[Federal Register Volume 67, Number 105 (Friday, May 31, 2002)]
[Proposed Rules]
[Pages 38025-38039]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 02-13578]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 67, No. 105 / Friday, May 31, 2002 / Proposed
Rules
[[Page 38025]]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-103823-99]
RIN 1545-AX12
Guidance on Cost Recovery Under the Income Forecast Method
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to
deductions available to taxpayers using the income forecast method of
depreciation under section 167(g). These proposed regulations reflect
changes to the law made by the Small Business Job Protection Act of
1996 and the Taxpayer Relief Act of 1997 and affect taxpayers that
produce, own, or license films, videos, sound recordings, books,
copyrights, patents, and certain other similar properties. This
document also provides notice of a public hearing on these regulations.
DATES: Written comments must be received by August 29, 2002. Requests
to speak and outlines of topics to be discussed at the public hearing
scheduled for September 4, 2002, at 10 a.m., must be received by August
13, 2002.
ADDRESSES: Send submissions to: CC:IT&A:RU (REG-103823-99), room 5226,
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:IT&A:RU (REG-103823-99), Courier's Desk, Internal
Revenue Service, 1111 Constitution Avenue NW., Washington, DC.
Alternatively, taxpayers may submit comments directly to the IRS
Internet site at www.irs.gov/regs. A public hearing will be held in
room 2615, Internal Revenue Building, 1111 Constitution Avenue NW.,
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Bernard P.
Harvey, (202) 622-3110; concerning submissions and the hearing, and/or
to be placed on the building access list to attend the hearing, Guy R.
Traynor, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to 26 CFR part 1 to
provide regulations under section 167(g) of the Internal Revenue Code
of 1986 (Code). Section 167(g) was added to the Code by the Small
Business Job Protection Act of 1996, Public Law 104-188, 1604 (110
Stat. 1755, 1836) (Aug. 20, 1996), and significant amendments were made
to the provision by the Taxpayer Relief Act of 1997, Public Law 105-34,
1086 (111 Stat. 788, 957) (Aug. 5, 1997).
Explanation of Provisions
The income forecast method of depreciation has been a permissible
method for certain properties since the early 1960s. The income
forecast method permits taxpayers to recover the depreciable basis in
property over the anticipated income to be earned from the property.
The income forecast method is available for interests (including
interests involving limited rights in property) in motion picture
films, videotapes, sound recordings, copyrights, books, and patents.
See Rev. Rul. 60-358 (1960-2 C.B. 68); Rev. Rul. 64-273 (1964-2 C.B.
62); Rev. Rul. 79-285 (1979-2 C.B. 91); and Rev. Rul. 89-62 (1989-1
C.B. 78). The income forecast method is appropriate for these types of
property because they possess unique income earning characteristics
(for example, the income earning potential of a film may vary as a
direct result of the film's popularity) and, therefore, the economic
usefulness of these properties cannot be measured adequately by the
property's physical condition or by the passage of time. In 1996,
Congress enacted statutory income forecast rules to ensure that, for
certain properties, the allowances for depreciation appropriately match
the basis of an income forecast property with the income derived
therefrom. In 1997, Congress placed limitations on the type of property
that could be depreciated using the income forecast method.
Computation of Allowances for Depreciation
The proposed regulations provide that, under the income forecast
method, a taxpayer's allowance for depreciation for a given year for an
income forecast property generally is an amount that bears the same
relationship to the depreciable basis of the property that the
``current year income'' for that year bears to the ``forecasted total
income'' for the property. The proposed regulations provide a revised
computation for computing a taxpayer's allowance for depreciation in
years when conditions necessitate using a revised forecasted total
income that differs from the forecasted total income used in computing
depreciation allowances in previous years. Pursuant to these rules,
taxpayers may revise forecasted total income and use the revised
computation in taxable years after income forecast property is placed
in service when information becomes available that indicates that
forecasted total income (or revised forecasted total income) previously
used to compute income forecast depreciation is inaccurate. Under the
revised computation, a taxpayer's allowance for depreciation for the
current and all future years for an income forecast property is an
amount that bears the same relationship to the unrecovered depreciable
basis of the property that the current year income for that year bears
to the result obtained by subtracting from revised forecasted total
income for the property the amounts of current year income for prior
taxable years. Taxpayers are required to use the revised computation in
certain situations (discussed in this preamble under the heading of
Income From the Property).
The proposed regulations also provide several special rules for
computing allowances for depreciation under the income forecast method.
A special rule applies for certain basis redeterminations whereby an
additional ``catch up'' allowance for depreciation is allowed in the
year that basis is redetermined. Under this special rule, the
additional depreciation allowance is an amount equal to the cumulative
allowances for depreciation that would have been permitted in previous
years
[[Page 38026]]
had the basis redetermination amount been included in basis in the year
the property was placed in service. It is intended that this additional
allowance will ameliorate the potential back-loading of depreciation
deductions that may otherwise occur if the additional amount were taken
into account over the remaining income from the property and diminish
the amount of look-back interest that may otherwise accrue. This
special rule does not apply if the additional basis is treated as
separate property.
Pursuant to section 167(g)(1)(C), a taxpayer's adjusted basis in an
income forecast property is to be recovered by the end of the tenth
taxable year following the taxable year in which the income forecast
property is placed in service. The proposed regulations also provide
that generally a taxpayer may deduct the adjusted basis in income
forecast property in the year income from the property ceases
completely and permanently (unless the income cessation arises in
connection with the disposition of income forecast property). If
additional amounts are paid or incurred with respect to income forecast
property in taxable years after either of these special rules is
applied, the additional amounts may be deducted when paid or incurred
unless such amounts give rise to separate property.
Use of the income forecast method is elected on a property-by-
property basis. Once elected, the income forecast method is a method of
accounting that may not be changed without the consent of the
Commissioner. Modifications to forecasted total income to take into
account information that becomes available after the property is placed
in service in accordance with these proposed regulations is not a
change in a method of accounting requiring the Commissioner's consent.
Section 167(g) sets forth rules for the use of the income forecast
method and any similar method. Thus, any method that calculates
depreciation based on the flow of income generated by a property (or
group of properties) is a ``similar method'' subject to the
requirements of this regulation, including, e.g., the requirement that
the look-back method be applied in certain circumstances. Congress did
not identify any method that should be treated as a similar method.
Treasury and the IRS seek comments on other methods that should be
treated as coming within the scope of the term any similar method.
Commentators suggested that we specifically approve a method of
depreciation based on the application of percentages derived from
historical patterns of income for similar properties as a similar
method because to do so would simplify the computation of depreciation
deductions for large groupings of properties. This suggestion has not
been adopted because it is not clear that the historical patterns of
income used to apply the suggested approach will accurately reflect the
income from any particular income forecast property. Moreover, this
suggested approach is not predicated upon the unique income earning
characteristics of an income forecast property.
Basis Rules
The cost of producing income forecast property is capitalized and
recovered through an allowance for depreciation. The proposed
regulations follow the general principles set forth in the regulations
under sections 263, 263A, 446, and 461 for determining the basis of
income forecast property. Commentators have written to Treasury and the
IRS requesting guidance on various issues involving the timing of
inclusion in basis of direct costs of income forecast property that are
contingent upon the amount of income earned from the property (or other
similar factors) and the means by which those costs may be deducted. In
accordance with these requests, and in light of section 167(g)(1)(B),
the proposed regulations address certain basis issues that are peculiar
to the income forecast method of computing depreciation allowances.
Section 263A applies to income forecast property produced by the
taxpayer. Section 1.263A-1(c)(2)(ii) provides that an amount required
to be capitalized under section 263A may not be included in basis any
earlier than the taxable year during which the amount is incurred
within the meaning of Sec. 1.446-1(c)(1)(ii). Section 1.446-1(c)(1)(ii)
provides that under an accrual method of accounting a liability is
incurred, and generally is taken into account for Federal income tax
purposes, in the taxable year in which the ``all events test'' is
satisfied. Sections 1.446-1(c)(1)(ii) and 1.461-1(a)(2) set forth the
``all events test'' which provides that a liability is incurred in the
taxable year in which: (1) All the events have occurred that establish
the fact of liability; (2) the amount of the liability can be
determined with reasonable accuracy; and (3) economic performance has
occurred with respect to the liability. Because section 167(g)(1)(B)
provides that the adjusted basis of income forecast property
depreciated using the income forecast method includes only amounts with
respect to which the requirements of section 461(h) are satisfied,
these rules are specifically restated in the proposed regulations.
The proposed regulations reiterate that contingent amounts that are
either direct costs of the production of income forecast property or
indirect costs properly allocable to the production of income forecast
property are not added to basis until the taxable year in which the all
events test, including the economic performance requirement of section
461(h), is satisfied. Under the proposed rules, the timing of the
inclusion of certain of these costs in basis may be affected by
Sec. 1.461-1(a)(2)(iii)(A), Sec. 1.461-1(a)(2)(iii)(D) and section 404.
Thus, the proposed regulations provide that contingent basis
amounts that are either direct costs of income forecast property or
indirect costs properly allocable to income forecast property are
generally treated as basis redetermination amounts which increase the
basis of income forecast property in the year paid or incurred. As
noted above, the proposed regulations provide a special allowance
applicable to certain basis redetermination amounts.
Commentators have also suggested that Transamerica Corp. v. United
States, 999 F.2d 1362 (9th Cir. 1993), supports including contingent
amounts in the basis of income forecast property beginning in the year
the property is placed in service. In Transamerica, the Ninth Circuit
interpreted Rev. Rul. 60-358, supra, as it applied in taxable years
prior to the enactment of section 167(g), the economic performance
requirements of section 461(h), the uniform capitalization requirement
of section 263A, and other changes. The Ninth Circuit held that
contingent basis amounts may be included in the basis of income
forecast property in the year that the property is placed in service so
long as the forecasted total income used in the computation of
depreciation under the income forecast method includes an amount of
income from the property sufficient to indicate that the contingency
will be satisfied. Commentators urge the continuing application of the
Transamerica approach because this approach matches most closely the
costs of creating an income forecast property with the income earned
therefrom. Treasury and the IRS recognize that it may appear to be
reasonable to include estimated amounts in the basis of income forecast
property when the operation of the income forecast formula requires the
use of estimated amounts in the forecasts of income that are used to
[[Page 38027]]
determine the amount of income forecast depreciation, particularly
where the income forecasts indicate that the contingencies will be
resolved, and resolved relatively quickly, after the property is placed
in service. Treasury and the IRS also recognize that the historic
operation of the income forecast formula deters taxpayers from
increasing their forecast of income in order to increase the contingent
basis amounts includible in the basis of income forecast property
because the increases in forecasted total income operate to increase
the denominator of the income forecast formula and thus diminish the
amount of depreciation of the income forecast property. This deterrent
effect operates in most (but not all) situations to prevent the
cumulative amount of income forecast depreciation deductions in any
given taxable year from exceeding the total amount actually incurred in
any given taxable year, which is the primary concern with the inclusion
of contingent amounts in basis. However, because Congress specifically
provided in section 167(g)(1)(B) that the adjusted basis of income
forecast property includes only those amounts which satisfy the
requirements of section 461(h) and because all events that establish
the fact of the liability for contingent amounts have not occurred, the
proposed regulations do not follow the Transamerica approach.
Commentators have also argued that Associated Patentees, Inc. v.
Commissioner, 4 T.C. 979 (1945), supports an immediate deduction for
contingent basis amounts arising from the provision of either property
or services in the production of income forecast property that are paid
or incurred in years after the year in which income forecast property
is placed in service. The proposed regulations do not adopt this
interpretation of Associated Patentees because providing a more
favorable cost recovery rule for contingent basis amounts than for
fixed amounts would create an unwarranted incentive for characterizing
costs as contingent amounts. Contingent basis amounts arising from the
provision of either property or services in the production of income
forecast property must be capitalized into the basis of income forecast
property in accordance with Sec. 1.263A-1(e).
Salvage Value
The proposed regulations do not provide that the basis upon which
depreciation is computed under the income forecast method is reduced
for salvage value. The unique statutory scheme Congress adopted for
income forecast property requires this departure from the rules
generally applicable to property depreciated under section 167, and
from the provisions of Rev. Rul. 60-358, supra, which had governed
income forecast depreciation prior to the enactment of section 167(g).
Based on the provisions of section 167(g), Congress intended that
taxpayers be able to recover their entire basis in income forecast
property within the period beginning with the year income forecast
property is placed in service and ending with the 10th taxable year
after the year the property is placed in service and that basis be
recovered over the total income earned in connection with the property
within that same time frame.
Section 167(g)(1)(C) requires taxpayers to recover the adjusted
basis of income forecast property as of the beginning of the 10th
taxable year after the property is placed in service as an allowance
for depreciation in such year. The term adjusted basis refers to the
basis of property for purposes of determining gain or loss, which is
determined generally by adjusting the cost or other basis in property
prescribed by section 1012 by the adjustments required by section 1016.
See Sec. 1.1011-1. The use of this term in section 167(g)(1)(C)
indicates that Congress intended that the entire basis of an income
forecast property be recovered within the period beginning with the
year income forecast property is placed in service and ending with the
10th taxable year after the year the property is placed in service. The
legislative history confirms this reading of the provision, stating
that ``(a)ny costs that are not recovered by the end of the tenth
taxable year after the property was placed in service may be taken into
account as depreciation in such year.'' H.R. Conf. Rep. No. 737, 104th
Cong., 2d Sess. 299 (1996).
Consistent with this rule, the estimated income from the property
is all the income projected to be earned over the first eleven taxable
years the property is used by any taxpayer. Under section 167(g)(1)(A),
the adjusted basis of income forecast property is to be recovered
through allowances for income forecast depreciation over the ``amount
of income earned in connection with the property'' through the end of
the tenth taxable year after the year in which the income forecast
property is placed in service. The legislative history to section
167(g)(1)(A) states that ``income to be taken into account under the
income forecast method includes all estimated income generated by the
property.'' H.R. Conf. Rep. No. 737, at 297. By referring to income
generated by the property, and not to income to be earned by the
taxpayer, Congress established a regime whereby a taxpayer using the
income forecast method must include within forecasted total income
amounts that are to be earned not only by the taxpayer, but also by any
subsequent owner during the eleven year period.
Income From the Property
The income forecast formula uses the ratio of current year income
to forecasted total income from the property to determine the current
allowance for depreciation. Both current year income and forecasted
total income are to be computed in accordance with a taxpayer's method
of accounting. Pursuant to Code section 167(g)(1)(A) and (g)(5)(C),
forecasted total income is to include all anticipated income from any
source through the end of the tenth taxable year following the year in
which the income forecast property is placed in service (except, as
discussed below, in the year of disposition of income forecast
property). Thus, for example, in the case of a film, such income
includes income from foreign and domestic theatrical, television, and
other releases and syndications; income from video tape releases,
sales, rentals, and syndications; and incidental income associated with
the property such as income from the financial exploitation of
characters, designs, titles, scripts, and scores, but only to the
extent that such incidental income is earned in connection with the
ultimate use of such items by, or the ultimate sale of merchandise to,
persons who are not related to the taxpayer (within the meaning of
section 267(b)). Apportionment rules are provided for situations when
income from the exploitation of characters, designs, titles, scripts,
scores, and other incidental income may relate to more than one income
forecast property.
Under the proposed regulations, taxpayers are required at the end
of the taxable year in which income forecast property is placed in
service to make an accurate projection of all anticipated income to be
earned from the income forecast property based on the conditions known
to exist at that time. This estimate is referred to as forecasted total
income. As discussed above, forecasted total income includes not only
the income that the taxpayer forecasts it will earn by the end of the
tenth taxable year after the year in which the income forecast property
is placed in service, but also income that may be earned by other
owners of the income forecast property during that same period.
[[Page 38028]]
The proposed regulations also require taxpayers to evaluate the
accuracy of their forecasts annually. In order to perform these
evaluations of forecasted total income, taxpayers must compute revised
forecasted total income. Revised forecasted total income is the sum of
current year income for the current taxable year and all prior taxable
years, plus all income from the income forecast property that the
taxpayer reasonably believes will be includible in current year income
in taxable years after the current taxable year up to and including the
10th taxable year after the year in which the income forecast property
is placed in service. Taxpayers are required to use the revised
computation if forecasted total income in the immediately preceding
taxable year falls outside a range bounded on the low end by 90 percent
of revised forecasted total income for the current taxable year, and on
the upper end by 110 percent of revised forecasted total income for the
current taxable year. (In the situation where revised forecasted total
income was used to compute income forecast depreciation in the
immediately preceding taxable year, this comparison is made by
comparing the revised forecasted total income for the current taxable
year to revised forecasted total income for the immediately preceding
taxable year.) Taxpayers may elect to alter their computations of
income forecast depreciation (using the revised computation detailed
below) when revised forecasted total income differs from forecasted
total income.
Pursuant to Code section 167(g)(5)(B), income from the syndication
of a television series need not be included in the income forecast
computation prior to the fourth taxable year beginning after the date
the first episode of the series is placed in service, unless an
arrangement relating to future syndication exists. In such a case,
syndication income is included in the income forecast computation at
the time the arrangement relating to future syndication is made. This
special rule also applies for purposes of applying the look-back
method.
Special rules apply if income forecast property is disposed of
prior to the end of the 10th taxable year after the year the property
is placed in service. In such a case, section 167(g)(5)(E) requires
that for purposes of applying the look-back method, income from the
disposition of the property is to be taken into account. Failure to
apply a similar rule for purposes of computing income forecast
depreciation in the year of disposition may permit a depreciation
differential that would not be corrected through the operation of the
look-back method (because the differential would arise in a year for
which the period of time to which look-back interest would apply would
be zero). Accordingly, the proposed regulations require taxpayers to
take income from the disposition of income forecast property into
account in the year of disposition in computing revised forecasted
total income both for purposes of computing its income forecast
depreciation and for purposes of applying the look-back method.
Income Forecast Property
Section 167(g)(6) limits the types of property for which the income
forecast method may be utilized. The income forecast method is
available for interests (including interests involving limited rights
in property) in motion picture films, video tapes, sound recordings,
copyrights, books, and patents. In addition, section 167(g)(6)(E)
provides the authority for Treasury and the IRS to extend the income
forecast method to other types of property. The proposed regulations
extend the method to theatrical productions and authorize the
Commissioner to publish guidance designating other properties.
The proposed regulations generally require the income forecast
method to be applied on a property-by-property basis. In certain
limited circumstances, interests in multiple properties may be grouped
together and treated as a single income forecast property. The ability
to treat multiple income forecast properties as a single property for
purposes of applying the income forecast method of depreciation is
limited, however, to certain episodes of a television series or to
multiple interests in specified income forecast properties acquired for
broadcast pursuant to a single contract. The special allowance
applicable to certain basis redetermination amounts is not available to
basis redetermination amounts associated with interests in multiple
income forecast properties treated as a single income forecast property
under these rules. Commentators have requested that broad groupings of
dissimilar properties be permitted in accordance with historic
financial accounting practices. Because it is not clear that income
would be clearly reflected if broader groupings of properties were
permitted, this suggestion has not been incorporated into the proposed
regulations. Treasury and the IRS request comments on whether the
proposed permitted groupings are appropriate and whether additional
groupings should be allowed.
Under section 167(g)(5)(A)(ii), an amount incurred after income
forecast property is placed in service that is significant and that
gives rise to a significant increase in income when compared to the
previous amount of forecasted total income is treated as a separate
income forecast property and depreciated accordingly. Under the
proposed regulations, an amount that does not exceed the lesser of 5
percent of the depreciable basis of the income forecast property with
which the amount is associated or $100,000 is not considered
significant for this purpose. An amount incurred after income forecast
property is placed in service that is not significant or that does not
give rise to a significant increase in income is subject to the general
rules and is treated as a basis redetermination amount.
In addition, a cost incurred in a taxable year following the year
in which the taxpayer has recovered through depreciation the entire
adjusted basis of an income forecast property is treated as a separate
income forecast property. If it is expected to give rise to a
significant increase in income, the amount of the cost is treated as
income forecast property that is newly placed in service. Otherwise, it
is deductible in the year paid or incurred.
Look-back
In general, the look-back method applies any time property is
depreciated using the income forecast method. A taxpayer using the
income forecast method is required to pay, or is entitled to receive,
interest computed under the look-back method for any year to which the
look-back requirement applies. A taxpayer must pay look-back interest
if deductions are accelerated due to the underestimation of total
income expected to be earned with respect to the property. Conversely,
a taxpayer is entitled to receive look-back interest if deductions are
delayed as a result of overestimating total income expected to be
earned with respect to the property. The look-back method applies
separately to each income forecast property, unless properties are
aggregated pursuant to special rules contained in the proposed
regulations.
Generally, the look-back method is applied in the third and tenth
taxable years following the year in which the income forecast property
is placed in service. The look-back method also applies in the year
income from the income forecast property ceases with respect to the
taxpayer (and with respect to all persons who would be treated as a
single taxpayer with the taxpayer under rules similar to those in
section 41(f)(1)).
[[Page 38029]]
The look-back method does not apply to any income forecast property
the basis of which is $100,000 or less in the year the look-back method
would otherwise apply (redetermined without any reduction for
depreciation allowed or allowable). In addition, the look-back method
is not applicable for any year which would otherwise be a recomputation
year if a 10 percent test is satisfied. The 10 percent test is met if
forecasted total income (and, if applicable, revised forecasted total
income) for each prior year is greater than 90 percent of revised
forecasted total income for the year which would otherwise be a
recomputation year and is less than 110 percent of revised forecasted
total income for the year which would otherwise be a recomputation
year. If the look-back method is applied for the third taxable year
following the year in which income forecast property is placed in
service, a special rule applies in determining whether the 10 percent
test is satisfied in any subsequent year. Under the special rule, the
amount of the forecasted total income or the revised forecasted total
income for each taxable year up to and including the third taxable year
following the year in which income forecast property is placed in
service is deemed to be equal to the revised forecasted total income
that was used for purposes of applying the look-back method in the
third taxable year following the year in which income forecast property
is placed in service.
In order to apply the look-back method, prior year allowances for
depreciation for income forecast property are recomputed using revised
forecasted total income for the recomputation year in lieu of
forecasted total income (or, if appropriate, revised forecasted income)
from the property that was used in the computation of depreciation
under the income forecast method in the prior year. If a taxpayer sells
or otherwise disposes of income forecast property, the amount realized
upon the disposition of the property is included in determining revised
forecasted total income from the property in the year of disposition.
These recomputed depreciation allowances are then used to determine
either a hypothetical overpayment of tax or a hypothetical underpayment
of tax.
Generally, taxpayers must determine the hypothetical overpayment or
underpayment of tax arising from the change in depreciation allowances
by recomputing their tax liability. Thus, a taxpayer's tax liability
for each prior year is recomputed by substituting the recomputed
depreciation allowances for the depreciation allowances originally
claimed. The recomputed tax liability is then compared to the
taxpayer's actual liability. For purposes of this comparison, the
taxpayer must determine the actual tax liability for each prior year
based on the information available on the later of (1) The due date of
the return, including extensions, (2) the date of an amended return,
(3) the date a return is adjusted by examination, or (4) the date of
any previous application of the look-back requirement for the income
forecast property. The result of this comparison is a hypothetical
overpayment or underpayment of tax for each prior year in which
allowances for depreciation were claimed for income forecast property
subject to the look-back method.
Pass-through entities that are not closely-held pass-through
entities must use a simplified method to compute their hypothetical
overpayment or underpayment for each prior year in which allowances for
depreciation were claimed for income forecast property subject to the
look-back method. Under the simplified method, taxpayers apply a set
rate (i.e., the highest rate applicable under section 1 or 11) to the
net changes in depreciation allowances for each year. Treasury and the
IRS considered, but did not provide, an election for other taxpayers to
use the simplified method similar to the election set forth in
Sec. 1.460-6(d)(4)(ii). Treasury and the IRS request comments on
whether the use of the simplified method should be extended to
taxpayers other than those required to use the simplified method, and
if so, whether additional safeguards beyond the consistency rules for
related taxpayers, the rules precluding changes from the simplified
method without permission, and the overpayment ceiling would be
appropriate.
Regardless of the method used, the resulting hypothetical
overpayments or underpayments are then used to compute interest that is
to be charged or credited on each of these amounts. Interest is
generally computed from the due date of the return (not including
extensions) for the years in which changes in depreciation allowances
occur to the due date of the recomputation year (not including
extensions). Special rules are provided for taxpayers who do not use
the simplified method where changes in depreciation allowances affect
tax liability in years other than the year in which the changes in
depreciation allowances occur. Interest is computed using the
overpayment rate under section 6621. The amounts resulting from these
computations are netted to arrive at look-back interest due to the
taxpayer or payable to the government for the recomputation year. For
purposes of computing taxable income, look-back interest is treated as
interest on an overpayment or underpayment of tax. Under section
167(g)(5)(D), look-back interest required to be paid is treated as a
tax liability for penalty purposes.
Proposed Effective Date
The regulations are proposed to apply to property placed in service
on or after the date that final regulations are published in the
Federal Register.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 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
these regulations do not impose on small entities a collection of
information requirement, 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 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.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written or electronic comments (a
signed original and eight (8) copies, if written) that are submitted
timely (in the manner described in the ADDRESSES portion of this
preamble) to the IRS. The IRS and the Treasury Department specifically
request comments on the clarity of the proposed regulations and how
they may be made easier to understand. All comments will be available
for public inspection and copying.
A public hearing has been scheduled for September 4, 2002, at 10
a.m. in the Internal Revenue Service Auditorium, Internal Revenue
Building, 1111 Constitution Avenue NW, Washington, DC. All visitors
must present photo identification to enter the building. Because of
access restrictions, visitors will not be admitted beyond the immediate
entrance area more than 30 minutes before the hearing starts at the
Constitution Avenue entrance. For information about having your name
[[Page 38030]]
placed on the building access list to attend the hearing, see the FOR
FURTHER INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to this hearing. Persons
that wish to present oral comments at the hearing must submit timely
written comments and an outline of the topics to be discussed and the
time to be devoted to each topic (preferably a signed original and
eight (8) copies) by August 13, 2002.
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 Bernard P. Harvey,
Office of Associate Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
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 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Sections 1.167(n)-0 through 1.167(n)-7 are added to read
as follows:
Sec. 1.167(n)-0 Outline of regulation sections for section 167(g).
This section lists the major captions contained in
Sec. 1.167(n)-1 through Sec. 1.167(n)-7
Sec. 1.167(n)-1 Income forecast method.
(a) Overview.
(b) Method of accounting.
(1) In general.
(2) Election of the income forecast method.
Sec. 1.167(n)-2 Basis.
(a) Depreciable basis.
(1) In general.
(2) Timing of basis determinations and redeterminations.
(3) Separate Property.
(b) Basis redeterminations.
(c) Unrecovered depreciable basis.
(d) Example.
Sec. 1.167(n)-3 Income from the property.
(a) Current year income.
(1) In general.
(2) Special rule for advance payments.
(b) Forecasted total income.
(c) Revised forecasted total income.
(d) Special rules.
(1) Disposition of the property.
(2) Syndication income from television series.
(3) Apportionment of income in certain circumstances.
(4) Examples.
Sec. 1.167(n)-4 Computation of depreciation using the income forecast
method.
(a) Computation of depreciation allowance.
(b) Revised computation.
(1) Change in estimated income.
(2) Requirement to use the revised computation.
(c) Basis redeterminations.
(1) Calculation of depreciation allowance.
(2) Example.
(d) Special rules.
(1) Final year depreciation.
(2) Certain basis redeterminations.
(3) Disposition of property.
(4) Separate property.
(e) Examples.
Sec. 1.167(n)-5 Property for which the income forecast method may be
used.
(a) In general.
(b) Specific exclusions.
(c) Costs treated as separate property.
(1) Costs giving rise to a significant increase in income.
(2) Significant increase in income.
(3) Special rule for costs paid or incurred after the end of the
final year.
(4) Time separate property is placed in service.
(5) Examples.
(d) Aggregations treated as a single income forecast property.
(1) Multiple episodes of a television series produced in the
same taxable year.
(2) Multiple episodes of a television series produced in more
than one taxable year.
(3) Multiple interests acquired pursuant to a single contract.
(4) Videocassettes and DVDs.
Sec. 1.167(n)-6 Look-back method.
(a) Application of the look-back method.
(b) Operation of the look-back method.
(1) In general.
(2) Property-by-property application.
(c) Recalculation of depreciation allowances.
(1) Computation.
(2) Revised forecasted total income from the property.
(3) Special rule for basis redeterminations.
(d) Hypothetical overpayment or underpayment of tax.
(1) In general.
(2) Hypothetical overpayment or underpayment, actual
recomputation.
(3) Hypothetical overpayment or underpayment, simplified method.
(4) Definitions.
(e) Recomputation year.
(1) In general.
(2) Look-back method inapplicable in certain de minimis cases.
(f) De minimis basis exception.
(g) Treatment of look-back interest.
(1) In general.
(2) Additional interest due on interest only after tax liability
due.
(3) Timing of look-back interest.
(4) Statute of limitations; compounding of interest on look-back
interest.
(h) Example.
Sec. 1.167(n)-7 Effective date.
Sec. 1.167(n)-1 Income forecast method.
(a) Overview. This section and Secs. 1.167(n)-2 through 1.167(n)-7
provide rules for computing depreciation allowances under section 167
for property depreciated using the income forecast method. Because the
income forecast method is only appropriate for property with unique
income earning characteristics, only property specified in
Sec. 1.167(n)-5 may be depreciated under the income forecast method. A
taxpayer using the income forecast method generally computes
depreciation allowances each year based upon the ratio of current year
income to forecasted total income from the property as described in
Sec. 1.167(n)-4. Current year income and forecasted total income are
determined in accordance with the provisions of Sec. 1.167(n)-3. In
addition, a taxpayer must determine depreciable basis for income
forecast property in accordance with the basis rules of Sec. 1.167(n)-
2. Property depreciated under the income forecast method generally is
subject to the look-back rules of Sec. 1.167(n)-6 whereby taxpayers
must determine the amount of interest owed on any hypothetical
underpayment of tax, or due on any hypothetical overpayment of tax,
attributable to the use of estimated income in the computation of
income forecast depreciation. Under these rules, look-back computations
must be performed in specified recomputation years, which are generally
the 3rd and 10th taxable years after the taxable year that the property
is placed in service.
(b) Method of accounting--(1) In general. The computation of
depreciation under the income forecast method is elected on a property-
by-property basis, and is a method of accounting under section 446 that
may not be changed without the consent of the Commissioner. However, a
change in forecasted total income in accordance with the rules of
Sec. 1.167(n)-4 is not a change in method of accounting requiring the
Commissioner's consent.
(2) Election of the income forecast method. A taxpayer elects the
income forecast method by computing allowances for depreciation for the
eligible property in accordance with the provisions of this section and
[[Page 38031]]
Sec. Sec. 1.167(n)-2 through Sec. 1.167(n)-6. See Sec. 1.167(n)-5 for
rules regarding eligible property.
Sec. 1.167(n)-2 Basis.
(a) Depreciable basis--(1) In general. The basis upon which the
allowance for depreciation is computed with respect to income forecast
property is the basis of the income forecast property for purposes of
section 1011 without regard to the adjustments described in section
1016(a)(2) and (3).
(2) Timing of basis determinations and redeterminations. Costs paid
or incurred in or after the taxable year in which the income forecast
property is placed in service are taken into account in accordance with
a taxpayer's method of accounting in redetermining the basis of income
forecast property in the taxable year paid or incurred (i.e., when all
events have occurred that establish the fact of the liability, the
amount of the liability can be determined with reasonable accuracy, and
economic performance has occurred with respect to the liability). See
Sec. 1.446-1(c)(1)(i) and (ii), 1.461-1(a)(1) and (2), and 1.263A-1(c).
Accordingly, contingent payments may not be included in the basis of
income forecast property when the property is placed in service, but
are included in the basis of income forecast property in the taxable
year in which they are paid or incurred, even if the forecasted total
income used in the computation of income forecast depreciation
allowances is sufficient to indicate that the contingency will be
satisfied.
(3) Separate property. Certain amounts paid or incurred in taxable
years after income forecast property is placed in service are treated
as separate property for purposes of computing depreciation allowances
under the income forecast method. See Sec. 1.167(n)-5(c).
(b) Basis redeterminations. If an amount required to be capitalized
into the basis of income forecast property is paid or incurred after
the income forecast property is placed in service, and if the amount
required to be capitalized is not treated as separate property in
accordance with Sec. 1.167(n)-5(c), the basis of the income forecast
property is redetermined and the amount required to be capitalized is
the basis redetermination amount. The redetermined basis of the income
forecast property is the depreciable basis of the income forecast
property increased by the basis redetermination amount. In the year
basis is redetermined (and in subsequent taxable years), the
redetermined basis must be used to determine depreciation under the
income forecast method. An additional allowance for depreciation under
the income forecast method is allowed in the taxable year the basis of
certain income forecast property is redetermined. See Sec. 1.167(n)-
4(c).
(c) Unrecovered depreciable basis. For any taxable year, the
unrecovered depreciable basis of an income forecast property is the
depreciable basis of the property less the adjustments described in
section 1016(a)(2) and (3).
(d) Example. The provisions of Sec. 1.167(n)-2 are illustrated by
the following example:
(i) Studio contracts with Actor to star in a motion picture film
to be produced by Studio. Both Studio and Actor are calendar year
taxpayers; Studio is an accrual basis taxpayer and Actor is a cash
basis taxpayer. As compensation for Actor's services, the contract
guarantees Actor a payment of five percent of the gross income from
the film, beginning after the film has earned a total gross income
(net of distribution costs) of $100x. Studio estimates that the film
will earn a total gross income of $160x by the end of the 10th
taxable year following the taxable year that the film is placed in
service. The film is placed in service and earns $65x of gross
income in year one, $30x in year two, and $25x in year three.
Because the income from the film does not exceed $100x in either
year one or year two, Studio pays nothing under the contract to
Actor in years one and two. In year three, the cumulative income
from the film reaches $120x, which exceeds the $100x threshold by
$20x. Based on this excess, Studio calculates that it owes Actor
$1x, calculated by multiplying $20x by Actor's contractual
percentage of five percent. Studio pays $1x to Actor 20 days after
the end of year three.
(ii) Studio may not include the $1x paid to Actor in the basis
of the film in years one or two because Studio does not have a fixed
liability to pay Actor any amount under the contract in years one
and two. Furthermore, while Studio does have a fixed liability to
pay Actor $1x in year three, the requirements of section 404 are not
met in year three and Studio thus may not include the $1x in the
basis of the film in year three. In year four, when section 404 is
satisfied, Studio incurs the $1x in accordance with Sec. 1.263A-1(c)
and increases its basis in the film. The $1x is treated as a basis
redetermination amount under Sec. 1.167(n)-2(b) in year four.
Sec. 1.167(n)-3 Income from the property.
(a) Current year income--(1) In general. Current year income is the
income from an income forecast property for the current year (less the
distribution costs of the income forecast property for such year),
determined in accordance with the taxpayer's method of accounting. All
income earned in connection with the income forecast property is
included in current year income, except as provided in paragraph (d) of
this section. In the case of a film, television show, or similar
property, such income includes, but is not limited to--
(i) Income from foreign and domestic theatrical, television, and
other releases and syndications;
(ii) Income from releases, sales, rentals, and syndications of
video tape, DVD, and other media; and
(iii) Incidental income associated with the property, such as
income from the financial exploitation of characters, designs, titles,
scripts, and scores, but only to the extent that such incidental income
is earned in connection with the ultimate use of such items by, or the
ultimate sale of merchandise to, persons who are not related to the
taxpayer (within the meaning of section 267(b)).
(2) Special rule for advance payments. In the year that income
forecast property is placed in service, current year income for an
income forecast property includes income included in gross income for
any prior taxable year in connection with the property. This paragraph
applies separately to any cost treated as separate property under
Sec. 1.167(n)-5(c).
(b) Forecasted total income. Forecasted total income is the sum of
current year income for the year that income forecast property is
placed in service, plus all income from the income forecast property
that the taxpayer reasonably believes will be includible in current
year income in subsequent taxable years (as adjusted for distribution
costs) up to and including the 10th taxable year after the year in
which the income forecast property is placed in service. Forecasted
total income is based on the conditions known to exist at the end of
the taxable year for which the income forecast property is placed in
service.
(c) Revised forecasted total income. If information is discovered
in a taxable year following the year in which income forecast property
is placed in service that indicates that forecasted total income is
inaccurate, a taxpayer must compute revised forecasted total income for
the taxable year. Revised forecasted total income is based on the
conditions known to exist at the end of the taxable year for which the
revised forecast is being made. Revised forecasted total income for the
taxable year is the sum of current year income for the taxable year and
all prior taxable years, plus all income from the income forecast
property that the taxpayer reasonably believes will be includible in
current year income in taxable years after the current taxable year up
to and including the 10th taxable year after the year in which the
income forecast property is placed in service. Where a taxpayer
[[Page 38032]]
computes revised forecasted total income in accordance with this
Sec. 1.167(n)-3(c), see Sec. 1.167(n)-4(b) for the computation of the
allowance for income forecast depreciation.
(d) Special rules--(1) Disposition of the property. In computing
the depreciation allowance for an income forecast property, income from
the sale or other disposition of income forecast property is not
included in current year income. However, if the income forecast
property is disposed of prior to the end of the 10th taxable year
following the taxable year in which the property is placed in service,
income from the sale or other disposition of income forecast property
is taken into account in calculating revised forecasted total income
both for purposes of calculating the allowance for depreciation in the
year of disposition and for purposes of applying look-back. See
Sec. 1.167(n)-4(d)(3) and Sec. 1.167(n)-6(c)(2).
(2) Syndication income from television series. (i) In the case of a
television series produced for distribution on television networks,
current year income and forecasted total income (or, if applicable,
revised forecasted total income) used in the computation of the
depreciation allowance for such property under Sec. 1.167(n)-4 need not
include income from syndication of the television series before the
earlier of--
(A) The fourth taxable year beginning after the date the first
episode in the series is placed in service; or
(B) The earliest taxable year in which the taxpayer has an
arrangement relating to the syndication of the series.
(ii) For purposes of this paragraph (d)(2), an arrangement relating
to syndication of a series of television shows means any arrangement
other than the first run exhibition agreement. For example, an
arrangement for exhibition of a television series by individual
television stations is an arrangement for syndication if it results in
an exhibition of one or more episodes of the series beginning after one
or more episodes of the series have been exhibited on a television
network. A first run exhibition agreement is an agreement under which
any episode (including a pilot episode) of a television series is first
placed in service within a particular market.
(3) Apportionment of income in certain circumstances. When income
from a particular source relates to more than one income forecast
property the taxpayer must make a reasonable allocation of the income
among those properties based on all relevant factors. Situations where
allocation is necessary include income generated by a syndication
arrangement involving more than one income forecast property,
incidental income described in paragraph (a)(1)(iii) of this section
that relates to more than one motion picture, and income associated
with income forecast property when expenditures relating to the
property have given rise to separate property as defined in
Sec. 1.167(n)-5(c). For example, when a taxpayer sells or licenses
merchandise that features the likeness of a character that has appeared
in more than one film, relevant factors might include merchandise sales
figures prior to the release of the subsequent film, specific
identification of certain merchandise with one particular film, and the
taxpayer's prior experience with similar situations.
(4) Examples. The provisions of this section are illustrated by the
following examples:
Example 1. C produces a motion picture film featuring the
adventures of a fictional character. C sells merchandise using the
character's image, enters into licensing agreements with unrelated
parties for the use of the image, and uses the image to promote a
ride at an amusement park that is wholly owned by C. Pursuant to
paragraph (a)(1) of this section, income from the sales of
merchandise by C to consumers and income from the licensing
agreements are included in current year income. No portion of the
admission fees for the amusement park is included in current year
income because the amusement part is wholly owned by C.
Example 2. Assume the same facts as in Example 1. C forecasts
that the cumulative amount of current year income it will earn (net
of distribution costs) from the year it places the motion picture
film in service through the end of the 7th taxable year thereafter
to be $345x. C also forecasts that the motion picture film will earn
current year income of $155x from the beginning of the 8th taxable
year through the end of the 10th taxable year after the year the
income forecast property is placed in service. C anticipates the
sale of the motion picture film at the end of the 7th taxable year
after the year the property is placed in service and in fact sells
the motion picture film for $200x on the last day of the 7th taxable
year after the year the property is placed in service. C's
computations of forecasted total income must reflect the fact that C
forecasts that $500x will be earned by the motion picture film
through the end of the 10th taxable year after the year the property
is placed in service ($345x from the year the film is placed in
service through the end of the 7th taxable year after the taxable
year that the property was placed in service, plus $155x C forecasts
from the beginning of the 8th taxable year through the end of the
10th taxable year after the year the property is placed in service).
Even though C only expects to earn $345x prior to the sale of the
film, C may not use $345x as forecasted total income in computing
its depreciation allowance under the income forecast method.
Similarly, C may not use the combination of the amounts it expects
to earn prior to the sale ($345x) plus the anticipated sales
proceeds ($200x) or $545x as forecasted total income, except when
computing its depreciation allowance for the 7th taxable year after
the year in which the income forecast property was placed in service
and for purposes of computing look-back interest.
Sec. 1.167(n)-4 Computation of depreciation using the income forecast
method.
(a) Computation of depreciation allowance. Generally, the
depreciation allowance for an income forecast property for a given
taxable year is computed by multiplying the depreciable or redetermined
basis of the property (as defined in Sec. 1.167(n)-2) by a fraction,
the numerator of which is current year income (as defined in
Sec. 1.167(n)-3(a)) and the denominator of which is forecasted total
income (as defined in Sec. 1.167(n)-3(b)).
(b) Revised computation--(1) Change in estimated income. The
depreciation allowance for an income forecast property for any taxable
year following the year in which income forecast property is placed in
service may be computed using the computation provided in this
paragraph (b)(1) if revised forecasted total income differs from
forecasted total income. Thus, for example, a taxpayer using the income
forecast method for a motion picture may revise upward the forecast of
total income from the motion picture (to arrive at revised forecasted
total income) in a taxable year wherein the taxpayer discovers that the
motion picture is more popular than originally expected, and may
thereafter use the revised computation to compute the allowance for
income forecast depreciation for the motion picture. Under the revised
computation, the unrecovered depreciable basis of the income forecast
property (as defined in Sec. 1.167(n)-2(c)) is multiplied by a
fraction, the numerator of which is current year income and the
denominator of which is obtained by subtracting from revised forecasted
total income the amounts of current year income from prior taxable
years.
(2) Requirement to use the revised computation. The revised
computation described in paragraph (b)(1) of this section must be used
in any taxable year following the year in which income forecast
property is placed in service if forecasted total income (as defined in
Sec. 1.167(n)-3(b)) (or, if applicable, revised forecasted total income
(as defined in Sec. 1.167(n)-3(c)) in the immediately preceding taxable
year is either--
[[Page 38033]]
(i) Less than 90 percent of revised forecasted total income for the
taxable year; or
(ii) Greater than 110 percent of revised forecasted total income
for the taxable year.
(c) Basis redeterminations--(1) Calculation of depreciation
allowance. An additional depreciation allowance is available under this
paragraph in the taxable year that basis is redetermined under
Sec. 1.167(n)-2(b) when that taxable year is subsequent to the taxable
year in which income forecast property is placed in service, but prior
to the 10th taxable year following the taxable year in which the
property is placed in service. The additional depreciation allowance is
that portion of the basis redetermination amount that would have been
recovered through depreciation allowances in prior taxable years if the
basis redetermination amount had been included in depreciable basis in
the taxable year that the property was placed in service. This
Sec. 1.167(n)-4(c) does not apply to property treated as a single
income forecast property pursuant to Sec. 1.167(n)-5(d)(1) through (4).
(2) Example. The provisions of paragraph (c)(1) of this section are
illustrated by the following example:
Example. D, an accrual basis movie producer, enters into a
contract with E, an author, under which D will make a film based on
E's book. E performs no services for D, but merely permits D to use
the book as a basis for D's film. D pays E a fixed dollar amount
upon entry into the agreement and promises to pay E a contingent
payment of five percent of D's income from the film, beginning after
the film has earned $100,000 (net of distribution costs). D
estimates that forecasted total income from the film will be
$200,000. The film earns $65,000 of current year income in year one,
$30,000 in year two, and $25,000 in year three. D takes allowances
for depreciation in year one ($65,000 divided by $200,000,
multiplied by the basis of the film) and year two ($30,000 divided
by $200,000, multiplied by the basis of the film). In year three,
D's liability to E becomes fixed and D pays E $1,000. The $1,000
incurred by D is a basis redetermination amount that increases the
basis of the film for purposes of computing D's depreciation
allowance for the film for year three. In addition to the year three
allowance based on current year income ($25,000 divided by $200,000
multiplied by the basis of the film, which includes for year three
the $1,000 basis redetermination amount), D is entitled to an
additional allowance for depreciation for year three under paragraph
(c)(1). This additional allowance is $475, the sum of the allowance
of $325 that would have been allowed in year one ($65,000 divided by
$200,000, multiplied by the $1,000 payment to E) and the allowance
of $150 that would have been allowed in year two ($30,000 divided by
$200,000, multiplied by $1,000) if the $1,000 had been included in
basis in the year that the film was placed in service.
(d) Special rules--(1) Final year depreciation. Except as provided
in paragraphs (d)(2) and (3) of this section, a taxpayer may deduct as
a depreciation allowance the remaining depreciable basis of income
forecast property depreciated under the income forecast method in the
earlier of--
(i) The year in which the taxpayer reasonably believes, based on
the conditions known to exist at the end of the taxable year, that no
income from the income forecast property will be included in current
year income in any subsequent taxable year up to and including the 10th
taxable year following the taxable year the income forecast property is
placed in service; or
(ii) The 10th taxable year following the taxable year the income
forecast property is placed in service.
(2) Certain basis redeterminations. A taxpayer may deduct as a
depreciation allowance the amount of any basis redetermination that
occurs in a taxable year in which the taxpayer reasonably believes,
based on the conditions known to exist at the end of the taxable year,
that no income from the income forecast property will be included in
current year income in any subsequent taxable year. In addition, a
taxpayer may deduct as a depreciation allowance the amount of any basis
redetermination that occurs in a taxable year following a taxable year
in which a deduction is allowable under paragraph (d)(1) of this
section.
(3) Disposition of property. Paragraph (d)(1) of this section does
not apply to income forecast property that is sold or otherwise
disposed of before the end of the 10th taxable year following the
taxable year that the property is placed in service. In the case of
such a disposition, the allowance for depreciation in the year of
disposition is calculated by multiplying the depreciable basis (or, if
applicable, the redetermined basis) of the property by a fraction, the
numerator of which is current year income and the denominator of which
is the sum of the amount realized on the disposition of the property
plus all amounts included in current year income in the year of
disposition and in taxable years prior to the year of disposition.
(4) Separate property. The deductions provided in paragraphs (d)(1)
and (2) of this section apply separately to property that is treated as
separate property under Sec. 1.167(n)-5(c).
(e) Examples. The provisions of this section are illustrated by the
following examples:
Example 1. F places in service income forecast property with a
depreciable basis of $100x, and estimates that forecasted total
income from the property will be $200x. In taxable year one, current
year income is $80x. The depreciation allowance for year one is
$40x, computed by multiplying the depreciable basis of the property
of $100x by the fraction obtained by dividing current year income of
$80x by forecasted total income of $200x.
Example 2. Assume the same facts as in Example 1. In year two,
F's current year income is $40x. In addition, F computes revised
forecasted total income to be $176x. F is required to compute its
depreciation allowance for this property using the revised
computation of paragraph (b)(1) of this section because forecasted
total income in year one of $200x is greater than 110 percent of
revised forecasted total income in year two (110 percent of $176x =
$193.6x). The depreciation allowance for taxable year two computed
under the revised computation is $25x, computed by multiplying the
unrecovered depreciable basis of $60x by the fraction obtained by
dividing current year income of $40x by $96x (revised forecasted
total income of $176x less current year income from prior taxable
years of $80x).
Example 3. Assume the same facts as in Example 2. Because F used
the revised computation in year two, the revised computation applies
in year three. In year three, F's current year income is $32x. The
depreciation allowance for year three computed under the revised
computation is $20x, computed by multiplying the unrecovered
depreciable basis of $60x by the fraction obtained by dividing
current year income of $32x by $96x (revised forecasted total income
of $176x less current year income from taxable years prior to the
change in estimate taxable year of $80x).
Sec. 1.167(n)-5 Property for which the income forecast method may be
used.
(a) In general. The depreciation allowance under Sec. 1.167(n)-4
may be computed under the income forecast method only with respect to
eligible property. Eligible property is limited to an interest
(including interests involving limited rights in property) in the
following property--
(1) Property described in section 168(f)(3) and (4);
(2) Copyrights;
(3) Books;
(4) Patents;
(5) Theatrical productions; and
(6) Other property as designated in published guidance by the
Commissioner.
(b) Specific exclusions. The income forecast method does not apply
to any amortizable section 197 intangible (as defined in section 197(c)
and Sec. 1.197-2(d)).
(c) Costs treated as separate property--(1) Costs giving rise to a
significant increase in income--(i) In general. For purposes of
Sec. 1.167(n)-1 through Sec. 1.167(n)-6, any amount paid or incurred
after the income forecast
[[Page 38034]]
property is placed in service must be treated as a separate property if
the cost is significant and gives rise to an increase in income that is
significant and that was not included in either forecasted total income
or revised forecasted total income in a prior taxable year.
(ii) Exception for de minimis amounts. For purposes of this
paragraph, a cost that is less than the lesser of 5 percent of the
depreciable basis (as of the date the amount is paid or incurred) of
the income forecast property to which the amount relates or $100,000 is
not significant. Such a cost is therefore not treated as separate
property but is instead treated as a basis redetermination amount in
accordance with Sec. 1.167(n)-2(b).
(2) Significant increase in income. For purposes of this paragraph,
whether an increase in income is significant is determined by comparing
the amount that would be considered revised forecasted total income
from the amounts treated as separate property to the most recent
estimate of forecasted total income or revised forecasted total income
used in calculating an allowance for depreciation with respect to the
income forecast property.
(3) Special rule for costs paid or incurred after the end of the
final year. For purposes of Sec. 1.167(n)-1 through Sec. 1.167(n)-6,
any amount paid or incurred with respect to an income forecast property
in a taxable year following the year in which the taxpayer claims a
depreciation allowance in accordance with the final year depreciation
rules of Sec. 1.167(n)-4(d)(1) is treated as a basis redetermination
amount under Sec. 1.167(n)-2(b) provided the amount is not expected to
give rise to a significant increase in current year income in any
taxable year.
(4) Time separate property is placed in service. Separate property
is treated as placed in service in the year the amount giving rise to
the property is paid or incurred.
(5) Examples. The provisions of this paragraph (c) are illustrated
in the following examples:
Example 1. G releases a film in 2001 and begins to recover the
depreciable basis in the film using the income forecast method in
the year 2001. In 2003, the film is re-edited and restored, and
director's commentary is added in order to prepare the film for
release on DVD. The total cost of preparing the film for the DVD
release exceeds both 5 percent of the depreciable basis of the film
and $100,000. G did not anticipate the income from the DVD market,
and did not include any DVD release income in the income projections
for the film in prior years. If G anticipates that the additional
DVD release income will be significant in relation to the forecasted
total income used in calculating an allowance for depreciation for
2002 (the previous taxable year), the additional amount gives rise
to separate property and must be recovered over the forecasted total
income from the DVD. If not, G must treat the additional amounts as
additions to basis under Sec. 1.167(n)-2(b).
Example 2. G releases a film in 2001 and recovers the
depreciable basis in the film using the income forecast method in
the years 2001 through 2011. In 2018, the film is re-edited and
restored, and director's commentary is added in order to prepare the
film for release on a newly discovered technology. If G anticipates
that the additional new technology release income will be
significant in relation to the revised forecasted total income used
in calculating an allowance for depreciation for 2011 (the last
taxable year for which an allowance was claimed), the cost of
preparing the release gives rise to separate property and must be
recovered over the forecasted total income from the new technology
release. If not, G may deduct the cost in 2018, the year paid or
incurred.
(d) Aggregations treated as a single income forecast property.
Taxpayers must apply the income forecast method on a property-by-
property basis, unless one of the aggregation rules provided in
paragraphs (d)(1) through (4) of this section applies. If a taxpayer
applies one of the aggregation rules provided in paragraphs (d)(1)
through (4) of this section, costs incurred in taxable years after the
initial income forecast property is placed in service are treated as
basis redeterminations under Sec. 1.167(n)-2; however, the additional
allowance for depreciation provided in Sec. 1.167(n)-4(c)(1) does not
apply. The application of the provisions of paragraphs (d)(1) through
(d)(4) is a method of accounting that may not be changed without the
consent of the Commissioner. Permissible aggregations are limited to
the following:
(1) Multiple episodes of a television series produced in the same
taxable year. The producer of a television series may treat multiple
episodes of a single television series produced in the same taxable
year as a single unit of property for purposes of the income forecast
method.
(2) Multiple episodes of a television series produced in more than
one taxable year. The producer of a television series may treat
multiple episodes of a single television series that are produced as a
single season of episodes and placed in service over a period not in
excess of twelve consecutive calendar months as a single unit of
property for purposes of the income forecast method notwithstanding
that the twelve-month period may span more than one taxable year.
(3) Multiple interests acquired pursuant to a single contract.
Multiple interests in specifically identified income forecast
properties acquired for broadcast pursuant to a single contract may be
treated as a single unit of property for purposes of the income
forecast method.
(4) Videocassettes and DVDs. The purchaser or licensee of
videocassettes and DVDs for rental to the public may treat multiple
copies of the same title purchased or licensed in the same taxable year
as a single unit of property for purposes of the income forecast
method.
Sec. 1.167(n)-6 Look-back method.
(a) Application of the look-back method. If a taxpayer claims a
depreciation deduction under the income forecast method for any
eligible income forecast property, such taxpayer is required to pay (or
is entitled to receive) interest computed as described in this
paragraph for any year to which the look-back method applies (a
recomputation year). The look-back method generally must be applied
when income forecast property is disposed of or ceases to generate
income. Further, the look-back method generally applies in the 3rd and
10th taxable years following the year in which income forecast property
is placed in service. Under the look-back method, taxpayers must pay
interest on deductions accelerated by the underestimation of either
forecasted total income or revised forecasted total income from income
forecast property. Conversely, taxpayers are entitled to receive
interest on deductions delayed by the overestimation of either
forecasted total income or revised forecasted total income from income
forecast property. If either forecasted total income or revised
forecasted total income are overestimated or underestimated, interest
may arise from basis redeterminations. The computation of adjusted tax
liability as part of the look-back method is hypothetical; application
of the look-back method does not require a taxpayer to adjust tax
liability as reported on the taxpayer's tax returns, on an amended
return, or as adjusted on examination for prior years.
(b) Operation of the look-back method--(1) In general. Under the
look-back method, a taxpayer must perform a series of computations to
determine look-back interest that the taxpayer is either required to
pay or entitled to receive. As specified in paragraph (c) of this
section, a taxpayer must first recompute depreciation allowances using
revised forecasted total income rather than forecasted total income
from
[[Page 38035]]
income forecast property for the recomputation year (as defined in
paragraph (e) of this section) and each prior year. These recomputed
depreciation amounts are then used to determine a hypothetical tax
liability that would have arisen had the taxpayer used revised
forecasted total income rather than forecasted total income in
determining depreciation allowances. The hypothetical tax liability is
compared to the taxpayer's prior tax liability and interest is
calculated in accordance with paragraph (d) of this section on the
resulting hypothetical overpayments or underpayments of tax for each
year. Reporting requirements and special rules for the resulting
amounts of interest are specified in paragraph (g) of this section.
(2) Property-by-property application. Except as provided in this
section, the look-back method applies to each property for which the
income forecast method is used. Aggregations properly treated as a
single income forecast property pursuant to Sec. 1.167(n)-5(d) are
treated as a single property for purposes of applying the look-back
method.
(c) Recalculation of depreciation allowances--(1) Computation.
Under the look-back method, a taxpayer must compute the depreciation
allowances for each income forecast property subject to the look-back
method that would have been allowable under Sec. 1.167(n)-1 through
Sec. 1.167(n)-5 for prior taxable years if the computation of the
amounts so allowable had been made using revised forecasted total
income as calculated at the end of the recomputation year.
(2) Revised forecasted total income from the property--(i) In
general. Except as provided in this paragraph (c)(2), revised
forecasted total income is determined in accordance with Sec. 1.167(n)-
3(c).
(ii) Syndication income from television series. Income excluded
from forecasted total income (or, if appropriate revised forecasted
total income) in any taxable year prior pursuant to Sec. 1.167(n)-
3(d)(2) is excluded from revised forecasted total income for purposes
of this section for that year.
(iii) Disposition of income forecast property. For purposes of this
section, income from the disposition of property must be taken into
account in determining the amount of revised forecasted total income.
Thus, when income forecast property is disposed of prior to the end of
the 10th taxable year following the taxable year the property is placed
in service, revised forecasted total income from the property for the
year of disposition is deemed to be the sum of the amount realized on
the disposition of the property plus all amounts included in current
year income in the year of disposition and in taxable years prior to
the year of disposition.
(3) Special rule for basis redeterminations. For purposes of the
look-back calculation, any amount that is not treated as a separate
property under Sec. 1.167(n)-5(c) that is paid or incurred with respect
to income forecast property after the property is placed in service is
taken into account by discounting (using the Federal mid-term rate
determined under section 1274(d) as of the time the cost is paid or
incurred) the amount to its value as of the date the property is placed
in service. The taxpayer may elect for the recomputation year with
respect to any income forecast property to have the preceding sentence
not apply to the property by taking the amount into account in the year
that the amount was paid or incurred in the same manner as it was taken
into account under Sec. 1.167(n)-2.
(d) Hypothetical overpayment or underpayment of tax--(1) In
general--(i) Years for which a hypothetical overpayment or underpayment
must be computed. After recalculating depreciation allowances in
accordance with paragraph (c) of this section, a taxpayer must
calculate a hypothetical overpayment or underpayment of tax for each
prior taxable year for which income tax liability is affected by the
change in depreciation allowances. A redetermination of income tax
liability is required for every tax year for which the income tax
liability would have been affected by a change in the allowance for
income forecast depreciation in any year. For example, if the change in
depreciation allowance results in a net operating loss carryforward
that affects income tax liability in a subsequent taxable year, income
tax liability must be recomputed for such subsequent year.
(ii) Methods of determining a hypothetical overpayment or
underpayment. Generally, the calculation of the hypothetical
overpayment or underpayment of tax must be made under the method
described in paragraph (d)(2) of this section. Certain taxpayers are
required to use the simplified method contained in paragraph (d)(3) of
this section.
(iii) Cumulative determination of hypothetical income tax
liability. The redetermination of income tax liability in any prior
taxable year for which income tax liability is affected by the change
in depreciation allowances must take into account all previous
applications of the look-back calculation. Thus, for example, in
computing the amount of a hypothetical overpayment or underpayment of
tax for a prior taxable year for which income tax liability is affected
by the change in depreciation allowances, the hypothetical income tax
liability is compared to the hypothetical income tax liability for that
year determined as of the previous application of the look-back method.
(2) Hypothetical overpayment or underpayment, actual
recomputation--(i) Computation of change in income tax liability. The
hypothetical overpayment or underpayment is calculated first by
redetermining the tax liability for each prior taxable year (either as
originally reported, or as subsequently adjusted on examination or by
amended return) using depreciation allowances calculated in paragraph
(c) of this section for each prior taxable year in which depreciation
allowances were determined under the income forecast method for the
income forecast property (affected year). These recomputed depreciation
allowances are then substituted for the depreciation allowances allowed
(or allowable) for each affected year (whether originally reported, or
as subsequently adjusted on examination or by amended return) and a
revised taxable income is computed. A hypothetical income tax liability
is then computed for each affected year using revised taxable income
for that year. The hypothetical income tax liability for any affected
year must be computed by taking into account all applicable additions
to tax, credits, and net operating loss carrybacks and carryforwards.
The tax, if any, imposed under section 55 (relating to alternative
minimum tax) must be taken into account. Hypothetical income tax
liability for each affected year is then compared to the tax liability
determined as of the latest of the following dates--
(A) The original due date of the return (including extensions);
(B) The date of a subsequently amended or adjusted return; or
(C) The date of the previous application of the look-back method,
in which case the hypothetical income tax liability for the affected
year used in the most recent previous application of the look-back
method (previous hypothetical tax liability) is used.
(ii) Determination of interest. Once the hypothetical overpayment
or underpayment for each year is computed, the adjusted overpayment
rate under section 460(b)(7), compounded daily, is applied to the
overpayment or underpayment determined under paragraph (d)(2)(i) of
[[Page 38036]]
this section for the period beginning with the due date of the return
(determined without regard to extensions) for the year in which either
an overpayment or underpayment arises, and ending on the earlier of the
due date of the return (determined without regard to extensions) for
the redetermination year, or the first date by which both the income
tax return for the filing year is filed and the tax for that year has
been paid in full. The amounts of interest on overpayments are then
netted against interest on underpayments to arrive at look-back
interest that must be paid by the taxpayer or that the taxpayer is
entitled to receive.
(iii) Changes in the amount of a loss or credit carryback or
carryforward. If a recomputation of income forecast depreciation
results in an increase or decrease to a net operating loss carryback
(but not a carryforward), the interest a taxpayer is entitled to
receive or required to pay must be computed on the decrease or increase
in tax attributable to the change to the carryback only from the due
date (not including extensions) of the return for the prior taxable
year that generated the carryback and not from the due date of the
return for the prior taxable year in which the carryback was absorbed.
In the case of a change in the amount of a carryforward as a result of
applying the look-back method, interest is computed from the due date
of the return for the years in which the carryforward was absorbed.
(iv) Changes in the amount of income tax liability that generated a
subsequent refund. If the hypothetical income tax liability for any
affected year is less than the amount of the affected year tax
liability (as reported on the taxpayer's original return, as
subsequently adjusted on examination, as adjusted by amended return, or
as redetermined by the last previous application of the look-back
method), and any portion of the affected year tax liability was
refunded as a result of a loss or credit carryback arising in a year
subsequent to the affected year, the look-back method applies as
follows to properly reflect the time period of the use of the tax
overpayment. To the extent the amount of refund because of the
carryback exceeds the hypothetical income tax liability for the
affected year, the taxpayer is entitled to receive interest only until
the due date (not including extensions) of the return for the year in
which the carryback arose.
(v) Example. The provisions of this paragraph (d)(2) are
illustrated by the following example:
Example. Upon the cessation of income from an income forecast
property in 2003, the taxpayer computes a hypothetical income tax
liability for 2001 under the look-back method. This computation
results in a hypothetical income tax liability ($1,200x) that is
less than the actual income tax liability the taxpayer originally
reported ($1,500x). In addition, the taxpayer had already received a
refund of some or all of the actual 2001 income tax liability by
carrying back a net operating loss (NOL) that arose in 2002. The
time period over which interest would be computed on the
hypothetical overpayment of $300x for 2001 would depend on the
amount of the refund generated by the carryback, as illustrated by
the following three alternative situations:
(i) If the amount refunded because of the NOL is $1,500x,
interest is credited to the taxpayer on the entire hypothetical
overpayment of $300x from the due date of the 2001 return, when the
hypothetical overpayment occurred, until the due date of the 2002
return, when the taxpayer received a refund for the entire amount of
the 2001 tax, including the hypothetical overpayment.
(ii) If the amount refunded because of the NOL is $1,000x,
interest is credited to the taxpayer on the entire amount of the
hypothetical overpayment of $300x from the due date of the 2001
return, when the hypothetical overpayment occurred, until the due
date of the 2003 return. In this situation interest is credited
until the due date of the return for the recomputation year, rather
than the due date of the return for the year in which the carryback
arose, because the amount refunded was less than the hypothetical
income tax liability of $1,200x. Therefore, no portion of the
hypothetical overpayment is treated as having been refunded to the
taxpayer before the recomputation year.
(iii) If the amount refunded because of the NOL is $1,300x,
interest is credited to the taxpayer on $100x ($1,300x-$1,200x) from
the due date of the 2001 return until the due date of the 2002
return because only this portion of the total hypothetical
overpayment is treated as having been refunded to the taxpayer
before the recomputation year. However, the taxpayer did not receive
a refund for the remaining $200x of the overpayment at that time
and, therefore, is credited with interest on $200x through the due
date of the tax return for 2003, the recomputation year.
(3) Hypothetical overpayment or underpayment, simplified method--
(i) Introduction. This paragraph provides a simplified method for
calculating look-back interest. A pass-through entity that is not a
closely held pass-through entity is required to apply the simplified
method at the entity level with respect to income forecast property and
the owners of the entity do not calculate look-back interest for the
property. Under the simplified method, a taxpayer calculates the
hypothetical underpayments or overpayments of tax for a prior year
based on an assumed marginal tax rate.
(ii) Operation of the simplified method. Under the simplified
method, depreciation allowances for income forecast property are first
recomputed in accordance with the procedures contained in paragraph (c)
of this section. These recomputed depreciation allowances are then
compared with depreciation allowances allowed (or allowable) for each
prior taxable year (whether originally reported, as subsequently
adjusted on examination or by amended return, or as recomputed in the
most recent previous application of the look-back method) to arrive at
changes in depreciation allowances for the income forecast property.
When multiple properties are subject to the look-back method in any
given affected year, the changes in depreciation allowances
attributable to each income forecast property determined in accordance
with paragraph (c) of this section for each such year are cumulated or
netted against one another to arrive at a net change in income forecast
depreciation for purposes of computing the hypothetical overpayment or
underpayment attributable to the year. The hypothetical underpayment or
overpayment of tax for each affected year is then determined by
multiplying the applicable regular tax rate (as defined in paragraph
(d)(3)(iv) of this section) by the increase or decrease in depreciation
allowances.
(iii) Determination of interest. Interest is credited to the
taxpayer on the net overpayment and is charged to the taxpayer on the
net underpayment for each affected year by applying the adjusted
overpayment rate under section 460(b)(7), compounded daily, to the
overpayment or underpayment determined under paragraph (d)(3)(ii) of
this section for the period beginning with the due date of the return
(determined without regard to extensions) for the affected year, and
ending on the earlier of the due date of the return (determined without
regard to extensions) for the recomputation year, or the first date by
which both the income tax return for the recomputation year is filed
and the tax for that year has been paid in full. The resulting amounts
of interest are then netted to arrive at look-back interest that must
be paid by the taxpayer or that the taxpayer is entitled to receive.
(iv) Applicable tax rate. For purposes of determining hypothetical
underpayments or overpayments of tax under the simplified method, the
applicable regular rate is generally the highest rate of tax in effect
for corporations under section 11. However, the applicable regular tax
rate is the
[[Page 38037]]
highest rate of tax imposed on individuals under section 1 if, at all
times during all affected years, more than 50 percent of the interests
in the entity were held by individuals directly or through 1 or more
pass-through entities. The highest rate of tax imposed on individuals
is determined without regard to any additional tax imposed for the
purpose of phasing out multiple tax brackets or exemptions.
(4) Definitions--(i) Pass-through entity. For purposes of this
section, a pass-through entity is either a partnership, an S
corporation, an estate or a trust.
(ii) Closely-held pass-through entity. A closely-held pass-through
entity is a pass-through entity that, at any time during any year for
which allowances for depreciation are recomputed, 50 percent or more
(by value) of the beneficial interests in that entity are held
(directly or indirectly) by or for 5 or fewer persons. For this
purpose, the term person has the same meaning as in section 7701(a)(1),
except that a pass-through entity is not treated as a person. In
addition, the constructive ownership rules of section 1563(e) apply by
substituting the term beneficial interest for the term stock and by
substituting the term pass-through entity for the term corporation used
in that section, as appropriate, for purposes of determining whether a
beneficial interest in a pass-through entity is indirectly owned by any
person.
(e) Recomputation year--(1) In general. Except as provided in this
paragraph (e), the term recomputation year means, with respect to any
income forecast property--
(i) The earlier of--
(A) The year the income from the income forecast property ceases
with respect to the taxpayer (and with respect to any person who would
be treated as a single taxpayer with the taxpayer under rules similar
to those in section 41(f)(1)); or
(B) The 3rd taxable year beginning after the taxable year in which
the income forecast property was placed in service; and
(ii) The earlier of--
(A) The year the income from the income forecast property ceases
with respect to the taxpayer (and with respect to any person who would
be treated as a single taxpayer with the taxpayer under rules similar
to those in section 41(f)(1)); or
(B) The 10th taxable year following the taxable year the income
forecast property is placed in service.
(2) Look-back method inapplicable in certain de minimis cases--(i)
De minimis difference between actual and forecasted income. A taxable
year described in paragraph (e)(1) of this section is not a
recomputation year if forecasted total income (as defined in
Sec. 1.167(n)-3(b)) or, where applicable, revised forecasted total
income (as defined in Sec. 1.167(n)-3(c)), for each preceding taxable
years is--
(A) Greater than 90 percent of revised forecasted total income for
the taxable year that would otherwise be a recomputation year; and
(B) Less than 110 percent of revised forecasted total income for
the taxable year that would otherwise be a recomputation year.
(ii) Application of the de minimis rule where the look-back method
was previously applied. For purposes of applying paragraph (e)(2)(i) of
this section in any taxable year after a taxable year in which the
look-back method has previously been applied, revised forecasted total
income for the year the look-back method was applied, forecasted total
income for the year the income forecast property was placed in service,
and revised forecasted total income for all taxable years preceding the
taxable year in which the look-back method was previously applied are
deemed to be equal to the amount of revised forecasted total income
that was used for purposes of applying the look-back method in the most
recent taxable year for which the look-back method was applied.
(f) De minimis basis exception. The look-back method does not apply
to any income forecast property with an adjusted basis, determined in
accordance with section 1011 but without regard to the adjustments
described in section 1016(a)(2) and (3), as of the close of any year
that would otherwise be a recomputation year of $100,000 or less.
(g) Treatment of look-back interest--(1) In general. The amount of
interest a taxpayer is required to pay is treated as an income tax
under Subtitle A of the Internal Revenue Code, but only for purposes of
Subtitle F of the Internal Revenue Code (other than sections 6654 and
6655), which addresses tax procedure and administration. Thus, a
taxpayer that fails to report look-back interest when due is subject to
any penalties under Subtitle F of the Internal Revenue Code applicable
to a failure to report and pay a tax liability. However, look-back
interest to be paid is treated as interest arising from an underpayment
of tax under Subtitle A of the Internal Revenue Code, even though it is
treated as an income tax liability for penalty purposes. Thus, look-
back interest required to be paid by an individual, or by a pass-
through entity on behalf of an individual owner (or beneficiary) under
the simplified method, is personal interest and, therefore, is not
deductible in accordance with Sec. 1.163-9T(b)(2). Interest received
under the look-back method is treated as taxable interest income for
all purposes, and is not treated as a reduction in tax liability. The
determination of whether interest computed under the look-back method
is treated as income tax under Subtitle A of the Internal Revenue Code
is determined on a net basis for each recomputation year. Thus, if a
taxpayer computes both hypothetical overpayments of tax and
hypothetical underpayments of tax for years prior to any given
recomputation year, the taxpayer has an increase in tax only if the
total interest computed on underpayments for all prior taxable years
for which income tax liability is affected by the application of the
look-back method exceeds the total interest computed on overpayments
for such years, taking into account all income forecast property for
which the look-back method is required. Interest determined at the
entity level under the simplified method is allocated among the owners
(or beneficiaries) for reporting purposes in the same manner that
interest income and interest expense are allocated to owners (or
beneficiaries) and subject to the allocation rules applicable to such
entities.
(2) Additional interest due on interest only after tax liability
due. For each recomputation year, taxpayers are required to file a Form
8866, ``Interest Computation Under the Look-back Method for Property
Depreciated Under the Income Forecast Method,'' at the time the return
for that recomputation year is filed to report the interest a taxpayer
is required to pay or entitled to receive under the look-back method.
Even if the taxpayer has received an extension to file its income tax
return for the recomputation year, look-back interest is computed with
respect to the hypothetical increase (or decrease) in the tax liability
determined under the look-back method only until the initial due date
of that return (without regard to the extension). Interest is charged,
unless the taxpayer otherwise has a refund that fully offsets the
amount of interest due, (or credited) with respect to the amount of
look-back interest due (or to be refunded) under the look-back method
from the initial due date of the return through the date the return is
filed. No interest is charged (or credited) after the due date of the
return with respect to the amount of the
[[Page 38038]]
hypothetical increases (or decreases) in tax liability determined under
the look-back method.
(3) Timing of look-back interest. For purposes of determining
taxable income under Subtitle A of the Internal Revenue Code, any
amount refunded to the taxpayer as a result of the application of the
look-back method is includible in gross income in accordance with the
taxpayer's method of accounting for interest income. Any amount
required to be paid is taken into account as interest expense arising
from an underpayment of income tax in the tax year it is properly taken
into account under the taxpayer's method of accounting for interest
expense.
(4) Statute of limitations; compounding of interest on look-back
interest. For guidance on the statute of limitations applicable to the
assessment and collection of look-back interest owed by a taxpayer, see
sections 6501 and 6502. A taxpayer's claim for credit or refund of
look-back interest previously paid by or collected from a taxpayer is a
claim for credit or refund of an overpayment of tax and is subject to
the statute of limitations provided in section 6511. A taxpayer's claim
for look-back interest (or interest payable on look-back interest) that
is not attributable to an amount previously paid or collected from a
taxpayer is a general claim against the federal government. For
guidance on the statute of limitations that applies to general claims
against the federal government, see 28 U.S.C. 2401 and 2501. For
guidance applicable to the compounding of interest when the look-back
interest is not paid, see sections 6601 to 6622.
(h) Example. The provisions of this section are illustrated by the
following example:
Example. (i) H, a calendar year corporation, creates a motion
picture at a cost of $60x. H completes the motion picture in 2001
and begins exhibition of the film that same year. Assume that $60x
is greater than $100,000. In 2001, H anticipates that it will earn
$200x from the motion picture (net of distribution costs). H
therefore uses this amount as Forecasted Total Income when computing
depreciation allowances for the motion picture.
(ii) H earns current year income of $80x in 2001, $60x in 2002,
and $40x in 2003. During the period from 2001 to 2004, one of the
actors who appeared in H's film became more popular, and this
increase in the actor's popularity increased the demand for H's
film. In 2004, therefore, H revised its forecast of income from the
film upward to $240x. H earns $20x in 2004 from the motion picture
and $10x in 2005.
(iii) Based on these facts, H's allowances for depreciation for
the motion picture for 2001 would be $24x, computed by multiplying
the depreciable basis of the motion picture of $60x by current year
income of $80x divided by forecasted total income of $200x under
Sec. 1.167(n)-4(a). Similarly, H's allowances for depreciation for
the motion picture for 2002 would be $18x, computed by multiplying
the depreciable basis of the motion picture of $60x by current year
income of $60x divided by forecasted total income of $200x, and H's
allowances for depreciation for the motion picture for 2003 would be
$12x, computed by multiplying the depreciable basis of the motion
picture of $60x by current year income of $40x divided by forecasted
total income of $200x.
(iv) In 2004, H determines revised forecasted total income of
$240x in accordance with Sec. 1.167(n)-3(c). Because revised
forecasted total income in 2004 of $240x is greater than 110 percent
of forecasted total income used in computing the allowance for
depreciation in the immediately preceding year (110 percent of $200x
equals $220x), H is required under Sec. 1.167(n)-4(b)(2) to compute
the allowance for depreciation in 2004 and thereafter using the
revised computation. H first computes its unrecovered depreciable
basis in the motion picture under Sec. 1.167(n)-2(c) of $6x by
subtracting from the depreciable basis of $60x the depreciation
allowances for 2001, 2002, and 2003 of $24x, $18x, and $12x. H then
multiplies the unrecovered depreciable basis of $6x by the current
year income for 2004 of $20x divided by $60x (revised forecasted
total income $240x less current year income for all years prior to
2004 ($80x + $60x + $40x or $180x), resulting in a depreciation
allowance for 2004 of $2x.
(v) In 2005, H is required to use the revised computation
because H used it in 2004. Thus, H multiplies the unrecovered
depreciable basis of $6x times current year income for 2005 of $10x
divided by $60x (revised forecasted total income as computed in
2004), resulting in a depreciation allowance for 2005 of $1x.
(vi) Thus, H's allowances for depreciation may be summarized as
follows:
----------------------------------------------------------------------------------------------------------------
Revised
Current Forecasted forecasted Depreciable Unrecovered Depreciation
Year year total total basis depreciable allowance
income income income basis
----------------------------------------------------------------------------------------------------------------
2001................................. 80x 200x .......... 60x ........... 24x
2002................................. 60x 200x .......... 60x ........... 18x
2003................................. 40x 200x .......... 60x ........... 12x
2004................................. 20x .......... 240x ........... 6x 2x
2005................................. 10x .......... 240x ........... 6x 1x
----------------------------------------------------------------------------------------------------------------
(vii) Under paragraph (e)(1)(i)(B) of this section, 2004 is a
recomputation year (because 2004 is the third taxable year after the
year in which the motion picture was placed in service) unless a de
minimis rule applies. The de minimis rule in paragraph (e)(2) of
this section does not apply in 2004 because forecasted total income
of $200x used in the computation of income forecast depreciation in
2001, 2002 and 2003 is not greater than 90 percent of year 2004
revised forecasted total income of $240x (90 percent of $240x =
$216x). Thus, H must apply the look-back method for 2004.
(viii) If H sells the motion picture in 2006 for $25x prior to
earning any current year income from the motion picture, H would not
be entitled to any allowance for depreciation in 2006. (The special
rule of Sec. 1.167(n)-3(d)(1) precludes H from including income from
the sale of the motion picture in current year income, H has no
other current year income, and Sec. 1.167(n)-4(d)(3) precludes the
use of the final year depreciation rule of Sec. 1.167(n)-4(d)(1).)
Under paragraph (e)(1)(ii)(A) of this section, 2006 is a
recomputation year (because in 2006 the income from the property to
H ceases) unless a de minimis rule applies.
(ix) To determine whether the de minimis rule applies, H is
required to determine revised forecasted total income for 2006.
Under paragraph (c)(2) of this section, revised forecasted total
income for 2006 is deemed to be the sum of current year income for
the years 2001-2006 of $210x ($80x + $60x + $40x + $20x + $10x +
$0x) plus the amount realized from the sale of the motion picture of
$25x or $235x. Revised forecasted total income for 2005 is $240x,
and pursuant to paragraph (e)(2)(ii) of this section, revised
forecasted total income for the years 2001-2004 is deemed (for
purposes of determining whether 2006 is a recomputation year) to be
the amount of revised forecasted total income used in the 2004
application of the look-back method of $240x. Because $240x is
greater than $212x (90 percent of $235x) and less than $259x (110
percent of $235x), the de minimis rule applies and H is not required
to apply the look-back method in 2006.
Sec. 1.167(n)-7 Effective date.
The regulations under Sec. 1.167(n)-1 through Sec. 1.167(n)-6 are
applicable for property placed in service on or after
[[Page 38039]]
the date that final regulations are published in the Federal Register.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-13578 Filed 5-30-02; 8:45 am]
BILLING CODE 4830-01-P