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Rule 4. For purposes of applying Rule 1, 2, or 3, treat stock constructively owned by a per- son under Rule 1 as actually owned by that per- son. Don't treat stock constructively owned by an individual under Rule 2 or 3 as owned by the individual for reapplying Rule 2 or 3 to make an- other person the constructive owner of the stock. Gain-recognition exception. This exception to the anti-churning rules applies if the person you acquired the intangible from (the transferor) meets both of the following requirements. • That person wouldn't be related to you (as described under Related person, earlier) if the 20% test for ownership of stock and partnership interests were replaced by a 50% test. • That person chose to recognize gain on the disposition of the intangible and pay in- come tax on the gain at the highest tax rate. See chapter 2 in Pub. 544 for infor- mation on making this choice. If this exception applies, the anti-churning rules apply only to the amount of your adjusted basis in the intangible that is more than the gain recognized by the transferor. Notification. If the person you acquired the intangible from chooses to recognize gain un- der the rules for this exception, that person must notify you in writing by the due date of the return on which the choice is made. Anti-abuse rule. You can't amortize any sec- tion 197 intangible acquired in a transaction for which the principal purpose was either of the following. • To avoid the requirement that the intangi- ble be acquired after August 10, 1993. • To avoid any of the anti-churning rules. More information. For more information about the anti-churning rules, including additional rules for partnerships, see Regulations section 1.197-2(h). Incorrect Amount of Amortization Deducted If you later discover that you deducted an incor- rect amount for amortization for a section 197 intangible in any year, you may be able to make a correction for that year by filing an amended return. See Amended Return next. If you aren't allowed to make the correction on an amended return, you can change your accounting method to claim the correct amortization. See Changing Your Accounting Method, later. Amended Return If you deducted an incorrect amount for amorti- zation, you can file an amended return to cor- rect the following. • A mathematical error made in any year. • A posting error made in any year. • An amortization deduction for a section 197 intangible for which you haven't adop- ted a method of accounting. When to file. If an amended return is allowed, you must file it by the later of the following dates. • 3 years from the date you filed your original return for the year in which you didn't de- duct the correct amount. (A return filed early is considered filed on the due date.) • 2 years from the time you paid your tax for that year. Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. File Form 3115 to request a change to a permissible method of accounting for amortization. The following are examples of a change in method of accounting for amortization. • A change in the amortization method, pe- riod of recovery, or convention of an amor- tizable asset. • A change in the accounting for amortizable assets from a single asset account to a multiple asset account (pooling), or vice versa. • A change in the accounting for amortizable assets from one type of multiple asset ac- count to a different type of multiple asset account. Changes in amortization that aren't a change in method of accounting include the fol- lowing. • A change in figuring amortization in the tax year in which your use of the asset changes. • An adjustment in the useful life of an amor- tizable asset. • Generally, the making of a late amortiza- tion election or the revocation of a timely valid amortization election. • Any change in the placed-in-service date of an amortizable asset. See Regulations section 1.446-1(e)(2)(ii)(a) for more information and examples. Automatic approval. In some instances, you may be able to get automatic approval from the IRS to change your method of accounting for amortization. For a list of automatic accounting method changes, see the Instructions for Form 3115. Also, see the Instructions for Form 3115 for more information on getting approval, auto- matic approval procedures, and a list of excep- tions to the automatic approval process. Disposition of Section 197 Intangibles A section 197 intangible is treated as deprecia- ble property used in your trade or business. If you held the intangible for more than 1 year, any gain on its disposition, up to the amount of allowable amortization, is ordinary income (sec- tion 1245 gain). If multiple section 197 intangi- bles are disposed of in a single transaction or a series of related transactions, treat all of the section 197 intangibles as if they were a single asset for purposes of determining the amount of gain that is ordinary income. Any remaining gain, or any loss, is a section 1231 gain or loss. If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss. For more information on ordinary or capital gain or loss on business property, see chapter 3 in Pub. 544. Nondeductible loss. You can't deduct any loss on the disposition or worthlessness of a section 197 intangible that you acquired in the same transaction (or series of related transac- tions) as other section 197 intangibles you still have. Instead, increase the adjusted basis of each remaining amortizable section 197 intangi- ble by a proportionate part of the nondeductible loss. Figure the increase by multiplying the non- deductible loss on the disposition of the intangi- ble by the following fraction. • The numerator is the adjusted basis of each remaining intangible on the date of the disposition. • The denominator is the total adjusted bases of all remaining amortizable section 197 intangibles on the date of the disposi- tion. Covenant not to compete. A covenant not to compete, or similar arrangement, isn't consid- ered disposed of or worthless before you dis- pose of your entire interest in the trade or busi- ness for which you entered into the covenant. Nonrecognition transfers. If you acquire a section 197 intangible in a nonrecognition trans- fer, you are treated as the transferor with re- spect to the part of your adjusted basis in the in- tangible that isn't more than the transferor's adjusted basis. You amortize this part of the ad- justed basis over the intangible's remaining am- ortization period in the hands of the transferor. Nonrecognition transfers include transfers to a corporation, partnership contributions and dis- tributions, like-kind exchanges, and involuntary conversions. In a like-kind exchange or involuntary con- version of a section 197 intangible, you must continue to amortize the part of your adjusted basis in the acquired intangible that isn't more than your adjusted basis in the exchanged or converted intangible over the remaining amorti- zation period of the exchanged or converted in- tangible. Amortize over a new 15-year period the part of your adjusted basis in the acquired intangible that is more than your adjusted basis in the exchanged or converted intangible. Example. You own a section 197 intangible you have amortized for 4 full years. It has a re- maining unamortized basis of $30,000. You ex- change the asset plus $10,000 for a like-kind section 197 intangible. The nonrecognition pro- visions of like-kind exchanges apply. You amor- tize $30,000 of the $40,000 adjusted basis of the acquired intangible over the 11 years re- maining in the original 15-year amortization pe- riod for the transferred asset. You amortize the other $10,000 of adjusted basis over a new 15-year period. For more information, see Reg- ulations section 1.197-2(g). Reforestation Costs You can elect to deduct a limited amount of re- forestation costs paid or incurred during the tax Chapter 8 Amortization Page 33