affiliate,
as appropriate, by the amount of the
basis increase that was denied pursuant
to paragraphs (g) and (h)(4)(i) of this
section. The preceding sentence shall
apply only to the extent that the asset is
owned (within the meaning of section
958(a)) by a member of the purchasing
corporation’s affiliated group.
(5) Examples. This paragraph (h) may
be illustrated by the following examples:
Example 1. Stock of target affiliate that is a
CFC. (a) The S group files a consolidated return;
however, T2 is a controlled foreign corporation.
On December 1 of Year 1, T1 sells the T2 stock to
P and recognizes gain. On January 2 of Year 2, P

makes a qualified stock purchase of T from S. No
section 338 election is made for T.
(b) Under paragraph (b)(1) of this section,
paragraph (d) of this section applies to the T2
stock. Under paragraph (h)(3) of this section,
paragraph (d)(2)(iii) of this section does not apply
to the T2 stock. Consequently, paragraph (d)(1) of
this section applies to the T2 stock. However, after
applying paragraph (d)(1) of this section, P’s basis
in the T2 stock is increased by the amount of T1’s
gain on the sale of the T2 stock that is treated as a
dividend under section 1248. Because P has a
carryover basis in the T2 stock, the T2 stock is not
considered purchased within the meaning of section 338(h)(3) and no section 338 election may be
made for T2.
Example 2. Stock of target affiliate CFC; inclusion under subpart F. (a) The S group files a
consolidated return; however, T2 is a controlled
foreign corporation. On December 1 of Year 1, T2
sells an asset to P and recognizes subpart F
income that results in an inclusion in T1’s gross
income under section 951(a)(1)(A). On January 2
of Year 2, P makes a qualified stock purchase of T
from S. No section 338 election is made for T.
(b) Because gain from the disposition of the
asset results in an inclusion under section
951(a)(1)(A), the gain is reflected in the basis of
the T stock as of T’s acquisition date. See
paragraph (h)(2)(i) of this section. Consequently,
under paragraph (b)(1) of this section, paragraph
(d)(1) of this section applies to the asset. In
addition, under paragraph (h)(2)(ii) of this section,
T1’s basis in the T2 stock is not increased under
section 961(a) by the amount of the inclusion that
is attributable to the sale of the asset.
(c) If, in addition to making a qualified stock
purchase of T, P acquires the T2 stock from T1 on
January 1 of Year 2, the results are the same for
the asset sold by T2. In addition, under paragraph
(h)(2)(ii) of this section, T1’s basis in the T2 stock
is not increased by the amount of the inclusion
that is attributable to the gain on the sale of the
asset. Further, under paragraph (h)(3) of this
section, paragraph (d)(1) of this section applies to
the T2 stock. However, after applying paragraph
(d)(1) of this section, P’s basis in the T2 stock is
increased by the amount of T1’s gain on the sale
of the T2 stock that is treated as a dividend under
section 1248. Finally, because P has a carryover
basis in the T2 stock, the T2 stock is not
considered purchased within the meaning of section 338(h)(3) and no section 338 election may be
made for T2.
(d) If P makes a qualified stock purchase of T2
from T1, rather than of T from S, and T1’s gain
on the sale of T2 is treated as a dividend under
section 1248, under paragraph (h)(1) of this section, paragraphs (h)(2) and (3) of this section do
not apply because there is no target that is a
domestic corporation. Consequently, the carryover
basis rules of paragraph do not apply to the asset
sold by T2 or the T2 stock.
Example 3. Gain reflected by reason of section
1248 dividend; gain from non-subpart F asset. (a)
The S group files a consolidated return; however,
T2 is a controlled foreign corporation. In Years 1
through 4, T2 does not pay any dividends to T1
and no amount is included in T1’s income under
section 951(a)(1)(B). On December 1 of Year 4,
T2 sells an asset with a basis of $400,000 to P for
$900,000. T2’s gain of $500,000 is not subpart F
income. On December 15 of Year 4, T1 sells T2,
in which it has a basis of $600,000, to P for
$1,600,000. Under section 1248, $800,000 of T1’s
gain of $1,000,000 is treated as a dividend.
However, in the absence of the sale of the asset by
T2 to P, only $300,000 would have been treated as

7

a dividend under section 1248. On December 30
of Year 4, P makes a qualified stock purchase of
T1 from T. No section 338 election is made for
T1. (b) Under paragraph (h)(4) of this section,
paragraph (g)(2) of this section applies by reference to the amount treated as a dividend under
section 1248 on the disposition of the T2 stock.
Because the amount treated as a dividend is taken
into account in determining T’s basis in the T1
stock under § 1.1502–32, the sale of the T2 stock
and the deemed dividend have the effect of a
transaction described in paragraph (g)(1) of this
section. Consequently, paragraph (d)(1) of this
section applies to the asset sold by T2 to P and P’s
basis in the asset is $400,000 as of December 1 of
Year 4.
(c) Under paragraph (h)(3) of this section, paragraph (d)(1) of this section applies to the T2 stock
and P’s basis in the T2 stock is $600,000 as of
December 15 of Year 4. Under paragraphs (h)(3)
and (4)(ii) of this section, however, P’s basis in
the T2 stock is increased by $300,000 (the amount
of T1’s gain treated as a dividend under section
1248 ($800,000), other than the amount treated as
a dividend solely as a result of the sale of the
asset by T2 to P ($500,000)) to $900,000.
*

*

*

*

*

§ 1.338–4T [Removed]
Par. 4. Section 1.338–4T is removed.
Par. 5. In § 1.338(i)–1, paragraphs (a)
and (b) are revised to read as follows:
§ 1.338(i)–1 Effective dates.
(a) In general. Sections 1.338–1
through 1.338–5 (except § 1.338–4(h)),
1.338(b)–1, and 1.338(h)(10)–1 generally are applicable for targets with acquisition dates on or after January 20,
1994. Section 1.338–4(h) is applicable
for targets with acquisition dates on or
after January 20, 1997. Section 1.338–
4T(h) (as contained in 26 CFR part 1 as
revised April 1, 1996) is generally applicable for targets with acquisition dates
on or after January 20, 1994, and before
January 20, 1997.
(b) Elective retroactive application. A
target with an acquisition date on or
after January 14, 1992 and before January 20, 1994 may apply §§ 1.338–1
through 1.338–5, 1.338–4T(h) (as contained in 26 CFR part 1 as revised April
1, 1996), 1.338(b)–1, and 1.338(h)(10)–1 by including a statement with its
return (including a timely filed amended
return) for the period that includes the
acquisition date to the effect that it is
applying all of these sections pursuant
to this paragraph (b). A target with an
acquisition date on or after January 14,
1992, and before January 20, 1997, may
choose to apply § 1.338–4(h) for the
period that includes the acquisition date
pursuant to paragraph (b) of this section.
*

*

*

*

*

Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved January 13, 1997.

Donald C. Lubick,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
January 22, 1997, 8:45 a.m., and published in the

8

issue of the Federal Register for January 23, 1997,
62 F.R. 3458)

Part III. Administrative, Procedural, and Miscellaneous
Tax on Certain Imported
Substances; Notice of
Determination
Notice 97–22
This notice announces a determination, under Notice 89–61, 1989–1 C.B.
717, that the list of taxable substances in
§ 4672(a)(3) will be modified to include
diglycidyl ether of bisphenol-A. This
modification is effective April 1, 1992.
Background
Under § 4672(a), an importer or exporter of any substance may request that
the Secretary determine whether that
substance should be listed as a taxable
substance. The Secretary shall add the
substance to the list of taxable substances in § 4672(a)(3) if the Secretary
determines that taxable chemicals constitute more than 50 percent of the
weight, or more than 50 percent of the
value, of the materials used to produce
the substance. This determination is to
be made on the basis of the predominant
method of production. Notice 89–61 sets
forth the rules relating to the determination process.
Determination
On February 24, 1997, the Secretary
determined that diglycidyl ether of
bisphenol-A should be added to the list
of taxable substances in § 4672(a)(3),
effective April 1, 1992.
The rate of tax prescribed for
diglycidyl ether of bisphenol-A, under
§ 4671(b)(3), is $7.08 per ton. This is
based upon a conversion factor for benzene of 0.459, a conversion factor for
propylene of 0.494, a conversion factor
for chlorine of 0.833, and a conversion
factor for sodium hydroxide of 0.705.
The petitioner is Dow Chemical Company, a manufacturer and exporter of
this substance. No material comments
were received on this petition. The following information is the basis for the
determination.
HTS number: 3907.3
CAS number: 025085–99–8
Diglycidyl ether of bisphenol-A
(DGEBA) is derived from the taxable
chemicals benzene, propylene, chlorine,
and sodium hydroxide and produced
predominantly from epichlorohydrin and
bisphenol-A via a two-step reaction.
The stoichiometric material consumption formula for this substance is:

2 C6H6 (benzene) + 4 C3H6 (propylene) + 4 Cl2
(chlorine) + 6 NaOH (sodium hydroxide) + 2 O22
(oxygen)
-----.
(CH 3 ) 2 C(C 6 H 4 OC 3 H 5 0) 2
(DGEBA) + CH3COCH3 (acetone) + 2 HCl
(hydrogen chloride) + 6 NaCl (sodium chloride) +
5 H2O (water)

Diglycidyl ether of bisphenol-A has
been determined to be a taxable substance because a review of its
stoichiometric material consumption formula shows that, based on the predominant method of production, taxable
chemicals constitute 92.95 percent by
weight of the materials used in its
production.
The principal author of this notice is
Ruth Hoffman, Office of Assistant Chief
Counsel (Passthroughs and Special Industries). For further information regarding this notice contact Ruth Hoffman on
(202) 622–3130 (not a toll-free number).

except for farmers and wage-earners,
any person subject to income tax, or any
person required to file a return of information with respect to income, must
keep such books and records, including
inventories, as are sufficient to establish
the amount of gross income, deductions,
credits, or other matters required to be
shown by that person in any return of
such tax or information.
.03 Section 1.6001–1(e) provides that
the books or records required by § 6001
must be kept available at all times for
inspection by authorized internal revenue officers or employees, and must be
retained so long as the contents thereof
may become material in the administration of any internal revenue law.
SECTION 3. SCOPE

26 CFR 601.105 Examination of returns and
claims for refund, credits or abatement; determination of correct tax liability.
(Also Part I, Section 6001; 1.6001–1.)

Rev. Proc. 97–22
SECTION 1. PURPOSE
This revenue procedure provides
guidance to taxpayers that maintain
books and records by using an electronic storage system that either images
their hardcopy (paper) books and
records, or transfers their computerized
books and records, to an electronic
storage media, such as an optical disk.
Records maintained in an electronic
storage system that complies with the
requirements of this revenue procedure
will constitute records within the meaning of § 6001 of the Internal Revenue
Code.
SECTION 2. BACKGROUND
.01 Section 6001 provides that every
person liable for any tax imposed by the
Code, or for the collection thereof, must
keep such records, render such statements, make such returns, and comply
with such rules and regulations as the
Secretary may from time to time prescribe. Whenever necessary, the Secretary may require any person, by notice
served upon that person or by regulations, to make such returns, render such
statements, or keep such records, as the
Secretary deems sufficient to show
whether or not that person is liable for
tax.
.02 Section 1.6001–1(a) of the Income Tax Regulations provides that,

9

.01 This revenue procedure applies to
taxpayers who maintain books and
records using an ‘‘electronic storage
system.’’ An electronic storage system is
a system to prepare, record, transfer,
index, store, preserve, retrieve, and reproduce books and records by either:
(1) electronically imaging hardcopy
documents to an electronic storage media; or
(2) transferring
computerized
books and records to an electronic storage media using a technique such as
‘‘COLD’’ (computer output to laser
disk), which allows books and records
to be viewed or reproduced without the
use of the original program.
.02 The requirements of this revenue
procedure pertain to all matters under
the jurisdiction of the Commissioner of
Internal Revenue including, but not limited to, income, excise, employment,
and estate and gift taxes, as well as
employee plans and exempt organizations.
.03 A taxpayer’s use of a third party
(such as a service bureau or timesharing service) to provide the taxpayer
with an electronic storage system for its
books and records does not relieve the
taxpayer of the responsibilities described
in this revenue procedure.
.04 Except as otherwise provided in
this revenue procedure, all requirements
of § 6001 that apply to hardcopy books
and records apply as well to books and
records that are stored electronically
pursuant to this revenue procedure.

SECTION 4. ELECTRONIC
STORAGE SYSTEM
REQUIREMENTS
.01 General Requirements.
(1) An electronic storage system
must ensure an accurate and complete
transfer of the hardcopy or computerized
books and records to an electronic storage media. The electronic storage system must also index, store, preserve,
retrieve, and reproduce the electronically
stored books and records.
(2) An electronic storage system
must include:
(a) reasonable controls to ensure
the integrity, accuracy, and reliability of
the electronic storage system;
(b) reasonable controls to prevent and detect the unauthorized creation of, addition to, alteration of, deletion of, or deterioration of electronically
stored books and records;
(c) an inspection and quality assurance program evidenced by regular
evaluations of the electronic storage system including periodic checks of electronically stored books and records;
(d) a retrieval system that includes an indexing system (within the
meaning of section 4.02 of this revenue
procedure); and
(e) the ability to reproduce legible and readable hardcopies (within the
meaning of section 4.01(3) of this revenue procedure) of electronically stored
books and records.
(3) All books and records reproduced by the electronic storage system
must exhibit a high degree of legibility
and readability when displayed on a
video display terminal and when reproduced in hardcopy. The term ‘‘legibility’’ means the observer must be able to
identify all letters and numerals positively and quickly to the exclusion of all
other letters or numerals. The term
‘‘readability’’ means that the observer
must be able to recognize a group of
letters or numerals as words or complete
numbers. The taxpayer must ensure that
the reproduction process maintains the
legibility and readability of the electronically stored document.
(4) The information maintained in
an electronic storage system must provide support for the taxpayer’s books
and records (including books and
records in an automated data processing
system). For example, the information
maintained in an electronic storage system and the taxpayer’s books and
records must be cross-referenced in a

manner that provides an audit trail between the general ledger and the source
document(s).
(5) For each electronic storage system used, the taxpayer must maintain,
and make available to the Service upon
request, complete descriptions of:
(a) the electronic storage system,
including all procedures relating to its
use; and
(b) the indexing system (see section 4.02 of this revenue procedure).
(6) At the time of an examination,
or for the tests described in section 5 of
this revenue procedure, the taxpayer
must:
(a) retrieve and reproduce (including hardcopies if requested) electronically stored books and records; and
(b) provide the Service with the
resources (e.g., appropriate hardware
and software, personnel, documentation,
etc.) necessary to locate, retrieve, read,
and reproduce (including hardcopies)
any electronically stored books and
records.
(7) An electronic storage system
must not be subject, in whole or in part,
to any agreement (such as a contract or
license) that would limit or restrict the
Service’s access to and use of the
electronic storage system on the taxpayer’s premises (or any other place where
the electronic storage system is maintained), including personnel, hardware,
software, files, indexes, and software
documentation.
(8) The taxpayer must retain electronically stored books and records so
long as their contents may become material in the administration of the Internal Revenue laws under § 1.6001–1(e).
(9) The taxpayer may use more
than one electronic storage system. In
that event, each electronic storage system must meet the requirements of this
revenue procedure. Electronically stored
books and records that are contained in
an electronic storage system with respect to which the taxpayer ceases to
maintain the hardware and the software
necessary to satisfy the conditions of
this revenue procedure will be deemed
destroyed by the taxpayer, unless the
electronically stored books and records
remain available to the Service in conformity with this revenue procedure.
(10) Taxpayers may use reasonable
data compression or formatting technologies as part of their electronic storage system so long as the requirements
of this revenue procedure are satisfied.

10

.02 Requirements of an Indexing System.
(1) For purposes of this revenue
procedure, an ‘‘indexing system’’ is a
system that permits the identification
and retrieval for viewing or reproducing
of relevant books and records maintained in an electronic storage system.
For example, an indexing system might
consist of assigning each electronically
stored document a unique identification
number and maintaining a separate database that contains descriptions of all
electronically stored books and records
along with their identification numbers.
In addition, any system used to maintain, organize, or coordinate multiple
electronic storage systems is treated as
an indexing system under this revenue
procedure. The requirement to maintain
an indexing system will be satisfied if
the indexing system is functionally comparable to a reasonable hardcopy filing
system. The requirement to maintain an
indexing system does not require that a
separate electronically stored books and
records description database be maintained if comparable results can be
achieved without a separate description
database.
(2) Reasonable controls must be
undertaken to protect the indexing system against the unauthorized creation of,
addition to, alteration of, deletion of, or
deterioration of any entries.
.03 Recommended Practices. The
implementation of records management
practices is a business decision that is
solely within the discretion of the taxpayer. Records management practices
may include the labeling of electronically stored books and records, providing a secure storage environment, creating back-up copies, selecting an off-site
storage location, retaining hardcopies of
books or records that are illegible or
that cannot be accurately or completely
transferred to an electronic storage system, and testing to confirm records
integrity.
SECTION 5. DISTRICT DIRECTOR
TESTING
.01 The District Director may periodically initiate tests of a taxpayer’s
electronic storage system. These tests
may include an evaluation (by actual
use) of a taxpayer’s equipment and
software, as well as the procedures used
by a taxpayer to prepare, record, transfer, index, store, preserve, retrieve, and
reproduce electronically stored documents. In some instances, the District

Director may choose to review the internal controls, security procedures, and
documentation associated with the taxpayer’s electronic storage system.
.02 The tests described in section
5.01 of this revenue procedure are not
an ‘‘examination,’’ ‘‘investigation,’’ or
‘‘inspection’’ of the books and records
within the meaning of § 7605(b), or a
prior audit for purposes of § 530 of the
Revenue Act of 1978, 1978–3 (Vol.1)
C.B. 119, as amended by § 1122 of the
Small Business Job Protection Act of
1996, because these tests are not directly
related to the determination of the tax
liability of a taxpayer for a particular
taxable period.
.03 The District Director must inform
the taxpayer of the results of any tests
under this section.
SECTION 6. COMPLIANCE
.01 A taxpayer’s electronic storage
system that meets the requirements of
this revenue procedure will be treated as
being in compliance with the
recordkeeping requirements of § 6001
and the regulations thereunder.
.02 A taxpayer’s electronic storage
system that fails to meet the requirements of this revenue procedure may be
treated as not being in compliance with
the recordkeeping requirements of
§ 6001 and the regulations thereunder.
See section 9 of this revenue procedure
for applicable penalties. However, even
though a taxpayer’s electronic storage
system fails to meet the requirements of
this revenue procedure, the penalties
described in section 9 of this revenue
procedure may not apply if the taxpayer
maintains its original books and records,
or maintains its books and records in
micrographic form in conformity with
Rev. Proc. 81–46, 1981–2 C.B. 621.
SECTION 7. DESTRUCTION AND
DELETION OF ORIGINAL BOOKS
AND RECORDS
This revenue procedure permits the
destruction of the original hardcopy
books and records and the deletion of
the original computerized records (other
than ‘‘machine-sensible’’ records required to be retained by Rev. Proc.
91–59, 1991–2 C.B. 841), after the
taxpayer:

(1) has completed its own testing
of the electronic storage system that
establishes that hardcopy or computerized books and records are being reproduced in compliance with all the provisions of this revenue procedure; and
(2) has instituted procedures that
ensure its continued compliance with all
the provisions of this revenue procedure.

Attention: CP:EX
Internal Revenue Service
1111 Constitution Ave., NW
Washington, DC 20224
.02 Questions regarding the application of this revenue procedure to a
specific factual situation should be directed to the appropriate District Director.

SECTION 8. IMPACT ON
MACHINE-SENSIBLE RECORDS

SECTION 11. PAPERWORK
REDUCTION ACT

The provisions of this revenue procedure regarding electronically stored
books and records do not relieve taxpayers of the responsibility of retaining any
other books and records required to be
retained under § 6001. Such other
books and records may include
‘‘machine-sensible’’ records required to
be retained by Rev. Proc. 91–59 in
connection with the taxpayer’s use of an
automatic data processing (ADP) system.

The collections of information contained in this revenue procedure have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control
number 1545–1533.
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information displays a valid control number.
The collections of information are in
sections 4 and 5 of this revenue procedure. This information is required to
ensure that records maintained in an
electronic storage system will constitute
records within the meaning of § 6001.
The collections of information are mandatory for a taxpayer who chooses to
electronically store its books and
records. The likely respondents are individuals, state or local governments,
farms, business or other for-profit institutions, federal agencies or employees,
nonprofit institutions, and small businesses or organizations.
The estimated total annual recordkeeping burden is 1,000,400 hours.
The estimated annual burden per
recordkeeper will vary from 20 hours to
22 hours, depending on individual circumstances, with an estimated average
of 20 hours. The estimated number of
recordkeepers is 50,000.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal revenue law. Generally tax returns
and tax return information are confidential, as required by 26 U.S.C. 6103.

SECTION 9. PENALTIES
The District Director may issue a
Notice of Inadequate Records pursuant
to § 1.6001–1(d) if the taxpayer’s books
and records are available only as electronically stored books and records and
the taxpayer’s electronic storage system
fails to meet the requirements of this
revenue procedure. Taxpayers whose
electronic storage system fails to meet
the requirements of this revenue procedure may also be subject to applicable
penalties under subtitle F of the Code,
including the § 6662(a) accuracy-related
civil penalty and the § 7203 willful
failure criminal penalty.
SECTION 10. INTERNAL REVENUE
SERVICE OFFICE CONTACT
.01 Questions regarding this revenue
procedure should be directed to the
Office of the Assistant Commissioner
(Examination). The telephone number
for this office is (202) 622–5480 (not a
toll-free number). Written questions
should be addressed to: Assistant Commissioner (Examination)

11

Part IV. Items of General Interest
Notice of Proposed Rulemaking
and Notice of Public Hearing
Amortization of Intangible Property
REG–209709–94
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to the amortization of certain intangible property.
The proposed regulations reflect changes
to the law made by the Omnibus Budget
Reconciliation Act of 1993 (OBRA ’93),
and affect taxpayers who acquired intangible property after August 10, 1993, or
made a retroactive election to apply
OBRA ’93 to intangibles acquired after
July 25, 1991. This document also provides notice of a public hearing on the
proposed regulations.
DATES: Comments must be received
by April 16, 1997. Requests to appear
and outlines of oral comments to be
presented at the public hearing scheduled for May 15, 1997, must be received by April 24, 1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–209709–94),
room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–209709–94), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC. Alternatively, taxpayers may submit
comments electronically via the Internet
by selecting the ‘‘Tax Regs’’ option of
the IRS Home Page, or by submitting
comments directly to the IRS Internet
site at http:\\www.irs.ustreas.gov\prod\
tax_regs\comments.html. The public
hearing will be held in the Commissioner’s Conference Room (Room 3313),
Internal Revenue Building, 1111 Constitution Avenue NW, Washington, DC
20224.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
John Huffman at (202) 622–3110; concerning submissions and the hearing,
Michael Slaughter at (202) 622–8452
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
regulations under sections 167(f) and
197. These provisions were added to the
Internal Revenue Code of 1986 (the
Code) by section 13261 of OBRA ’93,
and apply to intangible property acquired after August 10, 1993 (or after
July 25, 1991, if a valid retroactive
election to apply OBRA ’93 to intangibles has been made pursuant to
§ 1.197–1T).
The proposed regulations provide
definitions and rules for amortization of
intangible property subject to sections
197 and 167(f). On June 24, 1994, the
IRS published Announcement 94–92
(1994–28 I.R.B. 139) in the Federal
Register (59 FR 32670) inviting comments under section 197 relating to the
amortization of goodwill and certain
other intangibles that should be addressed in proposed regulations. The
IRS has reviewed these comments and
has addressed certain issues raised in the
comments in the proposed regulations.
However, because these comments were
received in anticipation of the issuance
of these proposed regulations, and because these regulations are subject to
further comment and a public hearing,
no attempt has been made to describe
all of the principal comments that are
not reflected in these regulations or the
reasons therefor.
Explanation of Provisions
1. General overview
Sections 167(f) and 197 provide comprehensive rules for the depreciation and
amortization of many intangible assets.
Intangible assets subject to section 197
are broadly defined to include most
intangible assets acquired in connection
with the acquisition of a trade or business and certain other separately acquired intangible assets. The adjusted
basis of an amortizable section 197
intangible must be amortized over a
15-year period. Certain other intangible
assets are excluded from section 197 for
various reasons. In some cases, such as
stock and partnership interests, the asset
is property of a character that is not
subject to an allowance for depreciation
because it represents a permanent investment that can only be recovered
through disposition of the asset (includ-

12

ing worthlessness). In other cases, such
as computer software, purchased mortgage servicing rights, service and supply
contracts, and certain other contracts or
rights with a fixed duration, other cost
recovery methods were prescribed by
the OBRA ’93 amendments. In still
other cases, such as motion picture
films, television series, books, and
sound recordings, other cost recovery
methods that were in effect prior to
OBRA ’93 are more appropriate under
the circumstances. Section 167(f) provides alternative methods of depreciation for certain of the intangibles excluded from the application of section
197.
The proposed regulations provide
guidance for certain intangible property
subject to sections 167(f) and 197. The
section 167(f) proposed regulations provide rules for intangible property subject
to the allowance for depreciation under
section 167 and specifically excluded
from section 197. These intangible assets include certain computer software,
rights to receive tangible property or
services, rights of fixed duration, patents, copyrights, and mortgage servicing
rights. These proposed regulations reserve guidance on the method of depreciating the cost of separately acquired
rights to receive tangible property or
services where the amount of the property or services to be received is not
specified. The IRS invites comments on
possible methods of depreciation in
these cases.
Because section 197 provides a
method of amortization and, except in
the case of certain covenants not to
compete, governmental licenses, permits
and other rights, and contracts for the
use of section 197 intangibles, does not
alter the rules for determining the basis
of an asset, section 197 generally does
not apply to amounts that would otherwise be deductible. For example, section
197 does not generally apply to the
costs of advertising because, in most
cases, these costs are deductible under
other provisions of the Code. See Rev.
Rul. 92–80 (1992–2 C.B. 57). In addition, section 197 does not apply to costs
that would not, under general principles
of Federal income tax law, be included
in the basis of a section 197 intangible.
For example, if a taxpayer borrows
money to purchase the assets of a trade
or business (including amortizable section 197 intangibles) and incurs fees in
connection with the loan, these costs are

generally amortized over the term of the
loan rather than under the rules of
sections 167(f) and 197. As a further
example, if the amortizable section 197
intangibles acquired in the transaction
include a favorable supply contract, the
amortizable basis in the contract does
not include amounts required to be paid
for goods to be received pursuant to the
contract.
In addition, section 197 does not
apply to any amount for which a deduction would be disallowed under other
provisions of the Code, such as section
162(k) (relating to amounts paid or
incurred by a corporation in connection
with the acquisition of its stock or the
stock of a related person).
No inference should be drawn from
any provision in the proposed regulations concerning the classification of
any section 197 intangible as property,
or whether any section 197 intangible is
treated as tangible or intangible property, for other purposes of the Code.
Furthermore, no inference should be
drawn from any provision in the proposed regulations regarding (a) whether
any section 197 intangible that is not an
amortizable section 197 intangible may
be amortized or depreciated under any
provision of the Code other than section
197, or (b) the proper method for determining any allowance therefor. Finally,
no inference should be drawn from any
provision in the proposed regulations
concerning whether any section 197 intangible (or any interest therein) has
been purchased, leased, or licensed for
Federal income tax purposes.
2. Section 197 intangibles
The proposed regulations define section 197 intangibles (subject to certain
exceptions) as goodwill, going concern
value, workforce in place, information
base, know-how, customer- and supplierbased intangibles, governmental licenses
and permits, covenants not to compete
and other similar arrangements, franchises, trademarks, trade names, and
contracts for the use of the foregoing
assets.

business. The legislative history provides, however, that section 197 applies
to a covenant not to compete acquired
with the assets of a trade or business,
the stock in a corporation, or an interest
in a partnership engaged in a trade or
business. Consequently, the proposed
regulations do not provide for this exception. In this regard, the proposed
regulations provide that for purposes of
section 197(f)(1)(B), the disposition or
cancellation of redeemed stock of a
corporation will not cause the covenant
to be written off faster than over the
15-year amortization period provided for
under section 197 (in the case of a
covenant to which section 162(k) does
not apply).
B. Contracts for the Use of Section 197
Intangibles
Some commentators also requested
guidance on the extent to which contracts for the use of section 197 intangibles would be subject to section 197,
in some cases suggesting that an intangible was not subject to section 197
unless the taxpayer obtained ownership
of property for Federal income tax purposes. However, it is sometimes difficult
to determine whether the terms of an
agreement confer ownership, for Federal
income tax purposes, of property, and
the IRS and Treasury believe that the
purposes of section 197 could be circumvented through the use of such
agreements. Accordingly, the proposed
regulations provide that contracts for the
use of section 197 intangibles will also
be treated as section 197 intangibles.
Contracts that are so treated may, however, be excluded under either section
197(e)(4)(B) or (D) on the basis that
they are contracts for the receipt of
property or services, contracts having a
fixed duration, or contracts having a
fixed amount and recovered on a unitof-production method or other similar
method.
3. Intangibles excluded from section
197
A. Computer Software

A. Covenants not to Compete
Some commentators in response to
Announcement 94–92 suggested that a
covenant not to compete relating to the
redemption of stock or a partnership
interest from a departing stockholder or
partner should be excluded from section
197 because this situation does not
involve the acquisition of a trade or

Section 197 intangibles do not include
computer software that is readily available for purchase by the general public,
is subject to a nonexclusive license, and
has not been substantially modified. The
proposed regulations provide a safe harbor for purposes of determining whether
computer software has been substantially modified. Under the safe harbor,

13

computer software has not been substantially modified if its capitalized cost
does not exceed the greater of $2,000 or
125 percent of the price at which the
unmodified version of the software is
readily available to the general public.
The proposed regulations incorporate
some of the provisions of Revenue
Procedure 69–21 (1969–2 C.B. 303),
involving the treatment of costs of computer software, and modify other provisions to the extent necessary to conform
to the amortization rules provided under
sections 197 and 167(f). Consequently,
if costs for developing computer software that the taxpayer has elected to
treat as deferred expenses under section
174(b) result in the development of a
self-created intangible excluded under
section 197(c)(2) and subject to the
allowance for depreciation under section
167(a), deductions for the unrecovered
expenditures are subject to section
167(f)(1). Computer software costs included, without being separately stated,
in the cost of the computer hardware
(bundled software) continue to be capitalized and depreciated as part of the
computer hardware. The proposed regulations also continue to treat as currently
deductible software costs properly and
consistently treated as deductible (not
capitalized) under § 1.162–11.
B. Certain Separately Acquired
Intangibles
Certain intangibles are excepted from
section 197 if they are not acquired as
part of a purchase of a trade or business.
The proposed regulations clarify that,
for purposes of section 197, a group of
assets constitutes a trade or business if
their use would constitute a trade or
business under section 1060; that is, if
goodwill or going concern value could
under any circumstances attach to the
assets. Temporary and proposed regulations under section 1060, in turn, provide that a group of assets constitutes a
trade or business for purposes of section
1060 if the use of such assets would
constitute an active trade or business for
purposes of section 355. However, in
appropriate cases, even if the use of a
group of assets would not constitute an
active trade or business for purposes
of section 355, such assets may nevertheless constitute a trade or business
for purposes of section 1060. See
§ 1.1060–1T(b)(2).
The IRS intends to provide additional
guidance as to the circumstances under
which the acquisition of a group of

assets constitutes a trade or business for
purposes of section 1060 in regulations
under that section. Accordingly, the proposed regulations do not provide substantive guidance on this question, except to the extent that the considerations
are unique to the application of section
197. The IRS invites comments on the
extent to which additional rules under
section 197 may be necessary.
C. Certain Contracts and Governmental
Rights
While section 197 intangibles include
licenses, permits, and other rights
granted by a governmental unit or an
agency or instrumentality thereof (section 197(d)(1)(D)), certain rights granted
by these governmental entities are excluded from section 197 pursuant to
section 197(e)(4)(B) and (D), subject to
the conditions and limitations therein.
Because a particular right may be described in two or more of these provisions, the proposed regulations provide
guidance regarding the potential conflict
between, or overlap with, these provisions. Thus, a right that would be
subject to section 197 pursuant to section 197(d)(1)(D) may nevertheless be
excluded if it is also described in section 197(e)(4) and meets all of the
requirements for exclusion. Furthermore,
a right that meets the requirements of
either section 197(e)(4)(B) or section
197(e)(4)(D) is excluded from section
197 even if it fails to meet one of the
requirements for the other exclusion. In
addition, any license, permit, or other
right granted by a governmental unit
that otherwise meets the definition of a
franchise under section 197(d)(1)(F),
such as an FCC broadcast license or
cable television franchise, is treated as a
franchise under the regulations. Accordingly, these licenses do not qualify for
any of the exceptions from section 197
provided under section 197(e)(4).

while retaining other intangibles acquired in the same or related transaction,
and then selling the stock. Special rules
are also provided for the application of
the loss disallowance provisions in cases
where a taxpayer has disposed of all of
the amortizable section 197 intangibles
acquired in a single transaction but is
treated as having retained other amortizable section 197 intangibles solely by
virtue of the retention of amortizable
section 197 intangibles by a related
person.
B. Transactions Involving Partnerships
The proposed regulations provide
rules and examples relating to the treatment of section 197 intangibles acquired
or transferred in certain partnership
transactions, including terminations under section 708(b)(1), and the application of section 197 to the special basis
adjustments of partnership property for
which a section 754 or section 732(d)
election is in effect. Guidance is also
provided regarding the effect of curative
and remedial allocations and the application of the anti-churning rules to certain partnership transactions.
In the case of the termination of a
partnership under section 708(b)(1)(B)
(relating to a sale or exchange of an
interest), the rules contained in the proposed regulations are based on recently
proposed regulations under that section,
pursuant to which the new partnership is
treated as having directly acquired the
assets of the old partnership in exchange
for the assumption of its liabilities and
the issuance of interests in the new
partnership. Accordingly, for purposes of
section 197, the consequences of the
termination of a partnership under section 708(b)(1)(B) may not be the same
as the consequences of such a termination under the rules in effect at the time
section 197 was enacted.
C. Treatment of Contingent Payments

4. Special rules of application
A. Loss Disallowance Provisions
The proposed regulations contain
rules for the loss disallowance provisions set forth in section 197(f)(1). In
particular, the proposed regulations provide that a taxpayer may not circumvent
the loss disallowance rules, for example,
by transferring some intangibles, whose
adjusted basis is greater than their fair
market value, to a corporation in exchange for stock in the corporation in a
transaction described in section 351,

The proposed regulations clarify that,
except in the case of contingent payments, amounts paid for section 197
intangibles are treated as amounts
chargeable to capital account, and the
entire principal amount is amortized
ratably over the 15-year amortization
period beginning with the later of the
month in which the intangible is acquired or the date on which the active
conduct of a trade or business begins.
Contingent payments for section 197
intangibles paid or incurred after the
taxable year in which the intangible is

14

acquired are added to basis at such time
and generally amortized ratably over the
remaining months in the 15-year period
as of the beginning of the month the
amount is paid or incurred. However, in
order to reduce the administrative burden that may result from a requirement
to maintain separate amortization schedules for each month during the 15-year
period, taxpayers are permitted to use
certain simplifying conventions. In addition, any amount that is not properly
included in the basis of an amortizable
section 197 intangible until after the
expiration of the 15-year period is amortized in full immediately upon the inclusion of the amount in the basis of the
intangible. The proposed regulations refer to § 1.461–1(a)(1) for rules governing the time at which an amount may be
taken into account by a taxpayer using
the cash receipts and disbursements
method. They refer to § 1.461–1(a)(2)
for rules governing the time at which a
liability is incurred and generally taken
into account (for example, by treating
the amount of the liability as a capital
expenditure) by an accrual basis taxpayer.
5. Anti-churning Rules
To be eligible for amortization, section 197 intangibles must qualify as
amortizable section 197 intangibles.
Generally, amortizable section 197 intangibles are section 197 intangibles that
are acquired after August 10, 1993 (or
acquired after July 25, 1991, and for
which the taxpayer made a proper election under § 1.197–1T) and held in
connection with the conduct of a trade
or business or an activity described in
section 212.
The proposed regulations provide
anti-churning rules to prevent taxpayers
from converting into amortizable section
197 intangibles existing goodwill, going
concern value, and any other section
197 intangible for which amortization
would not have been allowable prior to
OBRA ’93 through the use of related
persons and certain other transactions.
The proposed regulations define the
term related person for purposes of
these rules.
The proposed regulations also contain
provisions for the exception to the antichurning rules in situations where the
seller elects to recognize gain and
agrees to pay a specified amount of tax.
The regulations reserve guidance on the
manner of making this election. The IRS
intends to issue a revenue procedure in

order to provide interim guidance to
taxpayers on the manner of making this
election, and the final regulations will
include the relevant provisions of this
revenue procedure.
The proposed regulations contain both
an anti-churning anti-abuse rule and a
general anti-abuse rule that provide that
the Commissioner may recast any transaction if one of its principal purposes is
to avoid the purposes of section 197.
6. Assumption Reinsurance Transactions
Section 197(f)(5) provides special
rules for section 197 intangibles resulting from assumption reinsurance transactions. The proposed regulations reserve guidance on certain aspects of
these transactions. The IRS invites comments on the extent to which additional
guidance on the application of section
197 to these transactions may be necessary.

basis to individual assets in the case of
a direct acquisition of assets constituting
a trade or business or a deemed acquisition of assets as the result of an election
under section 338. Under this system,
assets in the nature of goodwill and
going concern value are included in
Class IV, while other intangible assets,
whether or not amortizable, are included
in Class III. Each successive class is
allocated basis under a residual method,
subject to a fair market value limitation
for all classes except Class IV. After
basis has been allocated to each class in
the aggregate, assets within each of the
first three classes are allocated basis on
a proportional method. This system is
inconsistent with the policies of section
197, which prescribes uniform treatment
for all amortizable section 197 intangibles. Accordingly, appropriate modifications are being proposed.
Special Analyses

7. Proposed Effective Dates
The regulations for sections 167(f)
and 197 are proposed to be effective on
the date on which the final regulations
are published in the Federal Register.
Regulations to implement section
197(e)(4)(D) (separately acquired contracts of fixed duration or amount) are
proposed to be effective August 11,
1993, for property acquired after August
10, 1993 (or July 26, 1991, if a valid
retroactive election has been made under
§ 1.197–1T).
8. Accounting Method Changes
A change in the method of depreciation or amortization of intangibles is a
change in method of accounting that
requires the consent of the Commissioner of Internal Revenue under section
446(e). To obtain this consent, a Form
3115, Application for Change in Accounting Method, generally must be
filed within 180 days after the beginning
of the taxable year in which the proposed change is to be made. Taxpayers
that have adopted a method of accounting for certain intangibles may need to
change their method of accounting to
comply with the final regulations.
9. Basis Allocation Rules
In separate notices the IRS and Treasury are issuing temporary and proposed
amendments to the temporary regulations under sections 1060 and 338(b).
The existing temporary regulations establish a four-class system for allocating

It has been determined that this notice
of proposed rulemaking is not a significant regulatory action as defined in EO
12866. Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these
regulations, and, because the regulations
do not impose a collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice
of proposed rulemaking will be submitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.

The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral
comments at the hearing must submit
comments and an outline of the topics
to be discussed and the time to be
devoted to each topic (in the manner
described in ADDRESSES) by April 16,
1997. A period of 10 minutes will be
allotted to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regulations is John Huffman, Office of Assistant Chief Counsel (Passthroughs and
Special Industries), IRS. However, other
personnel from the IRS and Treasury
Department participated in their development.
*

*

*

*

*

Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding an
entry in numerical order to read as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.197–2 also issued under 26
U.S.C. 197(g). * * *
Par. 2. Section 1.167(a)–3 is amended
by adding a sentence at the end to read
as follows:

Comments and Public Hearing

§ 1.167(a)–3 Intangibles.

Before these proposed regulations are
adopted as final regulations, consideration will be given to any comments
that are submitted (in the manner described in ADDRESSES) timely to the
IRS. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for May 15, 1997, at 10 a.m. in the
Commissioner’s Conference Room
(Room 3313), Internal Revenue Building, 1111 Constitution Avenue NW,
Washington, DC 20224. Because of access restrictions, visitors will not be
admitted beyond the Internal Revenue
Building lobby more than 15 minutes
before the hearing starts.

* * * See §§ 1.197–2 and 1.167(a)–14
for amortization of goodwill and certain
other intangibles acquired after August
10, 1993, or after July 25, 1991, if a
valid retroactive election under § 1.197–
1T has been made.
Par. 3. Section 1.167(a)–6 is amended
by adding two sentences at the end of
paragraph (a) to read as follows:

15

§ 1.167(a)–6 Depreciation in special
cases.
(a) * * * See § 1.167(a)–14(c)(4) for
depreciation of a separately acquired
interest in a patent or copyright described in section 167(f)(2) acquired
after the date on which the final regula-

tions are published in the Federal Register. See § 1.197–2 for amortization of
interests in patents and copyrights that
constitute amortizable section 197 intangibles.
*

*

*

*

*

Par. 4. Section 1.167(a)–14 is added
to read as follows:
§ 1.167(a)–14 Treatment of certain intangible property excluded from section
197.
(a) Overview. This section provides
rules for the amortization of certain
intangibles that are excluded from section 197 (relating to the amortization of
goodwill and certain other intangibles).
These excluded intangibles are specifically described in § 1.197–2(c)(4), (6),
(7), (11), and (13) and include certain
computer software and certain other
separately acquired rights, such as rights
to receive tangible property or services,
patents and copyrights, rights of fixed
duration or amount, and certain mortgage servicing rights. Intangibles for
which an amortization amount is determined under section 167(f) and intangibles otherwise excluded from section
197 (for example, self-created intangibles described in § 1.197–2(d)(2)) are
amortizable only if they qualify as property subject to the allowance for depreciation under section 167(a).
(b) Computer software—(1) In general. The amount of the deduction for
computer software described in section
167(f)(1) and § 1.197–2(c)(4) is determined by amortizing the adjusted basis
of the computer software using the
straight line method described in
§ 1.167(b)–1 (except that its salvage
value is treated as zero) and an amortization period of 36 months beginning
with the month that the computer software is placed in service. If costs for
developing computer software that the
taxpayer properly elects to defer under
section 174(b) result in the development
of property subject to the allowance for
depreciation under section 167, the rules
of this paragraph (b) will apply to the
unrecovered costs. In addition, this paragraph (b) applies to the cost of separately acquired computer software where
these costs are separately stated and the
costs are required to be capitalized under section 263(a).
(2) Exceptions. Paragraph (b)(1) of
this section does not apply to the cost of
computer software properly and consistently treated as currently deductible
(that is, not capitalized) under § 1.162–

11. The cost of acquiring an interest in
computer software that is included,
without being separately stated, in the
cost of the hardware or other tangible
property is treated as part of the cost of
the hardware or other tangible property
that is capitalized and depreciated under
other applicable sections of the Internal
Revenue Code.
(c) Certain interests or rights acquired separately—(1) Certain rights to
receive tangible property or services.
The amount of the deduction for a
separately acquired right to receive tangible property or services under a contract or from a governmental unit (specified in section 167(f)(2) and § 1.197–
2(c)(6)) is determined as follows:
(i) Amortization of fixed amounts.
The cost of acquiring a right to receive
a fixed amount of tangible property or
services is amortized for each taxable
year by multiplying the basis (as determined under section 1011) of the right
by a fraction, the numerator of which is
the amount of tangible property or services received during the taxable year
and the denominator of which is the
total amount of tangible property or
services received or to be received under the terms of the contract or governmental grant. For example, if a taxpayer
acquires a favorable contract right to
receive a fixed amount of raw materials
during an unspecified period, the taxpayer must amortize the cost of acquiring the contract right by multiplying the
total cost by a fraction, the numerator of
which is the amount of raw materials
received under the contract during the
taxable year and the denominator of
which is the total amount of raw materials received or to be received under the
contract.
(ii) Amortization of unspecified
amount over fixed period. The cost of
acquiring a right to receive an unspecified amount of tangible property or
services over a fixed period is amortized
ratably over the period of the right.
(iii) Amortization in other cases. [Reserved]
(2) Rights of fixed duration or
amount. The amount of the deduction
for a separately acquired right of fixed
duration or amount received under a
contract or granted by a governmental
unit (specified in section 167(f)(2) and
§ 1.197–2(c)(13)) and not covered by
paragraph (c)(1) of this section is determined as follows:
(i) Rights of a fixed amount. The cost
of acquiring a right of a fixed amount is
amortized for each taxable year by mul-

16

tiplying the cost of the right by a
fraction, the numerator of which is the
amount received or delivered during the
taxable year and the denominator of
which is the total amount to be received
or delivered (including amounts received
or delivered prior to the close of the
taxable year) under the terms of the
contract or governmental grant.
(ii) Rights of unspecified amount and
fixed duration of less than 15 years. The
cost of acquiring a right of an unspecified amount and a fixed duration of less
than 15 years is amortized ratably over
the period of the right.
(3) Application of renewals. (i) For
purposes of paragraphs (c)(1) and (2) of
this section, the duration of a right
under a contract (or granted by a governmental unit) includes any renewal
period if, based on all of the facts and
circumstances in existence at any time
during the taxable year in which the
right is acquired, the facts clearly indicate a reasonable expectancy of renewal.
(ii) The mere fact that a taxpayer will
have the opportunity to renew a contract
right or other right on the same terms as
are available to others, in a competitive
auction or similar process that is designed to reflect fair market value and
in which the taxpayer is not contractually advantaged, will generally not be
taken into account in determining the
duration of such right provided that the
bidding produces a fair market value
price comparable to the price that would
be obtained if the rights were purchased
immediately after renewal from a person
(other than the person granting the renewal) in an arm’s-length transaction.
(iii) The cost of a renewal not included in the terms of the contract or
governmental grant is treated as the
acquisition of a separate intangible asset.
(4) Patents and copyrights. The
amount of the deduction for a separately
acquired interest in a patent or copyright
described in section 167(f)(2) and
§ 1.197–2(c)(7) is equal to the purchase
price paid or incurred during the year if
the purchase price is payable on at least
an annual basis as either a fixed amount
per use or a fixed percentage of the
revenue derived from the use of the
patent or copyright. Otherwise, the cost
or other basis of a separately acquired
patent or copyright (or an interest
therein) is depreciated ratably over its
remaining useful life. If a patent or
copyright becomes valueless in any year
before its legal expiration, the adjusted
basis may be deducted in that year.

(5) Applicable rules and conventions.
The period of amortization under paragraphs (c)(1) through (4) of this section
begins when the intangible is placed in
service. For other applicable rules, see
§ 1.197–2(f).
(d) Mortgage servicing rights. The
amount of the deduction for mortgage
servicing rights described in section
167(f)(3) and § 1.197–2(c)(11) is determined by using the straight line method
described in § 1.167(b)–1 (except that
the salvage value is treated as zero) and
an amortization period of 108 months.
Mortgage servicing rights are not depreciable to the extent the rights are
stripped coupons under section 1286. An
event that renders mortgage servicing
rights wholly worthless is considered a
disposition of the rights. For purposes of
determining the deduction for mortgage
servicing rights and any loss from the
sale, exchange, or other disposition of
the rights, rights to service a pool of
mortgages are treated as a single asset.
Thus, if some (but not all) mortgages in
a pool prepay and the taxpayer retains
rights to service the remaining mortgages in the pool, no loss is recognized
by reason of the prepayment. The adjusted basis of the mortgage servicing
rights is not affected by the unrecognized loss.
(e) Effective date. This section is applicable on the date final regulations are
published in the Federal Register
except that § 1.167(a)–14(c)(2) (depreciation of the cost of certain separately acquired rights) and so much
of § 1.167(a)–14(c)(3) as relates to
§ 1.167(a)–14(c)(2) are applicable August 11, 1993 (or July 26, 1991, if a
valid retroactive election has been made
under § 1.197–1T).
Par. 5. Section 1.197–0 is added to
read as follows:
§ 1.197–0 Table of contents.
This section lists the headings that
appear in § 1.197–2.
§ 1.197–2 Amortization of goodwill and
certain other intangibles.
(a) Overview.
(1) In general.
(2) Section 167(f) property.
(3) Amounts otherwise deductible.
(4) Relationship to other Internal
Revenue Code provisions.
(b) Section 197 intangibles; in general.
(1) Goodwill.
(2) Going concern value.

(3) Workforce in place.
(4) Information base.
(5) Know-how, etc.
(6) Customer-based intangibles.
(7) Supplier-based intangibles.
(8) Licenses, permits, and other
rights granted by governmental units.
(9) Covenants not to compete and
other similar arrangements.
(10) Franchises, trademarks, and
trade names.
(11) Contracts for the use of, and
term interests in, other section 197 intangibles.
(12) Other similar items.
(c) Section 197 intangibles; exceptions.
(1) Interests in a corporation, partnership, trust, or estate.
(2) Interests under certain financial
contracts.
(3) Interests in land.
(4) Certain computer software.
(i) In general.
(ii) Separately acquired software.
(iii) Other exceptions.
(iv) Computer software defined.
(v) Readily available to the general public.
(5) Certain interests in films, sound
recordings, video tapes, books, or other
similar property.
(6) Certain rights to receive tangible property or services.
(7) Certain interests in patents or
copyrights.
(8) Interests under leases of tangible property.
(i) Interest as a lessor.
(ii) Interest as a lessee.
(9) Interests under indebtedness.
(i) In general.
(ii) Exceptions.
(10) Professional sports franchises.
(11) Mortgage servicing rights.
(12) Certain transaction costs.
(13) Rights of fixed duration or
amount.
(d) Amortizable section 197 intangibles.
(1) Definition.
(2) Exception for self-created intangibles.
(i) In general.
(ii) Created by the taxpayer.
(A) Defined.
(B) Contracts for the use of
intangibles.
(C) Improvements and modifications.
(iii) Exceptions.
(3) Exception for property subject
to anti-churning rules.
(e) Purchase of a trade or business.

17

(1) Goodwill or going concern
value.
(2) Customer-based intangibles.
(3) Franchise, trademark, or trade
name.
(i) In general.
(ii) Exceptions.
(4) Acquisitions to be included.
(5) Substantial portion.
(6) Deemed asset purchases under
section 338.
(f) Computation of amortization deduction.
(1) In general.
(2) Treatment
of
contingent
amounts.
(i) Amounts added to basis during 15-year period.
(ii) Amounts becoming fixed after expiration of 15-year period.
(iii) Time for including amounts
in basis.
(3) Determination of amounts
chargeable to capital account in certain
cases.
(i) Covenants not to compete,
rights granted by governmental units,
and contracts for the use of section 197
intangibles.
(A) In general.
(B) Time for taking amounts
into account.
(ii) Franchises, trademarks, or
trade names and licenses, permits, and
other rights granted by governmental
units.
(iii) Certain reinsurance transactions.
(4) Transactions subject to section
338 or 1060.
(g) Special rules.
(1) Treatment of certain dispositions.
(i) Loss disallowance rules.
(A) In general.
(B) Certain nonrecognition
transfers.
(ii) Separately acquired property.
(iii) Disposition of a covenant
not to compete.
(iv) Taxpayers under common
control.
(A) In general.
(B) Treatment of disallowed
loss.
(2) Treatment of certain nonrecognition and exchange transactions.
(i) In general.
(A) Transfer disregarded.
(B) Application of general
rule.
(ii) Transactions covered.
(iii) Certain exchanged-basis
property.

(iv) Transfers under section
708(b)(1).
(A) In general.
(B) Termination by sale or exchange of interest.
(C) Other terminations.
(D) Anti-churning rules.
(v) Distributions to which section 732(d) applies.
(vi) Curative and remedial allocations under section 704(c).
(3) Application of section 754 to
acquisitions of an interest in an intangible held through a partnership.
(4) Treatment of certain reinsurance transactions.
(i) In general.
(ii) Determination of adjusted
basis.
(A) Acquisitions (other than
under section 338) of specified insurance contracts.
(B) Other acquisitions. [Reserved]
(5) Amounts paid or incurred for a
franchise, trademark, or trade name.
(6) Amounts properly taken into
account in determining the cost of property that is not a section 197 intangible.
(7) Treatment of amortizable section 197 intangibles as depreciable property.
(i) In general.
(ii) Exceptions and limitations.
(A) Unstated interest and
original issue discount rules.
(B) Treatment of other parties
to transaction.
(h) Anti-churning rules.
(1) Conversions of existing goodwill, going concern value, and certain
other section 197 intangibles.
(2) Amounts deductible under section 1253(d).
(3) Transition period.
(4) Exceptions.
(5) Special partnership provisions.
(i) Basis increases.
(ii) Curative and remedial allocations under section 704(c).
(6) Related person.
(i) In general.
(ii) Time for testing relationships.
(iii) De minimis rule.
(A) In general.
(B) Determination of beneficial ownership interest.
(7) Special rules for entities that
owned or used property at any time
during the transition period and that are
no longer in existence.
(8) Special rules for section 338
deemed acquisitions.

(9) Exception to anti-churning
rules where gain is recognized.
(i) In general.
(ii) Manner of making election.
[Reserved]
(iii) Determination of highest
marginal rate of tax.
(A) Noncorporate taxpayers.
(B) Corporations and taxexempt entities.
(iv) Special rule for pass-through
entities.
(v) Coordination with other provisions.
(A) In general.
(B) Section 1374.
(C) Procedural and administrative provisions.
(D) Installment method.
(10) Transactions subject to both
anti-churning and nonrecognition rules.
(11) Anti-churning anti-abuse rule.
(i) [Reserved].
(j) General anti-abuse rule.
(k) Examples.
(l) Effective dates.
Par. 6. Section 1.197–2 is added to
read as follows:
§ 1.197–2 Amortization of goodwill and
certain other intangibles.
(a) Overview—(1) In general. Section
197 allows an amortization deduction
for the capitalized costs of an amortizable section 197 intangible and prohibits
any other depreciation or amortization
with respect to that property. Paragraphs
(b), (c), and (e) of this section provide
rules and definitions for determining
whether property is a section 197 intangible, and paragraphs (d) and (e) of this
section provide rules and definitions for
determining whether a section 197 intangible is an amortizable section 197
intangible. The amortization deduction
under section 197 is determined by
amortizing adjusted basis ratably over a
15-year period under the rules of paragraph (f) of this section. Section 197
also includes various special rules pertaining to the disposition of amortizable
section 197 intangibles, nonrecognition
transactions, anti-churning rules, and
anti-abuse rules. Rules relating to these
provisions are contained in paragraphs
(g), (h), and (j) of this section. Examples demonstrating the application of
these provisions are contained in paragraph (k) of this section. The effective
date of the rules in this section is
contained in paragraph (l) of this section.

18

(2) Section 167(f) property. Section
167(f) prescribes rules for computing
the depreciation deduction for certain
property to which section 197 does not
apply. See § 1.167(a)–14 for rules under
section 167(f) and paragraphs (c)(4), (6),
(7), (11), and (13) of this section for a
description of the property subject to
section 167(f).
(3) Amounts otherwise deductible.
Except as otherwise provided in section
197(f)(3) and paragraphs (b)(11) and
(f)(3) of this section, section 197 does
not apply to amounts that would be
currently deductible without regard to
section 197.
(4) Relationship to other Internal
Revenue Code provisions. Section 197
does not apply to any amount paid or
incurred for a section 197 intangible if a
deduction for the amount would be
disallowed under any provision of the
Internal Revenue Code other than section 263. (See, for example, section
162(k).)
(b) Section 197 intangibles; in general. Except as otherwise provided in
paragraph (c) of this section, the term
section 197 intangible means any property described in section 197(d)(1). The
following rules and definitions provide
guidance concerning property that is a
section 197 intangible unless an exception applies:
(1) Goodwill. Section 197 intangibles
include goodwill. Goodwill is the value
of a trade or business attributable to the
expectancy of continued customer patronage. This expectancy may be due to
the name or reputation of a trade or
business or any other factor.
(2) Going concern value. Section 197
intangibles include going concern value.
Going concern value is the additional
value that attaches to property by reason
of its existence as an integral part of an
ongoing business activity. Going concern value includes the value attributable to the ability of a trade or business
(or a part of a trade or business) to
continue functioning or generating income without interruption notwithstanding a change in ownership, but does not
include any of the intangibles described
in any other provision of this paragraph
(b). It also includes the value that is
attributable to the immediate use or
availability of an acquired trade or business, such as, for example, the use of
the revenues or net earnings that otherwise would not be received during any
period if the acquired trade or business
were not available or operational.

(3) Workforce in place. Section 197
intangibles include workforce in place.
Workforce in place (sometimes referred
to as agency force or assembled
workforce) includes the composition of
a workforce (for example, the experience, education, or training of a
workforce), the terms and conditions of
employment whether contractual or otherwise, and any other value placed on
employees or any of their attributes.
Thus, the amount paid or incurred for
workforce in place includes, for example, any portion of the purchase price
of an acquired trade or business attributable to the existence of a highly-skilled
workforce, an existing employment contract (or contracts), or a relationship
with employees or consultants (including, but not limited to, any key employee contract or relationship).
Workforce in place does not include any
covenant not to compete or other similar
arrangement described in paragraph
(b)(9) of this section.
(4) Information base. Section 197 intangibles include business books and
records, operating systems, and any
other information base, including lists or
other information of current or prospective customers (regardless of the method
of recording the information). Thus, the
amount paid or incurred for these items
includes, for example, any portion of the
purchase price of an acquired trade or
business attributable to the intangible
value of technical manuals, training
manuals or programs, data files, and
accounting or inventory control systems.
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.
(5) Know-how, etc. Section 197 intangibles include any patent, copyright,
formula, process, design, pattern, knowhow, format, package design, computer
software (as defined in paragraph (c)(4)
of this section), or interest in a film,
sound recording, video tape, book, or
other similar property. (See, however,
the exceptions in paragraph (c) of this
section.)
(6) Customer-based intangibles. Section 197 intangibles include any
customer-based intangible. A customerbased intangible is any composition of
market, market share, or other value
resulting from the future provision of
goods or services pursuant to contractual
or other relationships in the ordinary
course of business with customers.
Thus, the amount paid or incurred for

customer-based intangibles includes, for
example, any portion of the purchase
price of an acquired trade or business
attributable to the existence of a customer base, a circulation base, an undeveloped market or market growth, insurance in force, the existence of a
qualification to supply goods or services
to a particular customer, a mortgage
servicing contract (as defined in paragraph (c)(11) of this section), an investment management contract, or other relationship with customers involving the
future provision of goods or services.
(See, however, the exceptions in paragraph (c) of this section.) In addition,
customer-based intangibles include the
deposit base and any similar asset of a
financial institution. Thus, the amount
paid or incurred for customer-based intangibles also includes any portion of
the purchase price of an acquired financial institution attributable to the value
represented by existing checking accounts, savings accounts, escrow accounts, and other similar items of the
financial institution. However, any portion of the purchase price of an acquired
trade or business attributable to accounts
receivable or other similar rights to
income for goods or services provided
to customers prior to the acquisition of a
trade or business is not an amount paid
or incurred for a customer-based intangible.
(7) Supplier-based intangibles. Section 197 intangibles include any
supplier-based intangible. A supplierbased 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. Thus, the
amount paid or incurred for supplierbased 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), the existence of
a favorable credit rating, or the existence of favorable supply contracts. The
amount paid or incurred for supplierbased intangibles does not include any
amount required to be paid for the
goods or services themselves pursuant to
the terms of the agreement or other
relationship. In addition, see the exceptions in paragraph (c) of this section,
including the exception in paragraph
(c)(6) of this section for certain rights to

19

receive tangible property or services
from another person.
(8) Licenses, permits, and other
rights granted by governmental units.
Section 197 intangibles include any license, permit, or other right granted by
a governmental unit (including, for purposes of section 197, an agency or
instrumentality thereof) even if the right
is granted for an indefinite period or is
reasonably expected to be renewed for
an indefinite period. These rights include, for example, a liquor license, a
taxi-cab medallion (or license), an airport landing or takeoff right (sometimes
referred to as a slot), a regulated airline
route, or a television or radio broadcasting license. The issuance or renewal of
a license, permit, or other right granted
by a governmental unit is considered an
acquisition of the license, permit, or
other right. (See, however, the exceptions in paragraph (c) of this section,
including the exceptions in paragraph
(c)(3) of this section for an interest in
land, in paragraph (c)(8) of this section
for an interest under a lease of tangible
property, and in paragraphs (c)(6) and
(13) of this section for certain rights
granted by a governmental unit. See
paragraph (b)(10) of this section for the
treatment of franchises.)
(9) Covenants not to compete and
other similar arrangements. 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.
For purposes of this paragraph (b)(9), an
acquisition may be made in the form of
an asset acquisition (including a qualified stock purchase that is treated as a
purchase of assets under section 338), a
stock acquisition or redemption, and the
acquisition or redemption of a partnership interest. An agreement requiring the
performance of services or the provision
of property or the use of property (other
than property of the acquired trade or
business) does not have substantially the
same effect as a covenant not to compete to the extent that the amount paid
under the agreement represents reasonable compensation for the services actually rendered or for the property or use
of the property actually provided.
(10) Franchises, trademarks, and
trade names. (i) Section 197 intangibles
include any franchise, trademark, or
trade name. The term franchise includes
any agreement that provides one of the
parties to the agreement with the right

to distribute, sell, or provide goods,
services, or facilities, within a specified
area. (See section 1253(b)(1).) The term
includes distributorships or other similar
contractual arrangements pursuant to
which the transferee is permitted or
licensed to operate or conduct a trade or
business within a specific area. The term
trademark includes any word, name,
symbol, or device, or any combination
thereof, adopted and used by a manufacturer or merchant to identify goods or
services and distinguish them from those
manufactured or sold by others. The
term trade name includes any name
used by a manufacturer or merchant 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. A license, permit, or
other right granted by a governmental
unit is a franchise if it otherwise meets
the definition of a franchise. A trademark or trade name includes any trademark or trade name arising under statute
or applicable common law, and any
similar right granted by contract. The
renewal of a franchise, trademark, or
trade name is treated as an acquisition
of the franchise, trademark, or trade
name.
(ii) Notwithstanding the definitions
provided in paragraph (b)(10)(i) of this
section, any amount that is paid or
incurred on account of a transfer, sale,
or other disposition of a franchise, trademark, or trade name and that is subject
to section 1253(d)(1) is not included in
the basis of a section 197 intangible.
(See paragraph (g)(5) of this section.)
(11) Contracts for the use of, and
term interests in, other section 197
intangibles. Section 197 intangibles include any right under a license, contract,
or other arrangement providing for the
use of property that would be a section
197 intangible under any provision of
this paragraph (b) (including this paragraph (b)(11)) after giving effect to all
of the exceptions provided in paragraph
(c) of this section. Section 197 intangibles also include any term interest
(whether outright or in trust) in such
property.
(12) Other similar items. 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) and
paragraphs (b)(3) through (7) of this
section. (See paragraph (g)(4) of this
section for special rules regarding certain reinsurance transactions.)

(c) Section 197 intangibles; exceptions. The term section 197 intangible
does not include property described in
section 197(e). The following rules and
definitions provide guidance concerning
property to which the exceptions apply:
(1) Interests in a corporation, partnership, trust, or estate. Section 197
intangibles do not include an interest in
a corporation, partnership, trust, or estate. Thus, for example, amortization
under section 197 is not available for
the cost of acquiring stock, partnership
interests, or interests in a trust or estate,
whether or not the interests are regularly
traded on an established market. (See
paragraph (g)(3) of this section for special rules applicable to property of a
partnership when a section 754 election
is in effect for the partnership.)
(2) Interests under certain financial
contracts. Section 197 intangibles do not
include an interest under an existing
futures contract, foreign currency contract, notional principal contract, interest
rate swap, or other similar financial
contract, whether or not the interest is
regularly traded on an established market. However, this exception does not
apply to an interest under a mortgage
servicing contract, credit card servicing
contract, or other contract to service
another person’s indebtedness, or an
interest under an assumption reinsurance
contract. (See paragraph (g)(4) of this
section for the treatment of assumption
reinsurance contracts. See paragraph
(c)(11) of this section and § 1.167(a)–
14(d) for the treatment of mortgage
servicing rights.)
(3) Interests in land. Section 197 intangibles do not include any interest in
land. For this purpose, an interest in
land includes a fee interest, life estate,
remainder, easement, mineral right, timber right, grazing right, riparian right,
air right, zoning variance, and any other
similar right, such as a farm allotment,
quota for farm commodities, or crop
acreage base. An interest in land does
not include an airport landing or takeoff
right, a regulated airline route, or a
franchise to provide cable television
service. The cost of acquiring a license,
permit, or other land improvement right,
such as a building construction or use
permit, is taken into account in the same
manner as the underlying improvement.
(4) Certain computer software—(i) In
general. Section 197 intangibles do not
include any interest in computer software that is (or has been) readily available to the general public on similar
terms, is subject to a nonexclusive li-

20

cense, and has not been substantially
modified for the user. Computer software will not be considered to have
been substantially modified if its cost
does not exceed the greater of 125
percent of the price at which the unmodified version of the software is
readily available to the general public or
$2,000. For the purpose of determining
whether computer software has been
substantially modified—
(A) Integrated programs acquired in a
package from a single source are treated
as a single computer program; and
(B) Any cost incurred to install the
computer software is not treated as a
cost of the software.
(ii) Separately acquired software.
Section 197 intangibles do not include
an interest in computer software that is
not acquired as part of a purchase of a
trade or business within the meaning of
paragraph (e) of this section.
(iii) Other exceptions. Neither section
197 nor section 167(f) apply in the
following cases:
(A) Any amount of the cost of an
interest in computer software that is
included, without being separately
stated, in the cost of the hardware or
other tangible property will be treated as
part of the cost of the hardware or other
tangible property.
(B) Any amount of the cost of an
interest in computer software that would
be deductible under any provision other
than section 167(f) or 197 may be
deducted and is not required to be
capitalized.
(iv) Computer software defined. For
purposes of this section, computer software is any program or routine (that is,
any sequence of machine-readable code)
that is designed to cause a computer (as
defined in section 168(i)(2)(B)(ii)) to
perform a desired function or set of
functions, and the documentation required to describe and maintain those
programs. It includes all forms and
media in which the software is contained, whether written, magnetic, or
otherwise. Computer programs of all
classes, for example, operating systems,
executive systems, monitors, compilers
and translators, assembly routines, and
utility programs as well as application
programs, are included. Computer software also includes any incidental and
ancillary rights that are necessary to
effect the acquisition of the title to, the
ownership of, or the right to use the
computer software, and that are used
only in connection with that specific
computer software. Such incidental and

ancillary rights are not included in the
definition of trademark or trade name
under paragraph (b)(10)(i) of this section. For example, a trademark or trade
name that is ancillary to the ownership
or use of a specific computer software
program in the taxpayer’s trade or business and is not acquired for the purpose
of marketing the computer software is
included in the definition of computer
software and is not included in the
definition of trademark or trade name.
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. For this purpose, a copyrighted
or proprietary data or information base
is treated as in the public domain if its
availability through the computer program does not contribute significantly to
the cost of the program. 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.
(v) Readily available to the general
public. Computer software will be
treated as readily available to the general public if the software may be
obtained on substantially the same terms
by a significant number of persons that
would reasonably be expected to use the
software. The requirements of this paragraph (c)(4)(v) can be met even though
the software is not available through a
system of retail distribution.
(5) Certain interests in films, sound
recordings, video tapes, books, or other
similar property. 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. A film,
sound recording, video tape, book, or
other similar property 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. Such incidental
and ancillary rights are not included in
the definition of trademark or trade
name under paragraph (b)(10)(i) of this
section. For purposes of this paragraph
(c)(5), computer software (as defined in

paragraph (c)(4)(iv) of this section) is
not treated as other property similar to a
film, sound recording, video tape, or
book. (See section 167 for amortization
of excluded intangible property or interests.)
(6) Certain rights to receive tangible
property or services. Section 197 intangibles do not include any right to receive tangible property or services under
a contract or from a governmental unit
if the right is not acquired as part of a
purchase of a trade or business. Any
right that is described in the preceding
sentence is not treated as a section 197
intangible even though the right is also
described in section 197(d)(1)(D) and
paragraph (b)(8) of this section (relating
to certain governmental licenses, permits, and other rights) and even though
the right fails to meet one or more of
the requirements of paragraph (c)(13) of
this section (relating to certain rights of
fixed duration or amount). (See
§ 1.167(a)–14(c)(1) and (3) for applicable rules.)
(7) Certain interests in patents or
copyrights. Section 197 intangibles do
not include any interest (including an
interest as a licensee) in a patent, patent
application, or copyright that is not
acquired as part of a purchase of a trade
or business. (See § 1.167(a)–14(c)(4)
for applicable rules.)
(8) Interests under leases of tangible
property—(i) Interest as a lessor. Section 197 intangibles do not include any
interest as a lessor under an existing
lease or sublease of tangible real or
personal property. In addition, the cost
of acquiring an interest as a lessor in
connection with the acquisition of tangible property is taken into account as
part of the cost of the tangible property.
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. (See section 167(c)(2).)
(ii) Interest as a lessee. Section 197
intangibles do not include any interest
as a lessee under an existing lease of
tangible real or personal property. For
this purpose, an airline lease of an
airport passenger or cargo gate is a lease
of tangible property. The cost of acquiring such an interest is taken into account under section 178 and § 1.162–
11(a). If an interest as a lessee under a
lease of tangible property is acquired in

21

a transaction with any other intangible
property, a portion of the total purchase
price may be allocable to the interest as
a lessee based on all of the relevant
facts and circumstances.
(9) Interests under indebtedness—(i)
In general. Section 197 intangibles do
not include any interest (whether as a
creditor or debtor) under an indebtedness in existence when the interest was
acquired. Thus, for example, the value
attributable to the assumption of an
indebtedness with a below-market interest rate is not amortizable under section
197. In addition, the premium paid for
acquiring a debt instrument with an
above-market interest rate is not amortizable under section 197. See section
171 for rules concerning the treatment
of amortizable bond premium.
(ii) Exceptions. 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. An
interest under an existing indebtedness
includes mortgage servicing rights, however, to the extent the rights are stripped
coupons under section 1286.
(10) Professional sports franchises.
Section 197 intangibles do not include
any franchise to engage in professional
baseball, basketball, football, or any
other professional sport, and any item
(even though otherwise qualifying as a
section 197 intangible) acquired in connection with such a franchise.
(11) Mortgage servicing rights. Section 197 intangibles do not include any
right described in section 197(e)(7)
(concerning rights to service indebtedness secured by residential real property
that are not acquired as part of a
purchase of a trade or business). (See
§ 1.167(a)–14(d) for applicable rules.)
(12) Certain transaction costs. Section 197 intangibles do not include any
fees for professional services and any
transaction costs incurred by parties to a
transaction in which all or any portion
of the gain or loss is not recognized
under part III of subchapter C of the
Internal Revnue Code.
(13) Rights of fixed duration or
amount. (i) Section 197 intangibles do
not include any right under a contract or
any license, permit, or other right
granted by a governmental unit if the
right—
(A) Is acquired in the ordinary course
of business and not as part of a purchase of a trade or business;

(B) Is not described in sections
197(d)(1)(A), (B), (C)(ii), (iv), or (vi),
(E), or (F); and
(C) Either—
(1) Has a fixed duration of less than
15 years; or
(2) Is fixed as to amount and the
adjusted basis thereof is properly recoverable (without regard to this section)
under a method similar to the unit-ofproductio

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Adc307d22bce9128d. Public record. Not legal advice.