[Federal Register Volume 78, Number 182 (Thursday, September 19, 2013)]
[Proposed Rules]
[Pages 57547-57567]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-21753]
[[Page 57547]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-110732-13]
RIN 1545-BL52
Guidance Regarding Dispositions of Tangible Depreciable Property
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking, notice of public hearing, and
partial withdrawal of previously proposed regulations.
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SUMMARY: This document contains proposed regulations regarding
dispositions of property subject to depreciation under section 168 of
the Internal Revenue Code (Code) (Modified Accelerated Cost Recovery
System (MACRS) property). The proposed regulations also amend the
general asset account regulations under Sec. 1.168(i)-1 and the
accounting for MACRS property regulations under Sec. 1.168(i)-7. The
proposed regulations will affect all taxpayers that dispose of MACRS
property. This document also provides notice of a public hearing on
these proposed regulations and partially withdraws the proposed
regulations published in the Federal Register on December 27, 2011 (76
FR 81128).
DATES: Written and/or electronic comments must be received by November
18, 2013. Requests to speak and outlines of topics to be discussed at
the public hearing scheduled for December 19, 2013, at 10 a.m. must be
received by November 18, 2013.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-110732-13), room
5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR
(REG-110732-13), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC 20224, or sent electronically,
via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-
110732-13). The public hearing will be held in the IRS Auditorium,
Internal Revenue Building, 1111 Constitution Avenue NW., Washington,
DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Kathleen Reed and Patrick Clinton, Office of Associate Chief Counsel
(Income Tax and Accounting) (202) 622-4930; and concerning submission
of comments, the hearing, and/or to be placed on the building access
list to attend the hearing, Oluwafunmilayo (Funmi) Taylor, (202) 622-
7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
On December 27, 2011, the IRS and the Treasury Department published
in the Federal Register (76 FR 81060) temporary regulations (TD 9564)
regarding the accounting for, and dispositions of, property subject to
depreciation under section 168 (MACRS property). The temporary
regulations also amended the general asset account regulations under
Sec. 1.168(i)-1. On the same date, the IRS published in the Federal
Register (76 FR 81128) a notice of proposed rulemaking (REG-168745-03)
cross-referencing the temporary regulations (2011 proposed
regulations). The IRS and the Treasury Department received numerous
written comments responding to the notice of proposed rulemaking and
held a public hearing on May 9, 2012.
The temporary regulations generally apply to taxable years
beginning on or after January 1, 2012. In response to the comments
received and the statements made at the public hearing, the IRS and the
Treasury Department released Notice 2012-73, 2012-51 IRB 713, on
November 20, 2012, announcing that, to help taxpayers transition to the
final regulations, the IRS and the Treasury Department will change the
applicability date of the temporary regulations to taxable years
beginning on or after January 1, 2014, while permitting taxpayers to
choose to apply the temporary regulations to taxable years beginning on
or after January 1, 2012, and before the applicability date of the
final regulations. Notice 2012-73 also alerts taxpayers that the IRS
and the Treasury Department intend to publish final regulations in 2013
and expect the final regulations to apply to taxable years beginning on
or after January 1, 2014, but that the final regulations would permit
taxpayers to apply the provisions of the final regulations to taxable
years beginning on or after January 1, 2012. On December 17, 2012, the
IRS and the Treasury Department published in the Federal Register (77
FR 74583) a technical amendment to TD 9564, which amended the
applicability date of the temporary regulations to taxable years
beginning on or after January 1, 2014, while permitting taxpayers to
choose to apply the temporary regulations to taxable years beginning on
or after January 1, 2012, and before the applicability date of the
final regulations.
Notice 2012-73 also alerts taxpayers that the IRS and the Treasury
Department intend to revise the disposition rules in the temporary
regulations. After considering the comment letters and the statements
made at the public hearing, the IRS and the Treasury Department decided
to withdraw the 2011 proposed regulations under Sec. Sec. 1.168(i)-1
and 1.168(i)-8 and to propose new regulations. This document contains
the new proposed regulations under Sec. Sec. 1.168(i)-1 and 1.168(i)-8
as well as new proposed regulations under Sec. 1.168(i)-7. The
temporary regulations under Sec. Sec. 1.168(i)-1T and 1.168(i)-8T are
not revised and taxpayers continue to have the option of applying those
temporary regulations to taxable years beginning on or after January 1,
2012, and before the applicability date of the final regulations.
Summary of Comments and Explanation of Provisions
I. Overview
These proposed regulations under Sec. Sec. 1.168(i)-1 and
1.168(i)-8 include many of the provisions contained in the 2011
proposed regulations and the temporary regulations under Sec. Sec.
1.168(i)-1T and 1.168(i)-8T. However, these proposed regulations
provide significant changes to the rules relating to the determination
of the asset disposed of and a qualifying disposition of an asset in a
general asset account, and the proposed regulations under Sec. Sec.
1.168(i)-1, 1.168(i)-7, and 1.168(i)-8 provide new rules for partial
dispositions of assets. The IRS and the Treasury Department intend to
publish final regulations under Sec. Sec. 1.168(i)-1, 1.168(i)-7, and
1.168(i)-8 later this year. Accordingly, these proposed regulations
generally are proposed to apply to taxable years beginning on or after
January 1, 2014.
II. Disposition Rules for MACRS Property
The IRS and the Treasury Department received several comments on
the disposition rules under Sec. Sec. 1.168(i)-1T and 1.168(i)-8T.
Most of the comments related to dispositions of structural components
of a building, dispositions of assets in a general asset account, and
determination of the unadjusted depreciable basis of a disposed asset
in a multiple asset account or a general asset account.
[[Page 57548]]
A. Determination of Asset Disposed of and Partial Dispositions
1. The Temporary Regulations
The temporary regulations under Sec. 1.168(i)-8T provide rules for
determining gain or loss upon the disposition of MACRS property that
are generally consistent with the disposition rules under Sec. 1.168-6
of the proposed regulations on the Accelerated Cost Recovery System of
former section 168 (ACRS) (which have been generally applied to MACRS
property). However, if an abandoned asset is subject to nonrecourse
indebtedness, the temporary regulations clarify that the asset is
treated in the same manner as an asset disposed of by sale.
Section 1.168-2(l)(1) of the proposed ACRS regulations provides
that a disposition does not include the retirement of a structural
component of a building and, consequently, Sec. 1.168-6(b) of the
proposed ACRS regulations provides that no loss is recognized upon the
retirement of a structural component of a building. The temporary
regulations expand the definition of disposition for MACRS property to
include the retirement of a structural component of a building and,
accordingly, the temporary regulations allow the recognition of a loss
upon such a retirement.
The temporary regulations under Sec. 1.168(i)-1T provide rules for
establishing general asset accounts, for computing depreciation for
general asset accounts, and for determining gain or loss upon the
disposition of assets in general asset accounts. Section 1.168(i)-
1T(e)(2) provides that, in general, no loss is recognized upon the
disposition of an asset from a general asset account. However, Sec.
1.168-1T(e)(3)(iii) provides that a taxpayer may elect to recognize
gain or loss upon the disposition of an asset in a general asset
account if there is a qualifying disposition. The temporary regulations
define the term ``disposition'' to include the retirement of a
structural component of a building and define the term ``qualifying
disposition'' to allow the recognition of gain or loss upon most
dispositions of assets in general asset accounts. Thus, a taxpayer has
the option of recognizing a loss on most dispositions of assets in
general asset accounts under the temporary regulations.
The temporary regulations under Sec. Sec. 1.168(i)-1T and
1.168(i)-8T also provide rules for determining the disposed asset.
Those sections of the temporary regulations provide that the facts and
circumstances of each disposition are considered in determining the
appropriate disposed asset. In general, the asset for disposition
purposes cannot be larger than the unit of property as determined under
Sec. 1.263(a)-3(e)(2), (e)(3), and (e)(5) or as otherwise provided in
published guidance in the Federal Register or in the Internal Revenue
Bulletin. However, under Sec. Sec. 1.168(i)-1T and 1.168(i)-8T, each
building is the asset for disposition purposes, unless more than one
building is treated as the asset under Sec. 1.1250-1(a)(2)(ii). If the
building includes two or more condominium or cooperative units, then
each condominium or cooperative unit (instead of the building) is the
asset for disposition purposes. Consistent with including a retirement
of a structural component of a building as a disposition, the temporary
regulations provide that each structural component of a building,
condominium unit, or cooperative unit is the asset for disposition
purposes. Further, if a taxpayer properly includes an item in one of
the asset classes 00.11 through 00.4 of Rev. Proc. 87-56 (1987-2 CB
674), (see 26 CFR 601.601(d)(2)(ii)(b)) or classifies an item in one of
the categories under section 168(e)(3) (other than a category that
includes buildings or structural components; for example, retail motor
fuels outlet and qualified leasehold improvement property), each item
is the asset provided it is not larger than the unit of property as
determined under Sec. 1.263(a)-3(e)(3) or (e)(5). Consistent with
section 168(i)(6), the temporary regulations also provide that if the
taxpayer places in service an improvement or addition to an asset after
the taxpayer placed the asset in service, the improvement or addition
is a separate asset for depreciation purposes. The temporary
regulations also provide that a taxpayer generally may use any
reasonable, consistent method to treat each of an asset's components as
the asset for disposition purposes.
2. Comments on the Temporary Regulations
Several commenters stated that requiring taxpayers to treat the
structural components of a building as assets separate from the
underlying building increases administrative burdens for taxpayers
because of the necessity to track the components. Further, while the
temporary regulations permit taxpayers to define the asset for
disposition purposes at the smallest component level, effectively
allowing taxpayers the ability to recognize a loss on the partial
retirement of a larger item, some commenters indicated that such an
approach is unduly complicated and will pose significant administrative
burdens for taxpayers. Other commenters suggested that the ability to
use any reasonable, consistent method to treat each of an asset's
components as the asset for disposition purposes be expanded to assets
classified in asset classes 00.11 through 00.4 of Rev. Proc. 87-56,
which accounts for the property that a taxpayer typically uses in its
business (for example, office furniture, computers, cars, corporate
jets, and land improvements (other than a building and its structural
components)).
Several commenters suggested that the use of general asset accounts
be the default rule to eliminate traps for taxpayers. Commenters stated
that requiring taxpayers to make a general asset account election when
structural components are placed in service to forgo the loss on
dispositions of structural components occurring years later was a trap
for taxpayers. For example, because a taxpayer that did not elect
general asset account treatment cannot forgo a mandatory loss on a
disposition of a structural component, the taxpayer would be required
to capitalize the replacement of the structural component under Sec.
1.263(a)-3(k)(1)(i) even if the replacement of the structural component
does not constitute the replacement of a major component, a significant
portion of a major component, or a substantial structural part of the
building unit of property under Sec. Sec. 1.263(a)-3(k)(1)(vi) and
1.263(a)-3(k)(6)(ii). Further, because some structural components are
defined in Sec. 1.48-1(e)(2) at a diminutive level (for example, one
window in a building), commenters stated that absent including all
structural components in a general asset account, taxpayers run the
risk of failing to identify every disposition in a given taxable year.
The IRS and the Treasury Department do not think that the use of
general asset accounts should be the default rule. However, the IRS and
the Treasury Department agree that taxpayers that do not elect general
asset account treatment should have the same flexibility to forgo a
loss upon the disposition of a structural component as taxpayers that
elect general asset account treatment. As discussed in this preamble,
these proposed regulations make significant modifications to the
disposition rules to allow this flexibility.
3. Structural Components
These proposed regulations change the rule in the temporary
regulations under Sec. Sec. 1.168(i)-1T and 1.168(i)-8T that each
structural component of a building, condominium, or cooperative is the
asset for tax disposition purposes.
[[Page 57549]]
The proposed regulations provide that a building (including its
structural components), a condominium (including its structural
components), or a cooperative (including its structural components) is
the asset for disposition purposes. This rule allows taxpayers to forgo
a loss upon the disposition of a structural component of a building
without making a general asset account election.
4. Partial Dispositions
A. Assets Not Included in General Asset Accounts
The proposed regulations under Sec. 1.168(i)-8 also provide that
the disposition rules apply to a partial disposition of an asset (for
example, the disposition of a roof (or a portion of the roof)). This
rule allows taxpayers to claim a loss upon the disposition of a
structural component (or a portion thereof) of a building or upon the
disposition of a component (or a portion thereof) of any other asset
without identifying the component as an asset before the disposition
event. The partial disposition rule also minimizes circumstances in
which an original part and any subsequent replacements of the same part
are required to be capitalized and depreciated simultaneously. These
proposed regulations provide examples demonstrating the application of
the partial disposition rule.
In many cases, the partial disposition rule is elective (``partial
disposition election''). However, consistent with the operation of
sections 165, 168(i)(7), 1031, and 1033, and because sales of a portion
of an asset are common, the partial disposition rule is required to be
applied to a disposition of a portion of an asset as a result of a
casualty event described in section 165, to a disposition of a portion
of an asset for which gain (determined without regard to section 1245
or 1250) is not recognized in whole or in part under section 1031 or
1033, to a transfer of a portion of an asset in a step-in-the-shoes
transaction described in section 168(i)(7)(B), or to a sale of a
portion of an asset. Consequently, a disposition includes a disposition
of a portion of an asset under these circumstances, even if the
taxpayer does not make the partial disposition election for that
disposed portion. For other transactions, a disposition includes a
disposition of a portion of an asset only if the taxpayer makes the
partial disposition election for that disposed portion.
A taxpayer may make the partial disposition election for the
disposition of a portion of any type of MACRS property, including an
asset that is properly included in one of the asset classes 00.11
through 00.4 of Rev. Proc. 87-56. However, consistent with section
168(i)(6), a taxpayer making the partial disposition election for the
disposition of a portion of an asset that is properly included in one
of the asset classes 00.11 through 00.4 of Rev. Proc. 87-56 must
classify the replacement portion of the asset under the same asset
class as the disposed portion of the asset.
The partial disposition election is made on the taxpayer's timely
filed original Federal tax return, including extensions, for the
taxable year in which the portion of the asset is disposed of by the
taxpayer. This election may not be made or revoked by the filing of an
application for a change in method of accounting. A taxpayer may revoke
a partial disposition election by filing a request for a letter ruling
and obtaining the consent of the Commissioner of Internal Revenue to
revoke this election. The Commissioner may grant a request to revoke
this election if the taxpayer acted reasonably and in good faith, and
the revocation will not prejudice the interests of the Government. In
deciding whether to grant such a request, the Commissioner anticipates
applying standards similar to the standards under 26 CFR 301.9100-3 for
granting extensions of time for making regulatory elections. If a
taxpayer chooses to apply these proposed regulations to its taxable
year beginning in 2012 or 2013, these proposed regulations also provide
rules for making the partial disposition election for the portion of an
asset disposed of by the taxpayer during those taxable years.
These proposed regulations also provide a special partial
disposition rule to address commenters' concerns about the effect of an
IRS disallowance of a taxpayer's characterization of the replacement of
a portion of an asset as a repair. When the IRS disallows a taxpayer's
repair deduction for the amount paid or incurred for the replacement of
a portion of an asset and capitalizes such amount under Sec. 1.263(a)-
2 or Sec. 1.263(a)-3, the taxpayer may make the partial disposition
election for the disposition of the portion of the asset to which the
IRS's adjustment pertains by filing an application for change in
accounting method, provided the asset of which the disposed portion was
a part is owned by the taxpayer at the beginning of the year of change
(as defined for purposes of section 446(e)).
B. Assets Included in General Asset Accounts
Similarly, the proposed regulations under Sec. 1.168(i)-1 also
provide that the disposition rules apply to a partial disposition of an
asset included in a general asset account. Consequently, a disposition
includes a disposition of a portion of an asset as a result of a
casualty event described in section 165, a disposition of a portion of
an asset for which gain (determined without regard to section 1245 or
1250) is not recognized in whole or in part under section 1031 or 1033,
a transfer of a portion of an asset in a transaction described in
section 168(i)(7)(B), a sale of a portion of an asset, or a disposition
of a portion of an asset in a transaction described under the anti-
abuse rules applicable to general asset accounts. For other
transactions, a disposition includes a disposition of a portion of an
asset only if the taxpayer makes the election to terminate the general
asset account upon the disposition of all assets, including that
disposed portion, in that general asset account or makes the qualifying
disposition election for that disposed portion. A separate partial
disposition election is not provided for assets in a general asset
account because a taxpayer can claim a loss upon the disposition of an
asset (or a portion thereof) in a general asset account only when the
taxpayer makes these two elections.
5. Components of an Asset
Because the partial disposition rule under these proposed
regulations allows taxpayers to treat the disposition of an asset's
component as a disposition, the IRS and the Treasury Department believe
that the rule in Sec. Sec. 1.168(i)-1T and 1.168(i)-8T allowing
taxpayers to use any reasonable, consistent method to treat an asset's
components as the asset for disposition purposes is no longer needed.
Accordingly, these proposed regulations do not include that temporary
regulations rule. The IRS and the Treasury Department request comments
addressing whether the rule in Sec. Sec. 1.168(i)-1T and 1.168(i)-8T
allowing taxpayers to use any reasonable, consistent method to treat an
asset's components as the asset for disposition purposes is still
needed.
6. Disposition Definition
Consistent with these changes, these proposed regulations modify
the temporary regulations' definition of a disposition under Sec. Sec.
1.168(i)-1T and 1.168(i)-8T to provide that a disposition includes the
disposition of a structural component (or a portion thereof) of a
building only if the partial disposition rule applies to such
structural component (or a portion thereof).
[[Page 57550]]
7. General Asset Accounts
Finally, these proposed regulations change the temporary regulation
definition of a qualifying disposition under Sec. 1.168(i)-
1T(e)(3)(iii). The purpose of a general asset account is to reduce the
administrative burden of tracking depreciable assets. This purpose was
accomplished in the final regulations for general asset accounts under
Sec. 1.168(i)-1 (as in effect before the temporary regulations under
Sec. 1.168(i)-1T) by allowing a taxpayer to group assets in one or
more general asset accounts and by allowing a taxpayer to elect to
terminate general asset account treatment only when the taxpayer
disposes of all of the assets, or the last asset, in the account, or
disposes of an asset in a qualifying disposition, which generally was a
casualty or other extraordinary event. The temporary regulations under
Sec. 1.168(i)-1T expand a qualifying disposition to include generally
any disposition and, as a result, increased the administrative burden
of tracking depreciable assets. To reduce this burden, the IRS and the
Treasury Department have decided to change the definition of a
qualifying disposition so that it is the same as it was under the final
regulations for general asset accounts under Sec. 1.168(i)-1 (as in
effect before the temporary regulations under Sec. 1.168(i)-1T).
Accordingly, these proposed regulations provide that a qualifying
disposition is a disposition that does not involve all the assets, the
last asset, or the remaining portion of the last asset, remaining in a
general asset account and that is: (1) A direct result of a fire,
storm, shipwreck, or other casualty, or from theft; (2) a charitable
contribution for which a deduction is allowable under section 170; (3)
a direct result of a cessation, termination, or disposition of a
business, manufacturing, or other income producing process, operation,
facility, plant, or other unit (other than by transfer to a supplies,
scrap, or similar account); or (4) generally a transaction to which a
nonrecognition section of the Code applies.
B. Determination of Basis and Identification of Disposed or Converted
Asset
The temporary regulations under Sec. Sec. 1.168(i)-1T and
1.168(i)-8T provide that if the disposed asset is in a general asset
account, is in a multiple asset account, or is a component of a larger
asset, and it is impracticable from the taxpayer's records to determine
the unadjusted depreciable basis of the disposed asset, the taxpayer
may use any reasonable method that is consistently applied to the
taxpayer's general asset accounts, multiple asset accounts, or larger
assets, as applicable.
Several commenters requested that one or more specific
methodologies be provided. They suggested using replacement cost
adjusted for inflation using an objective index, using third-party
construction estimating and valuation services, or using relative fair
market value of acquired components.
In response, these proposed regulations provide nonexclusive
examples of reasonable methods. Such examples include: (1) Discounting
the cost of the replacement asset to its placed-in-service year cost
using the Consumer Price Index; (2) a pro rata allocation of the
unadjusted depreciable basis of the general asset account or multiple
asset account, as applicable, based on the replacement cost of the
disposed asset and the replacement cost of all of the assets in the
general asset account or multiple asset account, as applicable; and (3)
a study allocating the cost of the asset to its individual components.
The IRS and the Treasury Department expect that reasonable methods are
available that use information readily available or known to the
taxpayer and do not necessitate undertaking expensive studies.
As previously mentioned, these proposed regulations do not include
the temporary regulation rule in Sec. Sec. 1.168(i)-1T and 1.168(i)-8T
that allows taxpayers to use any reasonable, consistent method to treat
an asset's components as the asset for tax disposition purposes.
Consistent with this change, these proposed regulations do not include
the temporary regulation rules in Sec. Sec. 1.168(i)-1T and 1.168(i)-
8T regarding the determination of the unadjusted depreciable basis, and
identification, of the disposed component of a larger asset. However,
these proposed regulations provide rules regarding the determination of
the unadjusted depreciable basis, and identification, of the disposed
portion of an asset when the partial disposition rule applies.
If the partial disposition rule applies, these proposed regulations
provide that a taxpayer may use any reasonable method for determining
the unadjusted depreciable basis of the disposed portion of the asset.
Also, if a taxpayer disposes of more than one portion of the same
asset, the taxpayer may use any reasonable method that is consistently
applied to all portions of the same asset for purposes of determining
the unadjusted depreciable basis of each disposed portion of the asset.
These proposed regulations provide nonexclusive examples of reasonable
methods.
If a taxpayer disposes of a portion of the asset and the partial
disposition rule applies to that disposition, these proposed
regulations provide rules regarding the identification of the asset.
When it is impracticable from the taxpayer's records to determine the
particular taxable year in which the asset was placed in service by the
taxpayer, the taxpayer must identify the asset by using the methods
allowed when the asset is in a general asset account or a multiple
asset account: the first-in, first-out (FIFO) method, the modified FIFO
method, a mortality dispersion table if the asset is a mass asset, or
any other method designated by the Secretary in published guidance. A
last-in, first-out (LIFO) method is not permitted.
C. Other Changes
The proposed regulations under Sec. 1.168(i)-8 provide that if a
taxpayer disposes of a portion of an asset and the partial disposition
rule applies to that disposition, the taxpayer must account for the
disposed portion in a single asset account beginning in the taxable
year in which the disposition occurs. This new rule also is provided in
the proposed regulations under Sec. 1.168(i)-7.
The proposed regulations under Sec. Sec. 1.168(i)-1 and 1.168(i)-8
also provide examples demonstrating the interaction between the
disposition rules and the capitalization of tangible property rules
under Sec. 1.263(a)-3.
Proposed Effective Date
These regulations are proposed to apply to taxable years beginning
on or after January 1, 2014. The regulations also permit taxpayers to
rely on the provisions of the proposed regulations for taxable years
beginning on or after January 1, 2012, and before the applicability
date of the final regulations. The proposed regulations provide that
taxpayers may apply the provisions of the final regulations to taxable
years beginning on or after January 1, 2012. The temporary regulations
under Sec. Sec. 1.168(i)-1T and 1.168(i)-8T allow taxpayers to apply
the temporary regulations to taxable years beginning on or after
January 1, 2012, but the final regulations will provide that taxpayers
may not apply the temporary regulations to taxable years beginning on
or after January 1, 2014.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866, as
[[Page 57551]]
supplemented by Executive Order 13563. 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 a collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, this regulation has been 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 the proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES heading.
The IRS and the Treasury Department request comments on all aspects of
these proposed rules. All comments will be available for public
inspection and copying at www.regulations.gov or upon request.
A public hearing has been scheduled for December 19, 2013,
beginning at 10 a.m. in the IRS Auditorium, Internal Revenue Building,
1111 Constitution Avenue NW., Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance. In
addition, 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. For information about having your name 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 the hearing. Persons who
wish to present oral comments at the hearing must submit electronic or
written comments, an outline of the topics to be discussed, and the
time to be devoted to each topic (signed original and eight (8) copies)
by November 18, 2013. 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.
Statement of Availability for IRS Document
For copies of recently issued Revenue Procedures, Revenue Rulings,
notices and other guidance published in the Internal Revenue Bulletin
or Cumulative Bulletin please visit the IRS Web site at http://www.irs.gov.
Drafting Information
The principal author of these regulations is Kathleen Reed, Office
of the Associate Chief Counsel (Income Tax and Accounting). However,
other personnel from the IRS and the Treasury Department participated
in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Partial Withdrawal of Proposed Amendments to the Regulations
Accordingly, under the authority of 26 U.S.C. 7805, Sec. Sec.
1.168(i)-1 and 1.168(i)-8 of the notice of proposed rulemaking (REG-
168745-03) that was published in the Federal Register on December 27,
2011 (76 FR 81128), are withdrawn.
Proposed Amendment to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.168(i)-1 also issued under 26 U.S.C. 168(i)(4). * * *
0
Par. 2. In Sec. 1.168(i)-0, the entries under Sec. 1.168(i)-1 are
amended by:
0
1. Redesignating the entries for paragraphs (b)(4), (b)(5), and (b)(6)
as newly-designated entries for paragraphs (b)(5), (b)(6), and (b)(7).
0
2. Adding entries for paragraphs (b)(4), (b)(8), and (b)(9).
0
3. Revising the entries for newly-designated paragraphs (b)(6) and
(b)(7).
0
4. Revising entries for paragraphs (c)(3), (d)(2), (d)(3), (e),
(e)(2)(v) through (viii), (e)(3)(vi), (h)(1), (i), and (m).
0
5. Removing the entry for paragraph (h)(2).
0
6. Redesignating the entries for paragraph (h)(3) as newly-designated
entries for paragraph (h)(2).
The additions and revisions read as follows:
Sec. 1.168(i)-0 Table of contents for the general asset account
rules.
* * * * *
Sec. 1.168(i)-1 General asset accounts.
* * * * *
(b) * * *
(4) Building.
* * *
(6) Mass assets.
(7) Portion of an asset.
(8) Remaining adjusted depreciable basis of the general asset
account.
(9) Structural component.
(c) * * *
(3) Examples.
* * * * *
(d) * * *
(2) Assets in general asset account are eligible for additional
first year depreciation deduction.
(3) No assets in general asset account are eligible for additional
first year depreciation deduction.
* * * * *
(e) Dispositions from a general asset account.
* * * * *
(2) * * *
(v) Manner of disposition.
(vi) Disposition by transfer to a supplies account.
(vii) Leasehold improvements.
(viii) Determination of asset disposed of.
* * * * *
(3) * * *
(vi) Technical termination of a partnership.
* * * * *
(h) * * *
(1) Conversion to any personal use.
* * * * *
(i) Redetermination of basis.
* * * * *
(m) Effective/applicability date.
0
Par. 3. Section 1.168(i)-1 is amended by revising paragraphs (a)
through (l)(1), and paragraph (m), to read as follows:
Sec. 1.168(i)-1 General asset accounts.
(a) Scope. This section provides rules for general asset accounts
under section 168(i)(4). The provisions of this section apply only to
assets for which an election has been made under paragraph (l) of this
section.
(b) Definitions. For purposes of this section, the following
definitions apply:
(1) Unadjusted depreciable basis has the same meaning given such
term in Sec. 1.168(b)-1(a)(3).
(2) Unadjusted depreciable basis of the general asset account is
the sum of the unadjusted depreciable bases of all assets included in
the general asset account.
(3) Adjusted depreciable basis of the general asset account is the
unadjusted depreciable basis of the general asset account less the
adjustments to basis described in section 1016(a)(2) and (3).
(4) Building has the same meaning as that term is defined in Sec.
1.48-1(e)(1).
(5) Expensed cost is the amount of any allowable credit or
deduction
[[Page 57552]]
treated as a deduction allowable for depreciation or amortization for
purposes of section 1245 (for example, a credit allowable under section
30 or a deduction allowable under section 179, 179A, or 190). Expensed
cost does not include any additional first year depreciation deduction.
(6) Mass assets is a mass or group of individual items of
depreciable assets--
(i) That are not necessarily homogenous;
(ii) Each of which is minor in value relative to the total value of
the mass or group;
(iii) Numerous in quantity;
(iv) Usually accounted for only on a total dollar or quantity
basis;
(v) With respect to which separate identification is impracticable;
and
(vi) Placed in service in the same taxable year.
(7) Portion of an asset is any part of an asset that is less than
the entire asset as determined under paragraph (e)(2)(viii) of this
section.
(8) Remaining adjusted depreciable basis of the general asset
account is the unadjusted depreciable basis of the general asset
account less the amount of the additional first year depreciation
deduction allowed or allowable, whichever is greater, for the general
asset account.
(9) Structural component has the same meaning as that term is
defined in Sec. 1.48-1(e)(2).
(c) Establishment of general asset accounts--(1) Assets eligible
for general asset accounts--(i) General rules. Assets that are subject
to either the general depreciation system of section 168(a) or the
alternative depreciation system of section 168(g) may be accounted for
in one or more general asset accounts. An asset is included in a
general asset account only to the extent of the asset's unadjusted
depreciable basis. However, an asset is not to be included in a general
asset account if the asset is used both in a trade or business (or for
the production of income) and in a personal activity at any time during
the taxable year in which the asset is placed in service by the
taxpayer or if the asset is placed in service and disposed of during
the same taxable year.
(ii) Special rules for assets generating foreign source income. (A)
Assets that generate foreign source income, both United States and
foreign source income, or combined gross income of a foreign sales
corporation (FSC) (as defined in former section 922), domestic
international sales corporation (DISC) (as defined in section 992(a)),
or possessions corporation (as defined in section 936) and its related
supplier may be included in a general asset account if the requirements
of paragraph (c)(2)(i) of this section are satisfied. If, however, the
inclusion of these assets in a general asset account results in a
substantial distortion of income, the Commissioner may disregard the
general asset account election and make any reallocations of income or
expense necessary to clearly reflect income.
(B) A general asset account shall be treated as a single asset for
purposes of applying the rules in Sec. 1.861-9T(g)(3) (relating to
allocation and apportionment of interest expense under the asset
method). A general asset account that generates income in more than one
grouping of income (statutory and residual) is a multiple category
asset (as defined in Sec. 1.861-9T(g)(3)(ii)), and the income yield
from the general asset account must be determined by applying the rules
for multiple category assets as if the general asset account were a
single asset.
(2) Grouping assets in general asset accounts--(i) General rules.
If a taxpayer makes the election under paragraph (l) of this section,
assets that are subject to the election are grouped into one or more
general asset accounts. Assets that are eligible to be grouped into a
single general asset account may be divided into more than one general
asset account. Each general asset account must include only assets
that--
(A) Have the same applicable depreciation method;
(B) Have the same applicable recovery period;
(C) Have the same applicable convention; and
(D) Are placed in service by the taxpayer in the same taxable year.
(ii) Special rules. In addition to the general rules in paragraph
(c)(2)(i) of this section, the following rules apply when establishing
general asset accounts--
(A) Assets subject to the mid-quarter convention may only be
grouped into a general asset account with assets that are placed in
service in the same quarter of the taxable year;
(B) Assets subject to the mid-month convention may only be grouped
into a general asset account with assets that are placed in service in
the same month of the taxable year;
(C) Passenger automobiles for which the depreciation allowance is
limited under section 280F(a) must be grouped into a separate general
asset account;
(D) Assets not eligible for any additional first year depreciation
deduction (including assets for which the taxpayer elected not to
deduct the additional first year depreciation) provided by, for
example, section 168(k), 168(l), 168(m), 168(n), 1400L(b), or 1400N(d),
must be grouped into a separate general asset account;
(E) Assets eligible for the additional first year depreciation
deduction may only be grouped into a general asset account with assets
for which the taxpayer claimed the same percentage of the additional
first year depreciation (for example, 30 percent, 50 percent, or 100
percent);
(F) Except for passenger automobiles described in paragraph
(c)(2)(ii)(C) of this section, listed property (as defined in section
280F(d)(4)) must be grouped into a separate general asset account;
(G) Assets for which the depreciation allowance for the placed-in-
service year is not determined by using an optional depreciation table
(for further guidance, see section 8 of Rev. Proc. 87-57, 1987-2 CB
687, 693 (see Sec. 601.601(d)(2) of this chapter)) must be grouped
into a separate general asset account;
(H) Mass assets that are or will be subject to paragraph
(j)(2)(i)(D) of this section (disposed of or converted mass asset is
identified by a mortality dispersion table) must be grouped into a
separate general asset account; and
(I) Assets subject to paragraph (h)(2)(iii)(A) of this section
(change in use results in a shorter recovery period or a more
accelerated depreciation method) for which the depreciation allowance
for the year of change (as defined in Sec. 1.168(i)-4(a)) is not
determined by using an optional depreciation table must be grouped into
a separate general asset account.
(3) Examples. The following examples illustrate the application of
this paragraph (c). For purposes of these examples, assume that section
168 as in effect on September 19, 2013, applies to taxable years
beginning on or after January 1, 2014.
Example 1. In 2014, J, a proprietorship with a calendar year-
end, purchases and places in service one item of equipment that
costs $550,000. This equipment is section 179 property and also is
5-year property under section 168(e). On its Federal tax return for
2014, J makes an election under section 179 to expense $25,000 of
the equipment's cost and makes an election under paragraph (l) of
this section to include the equipment in a general asset account. As
a result, the unadjusted depreciable basis of the equipment is
$525,000. In accordance with paragraph (c)(1) of this section, J
must include only $525,000 of the equipment's cost in the general
asset account.
Example 2. In 2014, K, a proprietorship with a calendar year-
end, purchases and places in service 100 items of equipment. All of
these items are 5-year property under section 168(e), are not listed
property, and are not eligible for any additional first year
depreciation deduction. On its Federal tax return for 2014, K does
not make an election under section 179 to expense the cost of any
[[Page 57553]]
of the 100 items of equipment and does make an election under
paragraph (l) of this section to include the 100 items of equipment
in a general asset account. K depreciates its 5-year property placed
in service in 2014 using the optional depreciation table that
corresponds with the general depreciation system, the 200-percent
declining balance method, a 5-year recovery period, and the half-
year convention. In accordance with paragraph (c)(2) of this
section, K includes all of the 100 items of equipment in one general
asset account.
Example 3. The facts are the same as in Example 2, except that
K decides not to include all of the 100 items of equipment in one
general asset account. Instead and in accordance with paragraph
(c)(2) of this section, K establishes 100 general asset accounts and
includes one item of equipment in each general asset account.
Example 4. L, a calendar-year corporation, is a wholesale
distributer. In 2014, L places in service the following properties
for use in its wholesale distribution business: computers,
automobiles, and forklifts. On its Federal tax return for 2014, L
does not make an election under section 179 to expense the cost of
any of these items of equipment and does make an election under
paragraph (l) of this section to include all of these items of
equipment in a general asset account. All of these items are 5-year
property under section 168(e) and are not eligible for any
additional first year depreciation deduction. The computers are
listed property, and the automobiles are listed property and are
subject to section 280F(a). L depreciates its 5-year property placed
in service in 2014 using the optional depreciation table that
corresponds with the general depreciation system, the 200-percent
declining balance method, a 5-year recovery period, and the half-
year convention. Although the computers, automobiles, and forklifts
are 5-year property, L cannot include all of them in one general
asset account because the computers and automobiles are listed
property. Further, even though the computers and automobiles are
listed property, L cannot include them in one general asset account
because the automobiles also are subject to section 280F(a). In
accordance with paragraph (c)(2) of this section, L establishes
three general asset accounts: one for the computers, one for the
automobiles, and one for the forklifts.
Example 5. M, a fiscal-year corporation with a taxable year
ending June 30, purchases and places in service ten items of new
equipment in October 2014, and purchases and places in service five
other items of new equipment in February 2015. On its Federal tax
return for the taxable year ending June 30, 2015, M does not make an
election under section 179 to expense the cost of any of these items
of equipment and does make an election under paragraph (l) of this
section to include all of these items of equipment in a general
asset account. All of these items of equipment are 7-year property
under section 168(e), are not listed property, and are property
described in section 168(k)(2)(B). All of the ten items of equipment
placed in service in October 2014 are eligible for the 50-percent
additional first year depreciation deduction provided by section
168(k)(1). All of the five items of equipment placed in service in
February 2015 are not eligible for any additional first year
depreciation deduction. M depreciates its 7-year property placed in
service for the taxable year ending June 30, 2015, using the
optional depreciation table that corresponds with the general
depreciation system, the 200-percent declining balance method, a 7-
year recovery period, and the half-year convention. Although the 15
items of equipment are depreciated using the same depreciation
method, recovery period, and convention, M cannot include all of
them in one general asset account because some of items of equipment
are not eligible for any additional first year depreciation
deduction. In accordance with paragraph (c)(2) of this section, M
establishes two general asset accounts: one for the ten items of
equipment eligible for the 50-percent additional first year
depreciation deduction and one for the five items of equipment not
eligible for any additional first year depreciation deduction.
(d) Determination of depreciation allowance--(1) In general.
Depreciation allowances are determined for each general asset account.
The depreciation allowances must be recorded in a depreciation reserve
account for each general asset account. The allowance for depreciation
under this section constitutes the amount of depreciation allowable
under section 167(a).
(2) Assets in general asset account are eligible for additional
first year depreciation deduction. If all the assets in a general asset
account are eligible for the additional first year depreciation
deduction, the taxpayer first must determine the allowable additional
first year depreciation deduction for the general asset account for the
placed-in-service year and then must determine the amount otherwise
allowable as a depreciation deduction for the general asset account for
the placed-in-service year and any subsequent taxable year. The
allowable additional first year depreciation deduction for the general
asset account for the placed-in-service year is determined by
multiplying the unadjusted depreciable basis of the general asset
account by the additional first year depreciation deduction percentage
applicable to the assets in the account (for example, 30 percent, 50
percent, or 100 percent). The remaining adjusted depreciable basis of
the general asset account then is depreciated using the applicable
depreciation method, recovery period, and convention for the assets in
the account.
(3) No assets in general asset account are eligible for additional
first year depreciation deduction. If none of the assets in a general
asset account are eligible for the additional first year depreciation
deduction, the taxpayer must determine the allowable depreciation
deduction for the general asset account for the placed-in-service year
and any subsequent taxable year by using the applicable depreciation
method, recovery period, and convention for the assets in the account.
(4) Special rule for passenger automobiles. For purposes of
applying section 280F(a), the depreciation allowance for a general
asset account established for passenger automobiles is limited for each
taxable year to the amount prescribed in section 280F(a) multiplied by
the excess of the number of automobiles originally included in the
account over the number of automobiles disposed of during the taxable
year or in any prior taxable year in a transaction described in
paragraphs (e)(3)(iii) (disposition of an asset in a qualifying
disposition), (e)(3)(iv) (transactions subject to section 168(i)(7)),
(e)(3)(v) (transactions subject to section 1031 or section 1033),
(e)(3)(vi) (technical termination of a partnership), (e)(3)(vii) (anti-
abuse rule), (g) (assets subject to recapture), (h)(1) (conversion to
personal use), or (h)(2) (business or income-producing use percentage
changes) of this section.
(e) Dispositions from a general asset account--(1) Scope and
Definition--(i) In general. This paragraph (e) provides rules
applicable to dispositions of assets included in a general asset
account. For purposes of this paragraph (e), an asset in a general
asset account is disposed of when ownership of the asset is transferred
or when the asset is permanently withdrawn from use either in the
taxpayer's trade or business or in the production of income. A
disposition includes the sale, exchange, retirement, physical
abandonment, or destruction of an asset. A disposition also occurs when
an asset is transferred to a supplies, scrap, or similar account, or
when a portion of an asset is disposed of as described in paragraph
(e)(1)(ii) of this section. If a structural component (or a portion
thereof) of a building is disposed of in a disposition described in
paragraph (e)(1)(ii) of this section, a disposition also includes the
disposition of such structural component (or such portion thereof).
(ii) Disposition of a portion of an asset. For purposes of applying
paragraph (e) of this section, a disposition includes a disposition of
a portion of an asset in a general asset account as a result of a
casualty event described in section 165, a disposition of a portion of
an asset in a general asset account for which gain (determined without
regard to section 1245 or section 1250) is not recognized in whole or
in part under section 1031 or section 1033, a transfer of a portion of
an asset
[[Page 57554]]
in a general asset account in a transaction described in section
168(i)(7)(B), a sale of a portion of an asset in a general asset
account, or a disposition of a portion of an asset in a general asset
account in a transaction is described in paragraph (e)(3)(vii)(B) of
this section. For other transactions, a disposition includes a
disposition of a portion of an asset in a general asset account only if
the taxpayer makes the election under paragraph (e)(3)(ii) of this
section to terminate the general asset account in which that disposed
portion is included or makes the election under paragraph (e)(3)(iii)
of this section for that disposed portion.
(2) General rules for a disposition--(i) No immediate recovery of
basis. Except as provided in paragraph (e)(3) of this section,
immediately before a disposition of any asset in a general asset
account or a disposition of a portion of such asset as described in
paragraph (e)(1)(ii) of this section, the asset or the portion of the
asset, as applicable, is treated as having an adjusted depreciable
basis (as defined in Sec. 1.168(b)-1(a)(4)) of zero for purposes of
section 1011. Therefore, no loss is realized upon the disposition of an
asset from the general asset account or upon the disposition of a
portion of such asset as described in paragraph (e)(1)(ii) of this
section. Similarly, where an asset or a portion of an asset, as
applicable, is disposed of by transfer to a supplies, scrap, or similar
account, the basis of the asset or the portion of the asset, as
applicable, in the supplies, scrap, or similar account will be zero.
(ii) Treatment of amount realized. Any amount realized on a
disposition is recognized as ordinary income (notwithstanding any other
provision of subtitle A of the Internal Revenue Code) to the extent the
sum of the unadjusted depreciable basis of the general asset account
and any expensed cost (as defined in paragraph (b)(5) of this section)
for assets in the account exceeds any amounts previously recognized as
ordinary income upon the disposition of other assets in the account or
upon the disposition of portions of such assets as described in
paragraph (e)(1)(ii) of this section. The recognition and character of
any excess amount realized are determined under other applicable
provisions of the Internal Revenue Code (other than sections 1245 and
1250 or provisions of the Internal Revenue Code that treat gain on a
disposition as subject to section 1245 or 1250).
(iii) Effect of disposition on a general asset account. Except as
provided in paragraph (e)(3) of this section, the unadjusted
depreciable basis and the depreciation reserve of the general asset
account are not affected as a result of a disposition of an asset from
the general asset account or of a disposition of a portion of such
asset as described in paragraph (e)(1)(ii) of this section.
(iv) Coordination with nonrecognition provisions. For purposes of
determining the basis of an asset or a portion of an asset, as
applicable, acquired in a transaction, other than a transaction
described in paragraphs (e)(3)(iv) (pertaining to transactions subject
to section 168(i)(7)), (e)(3)(v) (pertaining to transactions subject to
section 1031 or section 1033), and (e)(3)(vi) (pertaining to technical
terminations of partnerships) of this section, to which a
nonrecognition section of the Internal Revenue Code applies (determined
without regard to this section), the amount of ordinary income
recognized under this paragraph (e)(2) is treated as the amount of gain
recognized on the disposition.
(v) Manner of disposition. The manner of disposition (for example,
normal retirement, abnormal retirement, ordinary retirement, or
extraordinary retirement) is not taken into account in determining
whether a disposition occurs or gain or loss is recognized.
(vi) Disposition by transfer to a supplies account. If a taxpayer
made an election under Sec. 1.162-3(d) to treat the cost of any
rotable spare part, temporary spare part, or standby emergency spare
part (as defined in Sec. 1.162-3(c)) as a capital expenditure subject
to the allowance for depreciation and also made an election under
paragraph (l) of this section to include that rotable, temporary, or
standby emergency spare part in a general asset account, the taxpayer
can dispose of the rotable, temporary, or standby emergency spare part
by transferring it to a supplies account only if the taxpayer has
obtained the consent of the Commissioner to revoke the Sec. 1.162-3(d)
election. See Sec. 1.162-3(d)(3) for the procedures for revoking a
Sec. 1.162-3(d) election.
(vii) Leasehold improvements. The rules of paragraph (e) of this
section also apply to--
(A) A lessor of leased property that made an improvement to that
property for the lessee of the property, has a depreciable basis in the
improvement, made an election under paragraph (l) of this section to
include the improvement in a general asset account, and disposes of the
improvement (or disposes of a portion of the improvement as described
in paragraph (e)(1)(ii) of this section) before or upon the termination
of the lease with the lessee. See section 168(i)(8)(B); and
(B) A lessee of leased property that made an improvement to that
property, has a depreciable basis in the improvement, made an election
under paragraph (l) of this section to include the improvement in a
general asset account, and disposes of the improvement (or disposes of
a portion of the improvement as described in paragraph (e)(1)(ii) of
this section) before or upon the termination of the lease.
(viii) Determination of asset disposed of--(A) General rules. For
purposes of applying paragraph (e) of this section to the disposition
of an asset in a general asset account (instead of the disposition of
the general asset account), the facts and circumstances of each
disposition are considered in determining what is the appropriate asset
disposed of. The asset for disposition purposes may not consist of
items placed in service by the taxpayer on different dates. For
purposes of determining what is the appropriate asset disposed of, the
unit of property determination under Sec. 1.263(a)-3(e) or in
published guidance in the Internal Revenue Bulletin under section
263(a) (see Sec. 601.601(d)(2) of this chapter) does not apply.
(B) Special rules. In addition to the general rules in paragraph
(e)(2)(viii)(A) of this section, the following rules apply for purposes
of applying paragraph (e) of this section to the disposition of an
asset in a general asset account (instead of the disposition of the
general asset account):
(1) Each building (including its structural components) is the
asset except as provided in Sec. 1.1250-1(a)(2)(ii) or in paragraph
(e)(2)(viii)(B)(2) or paragraph (e)(2)(viii) (B)(4) of this section.
(2) If a building has two or more condominium or cooperative units,
each condominium or cooperative unit (including its structural
components) is the asset except as provided in Sec. 1.1250-1(a)(2)(ii)
or in paragraph (e)(2)(viii)(B)(4) of this section.
(3) If a taxpayer properly includes an item in one of the asset
classes 00.11 through 00.4 of Rev. Proc. 87-56 (1987-2 CB 674) (see
Sec. 601.601(d)(2) of this chapter) or properly classifies an item in
one of the categories under section 168(e)(3) (except for a category
that includes buildings or structural components; for example, retail
motor fuels outlet, qualified leasehold improvement property, qualified
restaurant property, and qualified retail improvement property), each
item is the asset provided paragraph (e)(2)(viii)(B)(4) of this section
does not apply to the item. For example, each desk is the asset, each
computer is the
[[Page 57555]]
asset, and each qualified smart electric meter is the asset.
(4) If the taxpayer places in service an improvement or addition to
an asset after the taxpayer placed the asset in service, the
improvement or addition is a separate asset.
(ix) Examples. The following examples illustrate the application of
this paragraph (e)(2). For purposes of these examples, assume that
section 168 as in effect on September 19, 2013, applies to taxable
years beginning on or after January 1, 2014.
Example 1. A, a calendar-year partnership, maintains one
general asset account for one office building that cost $10 million.
A discovers a leak in the roof of the building and decides to
replace the entire roof. The roof is a structural component of the
building. In accordance with paragraph (e)(2)(viii)(B)(1) of this
section, the office building (including its structural components)
is the asset for disposition purposes. The retirement of the
replaced roof is not a disposition of a portion of an asset as
described in paragraph (e)(1)(ii) of this section. Thus, the
retirement of the replaced roof is not a disposition under paragraph
(e)(1) of this section. As a result, A continues to depreciate the
$10 million cost of the general asset account. If A must capitalize
the amount paid for the replacement roof pursuant to Sec. 1.263(a)-
3, the replacement roof is a separate asset for disposition purposes
pursuant to paragraph (e)(2)(viii)(B)(4) of this section and for
depreciation purposes pursuant to section 168(i)(6).
Example 2. B, a calendar-year commercial airline company,
maintains one general asset account for five aircraft that cost a
total of $500 million. These aircraft are described in asset class
45.0 of Rev. Proc. 87-56. B replaces the existing engines on one of
the aircraft with new engines. Assume each aircraft is a unit of
property as determined under Sec. 1.263(a)-3(e)(3) and each engine
of an aircraft is a major component or substantial structural part
of the aircraft as determined under Sec. 1.263(a)-3(k)(6). Assume
also that B treats each aircraft as the asset for disposition
purposes in accordance with paragraph (e)(2)(viii) of this section.
The retirement of the replaced engines is not a disposition of a
portion of an asset as described in paragraph (e)(1)(ii) of this
section. Thus, the retirement of the replaced engines is not a
disposition under paragraph (e)(1) of this section. As a result, B
continues to depreciate the $500 million cost of the general asset
account. If B must capitalize the amount paid for the replacement
engines pursuant to Sec. 1.263(a)-3, the replacement engines are a
separate asset for disposition purposes pursuant to paragraph
(e)(2)(viii)(B)(4) of this section and for depreciation purposes
pursuant to section 168(i)(6).
Example 3. (i) R, a calendar-year corporation, maintains one
general asset account for ten machines. The machines cost a total of
$10,000 and are placed in service in June 2014. Of the ten machines,
one machine costs $8,200 and nine machines cost a total of $1,800.
Assume R depreciates this general asset account using the optional
depreciation table that corresponds with the general depreciation
system, the 200-percent declining balance method, a 5-year recovery
period, and a half-year convention. R does not make a section 179
election for any of the machines, and all of the machines are not
eligible for any additional first year depreciation deduction. As of
January 1, 2015, the depreciation reserve of the account is $2,000
($10,000 x 20%).
(ii) On February 8, 2015, R sells the machine that cost $8,200
to an unrelated party for $9,000. Under paragraph (e)(2)(i) of this
section, this machine has an adjusted depreciable basis of zero.
(iii) On its 2015 tax return, R recognizes the amount realized
of $9,000 as ordinary income because such amount does not exceed the
unadjusted depreciable basis of the general asset account ($10,000),
plus any expensed cost for assets in the account ($0), less amounts
previously recognized as ordinary income ($0). Moreover, the
unadjusted depreciable basis and depreciation reserve of the account
are not affected by the disposition of the machine. Thus, the
depreciation allowance for the account in 2015 is $3,200 ($10,000 x
32%).
Example 4. (i) The facts are the same as in Example 3. In
addition, on June 4, 2016, R sells seven machines to an unrelated
party for a total of $1,100. In accordance with paragraph (e)(2)(i)
of this section, these machines have an adjusted depreciable basis
of zero.
(ii) On its 2016 tax return, R recognizes $1,000 as ordinary
income (the unadjusted depreciable basis of $10,000, plus the
expensed cost of $0, less the amount of $9,000 previously recognized
as ordinary income). The recognition and character of the excess
amount realized of $100 ($1,100 - $1,000) are determined under
applicable provisions of the Internal Revenue Code other than
section 1245 (such as section 1231). Moreover, the unadjusted
depreciable basis and depreciation reserve of the account are not
affected by the disposition of the machines. Thus, the depreciation
allowance for the account in 2016 is $1,920 ($10,000 x 19.2%).
(3) Special rules--(i) In general. This paragraph (e)(3) provides
the rules for terminating general asset account treatment upon certain
dispositions. While the rules under paragraphs (e)(3)(ii) and (iii) of
this section are optional rules, the rules under paragraphs (e)(3)(iv),
(v), (vi), and (vii) of this section are mandatory rules. A taxpayer
elects to apply paragraph (e)(3)(ii) or paragraph (e)(3)(iii) of this
section by reporting the gain, loss, or other deduction on the
taxpayer's timely filed original Federal tax return (including
extensions) for the taxable year in which the disposition occurs. A
taxpayer may revoke the election to apply paragraph (e)(3)(ii) or
paragraph (e)(3)(iii) of this section only by filing a request for a
private letter ruling and obtaining the Commissioner's consent to
revoke the election. The Commissioner may grant a request to revoke
this election if the taxpayer acted reasonably and in good faith, and
the revocation will not prejudice the interests of the Government. See
generally Sec. 301.9100-3 of this chapter. The election to apply
paragraph (e)(3)(ii) or (iii) of this section may not be made or
revoked through the filing of an application for change in accounting
method. For purposes of applying paragraph (e)(3)(iii) through (vii) of
this section, see paragraph (j) of this section for identifying an
asset disposed of and its unadjusted depreciable basis. Solely for
purposes of applying paragraphs (e)(3)(iii), (e)(3)(iv)(C),
(e)(3)(v)(B), and (e)(3)(vii) of this section, the term asset is:
(A) The asset as determined under paragraph (e)(2)(viii) of this
section, or
(B) The portion of such asset that is disposed of in a disposition
described in paragraph (e)(1)(ii) of this section.
(ii) Disposition of all assets remaining in a general asset
account--(A) Optional termination of a general asset account. Upon the
disposition of all of the assets, the last asset, or the remaining
portion of the last asset, in a general asset account, a taxpayer may
apply this paragraph (e)(3)(ii) to recover the adjusted depreciable
basis of the general asset account (rather than having paragraph (e)(2)
of this section apply). Under this paragraph (e)(3)(ii), the general
asset account terminates and the amount of gain or loss for the general
asset account is determined under section 1001(a) by taking into
account the adjusted depreciable basis of the general asset account at
the time of the disposition (as determined under the applicable
convention for the general asset account). The recognition and
character of the gain or loss are determined under other applicable
provisions of the Internal Revenue Code, except that the amount of gain
subject to section 1245 (or section 1250) is limited to the excess of
the depreciation allowed or allowable for the general asset account,
including any expensed cost (or the excess of the additional
depreciation allowed or allowable for the general asset account), over
any amounts previously recognized as ordinary income under paragraph
(e)(2) of this section.
(B) Examples. The following examples illustrate the application of
this paragraph (e)(3)(ii). For purposes of these examples, assume that
section 168 as in effect on September 19, 2013, applies to taxable
years beginning on or after January 1, 2014.
[[Page 57556]]
Example 1. (i) T, a calendar-year corporation, maintains a
general asset account for 1,000 calculators. The calculators cost a
total of $60,000 and are placed in service in 2014. Assume T
depreciates this general asset account using the optional
depreciation table that corresponds with the general depreciation
system, the 200-percent declining balance method, a 5-year recovery
period, and a half-year convention. T does not make a section 179
election for any of the calculators, and all of the calculators are
not eligible for any additional first year depreciation deduction.
In 2015, T sells 200 of the calculators to an unrelated party for a
total of $10,000 and recognizes the $10,000 as ordinary income in
accordance with paragraph (e)(2) of this section.
(ii) On March 26, 2016, T sells the remaining calculators in the
general asset account to an unrelated party for $35,000. T elects to
apply paragraph (e)(3)(ii) of this section. As a result, the account
terminates and gain or loss is determined for the account.
(iii) On the date of disposition, the adjusted depreciable basis
of the account is $23,040 (unadjusted depreciable basis of $60,000
less the depreciation allowed or allowable of $36,960). Thus, in
2016, T recognizes gain of $11,960 (amount realized of $35,000 less
the adjusted depreciable basis of $23,040). The gain of $11,960 is
subject to section 1245 to the extent of the depreciation allowed or
allowable for the account (plus the expensed cost for assets in the
account) less the amounts previously recognized as ordinary income
($36,960 + $0 - $10,000 = $26,960). As a result, the entire gain of
$11,960 is subject to section 1245.
Example 2. (i) J, a calendar-year corporation, maintains a
general asset account for one item of equipment. This equipment
costs $2,000 and is placed in service in 2014. Assume J depreciates
this general asset account using the optional depreciation table
that corresponds with the general depreciation system, the 200-
percent declining balance method, a 5-year recovery period, and a
half-year convention. J does not make a section 179 election for the
equipment, and it is not eligible for any additional first year
depreciation deduction. In June 2016, J sells the equipment to an
unrelated party for $1,000. J elects to apply paragraph (e)(3)(ii)
of this section. As a result, the account terminates and gain or
loss is determined for the account.
(ii) On the date of disposition, the adjusted depreciable basis
of the account is $768 (unadjusted depreciable basis of $2,000 less
the depreciation allowed or allowable of $1,232). Thus, in 2016, J
recognizes gain of $232 (amount realized of $1,000 less the adjusted
depreciable basis of $768). The gain of $232 is subject to section
1245 to the extent of the depreciation allowed or allowable for the
account (plus the expensed cost for assets in the account) less the
amounts previously recognized as ordinary income ($1,232 + $0 - $0 =
$1,232). As a result, the entire gain of $232 is subject to section
1245.
(iii) Disposition of an asset in a qualifying disposition--(A)
Optional determination of the amount of gain, loss, or other deduction.
In the case of a qualifying disposition (described in paragraph
(e)(3)(iii)(B) of this section) of an asset, a taxpayer may elect to
apply this paragraph (e)(3)(iii) (rather than having paragraph (e)(2)
of this section apply). Under this paragraph (e)(3)(iii), general asset
account treatment for the asset terminates as of the first day of the
taxable year in which the qualifying disposition occurs, and the amount
of gain, loss, or other deduction for the asset is determined under
Sec. 1.168(i)-8 or Sec. 1.168(i)-8T, as applicable, by taking into
account the asset's adjusted depreciable basis at the time of the
disposition. The adjusted depreciable basis of the asset at the time of
the disposition (as determined under the applicable convention for the
general asset account in which the asset was included) equals the
unadjusted depreciable basis of the asset less the depreciation allowed
or allowable for the asset, computed by using the depreciation method,
recovery period, and convention applicable to the general asset account
in which the asset was included and by including the portion of the
additional first year depreciation deduction claimed for the general
asset account that is attributable to the asset disposed of. The
recognition and character of the gain, loss, or other deduction are
determined under other applicable provisions of the Internal Revenue
Code, except that the amount of gain subject to section 1245 (or
section 1250) is limited to the lesser of--
(1) The depreciation allowed or allowable for the asset, including
any expensed cost (or the additional depreciation allowed or allowable)
for the asset; or
(2) The excess of--
(i) The original unadjusted depreciable basis of the general asset
account plus, in the case of section 1245 property originally included
in the general asset account, any expensed cost; over
(ii) The cumulative amounts of gain previously recognized as
ordinary income under either paragraph (e)(2) of this section or
section 1245 (or section 1250).
(B) Qualifying dispositions. A qualifying disposition is a
disposition that does not involve all the assets, or the last asset,
remaining in a general asset account and that is--
(1) A direct result of a fire, storm, shipwreck, or other casualty,
or from theft;
(2) A charitable contribution for which a deduction is allowable
under section 170;
(3) A direct result of a cessation, termination, or disposition of
a business, manufacturing or other income producing process, operation,
facility, plant, or other unit (other than by transfer to a supplies,
scrap, or similar account); or
(4) A transaction, other than a transaction described in paragraph
(e)(3)(iv) (pertaining to transactions subject to section 168(i)(7)),
(v) (pertaining to transactions subject to section 1031 or section
1033), (vi) (pertaining to technical terminations of partnerships), or
(vii) (anti-abuse rule) of this section, to which a nonrecognition
section of the Internal Revenue Code applies (determined without regard
to this section).
(C) Effect of a qualifying disposition on a general asset account.
If the taxpayer elects to apply this paragraph (e)(3)(iii) to a
qualifying disposition of an asset, then--
(1) The asset is removed from the general asset account as of the
first day of the taxable year in which the qualifying disposition
occurs. For that taxable year, the taxpayer accounts for the asset in a
single asset account in accordance with the rules under Sec. 1.168(i)-
7(b) or Sec. 1.168(i)-7T(b), as applicable;
(2) The unadjusted depreciable basis of the general asset account
is reduced by the unadjusted depreciable basis of the asset as of the
first day of the taxable year in which the disposition occurs;
(3) The depreciation reserve of the general asset account is
reduced by the depreciation allowed or allowable for the asset as of
the end of the taxable year immediately preceding the year of
disposition, computed by using the depreciation method, recovery
period, and convention applicable to the general asset account in which
the asset was included and by including the portion of the additional
first year depreciation deduction claimed for the general asset account
that is attributable to the asset disposed of; and
(4) For purposes of determining the amount of gain realized on
subsequent dispositions that is subject to ordinary income treatment
under paragraph (e)(2)(ii) of this section, the amount of any expensed
cost with respect to the asset is disregarded.
(D) Examples. The following examples illustrate the application of
this paragraph (e)(3)(iii). For purposes of these examples, assume that
section 168 as in effect on September 19, 2013, applies to taxable
years beginning on or after January 1, 2014.
Example 1. (i) Z, a calendar-year corporation, maintains one
general asset
[[Page 57557]]
account for 12 machines. Each machine costs $15,000 and is placed in
service in 2014. Of the 12 machines, nine machines that cost a total
of $135,000 are used in Z's Kentucky plant, and three machines that
cost a total of $45,000 are used in Z's Ohio plant. Assume Z
depreciates this general asset account using the optional
depreciation table that corresponds with the general depreciation
system, the 200-percent declining balance method, a 5-year recovery
period, and the half-year convention. Z does not make a section 179
election for any of the machines, and all of the machines are not
eligible for any additional first year depreciation deduction. As of
December 31, 2015, the depreciation reserve for the account is
$93,600.
(ii) On May 27, 2016, Z sells its entire manufacturing plant in
Ohio to an unrelated party. The sales proceeds allocated to each of
the three machines at the Ohio plant is $5,000. This transaction is
a qualifying disposition under paragraph (e)(3)(iii)(B)(3) of this
section and Z elects to apply paragraph (e)(3)(iii) of this section.
(iii) For Z's 2016 return, the depreciation allowance for the
account is computed as follows. As of December 31, 2015, the
depreciation allowed or allowable for the three machines at the Ohio
plant is $23,400. Thus, as of January 1, 2016, the unadjusted
depreciable basis of the account is reduced from $180,000 to
$135,000 ($180,000 less the unadjusted depreciable basis of $45,000
for the three machines), and, as of December 31, 2015, the
depreciation reserve of the account is decreased from $93,600 to
$70,200 ($93,600 less the depreciation allowed or allowable of
$23,400 for the three machines as of December 31, 2015).
Consequently, the depreciation allowance for the account in 2016 is
$25,920 ($135,000 x 19.2%).
(iv) For Z's 2016 return, gain or loss for each of the three
machines at the Ohio plant is determined as follows. The
depreciation allowed or allowable in 2016 for each machine is $1,440
(($15,000 x 19.2%)/2). Thus, the adjusted depreciable basis of each
machine under section 1011 is $5,760 (the adjusted depreciable basis
of $7,200 removed from the account less the depreciation allowed or
allowable of $1,440 in 2016). As a result, the loss recognized in
2016 for each machine is $760 ($5,000-$5,760), which is subject to
section 1231.
Example 2. (i) A, a calendar-year partnership, maintains one
general asset account for one office building that cost $20 million
and was placed in service in July 2011. A depreciates this general
asset account using the optional depreciation table that corresponds
with the general depreciation system, the straight-line method, a
39-year recovery period, and the mid-month convention. As of January
1, 2014, the depreciation reserve for the account is $1,261,000.
(ii) In May 2014, a tornado occurs where the building is located
and damages the roof of the building. A decides to replace the
entire roof. The roof is replaced in June 2014. The roof is a
structural component of the building. Because the roof was damaged
as a result of a casualty event described in section 165, the
partial disposition rule provided under paragraph (e)(1)(ii) of this
section applies to the roof. Although the office building (including
its structural components) is the asset for disposition purposes,
the partial disposition rule provides that the retirement of the
replaced roof is a disposition under paragraph (e)(1) of this
section. This retirement is a qualifying disposition under paragraph
(e)(3)(iii)(B)(1) of this section and A elects to apply paragraph
(e)(3)(iii) of this section for the retirement of the damaged roof.
(iii) Of the $20 million cost of the office building, assume $1
million is the cost of the retired roof.
(iv) For A's 2014 return, the depreciation allowance for the
account is computed as follows. As of December 31, 2013, the
depreciation allowed or allowable for the retired roof is $63,050.
Thus, as of January 1, 2014, the unadjusted depreciable basis of the
account is reduced from $20,000,000 to $19,000,000 ($20,000,000 less
the unadjusted depreciable basis of $1,000,000 for the retired
roof), and the depreciation reserve of the account is decreased from
$1,261,000 to $1,197,950 ($1,261,000 less the depreciation allowed
or allowable of $63,050 for the retired roof as of December 31,
2013). Consequently, the depreciation allowance for the account in
2014 is $487,160 ($19,000,000 x 2.564%).
(v) For A's 2014 return, gain or loss for the retired roof is
determined as follows. The depreciation allowed or allowable in 2014
for the retired roof is $11,752 (($1,000,000 x 2.564%) x 5.5/12).
Thus, the adjusted depreciable basis of the retired roof under
section 1011 is $925,198 (the adjusted depreciable basis of $936,950
removed from the account less the depreciation allowed or allowable
of $11,752 in 2014). As a result, the loss recognized in 2014 for
the retired roof is $925,198, which is subject to section 1231.
(vi) If A must capitalize the amount paid for the replacement
roof under Sec. 1.263(a)-3, the replacement roof is a separate
asset for depreciation purposes pursuant to section 168(i)(6). If A
includes the replacement roof in a general asset account, the
replacement roof is a separate asset for disposition purposes
pursuant to paragraph (e)(2)(viii)(B)(4) of this section. If A
includes the replacement roof in a single asset account or a
multiple asset account under Sec. 1.168(i)-7, the replacement roof
is a separate asset for disposition purposes pursuant to Sec.
1.168(i)-8(c)(4)(ii)(D).
(iv) Transactions subject to section 168(i)(7)--(A) In general. If
a taxpayer transfers one or more assets in a general asset account (or
a portion of such asset) in a transaction described in section
168(i)(7)(B) (pertaining to treatment of transferees in certain
nonrecognition transactions), the taxpayer (the transferor) and the
transferee must apply this paragraph (e)(3)(iv) to the asset (or the
portion of such asset) (instead of applying paragraph (e)(2),
(e)(3)(ii), or (e)(3)(iii) of this section). The transferee is bound by
the transferor's election under paragraph (l) of this section for the
portion of the transferee's basis in the asset (or the portion of such
asset) that does not exceed the transferor's adjusted depreciable basis
of the general asset account or the asset (or the portion of such
asset), as applicable (as determined under paragraph (e)(3)(iv)(B)(2)
or paragraph (e)(3)(iv)(C)(2) of this section, as applicable).
(B) All assets remaining in general asset account are transferred.
If a taxpayer transfers all the assets, the last asset, or the
remaining portion of the last asset, in a general asset account in a
transaction described in section 168(i)(7)(B)--
(1) The taxpayer (the transferor) must terminate the general asset
account on the date of the transfer. The allowable depreciation
deduction for the general asset account for the transferor's taxable
year in which the section 168(i)(7)(B) transaction occurs is computed
by using the depreciation method, recovery period, and convention
applicable to the general asset account. This allowable depreciation
deduction is allocated between the transferor and the transferee on a
monthly basis. This allocation is made in accordance with the rules in
Sec. 1.168(d)-1(b)(7)(ii) for allocating the depreciation deduction
between the transferor and the transferee;
(2) The transferee must establish a new general asset account for
all the assets, the last asset, or the remaining portion of the last
asset, in the taxable year in which the section 168(i)(7)(B)
transaction occurs for the portion of its basis in the assets that does
not exceed the transferor's adjusted depreciable basis of the general
asset account in which all the assets, the last asset, or the remaining
portion of the last asset, were included. The transferor's adjusted
depreciable basis of this general asset account is equal to the
adjusted depreciable basis of that account as of the beginning of the
transferor's taxable year in which the transaction occurs, decreased by
the amount of depreciation allocable to the transferor for the year of
the transfer (as determined under paragraph (e)(3)(iv)(B)(1) of this
section). The transferee is treated as the transferor for purposes of
computing the allowable depreciation deduction for the new general
asset account under section 168. The new general asset account must be
established in accordance with the rules in paragraph (c) of this
section, except that the unadjusted depreciable bases of all the
assets, the last asset, or the remaining portion of the last asset, and
the greater of the depreciation allowed or allowable for all the
assets, the last asset, or the remaining portion of the last asset
[[Page 57558]]
(including the amount of depreciation for the transferred assets that
is allocable to the transferor for the year of the transfer), are
included in the newly established general asset account. Consequently,
this general asset account in the year of the transfer will have a
beginning balance for both the unadjusted depreciable basis and the
depreciation reserve of the general asset account; and
(3) For purposes of section 168 and this section, the transferee
treats the portion of its basis in the assets that exceeds the
transferor's adjusted depreciable basis of the general asset account in
which all the assets, the last asset, or the remaining portion of the
last asset, were included (as determined under paragraph
(e)(3)(iv)(B)(2) of this section) as a separate asset that the
transferee placed in service on the date of the transfer. The
transferee accounts for this asset under Sec. 1.168(i)-7 or Sec.
1.168(i)-7T, as applicable, or may make an election under paragraph (l)
of this section to include the asset in a general asset account.
(C) Not all assets remaining in general asset account are
transferred. If a taxpayer transfers an asset in a general asset
account in a transaction described in section 168(i)(7)(B) and if
paragraph (e)(3)(iv)(B) of this section does not apply to this asset--
(1) The taxpayer (the transferor) must remove the transferred asset
from the general asset account in which the asset is included, as of
the first day of the taxable year in which the section 168(i)(7)(B)
transaction occurs. In addition, the adjustments to the general asset
account described in paragraphs (e)(3)(iii)(C)(2) through (4) of this
section must be made. The allowable depreciation deduction for the
asset for the transferor's taxable year in which the section
168(i)(7)(B) transaction occurs is computed by using the depreciation
method, recovery period, and convention applicable to the general asset
account in which the asset was included. This allowable depreciation
deduction is allocated between the transferor and the transferee on a
monthly basis. This allocation is made in accordance with the rules in
Sec. 1.168(d)-1(b)(7)(ii) for allocating the depreciation deduction
between the transferor and the transferee;
(2) The transferee must establish a new general asset account for
the asset in the taxable year in which the section 168(i)(7)(B)
transaction occurs for the portion of its basis in the asset that does
not exceed the transferor's adjusted depreciable basis of the asset.
The transferor's adjusted depreciable basis of this asset is equal to
the adjusted depreciable basis of the asset as of the beginning of the
transferor's taxable year in which the transaction occurs, decreased by
the amount of depreciation allocable to the transferor for the year of
the transfer (as determined under paragraph (e)(3)(iv)(C)(1) of this
section). The transferee is treated as the transferor for purposes of
computing the allowable depreciation deduction for the new general
asset account under section 168. The new general asset account must be
established in accordance with the rules in paragraph (c) of this
section, except that the unadjusted depreciable basis of the asset, and
the greater of the depreciation allowed or allowable for the asset
(including the amount of depreciation for the transferred asset that is
allocable to the transferor for the year of the transfer), are included
in the newly established general asset account. Consequently, this
general asset account in the year of the transfer will have a beginning
balance for both the unadjusted depreciable basis and the depreciation
reserve of the general asset account; and
(3) For purposes of section 168 and this section, the transferee
treats the portion of its basis in the asset that exceeds the
transferor's adjusted depreciable basis of the asset (as determined
under paragraph (e)(3)(iv)(C)(2) of this section) as a separate asset
that the transferee placed in service on the date of the transfer. The
transferee accounts for this asset under Sec. 1.168(i)-7 or Sec.
1.168(i)-7T, as applicable, or may make an election under paragraph (l)
of this section to include the asset in a general asset account.
(v) Transactions subject to section 1031 or section 1033--(A) Like-
kind exchange or involuntary conversion of all assets remaining in a
general asset account. If all the assets, the last asset, or the
remaining portion of the last asset, in a general asset account are
transferred by a taxpayer in a like-kind exchange (as defined under
Sec. 1.168-6(b)(11)) or in an involuntary conversion (as defined under
Sec. 1.168-6(b)(12)), the taxpayer must apply this paragraph
(e)(3)(v)(A) (instead of applying paragraph (e)(2), (e)(3)(ii), or
(e)(3)(iii) of this section). Under this paragraph (e)(3)(v)(A), the
general asset account terminates as of the first day of the year of
disposition (as defined in Sec. 1.168(i)-6(b)(5)) and--
(1) The amount of gain or loss for the general asset account is
determined under section 1001(a) by taking into account the adjusted
depreciable basis of the general asset account at the time of
disposition (as defined in Sec. 1.168(i)-6(b)(3)). The depreciation
allowance for the general asset account in the year of disposition is
determined in the same manner as the depreciation allowance for the
relinquished MACRS property (as defined in Sec. 1.168(i)-6(b)(2)) in
the year of disposition is determined under Sec. 1.168(i)-6. The
recognition and character of gain or loss are determined in accordance
with paragraph (e)(3)(ii)(A) of this section (notwithstanding that
paragraph (e)(3)(ii) of this section is an optional rule); and
(2) The adjusted depreciable basis of the general asset account at
the time of disposition is treated as the adjusted depreciable basis of
the relinquished MACRS property.
(B) Like-kind exchange or involuntary conversion of less than all
assets remaining in a general asset account. If an asset in a general
asset account is transferred by a taxpayer in a like-kind exchange or
in an involuntary conversion and if paragraph (e)(3)(v)(A) of this
section does not apply to this asset, the taxpayer must apply this
paragraph (e)(3)(v)(B) (instead of applying paragraph (e)(2),
(e)(3)(ii), or (e)(3)(iii) of this section). Under this paragraph
(e)(3)(v)(B), general asset account treatment for the asset terminates
as of the first day of the year of disposition (as defined in Sec.
1.168(i)-6(b)(5)), and--
(1) The amount of gain or loss for the asset is determined by
taking into account the asset's adjusted depreciable basis at the time
of disposition (as defined in Sec. 1.168(i)-6(b)(3)). The adjusted
depreciable basis of the asset at the time of disposition equals the
unadjusted depreciable basis of the asset less the depreciation allowed
or allowable for the asset, computed by using the depreciation method,
recovery period, and convention applicable to the general asset account
in which the asset was included and by including the portion of the
additional first year depreciation deduction claimed for the general
asset account that is attributable to the relinquished asset. The
depreciation allowance for the asset in the year of disposition is
determined in the same manner as the depreciation allowance for the
relinquished MACRS property (as defined in Sec. 1.168(i)-6(b)(2)) in
the year of disposition is determined under Sec. 1.168(i)-6. The
recognition and character of the gain or loss are determined in
accordance with paragraph (e)(3)(iii)(A) of this section
(notwithstanding that paragraph (e)(3)(iii) of this section is an
optional rule); and
[[Page 57559]]
(2) As of the first day of the year of disposition, the taxpayer
must remove the relinquished asset from the general asset account and
make the adjustments to the general asset account described in
paragraphs (e)(3)(iii)(C)(2) through (4) of this section.
(vi) Technical termination of a partnership. In the case of a
technical termination of a partnership under section 708(b)(1)(B), the
terminated partnership must apply this paragraph (e)(3)(vi) (instead of
applying paragraph (e)(2), (e)(3)(ii), or (e)(3)(iii) of this section).
Under this paragraph (e)(3)(vi), all of the terminated partnership's
general asset accounts terminate as of the date of its termination
under section 708(b)(1)(B). The terminated partnership computes the
allowable depreciation deduction for each of its general asset accounts
for the taxable year in which the technical termination occurs by using
the depreciation method, recovery period, and convention applicable to
the general asset account. The new partnership is not bound by the
terminated partnership's election under paragraph (l) of this section.
(vii) Anti-abuse rule--(A) In general. If an asset in a general
asset account is disposed of by a taxpayer in a transaction described
in paragraph (e)(3)(vii)(B) of this section, general asset account
treatment for the asset terminates as of the first day of the taxable
year in which the disposition occurs. Consequently, the taxpayer must
determine the amount of gain, loss, or other deduction attributable to
the disposition in the manner described in paragraph (e)(3)(iii)(A) of
this section (notwithstanding that paragraph (e)(3)(iii)(A) of this
section is an optional rule) and must make the adjustments to the
general asset account described in paragraphs (e)(3)(iii)(C)(1) through
(4) of this section.
(B) Abusive transactions. A transaction is described in this
paragraph (e)(3)(vii)(B) if the transaction is not described in
paragraph (e)(3)(iv), (e)(3)(v), or (e)(3)(vi) of this section, and if
the transaction is entered into, or made, with a principal purpose of
achieving a tax benefit or result that would not be available absent an
election under this section. Examples of these types of transactions
include--
(1) A transaction entered into with a principal purpose of shifting
income or deductions among taxpayers in a manner that would not be
possible absent an election under this section to take advantage of
differing effective tax rates among the taxpayers; or
(2) An election made under this section with a principal purpose of
disposing of an asset from a general asset account to utilize an
expiring net operating loss or credit if the transaction is not a bona
fide disposition. The fact that a taxpayer with a net operating loss
carryover or a credit carryover transfers an asset to a related person
or transfers an asset pursuant to an arrangement where the asset
continues to be used (or is available for use) by the taxpayer pursuant
to a lease (or otherwise) indicates, absent strong evidence to the
contrary, that the transaction is described in this paragraph
(e)(3)(vii)(B).
(f) Assets generating foreign source income--(1) In general. This
paragraph (f) provides the rules for determining the source of any
income, gain, or loss recognized, and the appropriate section 904(d)
separate limitation category or categories for any foreign source
income, gain, or loss recognized on a disposition (within the meaning
of paragraph (e)(1) of this section) of an asset in a general asset
account that consists of assets generating both United States and
foreign source income. These rules apply only to a disposition to which
paragraphs (e)(2) (general disposition rules), (e)(3)(ii) (disposition
of all assets remaining in a general asset account), (e)(3)(iii)
(disposition of an asset in a qualifying disposition), (e)(3)(v)
(transactions subject to section 1031 or section 1033), or (e)(3)(vii)
(anti-abuse rule) of this section applies. Solely for purposes of
applying this paragraph (f), the term asset is:
(i) The asset as determined under paragraph (e)(2)(viii) of this
section, or
(ii) The portion of such asset that is disposed of in a disposition
described in paragraph (e)(1)(ii) of this section.
(2) Source of ordinary income, gain, or loss--(i) Source determined
by allocation and apportionment of depreciation allowed. The amount of
any ordinary income, gain, or loss that is recognized on the
disposition of an asset in a general asset account must be apportioned
between United States and foreign sources based on the allocation and
apportionment of the--
(A) Depreciation allowed for the general asset account as of the
end of the taxable year in which the disposition occurs if paragraph
(e)(2) of this section applies to the disposition;
(B) Depreciation allowed for the general asset account as of the
time of disposition if the taxpayer applies paragraph (e)(3)(ii) of
this section to the disposition of all assets, the last asset, or the
remaining portion of the last asset, in the general asset account, or
if all the assets, the last asset, or the remaining portion of the last
asset, in the general asset account are disposed of in a transaction
described in paragraph (e)(3)(v)(A) of this section; or
(C) Depreciation allowed for the asset disposed of for only the
taxable year in which the disposition occurs if the taxpayer applies
paragraph (e)(3)(iii) of this section to the disposition of the asset
in a qualifying disposition, if the asset is disposed of in a
transaction described in paragraph (e)(3)(v)(B) of this section (like-
kind exchange or involuntary conversion), or if the asset is disposed
of in a transaction described in paragraph (e)(3)(vii) of this section
(anti-abuse rule).
(ii) Formula for determining foreign source income, gain, or loss.
The amount of ordinary income, gain, or loss recognized on the
disposition that shall be treated as foreign source income, gain, or
loss must be determined under the formula in this paragraph (f)(2)(ii).
For purposes of this formula, the allowed depreciation deductions are
determined for the applicable time period provided in paragraph
(f)(2)(i) of this section. The formula is:
Foreign Source = Total Ordinary x Allowed Depreciation
Income, Gain, or Income, Gain, or Deductions Allocated
Loss from The Loss from the and Apportioned to
Disposition of an Disposition of an Foreign Source Income/
Asset Asset Total Allowed
Depreciation
Deductions for the
General Asset Account
or for the Asset
Disposed of (as
applicable).
(3) Section 904(d) separate categories. If the assets in the
general asset account generate foreign source income in more than one
separate category under section 904(d)(1) or another section of the
Internal Revenue Code (for example, income treated as foreign source
income under section 904(g)(10)), or under a United States income tax
treaty that requires the foreign tax credit limitation to be determined
separately for specified types of income, the amount of ``foreign
source income, gain, or loss from the disposition of an asset'' (as
determined under the formula in paragraph (f)(2)(ii) of this section)
must be allocated and apportioned to the applicable separate category
or
[[Page 57560]]
categories under the formula in this paragraph (f)(3). For purposes of
this formula, the allowed depreciation deductions are determined for
the applicable time period provided in paragraph (f)(2)(i) of this
section. The formula is:
Foreign Source = Foreign Source x Allowed Depreciation
Income, Gain, or Income, Gain, or Deductions Allocated
Loss in a Separate Loss from The and Apportioned to a
Cateogory Disposition of an Separate Category
Asset Total/Allowed
Depreciation
Deductions and
Apportioned to
Foreign Source
Income.
(g) Assets subject to recapture. If the basis of an asset in a
general asset account is increased as a result of the recapture of any
allowable credit or deduction (for example, the basis adjustment for
the recapture amount under section 30(d)(2), 50(c)(2), 168(l)(7),
168(n)(4), 179(d)(10), 179A(e)(4), or 1400N(d)(5)), general asset
account treatment for the asset terminates as of the first day of the
taxable year in which the recapture event occurs. Consequently, the
taxpayer must remove the asset from the general asset account as of
that day and must make the adjustments to the general asset account
described in paragraphs (e)(3)(iii)(C)(2) through (4) of this section.
(h) Changes in use--(1) Conversion to any personal use. An asset in
a general asset account becomes ineligible for general asset account
treatment if a taxpayer uses the asset in any personal activity during
a taxable year. Upon a conversion to any personal use, the taxpayer
must remove the asset from the general asset account as of the first
day of the taxable year in which the change in use occurs (the year of
change) and must make the adjustments to the general asset account
described in paragraphs (e)(3)(iii)(C)(2) through (4) of this section.
(2) Change in use results in a different recovery period or
depreciation method--(i) No effect on general asset account election. A
change in the use described in Sec. 1.168(i)-4(d) (change in use
results in a different recovery period or depreciation method) of an
asset in a general asset account shall not cause or permit the
revocation of the election made under this section.
(ii) Asset is removed from the general asset account. Upon a change
in the use described in Sec. 1.168(i)-4(d), the taxpayer must remove
the asset from the general asset account as of the first day of the
year of change (as defined in Sec. 1.168(i)-4(a)) and must make the
adjustments to the general asset account described in paragraphs
(e)(3)(iii)(C)(2) through (4) of this section. If, however, the result
of the change in use is described in Sec. 1.168(i)-4(d)(3) (change in
use results in a shorter recovery period or a more accelerated
depreciation method) and the taxpayer elects to treat the asset as
though the change in use had not occurred pursuant to Sec. 1.168(i)-
4(d)(3)(ii), no adjustment is made to the general asset account upon
the change in use.
(iii) New general asset account is established--(A) Change in use
results in a shorter recovery period or a more accelerated depreciation
method. If the result of the change in use is described in Sec.
1.168(i)-4(d)(3) (change in use results in a shorter recovery period or
a more accelerated depreciation method) and adjustments to the general
asset account are made pursuant to paragraph (h)(2)(ii) of this
section, the taxpayer must establish a new general asset account for
the asset in the year of change in accordance with the rules in
paragraph (c) of this section, except that the adjusted depreciable
basis of the asset as of the first day of the year of change is
included in the general asset account. For purposes of paragraph (c)(2)
of this section, the applicable depreciation method, recovery period,
and convention are determined under Sec. 1.168(i)-4(d)(3)(i).
(B) Change in use results in a longer recovery period or a slower
depreciation method. If the result of the change in use is described in
Sec. 1.168(i)-4(d)(4) (change in use results in a longer recovery
period or a slower depreciation method), the taxpayer must establish a
separate general asset account for the asset in the year of change in
accordance with the rules in paragraph (c) of this section, except that
the unadjusted depreciable basis of the asset, and the greater of the
depreciation of the asset allowed or allowable in accordance with
section 1016(a)(2), as of the first day of the year of change are
included in the newly established general asset account. Consequently,
this general asset account as of the first day of the year of change
will have a beginning balance for both the unadjusted depreciable basis
and the depreciation reserve of the general asset account. For purposes
of paragraph (c)(2) of this section, the applicable depreciation
method, recovery period, and convention are determined under Sec.
1.168(i)-4(d)(4)(ii).
(i) Redetermination of basis. If, after the placed-in-service year,
the unadjusted depreciable basis of an asset in a general asset account
is redetermined due to a transaction other than that described in
paragraph (g) of this section (for example, due to contingent purchase
price or discharge of indebtedness), the taxpayer's election under
paragraph (l) of this section for the asset also applies to the
increase or decrease in basis resulting from the redetermination. For
the taxable year in which the increase or decrease in basis occurs, the
taxpayer must establish a new general asset account for the amount of
the increase or decrease in basis in accordance with the rules in
paragraph (c) of this section. For purposes of paragraph (c)(2) of this
section, the applicable recovery period for the increase or decrease in
basis is the recovery period of the asset remaining as of the beginning
of the taxable year in which the increase or decrease in basis occurs,
the applicable depreciation method and applicable convention for the
increase or decrease in basis are the same depreciation method and
convention applicable to the asset that applies for the taxable year in
which the increase or decrease in basis occurs, and the increase or
decrease in basis is deemed to be placed in service in the same taxable
year as the asset.
(j) Identification of disposed or converted asset--(1) In general.
The rules of this paragraph (j) apply when an asset in a general asset
account is disposed of or converted in a transaction described in
paragraphs (e)(3)(iii) (disposition of an asset in a qualifying
disposition), (e)(3)(iv)(B) (transactions subject to section
168(i)(7)), (e)(3)(v)(B) (transactions subject to section 1031 or
section 1033), (e)(3)(vii) (anti-abuse rule), (g) (assets subject to
recapture), or (h)(1) (conversion to any personal use) of this section.
(2) Identifying which asset is disposed of or converted--(i) In
general. For purposes of identifying which asset in a general asset
account is disposed of or converted, a taxpayer must identify the
disposed of or converted asset by using--
(A) The specific identification method of accounting. Under this
method of accounting, the taxpayer can determine the particular taxable
year in which the disposed of or converted asset was placed in service
by the taxpayer;
[[Page 57561]]
(B) A first-in, first-out method of accounting if the taxpayer can
readily determine from its records the total dispositions of assets
with the same recovery period during the taxable year but the taxpayer
cannot readily determine from its records the unadjusted depreciable
basis of the disposed of or converted asset. Under this method of
accounting, the taxpayer identifies the general asset account with the
earliest placed-in-service year that has the same recovery period as
the disposed of or converted asset and that has assets at the beginning
of the taxable year of the disposition or conversion, and the taxpayer
treats the disposed of or converted asset as being from that general
asset account. To determine which general asset account has assets at
the beginning of the taxable year of the disposition or conversion, the
taxpayer reduces the number of assets originally included in the
account by the number of assets disposed of or converted in any prior
taxable year in a transaction to which this paragraph (j) applies;
(C) A modified first-in, first-out method of accounting if the
taxpayer can readily determine from its records the total dispositions
of assets with the same recovery period during the taxable year and the
unadjusted depreciable basis of the disposed of or converted asset.
Under this method of accounting, the taxpayer identifies the general
asset account with the earliest placed-in-service year that has the
same recovery period as the disposed of or converted asset and that has
assets at the beginning of the taxable year of the disposition or
conversion with the same unadjusted depreciable basis as the disposed
of or converted asset, and the taxpayer treats the disposed of or
converted asset as being from that general asset account. To determine
which general asset account has assets at the beginning of the taxable
year of the disposition or conversion, the taxpayer reduces the number
of assets originally included in the account by the number of assets
disposed of or converted in any prior taxable year in a transaction to
which this paragraph (j) applies;
(D) A mortality dispersion table if the asset is a mass asset
accounted for in a separate general asset account in accordance with
paragraph (c)(2)(ii)(H) of this section and if the taxpayer can readily
determine from its records the total dispositions of assets with the
same recovery period during the taxable year. The mortality dispersion
table must be based upon an acceptable sampling of the taxpayer's
actual disposition and conversion experience for mass assets or other
acceptable statistical or engineering techniques. To use a mortality
dispersion table, the taxpayer must adopt recordkeeping practices
consistent with the taxpayer's prior practices and consonant with good
accounting and engineering practices; or
(E) Any other method as the Secretary may designate by publication
in the Federal Register or in the Internal Revenue Bulletin (see Sec.
601.601(d)(2) of this chapter) on or after September 19, 2013. See
paragraph (j)(2)(iii) of this section regarding the last-in, first-out
method of accounting.
(ii) Disposition of a portion of an asset. If a taxpayer disposes
of a portion of an asset and paragraph (e)(1)(ii) of this section
applies to that disposition, the taxpayer may identify the asset by
using any applicable method provided in paragraph (j)(2)(i) of this
section (after taking into account paragraph (j)(2)(iii) of this
section).
(iii) Last-in, first-out method of accounting. For purposes of
paragraph (j)(2) of this section, a last-in, first-out method of
accounting may not be used. Under a last-in, first-out method of
accounting, the taxpayer identifies the general asset account with the
most recent placed-in-service year that has the same recovery period as
the disposed of or converted asset and that has assets at the beginning
of the taxable year of the disposition or conversion, and the taxpayer
treats the disposed of or converted asset as being from that general
asset account.
(3) Basis of disposed of or converted asset. Solely for purposes of
this paragraph (j)(3), the term asset is the asset as determined under
paragraph (e)(2)(viii) of this section or the portion of such asset
that is disposed of in a disposition described in paragraph (e)(1)(ii)
of this section. After identifying which asset in a general asset
account is disposed of or converted, the taxpayer may use any
reasonable method that is consistently applied to all assets in the
same general asset account for purposes of determining the unadjusted
depreciable basis of the disposed of or converted asset in that general
asset account. Examples of a reasonable method include, but are not
limited to, discounting the cost of the replacement asset to its
placed-in-service year cost using the Consumer Price Index, a pro rata
allocation of the unadjusted depreciable basis of the general asset
account based on the replacement cost of the disposed asset and the
replacement cost of all of the assets in the general asset account, and
a study allocating the cost of the asset to its individual components.
(k) Effect of adjustments on prior dispositions. The adjustments to
a general asset account under paragraphs (e)(3)(iii), (e)(3)(iv),
(e)(3)(v), (e)(3)(vii), (g), or (h) of this section have no effect on
the recognition and character of prior dispositions subject to
paragraph (e)(2) of this section.
(l) Election--(1) Irrevocable election. If a taxpayer makes an
election under this paragraph (l), the taxpayer consents to, and agrees
to apply, all of the provisions of this section to the assets included
in a general asset account. Except as provided in paragraphs
(c)(1)(ii)(A), (e)(3), (g), or (h) of this section or except as
otherwise expressly provided by other guidance published in the
Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter), an
election made under this section is irrevocable and will be binding on
the taxpayer for computing taxable income for the taxable year for
which the election is made and for all subsequent taxable years. An
election under this paragraph (l) is made separately by each person
owning an asset to which this section applies (for example, by each
member of a consolidated group, at the partnership level (and not by
the partner separately), or at the S corporation level (and not by the
shareholder separately)).
* * * * *
(m) Effective/applicability date--(1) In general. This section
applies to taxable years beginning on or after January 1, 2014. Except
as provided in paragraphs (m)(2), (m)(3), and (m)(4) of this section,
Sec. 1.168(i)-1 as contained in 26 CFR part 1 edition revised as of
April 1, 2011, applies to taxable years beginning before January 1,
2014.
(2) Early application of this section. A taxpayer may choose to
apply the provisions of this section to taxable years beginning on or
after January 1, 2012.
(3) Early application of regulation project REG-110732-13. A
taxpayer may rely on the provisions of this section in regulation
project REG-110732-13 for taxable years beginning on or after January
1, 2012. However, a taxpayer may not rely on the provisions of this
section in regulation project REG-110732-13 for taxable years beginning
on or after January 1, 2014.
(4) Optional application of TD 9564. A taxpayer may choose to apply
Sec. 1.168(i)-1T as contained in TD 9564 (76 FR 81060) December 27,
2011, to taxable years beginning on or after January 1, 2012. However,
a taxpayer may not apply Sec. 1.168(i)-1T as contained in TD 9564 (76
FR 81060) December 27, 2011, to taxable years beginning on or after
January 1, 2014.
[[Page 57562]]
(5) Change in method of accounting. A change to comply with this
section for depreciable assets placed in service in a taxable year
ending on or after December 30, 2003, is a change in method of
accounting to which the provisions of section 446(e) and the
regulations under section 446(e) apply. A taxpayer also may treat a
change to comply with this section for depreciable assets placed in
service in a taxable year ending before December 30, 2003, as a change
in method of accounting to which the provisions of section 446(e) and
the regulations under section 446(e) apply. This paragraph (m)(5) does
not apply to a change to comply with paragraphs (e)(3)(ii),
(e)(3)(iii), or paragraph (l) of this section.
0
Par. 4. Section 1.168(i)-7 is amended by:
0
1. Adding a new sentence at end of paragraph (b).
0
2. Revising paragraph (e).
The addition and revision read as follows:
Sec. 1.168(i)-7 Accounting for MACRS property.
* * * * *
(b) * * * If a taxpayer disposes of a portion of an asset and Sec.
1.168(i)-8(d)(1) applies to that disposition, the taxpayer must account
for the disposed portion in a single asset account beginning in the
taxable year in which the disposition occurs. See Sec. 1.168(i)-
8(h)(3)(i).
* * * * *
(e) Effective/applicability date--(1) In general. This section
applies to taxable years beginning on or after January 1, 2014.
(2) Early application of this section. A taxpayer may choose to
apply the provisions of this section to taxable years beginning on or
after January 1, 2012.
(3) Early application of regulation project REG-110732-13. A
taxpayer may rely on the provisions of this section in regulation
project REG-110732-13 for taxable years beginning on or after January
1, 2012. However, a taxpayer may not rely on the provisions of this
section in regulation project REG-110732-13 for taxable years beginning
on or after January 1, 2014.
(4) Optional application of TD 9564. A taxpayer may choose to apply
Sec. 1.168(i)-7T as contained in TD 9564 (76 FR 81060) December 27,
2011, to taxable years beginning on or after January 1, 2012. However,
a taxpayer may not apply Sec. 1.168(i)-7T as contained in TD 9564 (76
FR 81060) December 27, 2011, to taxable years beginning on or after
January 1, 2014.
(5) Change in method of accounting. A change to comply with this
section for depreciable assets placed in service in a taxable year
ending on or after December 30, 2003, is a change in method of
accounting to which the provisions of section 446(e) and the
regulations under section 446(e) apply. A taxpayer also may treat a
change to comply with this section for depreciable assets placed in
service in a taxable year ending before December 30, 2003, as a change
in method of accounting to which the provisions of section 446(e) and
the regulations under section 446(e) apply.
0
Par. 5. Section 1.168(i)-8 is added to read as follows:
Sec. 1.168(i)-8 Dispositions of MACRS property.
(a) Scope. This section provides rules applicable to dispositions
of MACRS property (as defined in Sec. 1.168(b)-1(a)(2)) or to
depreciable property (as defined in Sec. 1.168(b)-1(a)(1)) that would
be MACRS property but for an election made by the taxpayer either to
expense all or some of the property's cost under section 179, 179A,
179B, 179C, 179D, or 1400I(a)(1), or any similar provision, or to
amortize all or some of the property's cost under section 1400I(a)(2)
or any similar provision. This section also applies to dispositions
described in paragraph (d)(1) of this section of a portion of such
property. Except as provided in Sec. 1.168(i)-1(e)(iii), this section
does not apply to dispositions of assets included in a general asset
account. For rules applicable to dispositions of assets included in a
general asset account, see Sec. 1.168(i)-1(e) or Sec. 1.168(e)-1T, as
applicable.
(b) Definitions. For purposes of this section--
(1) Building has the same meaning as that term is defined in Sec.
1.48-1(e)(1).
(2) Disposition occurs when ownership of the asset is transferred
or when the asset is permanently withdrawn from use either in the
taxpayer's trade or business or in the production of income. A
disposition includes the sale, exchange, retirement, physical
abandonment, or destruction of an asset. A disposition also occurs when
an asset is transferred to a supplies, scrap, or similar account, or
when a portion of an asset is disposed of as described in paragraph
(d)(1) of this section. If a structural component (or a portion
thereof) of a building is disposed of in a disposition described in
paragraph (d)(1) of this section, a disposition also includes the
disposition of such structural component (or such portion thereof).
(3) Mass assets is a mass or group of individual items of
depreciable assets--
(i) That are not necessarily homogenous;
(ii) Each of which is minor in value relative to the total value of
the mass or group;
(iii) Numerous in quantity;
(iv) Usually accounted for only on a total dollar or quantity
basis;
(v) With respect to which separate identification is impracticable;
and
(vi) Placed in service in the same taxable year.
(4) Portion of an asset is any part of an asset that is less than
the entire asset as determined under paragraph (c)(4) of this section.
(5) Structural component has the same meaning as that term is
defined in Sec. 1.48-1(e)(2).
(6) Unadjusted depreciable basis of the multiple asset account or
pool is the sum of the unadjusted depreciable bases (as defined in
Sec. 1.168(b)-1(a)(3)) of all assets included in the multiple asset
account or pool.
(c) Special rules--(1) Manner of disposition. The manner of
disposition (for example, normal retirement, abnormal retirement,
ordinary retirement, or extraordinary retirement) is not taken into
account in determining whether a disposition occurs or gain or loss is
recognized.
(2) Disposition by transfer to a supplies account. If a taxpayer
made an election under Sec. 1.162-3(d) to treat the cost of any
rotable spare part, temporary spare part, or standby emergency spare
part (as defined in Sec. 1.162-3(c)) as a capital expenditure subject
to the allowance for depreciation, the taxpayer can dispose of the
rotable, temporary, or standby emergency spare part by transferring it
to a supplies account only if the taxpayer has obtained the consent of
the Commissioner to revoke the Sec. 1.162-3(d) election. See Sec.
1.162-3(d)(3) for the procedures for revoking a Sec. 1.162-3(d)
election.
(3) Leasehold improvements. This section also applies to--
(i) A lessor of leased property that made an improvement to that
property for the lessee of the property, has a depreciable basis in the
improvement, and disposes of the improvement before or upon the
termination of the lease with the lessee. See section 168(i)(8)(B); and
(ii) A lessee of leased property that made an improvement to that
property, has a depreciable basis in the improvement, and disposes of
the improvement before or upon the termination of the lease.
(4) Determination of asset disposed of--(i) General rules. For
purposes of
[[Page 57563]]
applying this section, the facts and circumstances of each disposition
are considered in determining what is the appropriate asset disposed
of. The asset for disposition purposes may not consist of items placed
in service by the taxpayer on different dates. For purposes of
determining what is the appropriate asset disposed of, the unit of
property determination under Sec. 1.263(a)-3(e) or in published
guidance in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of
this chapter) under section 263(a) does not apply.
(ii) Special rules. In addition to the general rules in paragraph
(c)(4)(i) of this section, the following rules apply for purposes of
applying this section:
(A) Each building (including its structural components) is the
asset except as provided in Sec. 1.1250-1(a)(2)(ii) or in paragraph
(c)(4)(ii)(B) or paragraph (c)(4)(ii)(D) of this section.
(B) If a building has two or more condominium or cooperative units,
each condominium or cooperative unit (including its structural
components) is the asset except as provided in Sec. 1.1250-1(a)(2)(ii)
or in paragraph (c)(4)(ii)(D) of this section.
(C) If a taxpayer properly includes an item in one of the asset
classes 00.11 through 00.4 of Rev. Proc. 87-56 (1987-2 CB 674) (see
Sec. 601.601(d)(2) of this chapter) or properly classifies an item in
one of the categories under section 168(e)(3) (except for a category
that includes buildings or structural components; for example, retail
motor fuels outlet, qualified leasehold improvement property, qualified
restaurant property, and qualified retail improvement property), each
item is the asset provided paragraph (c)(4)(ii)(D) of this section does
not apply to the item. For example, each desk is the asset, each
computer is the asset, and each qualified smart electric meter is the
asset.
(D) If the taxpayer places in service an improvement or addition to
an asset after the taxpayer placed the asset in service, the
improvement or addition is a separate asset.
(d) Disposition of a portion of an asset--(1) In general. For
purposes of applying this section, a disposition includes a disposition
of a portion of an asset as a result of a casualty event described in
section 165, a disposition of a portion of an asset for which gain
(determined without regard to section 1245 or section 1250) is not
recognized in whole or in part under section 1031 or section 1033, a
transfer of a portion of an asset in a transaction described in section
168(i)(7)(B), or a sale of a portion of an asset, even if the taxpayer
does not make the election under paragraph (d)(2)(i) of this section
for that disposed portion. For other transactions, a disposition
includes a disposition of a portion of an asset only if the taxpayer
makes the election under paragraph (d)(2)(i) of this section for that
disposed portion.
(2) Partial disposition election--(i) In general. A taxpayer may
make an election under this paragraph (d)(2) to apply this section to a
disposition of a portion of an asset. If the asset is properly included
in one of the asset classes 00.11 through 00.4 of Rev. Proc. 87-56
(1987-2 CB 674) (see Sec. 601.601(d)(2) of this chapter), a taxpayer
may make an election under this paragraph (d)(2) to apply this section
to a disposition of a portion of such asset only if the taxpayer
classifies the replacement portion of the asset under the same asset
class as the disposed portion of the asset.
(ii) Time and manner for making election--(A) Time for making
election. Except as provided in paragraph (d)(2)(iii) or paragraph
(d)(2)(iv) of this section, a taxpayer must make the election specified
in paragraph (d)(2)(i) of this section by the due date (including
extensions) of the original Federal tax return for the taxable year in
which the portion of an asset is disposed of by the taxpayer.
(B) Manner of making election. Except as provided in paragraph
(d)(2)(iii) or paragraph (d)(2)(iv) of this section, a taxpayer must
make the election specified in paragraph (d)(2)(i) of this section by
applying the provisions of this section for the taxable year in which
the portion of an asset is disposed of by the taxpayer, by reporting
the gain, loss, or other deduction on the taxpayer's timely filed
(including extensions) original Federal tax return for that taxable
year, and, if the asset is properly included in one of the asset
classes 00.11 through 00.4 of Rev. Proc. 87-56 (1987-2 CB 674) (see
Sec. 601.601(d)(2) of this chapter), by classifying the replacement
portion of such asset under the same asset class as the disposed
portion of the asset in the taxable year in which the replacement
portion is placed in service by the taxpayer. Except as provided in
paragraph (d)(2)(iii) or paragraph (d)(2)(iv)(B) of this section, the
election specified in paragraph (d)(2)(i) of this section may not be
made through the filing of an application for change in accounting
method.
(iii) Special rule for subsequent Internal Revenue Service
adjustment. This paragraph (d)(2)(iii) applies when a taxpayer deducted
the amount paid or incurred for the replacement of a portion of an
asset as a repair under Sec. 1.162-4, the taxpayer did not make the
election specified in paragraph (d)(2)(i) of this section for the
disposed portion of that asset within the time and in the manner under
paragraph (d)(2)(ii) or paragraph (d)(2)(iv) of this section, and as a
result of an examination of the taxpayer's Federal tax return, the
Internal Revenue Service disallows the taxpayer's repair deduction for
the amount paid or incurred for the replacement of the portion of that
asset and instead capitalizes such amount under Sec. 1.263(a)-2 or
Sec. 1.263(a)-3. If this paragraph (d)(2)(iii) applies, the taxpayer
may make the election specified in paragraph (d)(2)(i) of this section
for the disposition of the portion of the asset to which the Internal
Revenue Service's adjustment pertains by filing an application for
change in accounting method, provided the asset of which the disposed
portion was a part is owned by the taxpayer at the beginning of the
year of change (as defined for purposes of section 446(e)).
(iv) Special rules for 2012 or 2013 returns. If, under paragraph
(j)(2) or paragraph (j)(3) of this section, a taxpayer chooses to apply
the provisions of this section to a taxable year beginning on or after
January 1, 2012, and ending on or before September 19, 2013 (applicable
taxable year), and the taxpayer did not make the election specified in
paragraph (d)(2)(i) of this section on its timely filed original
Federal tax return for the applicable taxable year, including
extensions, the taxpayer must make the election specified in paragraph
(d)(2)(i) of this section for the applicable taxable year by filing
either--
(A) An amended Federal tax return for the applicable taxable year
on or before 180 days from the due date including extensions of the
taxpayer's Federal tax return for the applicable taxable year,
notwithstanding that the taxpayer may not have extended the due date;
or
(B) An application for change in accounting method with the
taxpayer's timely filed original Federal tax return for the first or
second taxable year succeeding the applicable taxable year.
(v) Revocation. A taxpayer may revoke the election specified in
paragraph (d)(2)(i) of this section only by filing a request for a
private letter ruling and obtaining the Commissioner's consent to
revoke the election. The Commissioner may grant a request to revoke
this election if the taxpayer acted reasonably and in good faith, and
the revocation will not prejudice the interests of the Government. See
generally Sec. 301.9100-3 of this chapter. The election specified in
paragraph (d)(2)(i) of this section may
[[Page 57564]]
not be revoked through the filing of an application for change in
accounting method.
(e) Gain or loss on dispositions. Solely for purposes of this
paragraph (e), the term asset is an asset within the scope of this
section or the portion of such asset that is disposed of in a
disposition described in paragraph (d)(1) of this section. Except as
provided by section 280B and Sec. 1.280B-1, the following rules apply
when an asset is disposed of during a taxable year:
(1) If an asset is disposed of by sale, exchange, or involuntary
conversion, gain or loss must be recognized under the applicable
provisions of the Internal Revenue Code.
(2) If an asset is disposed of by physical abandonment, loss must
be recognized in the amount of the adjusted depreciable basis (as
defined in Sec. 1.168(b)-1(a)(4)) of the asset at the time of the
abandonment (taking into account the applicable convention). However,
if the abandoned asset is subject to nonrecourse indebtedness,
paragraph (e)(1) of this section applies to the asset (instead of this
paragraph (e)(2)). For a loss from physical abandonment to qualify for
recognition under this paragraph (e)(2), the taxpayer must intend to
discard the asset irrevocably so that the taxpayer will neither use the
asset again nor retrieve it for sale, exchange, or other disposition.
(3) If an asset is disposed of other than by sale, exchange,
involuntary conversion, physical abandonment, or conversion to personal
use (as, for example, when the asset is transferred to a supplies or
scrap account), gain is not recognized. Loss must be recognized in the
amount of the excess of the adjusted depreciable basis of the asset at
the time of the disposition (taking into account the applicable
convention) over the asset's fair market value at the time of the
disposition (taking into account the applicable convention).
(f) Basis of asset disposed of--(1) In general. The adjusted basis
of an asset disposed of for computing gain or loss is its adjusted
depreciable basis at the time of the asset's disposition (as determined
under the applicable convention for the asset).
(2) Assets disposed of are in multiple asset accounts. If the
taxpayer accounts for the asset disposed of in a multiple asset account
or pool and it is impracticable from the taxpayer's records to
determine the unadjusted depreciable basis (as defined in Sec.
1.168(b)-1(a)(3)) of the asset disposed of, the taxpayer may use any
reasonable method that is consistently applied to all assets in the
same multiple asset account or pool for purposes of determining the
unadjusted depreciable basis of assets disposed of. Examples of a
reasonable method include, but are not limited to, discounting the cost
of the replacement asset to its placed-in-service year cost using the
Consumer Price Index, a pro rata allocation of the unadjusted
depreciable basis of the multiple asset account or pool based on the
replacement cost of the disposed asset and the replacement cost of all
of the assets in the multiple asset account or pool, and a study
allocating the cost of the asset to its individual components. To
determine the adjusted depreciable basis of an asset disposed of in a
multiple asset account, the depreciation allowed or allowable for the
asset disposed of is computed by using the depreciation method,
recovery period, and convention applicable to the multiple asset
account or pool in which the asset disposed of was included and by
including the additional first year depreciation deduction claimed for
the asset disposed of.
(3) Disposition of a portion of an asset. This paragraph (f)(3)
applies only when a taxpayer disposes of a portion of an asset and
paragraph (d)(1) of this section applies to that disposition. For
computing gain or loss, the adjusted basis of the disposed portion of
the asset is the adjusted depreciable basis of that disposed portion at
the time of its disposition (as determined under the applicable
convention for the asset). The taxpayer may use any reasonable method
for purposes of determining the unadjusted depreciable basis (as
defined in Sec. 1.168(b)-1(a)(3)) of the disposed portion of the
asset. If a taxpayer disposes of more than one portion of the same
asset and paragraph (d)(1) of this section applies to more than one of
those dispositions, the taxpayer may use any reasonable method that is
consistently applied to all portions of the same asset for purposes of
determining the unadjusted depreciable basis of each disposed portion
of the asset. Examples of a reasonable method include, but are not
limited to, discounting the cost of the replacement portion of the
asset to its placed-in-service year cost using the Consumer Price
Index, a pro rata allocation of the unadjusted depreciable basis of the
asset based on the replacement cost of the disposed portion of the
asset and the replacement cost of the asset, and a study allocating the
cost of the asset to its individual components. To determine the
adjusted depreciable basis of the disposed portion of the asset, the
depreciation allowed or allowable for the disposed portion is computed
by using the depreciation method, recovery period, and convention
applicable to the asset in which the disposed portion was included and
by including the portion of the additional first year depreciation
deduction claimed for the asset that is attributable to the disposed
portion.
(g) Identification of asset disposed of--(1) In general. Except as
provided in paragraph (g)(2) or paragraph (g)(3) of this section, a
taxpayer must use the specific identification method of accounting to
identify which asset is disposed of by the taxpayer. Under this method
of accounting, the taxpayer can determine the particular taxable year
in which the asset disposed of was placed in service by the taxpayer.
(2) Asset disposed of is in a multiple asset account. If a taxpayer
accounts for the asset disposed of in a multiple asset account or pool
and the total dispositions of assets with the same recovery period
during the taxable year are readily determined from the taxpayer's
records, but it is impracticable from the taxpayer's records to
determine the particular taxable year in which the asset disposed of
was placed in service by the taxpayer, the taxpayer must identify the
asset disposed of by using--
(i) A first-in, first-out method of accounting if the unadjusted
depreciable basis of the asset disposed of cannot be readily determined
from the taxpayer's records. Under this method of accounting, the
taxpayer identifies the multiple asset account or pool with the
earliest placed-in-service year that has the same recovery period as
the asset disposed of and that has assets at the beginning of the
taxable year of the disposition, and the taxpayer treats the asset
disposed of as being from that multiple asset account or pool;
(ii) A modified first-in, first-out method of accounting if the
unadjusted depreciable basis of the asset disposed of can be readily
determined from the taxpayer's records. Under this method of
accounting, the taxpayer identifies the multiple asset account or pool
with the earliest placed-in-service year that has the same recovery
period as the asset disposed of and that has assets at the beginning of
the taxable year of the disposition with the same unadjusted
depreciable basis as the asset disposed of, and the taxpayer treats the
asset disposed of as being from that multiple asset account or pool;
(iii) A mortality dispersion table if the asset disposed of is a
mass asset. The mortality dispersion table must be based upon an
acceptable sampling of the taxpayer's actual disposition experience for
mass assets or other acceptable
[[Page 57565]]
statistical or engineering techniques. To use a mortality dispersion
table, the taxpayer must adopt recordkeeping practices consistent with
the taxpayer's prior practices and consonant with good accounting and
engineering practices; or
(iv) Any other method as the Secretary may designate by publication
in the Federal Register or in the Internal Revenue Bulletin (see Sec.
601.601(d)(2) of this chapter) on or after September 19, 2013. See
paragraph (g)(4) of this section regarding the last-in, first-out
method of accounting.
(3) Disposition of a portion of an asset. If a taxpayer disposes of
a portion of an asset and paragraph (d)(1) of this section applies to
that disposition, but it is impracticable from the taxpayer's records
to determine the particular taxable year in which the asset was placed
in service, the taxpayer must identify the asset by using any
applicable method provided in paragraph (g)(2) of this section (after
taking into account paragraph (g)(4) of this section).
(4) Last-in, first-out method of accounting. For purposes of
paragraph (g)(2) of this section, a last-in, first-out method of
accounting may not be used. Under a last-in, first-out method of
accounting, the taxpayer identifies the multiple asset account or pool
with the most recent placed-in-service year that has the same recovery
period as the asset disposed of and that has assets at the beginning of
the taxable year of the disposition, and the taxpayer treats the asset
disposed of as being from that multiple asset account or pool.
(h) Accounting for asset disposed of--(1) Depreciation ends.
Depreciation ends for an asset at the time of the asset's disposition
(as determined under the applicable convention for the asset). See
Sec. 1.167(a)-10(b). If the asset disposed of is in a single asset
account initially or as a result of Sec. 1.168(i)-8(h)(2)(i) or Sec.
1.168(i)-8(h)(3)(i), the single asset account terminates at the time of
the asset's disposition (as determined under the applicable convention
for the asset). If a taxpayer disposes of a portion of an asset and
paragraph (d)(1) of this section applies to that disposition,
depreciation ends for that disposed portion of the asset at the time of
the disposition of the disposed portion (as determined under the
applicable convention for the asset).
(2) Asset disposed of in a multiple asset account or pool. If the
taxpayer accounts for the asset disposed of in a multiple asset account
or pool, then--
(i) As of the first day of the taxable year in which the
disposition occurs, the asset disposed of is removed from the multiple
asset account or pool and is placed into a single asset account. See
Sec. 1.168(i)-7(b) or Sec. 1.168(i)-7T(b), as applicable;
(ii) The unadjusted depreciable basis of the multiple asset account
or pool must be reduced by the unadjusted depreciable basis of the
asset disposed of as of the first day of the taxable year in which the
disposition occurs. See paragraph (f)(2) of this section for
determining the unadjusted depreciable basis of the asset disposed of;
(iii) The depreciation reserve of the multiple asset account or
pool must be reduced by the depreciation allowed or allowable for the
asset disposed of as of the end of the taxable year immediately
preceding the year of disposition, computed by using the depreciation
method, recovery period, and convention applicable to the multiple
asset account or pool in which the asset disposed of was included and
by including the additional first year depreciation deduction claimed
for the asset disposed of; and
(iv) In determining the adjusted depreciable basis of the asset
disposed of at the time of disposition (taking into account the
applicable convention), the depreciation allowed or allowable for the
asset disposed of is computed by using the depreciation method,
recovery period, and convention applicable to the multiple asset
account or pool in which the asset disposed of was included and by
including the additional first year depreciation deduction claimed for
the asset disposed of.
(3) Disposition of a portion of an asset. This paragraph (h)(3)
applies only when a taxpayer disposes of a portion of an asset and
paragraph (d)(1) of this section applies to that disposition. In this
case--
(i) As of the first day of the taxable year in which the
disposition occurs, the disposed portion is placed into a single asset
account. See Sec. 1.168(i)-7(b);
(ii) The unadjusted depreciable basis of the asset must be reduced
by the unadjusted depreciable basis of the disposed portion of the
first day of the taxable year in which the disposition occurs. See
paragraph (f)(3) of this section for determining the unadjusted
depreciable basis of the disposed portion;
(iii) The depreciation reserve of the asset must be reduced by the
depreciation allowed or allowable for the disposed portion as of the
end of the taxable year immediately preceding the year of disposition,
computed by using the depreciation method, recovery period, and
convention applicable to the asset in which the disposed portion was
included and by including the portion of the additional first year
depreciation deduction claimed for the asset that is attributable to
the disposed portion; and
(iv) In determining the adjusted depreciable basis of the disposed
portion at the time of disposition (taking into account the applicable
convention), the depreciation allowed or allowable for the disposed
portion is computed by using the depreciation method, recovery period,
and convention applicable to the asset in which the disposed portion
was included and by including the portion of the additional first year
depreciation deduction claimed for the asset that is attributable to
the disposed portion.
(i) Examples. The application of this section is illustrated by the
following examples. For purposes of these examples, assume that section
168 as in effect on September 19, 2013, applies to taxable years
beginning on or after January 1, 2014.
Example 1. A owns an office building with four elevators. A
replaces one of the elevators. The elevator is a structural
component of the office building. In accordance with paragraph
(c)(4)(ii)(A) of this section, the office building (including its
structural components) is the asset for disposition purposes. A does
not make the partial disposition election provided under paragraph
(d)(2) of this section for the elevator. Thus, the retirement of the
replaced elevator is not a disposition. As a result, depreciation
continues for the cost of the building (including the cost of the
retired elevator and the building's other structural components),
and A does not recognize a loss for this retired elevator. If A must
capitalize the amount paid for the replacement elevator pursuant to
Sec. 1.263(a)-3, the replacement elevator is a separate asset for
disposition purposes pursuant to paragraph (c)(4)(ii)(D) of this
section and for depreciation purposes pursuant to section 168(i)(6).
Example 2. The facts are the same as in Example 1, except A
accounts for each structural component of the office building as a
separate asset in its fixed asset system. Although A treats each
structural component as a separate asset in its records, the office
building (including its structural components) is the asset for
disposition purposes in accordance with paragraph (c)(4)(ii)(A) of
this section. Accordingly, the result is the same as in Example 1.
Example 3. The facts are the same as in Example 1, except A
makes the partial disposition election provided under paragraph
(d)(2) of this section for the elevator. Although the office
building (including its structural components) is the asset for
disposition purposes, the result of A making the partial disposition
election for the elevator is that the retirement of the replaced
elevator is a disposition. Thus, depreciation for the retired
elevator ceases at the time of its retirement (taking into account
the applicable convention), and A recognizes a loss upon this
retirement. Further, A must capitalize the amount paid for the
replacement elevator pursuant to Sec. 1.263(a)-3(k)(1)(i), and the
replacement elevator is a
[[Page 57566]]
separate asset for disposition purposes pursuant to paragraph
(c)(4)(ii)(D) of this section and for depreciation purposes pursuant
to section 168(i)(6).
Example 4. B, a calendar-year commercial airline company, owns
several aircraft that are used in the commercial carrying of
passengers and described in asset class 45.0 of Rev. Proc. 87-56. B
replaces the existing engines on one of the aircraft with new
engines. Assume each aircraft is a unit of property as determined
under Sec. 1.263(a)-3(e)(3) and each engine of an aircraft is a
major component or substantial structural part of the aircraft as
determined under Sec. 1.263(a)-3(k)(6). Assume also that B treats
each aircraft as the asset for disposition purposes in accordance
with paragraph (c)(4) of this section. B makes the partial
disposition election provided under paragraph (d)(2) of this section
for the engines in the aircraft. Although the aircraft is the asset
for disposition purposes, the result of B making the partial
disposition election for the engines is that the retirement of the
replaced engines is a disposition. Thus, depreciation for the
retired engines ceases at the time of their retirement (taking into
account the applicable convention), and B recognizes a loss upon
this retirement. Further, B must capitalize the amount paid for the
replacement engines pursuant to Sec. 1.263(a)-3(k)(1)(i), and the
replacement engines are a separate asset for disposition purposes
pursuant to paragraph (c)(4)(ii)(D) of this section and for
depreciation purposes pursuant to section 168(i)(6).
Example 5. The facts are the same as in Example 4, except B does
not make the partial disposition election provided under paragraph
(d)(2) of this section for the engines. Thus, the retirement of the
replaced engines on one of the aircraft is not a disposition. As a
result, depreciation continues for the cost of the aircraft
(including the cost of the retired engines), and B does not
recognize a loss for these retired engines. If B must capitalize the
amount paid for the replacement engines pursuant to Sec. 1.263(a)-
3, the replacement engines are a separate asset for disposition
purposes pursuant to paragraph (c)(4)(ii)(D) of this section and for
depreciation purposes pursuant to section 168(i)(6).
Example 6. C, a corporation, owns several trucks that are used
in its trade or business and described in asset class 00.241 of Rev.
Proc. 87-56. C replaces the engine on one of the trucks with a new
engine. Assume each truck is a unit of property as determined under
Sec. 1.263(a)-3(e)(3) and each engine is a major component or
substantial structural part of the truck as determined under Sec.
1.263(a)-3(k)(6). Because the trucks are described in asset class
00.241 of Rev. Proc. 87-56, C must treat each truck as the asset for
disposition purposes. C does not make the partial disposition
election provided under paragraph (d)(2) of this section for the
engine. Thus, the retirement of the replaced engine on the truck is
not a disposition. As a result, depreciation continues for the cost
of the truck (including the cost of the retired engine), and C does
not recognize a loss for this retired engine. If C must capitalize
the amount paid for the replacement engine pursuant to Sec.
1.263(a)-3, the replacement engine is a separate asset for
disposition purposes pursuant to paragraph (c)(4)(ii)(D) of this
section and for depreciation purposes pursuant to section 168(i)(6).
Example 7. D owns a retail building. D replaces 60 percent of
the roof of this building. In accordance with paragraph
(c)(4)(ii)(A) of this section, the retail building (including its
structural components) is the asset for disposition purposes. Assume
D must capitalize the costs incurred for replacing 60 percent of the
roof pursuant to Sec. 1.263(a)-3(k)(1)(vi). D makes the partial
disposition election provided under paragraph (d)(2) of this section
for the 60 percent of the replaced roof. Thus, the retirement of 60
percent of the roof is a disposition. As a result, depreciation for
60 percent of the roof ceases at the time of its retirement (taking
into account the applicable convention), and D recognizes a loss
upon this retirement. Further, D must capitalize the amount paid for
the 60 percent of the roof pursuant to Sec. 1.263(a)-3(k)(1)(i) and
(vi) and the replacement 60 percent of the roof is a separate asset
for disposition purposes pursuant to paragraph (c)(4)(ii)(D) of this
section and for depreciation purposes pursuant to section 168(i)(6).
Example 8. (i) The facts are the same as in Example 7. Ten years
after replacing 60 percent of the roof, D replaces 55 percent of the
roof of the building. In accordance with paragraph (c)(4)(ii)(A) and
(D) of this section, for disposition purposes, the retail building
(including its structural components except the replacement 60
percent of the roof) is an asset and the replacement 60 percent of
the roof is a separate asset. Assume D must capitalize the costs
incurred for replacing 55 percent of the roof pursuant to Sec.
1.263(a)-3(k)(1)(vi). D makes the partial disposition election
provided under paragraph (d)(2) of this section for the 55 percent
of the replaced roof. Thus, the retirement of 55 percent of the roof
is a disposition.
(ii) However, D cannot determine from its records whether the
replaced 55 percent is part of the 60 percent of the roof replaced
ten years ago or whether the replaced 55 percent is part of the
remaining 40 percent of the original roof. Pursuant to paragraph
(g)(3) of this section, D identifies which asset it disposed of by
using the first-in, first-out method of accounting. As a result, D
disposed of the remaining 40 percent of the original roof and 25
percent of the 60 percent of the roof replaced ten years ago.
(iii) Thus, depreciation for the remaining 40 percent of the
original roof ceases at the time of its retirement (taking into
account the applicable convention), and D recognizes a loss upon
this retirement. Further, depreciation for 25 percent of the 60
percent of the roof replaced ten years ago ceases at the time of its
retirement (taking into account the applicable convention), and D
recognizes a loss upon this retirement. Also, D must capitalize the
amount paid for the 55 percent of the roof pursuant to Sec.
1.263(a)-3(k)(1)(i) and (vi), and the replacement 55 percent of the
roof is a separate asset for disposition purposes pursuant to
paragraph (c)(4)(ii)(D) of this section and for depreciation
purposes pursuant to section 168(i)(6).
Example 9. (i) On July 1, 2011, E, a calendar-year taxpayer,
purchased and placed in service a multi-story office building that
costs $20,000,000. The cost of each structural component of the
building was not separately stated. E accounts for the building in
its records as a single asset with a cost of $20,000,000. E
depreciates the building as nonresidential real property and uses
the optional depreciation table that corresponds with the general
depreciation system, the straight-line method, a 39-year recovery
period, and the mid-month convention. As of January 1, 2014, the
depreciation reserve for the building is $1,261,000.
(ii) On June 30, 2014, E replaces one of the office building's
elevators. E did not dispose of any other structural components of
this building in 2014. E makes the partial disposition election
provided under paragraph (d)(2) of this section for this elevator.
Although the office building (including its structural components)
is the asset for disposition purposes, the result of E making the
partial disposition election for the elevator is that the retirement
of the replaced elevator is a disposition. Because E cannot identify
the cost of the structural components of the office building from
its records, E determines the cost of any disposed structural
component of this building by discounting the cost of the
replacement structural component to its placed-in-service year cost
using the Consumer Price Index. Using this reasonable method, E
determines the cost of the retired elevator by discounting the cost
of the replacement elevator to its cost in 2011 (the placed-in-
service year) using the Consumer Price Index, resulting in $150,000
of the $20,000,000 purchase price for the building to be the cost of
the retired elevator. Using the optional depreciation table that
corresponds with the general depreciation system, the straight-line
method, a 39-year recovery period, and the mid-month convention, the
depreciation allowed or allowable for the retired elevator as of
December 31, 2013, is $9,457.50.
(iii) For E's 2014 Federal tax return, the loss for the retired
elevator is determined as follows. The depreciation allowed or
allowable for 2014 for the retired elevator is $1,763 ((unadjusted
depreciable basis of $150,000 x depreciation rate of 2.564% for
2014) x 5.5/12 months). Thus, the adjusted depreciable basis of the
retired elevator is $138,779.50 (the adjusted depreciable basis of
$140,542.50 removed from the building cost less the depreciation
allowed or allowable of $1,763 for 2014). As a result, E recognizes
a loss of $138,779.50 for the retired elevator in 2014, which is
subject to section 1231.
(iv) For E's 2014 Federal tax return, the depreciation allowance
for the building is computed as follows. As of January 1, 2014, the
unadjusted depreciable basis of the building is reduced from
$20,000,000 to $19,850,000 ($20,000,000 less the unadjusted
depreciable basis of $150,000 for the retired elevator), and the
depreciation reserve of the building is reduced from $1,261,000 to
$1,251,542.50 ($1,261,000 less the depreciation allowed or allowable
of $9,457.50 for the retired elevator as of
[[Page 57567]]
December 31, 2013). Consequently, the depreciation allowance for the
building for 2014 is $508,954 ($19,850,000 x depreciation rate of
2.564% for 2014).
(v) E also must capitalize the amount paid for the replacement
elevator pursuant to Sec. 1.263(a)-3(k)(1)(i). The replacement
elevator is a separate asset for tax disposition purposes pursuant
to paragraph (c)(4)(ii)(D) of this section and for depreciation
purposes pursuant to section 168(i)(6).
Example 10. (i) Since 2005, F, a calendar year taxpayer, has
accounted for items of MACRS property that are mass assets in pools.
Each pool includes only the mass assets that have the same
depreciation method, recovery period, and convention, and are placed
in service by F in the same taxable year. None of the pools are
general asset accounts under section 168(i)(4) and the regulations
under section 168(i)(4). F identifies any dispositions of these mass
assets by specific identification.
(ii) During 2014, F sells 10 items of mass assets with a 5-year
recovery period each for $100. Under the specific identification
method, F identifies these mass assets as being from the pool
established by F in 2012 for mass assets with a 5-year recovery
period. Assume F depreciates this pool using the optional
depreciation table that corresponds with the general depreciation
system, the 200-percent declining balance method, a 5-year recovery
period, and the half-year convention. F elected not to deduct the
additional first year depreciation provided by section 168(k) for 5-
year property placed in service during 2012. As of January 1, 2014,
this pool contains 100 similar items of mass assets with a total
cost of $25,000 and a total depreciation reserve of $13,000. Because
all the items of mass assets in the pool are similar, F allocates
the cost and depreciation allowed or allowable for the pool ratably
among each item in the pool. Using this reasonable method (because
all the items of mass assets in the pool are similar), F allocates a
cost of $250 ($25,000 x (1/100)) to each disposed of mass asset and
depreciation allowed or allowable of $130 ($13,000 x (1/100)) to
each disposed of mass asset. The depreciation allowed or allowable
in 2014 for each disposed of mass asset is $24 (($250 x 19.2%)/2).
As a result, the adjusted depreciable basis of each disposed of mass
asset under section 1011 is $96 ($250-$130--$24). Thus, F recognizes
a gain of $4 for each disposed of mass asset in 2014, which is
subject to section 1245.
(iii) Further, as of January 1, 2014, the unadjusted depreciable
basis of the 2012 pool of mass assets with a 5-year recovery period
is reduced from $25,000 to $22,500 ($25,000 less the unadjusted
depreciable basis of $2,500 for the 10 disposed of items), and the
depreciation reserve of this 2012 pool is reduced from $13,000 to
$11,700 ($13,000 less the depreciation allowed or allowable of
$1,300 for the 10 disposed of items as of December 31, 2013).
Consequently, as of January 1, 2014, the 2012 pool of mass assets
with a 5-year recovery period has 90 items with a total cost of
$22,500 and a depreciation reserve of $11,700. Thus, the
depreciation allowance for this pool for 2014 is $4,320 ($22,500 x
19.2%).
Example 11. (i) The facts are the same as in Example 10.
Because of changes in F's recordkeeping in 2015, it is impracticable
for F to continue to identify disposed of mass assets using specific
identification and to determine the unadjusted depreciable basis of
the disposed of mass assets. As a result, F files a Form 3115,
Application for Change in Accounting Method, to change to a first-
in, first-out method beginning with the taxable year beginning on
January 1, 2015, on a modified cut-off basis. See Sec. 1.446-
1(e)(2)(ii)(d)(2)(vii). Under the first-in, first-out method, the
mass assets disposed of in a taxable year are deemed to be from the
pool with the earliest placed-in-service year that has assets as of
the beginning of the taxable year of the disposition with the same
recovery period as the asset disposed of. The Commissioner of
Internal Revenue consents to this change in method of accounting.
(ii) During 2015, F sells 20 items of mass assets with a 5-year
recovery period each for $50. As of January 1, 2015, the 2008 pool
is the pool with the earliest placed-in-service year for mass assets
with a 5-year recovery period, and this pool contains 25 items of
mass assets with a total cost of $10,000 and a total depreciation
reserve of $10,000. Thus, F allocates a cost of $400 ($10,000 x (1/
25)) to each disposed of mass asset and depreciation allowed or
allowable of $400 to each disposed of mass asset. As a result, the
adjusted depreciable basis of each disposed of mass asset is $0.
Thus, F recognizes a gain of $50 for each disposed of mass asset in
2015, which is subject to section 1245.
(iii) Further, as of January 1, 2015, the unadjusted depreciable
basis of the 2008 pool of mass assets with a 5-year recovery period
is reduced from $10,000 to $2,000 ($10,000 less the unadjusted
depreciable basis of $8,000 for the 20 disposed of items ($400 x
20)), and the depreciation reserve of this 2008 pool is reduced from
$10,000 to $2,000 ($10,000 less the depreciation allowed or
allowable of $8,000 for the 20 disposed of items as of December 31,
2014). Consequently, as of January 1, 2015, the 2008 pool of mass
assets with a 5-year recovery period has 5 items with a total cost
of $2,000 and a depreciation reserve of $2,000.
(j) Effective/applicability date--(1) In general. This section
applies to taxable years beginning on or after January 1, 2014.
(2) Early application of this section. A taxpayer may choose to
apply the provisions of this section to taxable years beginning on or
after January 1, 2012.
(3) Early application of regulation project REG-110732-13. A
taxpayer may rely on the provisions of this section in regulation
project REG-110732-13 for taxable years beginning on or after January
1, 2012. However, a taxpayer may not rely on the provisions of this
section in regulation project REG-110732-13 for taxable years beginning
on or after January 1, 2014.
(4) Optional application of TD 9564. A taxpayer may choose to apply
Sec. 1.168(i)-8T as contained in TD 9564 (76 FR 81060) December 27,
2011, to taxable years beginning on or after January 1, 2012. However,
a taxpayer may not apply Sec. 1.168(i)-8T as contained in TD 9564 (76
FR 81060) December 27, 2011, to taxable years beginning on or after
January 1, 2014.
(5) Change in method of accounting. A change to comply with this
section for depreciable assets placed in service in a taxable year
ending on or after December 30, 2003, is a change in method of
accounting to which the provisions of section 446(e) and the
regulations under section 446(e) apply. A taxpayer also may treat a
change to comply with this section for depreciable assets placed in
service in a taxable year ending before December 30, 2003, as a change
in method of accounting to which the provisions of section 446(e) and
the regulations under section 446(e) apply. This paragraph (j)(5) does
not apply to a change to comply with paragraph (d)(2) of this section
(except as provided in paragraph (d)(2)(iii) or (d)(2)(iv)(B) of this
section).
Beth Tucker,
Deputy Commissioner for Operations Support.
[FR Doc. 2013-21753 Filed 9-13-13; 11:15 am]
BILLING CODE 4830-01-P