Simple English definitions for legal terms
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An antichurning rule is a law that prevents taxpayers from receiving certain tax benefits, such as accelerated depreciation and amortization schedules, if they acquire property without making a significant change in its ownership or use. This rule is meant to discourage the practice of churning, which is when a stockbroker excessively trades a customer's account to earn more commissions instead of acting in the customer's best interest. Churning is illegal under securities laws, but it can be difficult to prove as fraud because there is no specific communication between the broker and the customer about a particular sale of securities.
The antichurning rule is a tax provision that denies certain tax benefits, such as accelerated depreciation and amortization schedules, to taxpayers who acquire property in a transaction that does not result in a significant change in the property's ownership or use.
In securities, churning refers to a stockbroker's excessive trading of a customer's account to earn more commissions rather than to further the customer's interests. This is considered an abuse of a customer's confidence for personal gain by frequent and numerous transactions, disproportionate to the size and nature of the customer's account.
Under securities laws, churning is illegal and a violation of the Exchange Act. However, because the fraud is the activity as a whole and there is no communication between the broker and the customer about a specific sale of securities, there is not normally a right of action for fraud based on churning.
An example of the antichurning rule would be a taxpayer who acquires a property and claims accelerated depreciation or amortization benefits without making any significant changes to the property's ownership or use. This would be considered an abuse of the tax system and would not be allowed under the antichurning rule.
Another example would be a stockbroker who excessively trades a customer's account to earn more commissions, without regard for the customer's best interests. This would be considered churning and is illegal under securities laws.
These examples illustrate how the antichurning rule and churning are designed to prevent abuses of the tax and securities systems, respectively, and protect taxpayers and investors from fraudulent practices.