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Computer software. Section 197 intangibles don’t include the following types of computer software. 1. Software that meets all the following re- quirements. a. It is, or has been, readily available for purchase by the general public. b. It is subject to a nonexclusive license. c. It hasn't been substantially modified. This requirement is considered met if the cost of all modifications isn't more than the greater of 25% of the price of the publicly available unmodified soft- ware or $2,000. 2. Software that isn't acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Computer software defined. Computer software includes all programs designed to cause a computer to perform a desired function. It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software. Rights of fixed duration or amount. Section 197 intangibles don't include any right under a contract or from a governmental agency if the right is acquired in the ordinary course of a trade or business (or in an activity engaged in for the production of income) but not as part of a purchase of a trade or business and either: • Has a fixed life of less than 15 years; or • Is of a fixed amount that, except for the rules for section 197 intangibles, would be recovered under a method similar to the unit-of-production method of cost recov- ery. However, this doesn't apply to the following in- tangibles. • Goodwill. • Going concern value. • A covenant not to compete. • A franchise, trademark, or trade name. • A customer-related information base, cus- tomer-based intangible, or similar item. Safe Harbor for Creative Property Costs If you are engaged in the trade or business of film production, you may be able to amortize the creative property costs for properties not set for production within 3 years of the first capitalized transaction. You may amortize these costs rata- bly over a 15-year period beginning on the first day of the second half of the tax year in which you properly write off the costs for financial ac- counting purposes. If, during the 15-year pe- riod, you dispose of the creative property rights, you must continue to amortize the costs over the remainder of the 15-year period. Creative property costs include costs paid or incurred to acquire and develop screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties for purposes of potential future film development, production, and exploitation. Amortize these costs using the rules of Rev- enue Procedure 2004-36. For more information, see Revenue Procedure 2004-36, 2004-24 I.R.B. 1063, available at IRS.gov/irb/2004-24_IRB#RP-2004-36. A change in the treatment of creative property costs is a change in method of accounting. Anti-Churning Rules Anti-churning rules prevent you from amortizing most section 197 intangibles if the transaction in which you acquired them didn't result in a sig- nificant change in ownership or use. These rules apply to goodwill and going concern value, and to any other section 197 intangible that isn't otherwise depreciable or amortizable. Under the anti-churning rules, you can't use 15-year amortization for the intangible if any of the following conditions apply. 1. You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993. 2. You acquired the intangible from a person who held it at any time during the period in (1) and, as part of the transaction, the user didn't change. 3. You granted the right to use the intangible to a person (or a person related to that person) who held or used it at any time during the period in (1). This applies only if the transaction in which you granted the right and the transaction in which you ac- quired the intangible are part of a series of related transactions. See Related person, later, for more information. Exceptions. The anti-churning rules don't ap- ply in the following situations. • You acquired the intangible from a dece- dent and its basis was stepped up to its FMV. • The intangible was amortizable as a sec- tion 197 intangible by the seller or trans- feror you acquired it from. This exception doesn't apply if the transaction in which you acquired the intangible and the trans- action in which the seller or transferor ac- quired it are part of a series of related transactions. • The gain-recognition exception, discussed later, applies. Related person. For purposes of the anti-churning rules, the following are related persons. • An individual and his or her brothers, sis- ters, half-brothers, half-sisters, spouse, an- cestors (parents, grandparents, etc.), and lineal descendants (children, grandchil- dren, etc.). • A corporation and an individual who owns, directly or indirectly, more than 20% of the value of the corporation's outstanding stock. • Two corporations that are members of the same controlled group as defined in sec- tion 1563(a), except that “more than 20%” is substituted for “at least 80%” in that defi- nition and the determination is made with- out regard to subsections (a)(4) and (e)(3) CAUTION ! (C) of section 1563. For an exception, see section 1.197-2(h)(6)(iv) of the regulations. • A trust fiduciary and a corporation if more than 20% of the value of the corporation's outstanding stock is owned, directly or in- directly, by or for the trust or grantor of the trust. • The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. • The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two dif- ferent trusts, if the same person is the grantor of both trusts. • The executor and beneficiary of an estate. • A tax-exempt educational or charitable or- ganization and a person who directly or in- directly controls the organization (or whose family members control it). • A corporation and a partnership if the same persons own more than 20% of the value of the outstanding stock of the cor- poration and more than 20% of the capital or profits interest in the partnership. • Two S corporations, and an S corporation and a regular corporation, if the same per- sons own more than 20% of the value of the outstanding stock of each corporation. • Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or profits interests in both partner- ships. • A partnership and a person who owns, di- rectly or indirectly, more than 20% of the capital or profits interests in the partner- ship. • Two persons who are engaged in trades or businesses under common control (as de- scribed in section 41(f)(1)). When to determine relationship. Persons are treated as related if the relationship existed at the following time. • In the case of a single transaction, immedi- ately before or immediately after the trans- action in which the intangible was ac- quired. • In the case of a series of related transac- tions (or a series of transactions that com- prise a qualified stock purchase under sec- tion 338(d)(3)), immediately before the earliest transaction or immediately after the last transaction. Ownership of stock. In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Rule 1. Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Rule 2. An individual is considered to own the stock directly or indirectly owned by or for his or her family. Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Rule 3. An individual owning (other than by applying Rule 2) any stock in a corporation is considered to own the stock directly or indi- rectly owned by or for his or her partner. Page 32 Chapter 8 Amortization