Legal Definitions - antichurning rule

The antichurning rule is a tax provision designed to prevent taxpayers from gaining new or enhanced tax benefits, particularly those related to deducting the cost of assets over time (such as accelerated depreciation or amortization), when property is transferred in a way that does not genuinely change who ultimately owns or uses it.

Essentially, this rule stops individuals or related entities from artificially "churning" assets—meaning transferring them among themselves—solely to restart or accelerate tax deductions that would otherwise be unavailable or significantly reduced. It ensures that tax advantages are granted for true economic changes in ownership, not just internal reorganizations or transfers between closely related parties.

• Example 1: Family Business Asset Transfer

  Imagine a father who owns a commercial building through his sole proprietorship. He has been depreciating the building for many years, and its remaining depreciable value is low. To potentially gain new tax benefits, he sells the building at market value to a new limited liability company (LLC) formed by his daughter, where he also holds a significant controlling interest. The daughter's LLC then attempts to claim a fresh round of accelerated depreciation on the building.

  The antichurning rule would likely apply here. Despite the formal sale, the transaction did not result in a significant change in the ultimate economic ownership or use of the property, as it remained within the immediate family and under the father's effective control. Therefore, the daughter's LLC would be denied the ability to claim new accelerated depreciation benefits.

• Example 2: Partnership Restructuring

  Consider a long-standing business partnership that owns a valuable patent, which has been amortized for several years. The partners decide to dissolve the existing partnership and immediately form a new partnership with almost identical partners and ownership percentages. The new partnership then tries to claim new amortization deductions for the same patent, treating it as a newly acquired asset.

  The antichurning rule would prevent the new partnership from restarting the amortization schedule. Even though a "new" legal entity was created, the underlying ownership and use of the patent remained substantially the same among the same individuals. Since there was no significant change in ownership, the tax benefit of new amortization would be denied.

• Example 3: Corporate Group Asset Sale

  A large corporation, "Holding Co.," owns two subsidiaries: "Manufacturing Inc." and "Logistics Corp." Manufacturing Inc. owns a fleet of delivery trucks that it has been depreciating for several years. To optimize its internal tax strategy, Manufacturing Inc. sells the entire fleet of trucks to Logistics Corp. at fair market value. Logistics Corp. then attempts to claim new accelerated depreciation on these "newly acquired" trucks.

  Because Manufacturing Inc. and Logistics Corp. are both subsidiaries of Holding Co., the sale between them does not represent a significant change in the ultimate economic ownership or use of the trucks from the perspective of the controlling corporate group. The antichurning rule would deny Logistics Corp. the ability to claim new accelerated depreciation, as the assets essentially moved within the same corporate family without a true change in control or independent ownership.