[Federal Register Volume 59, Number 195 (Tuesday, October 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24949]
[[Page Unknown]]
[Federal Register: October 11, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8566]
RIN 1545-AN82
General Asset Accounts Under the Accelerated Cost Recovery System
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations on the election to
maintain general asset accounts for depreciable assets to which section
168 of the Internal Revenue Code applies. These regulations reflect
changes to the law made by the Tax Reform Act of 1986. The regulations
will simplify certain depreciation calculations.
EFFECTIVE DATE: October 11, 1994.
For dates of applicability of these regulations, see Dates under
SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT: Kathleen Reed at (202) 622-3110 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the requirements of the Paperwork Reduction Act (44
U.S.C 3504(h)) under control number 1545-1331. The estimated annual
burden per respondent or recordkeeper varies from .20 to .30 hours,
depending on individual circumstances, with an estimated average of .25
hours.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,
Washington, DC 20224, and to the Office of Management and Budget, Attn:
Desk Officer for the Department of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC 20503.
Background
On August 31, 1992, the IRS published a notice of proposed
rulemaking in the Federal Register (57 FR 39374 [PS-55-89, 1992-2 C.B.
870]) proposing amendments to the Income Tax Regulations (26 CFR part
1) under section 168(i)(4). These amendments were proposed to reflect
the amendments made by section 201 of the Tax Reform Act of 1986. The
preamble to the notice contains an explanation of the proposed
regulations.
Written comments responding to the notice were received, and a
public hearing was held on November 4, 1992. After considering all
written and oral comments, the proposed regulations under section
168(i)(4) are adopted as revised by this Treasury decision.
Explanation of Provisions
In General
The final regulations would simplify the computation of
depreciation by allowing taxpayers an election to group assets into one
or more general asset accounts under section 168(i)(4). The assets in
any particular general asset account are depreciated as a single asset.
Unlike the rules under section 168 as in existence before enactment of
the Tax Reform Act of 1986, general asset account treatment is not
limited to ``mass assets.''
As required by section 168(i)(4), the final regulations provide
generally that the amount realized upon the disposition of an asset
from a general asset account is recognized as ordinary income. In
addition, special rules are provided for terminating general asset
account treatment upon certain dispositions. For transactions described
in section 168(i)(7)(B), the transferee generally is bound by the
transferor's general asset account election.
Changes to the Proposed Regulations
This Treasury decision generally adopts the rules in the proposed
regulations. Certain changes to the proposed regulations have been
made, however, in response to comments. These changes and the comments
that were not adopted in the final regulations are discussed below.
Assets Subject to Recapture. One commentator recommended that the
proposed regulations be amended to allow general asset account
treatment for assets qualifying for the credit under section 47 or 48.
After considering this comment, the IRS and Treasury Department have
concluded that it is appropriate to allow taxpayers greater flexibility
in determining what assets will be included in a general asset account.
Therefore, the proposed rule that prohibits general asset account
treatment for investment credit property has been deleted. Accordingly,
under the final regulations, a general asset account may include any
depreciable asset for which a credit or deduction is allowable.
A new rule, however, has been added in the final regulations to
account for any basis increase upon recapture. The final regulations
provide that upon recapture, the asset is removed from the general
asset account as of the first day of the taxable year in which the
recapture event occurs. In addition, corresponding adjustments to the
unadjusted depreciable basis and depreciation reserve of the account
must be made. This rule was formulated in view of the limited types of
property currently eligible for the investment credit. The IRS,
however, may consider other alternatives to take into account the basis
increase upon recapture if the scope of property that qualifies for the
investment credit is expanded.
Assets Used in a Personal Activity. The final regulations retain
the rule of the proposed regulations that a general asset account may
not include an asset if a taxpayer uses the asset 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 first placed
in service by the taxpayer. Consistent with the retention of this rule
in the final regulations, a new rule has been added providing that an
asset in a general asset account becomes ineligible for general asset
account treatment if a taxpayer uses the asset in a personal activity
in a taxable year after the taxable year the asset is placed in
service. If this change in use occurs, the final regulations provide
that the taxpayer must use the method provided in Sec. 1.168(i)-
1(e)(3)(iii)(C) for adjusting a general asset account when an asset
becomes ineligible for general asset account treatment.
Assets that Generate Foreign Source Income. A commentator suggested
that the proposed regulations be amended to allow general asset account
treatment for assets generating foreign source income.
In response to this comment, the final regulations allow general
asset account treatment for assets generating foreign source income.
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 reallocations of
income or expense as necessary to clearly reflect income.
The final regulations provide a rule coordinating the general asset
account rules with the rules in Sec. 1.8611-9T(g)(3) relating to
allocation and apportionment of interest expense under the asset
method. A general asset account will be treated as a single asset for
purposes of applying the rules in Sec. 1.861-9T(g)(3). If the general
asset account generates income in more than one separate grouping
(statutory and residual), then the account 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 computed as if the account were a
single multiple category asset.
The final regulations also provide rules for determining the source
of income from a disposition of an asset in a general asset account. If
the general asset account includes assets generating both United States
and foreign source income, any amount of ordinary income, gain, or loss
recognized on the disposition must be apportioned between United States
and foreign sources based on the allocation and apportionment of
depreciation allowed for the general asset account or for the disposed
asset, as applicable. If the general asset account includes assets that
generate foreign source income in more than one separate category under
section 904(d)(1) or another section of the Internal Revenue Code, or
under a United States income tax treaty that requires the foreign tax
credit limitation to be determined separately for specified types of
income, then the amount of ordinary income, gain, or loss recognized on
the disposition that is treated as foreign source income must be
allocated and apportioned to the applicable separate category or
categories.
Disposition of All Assets or the Last Asset. One commentator
questioned whether the rule under the proposed regulations that
provided that a general asset account terminates on the disposition of
all of the assets in the account or the last asset in the account was
mandatory. In response to this comment, the final regulations clarify
that this rule is an optional rule for taxpayers that maintain records
showing the disposition of assets in a general asset account. The final
regulations also provide that a taxpayer adopts the rule by reporting
the gain or loss on the taxpayer's income tax return for the taxable
year in which the disposition of all of the assets, or the last asset,
in the general asset account occurs.
Qualifying Dispositions. Under the proposed regulations, a
qualifying disposition of an asset in a general asset account occurs
when the asset is disposed of as a direct result of a cessation,
termination, curtailment, 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).
One commentator recommended that the final regulations should provide
an example showing that the sale of an undivided interest in mineral
property, along with the related operating equipment, is a curtailment
of a taxpayer's business and, thus, constitutes a qualifying
disposition. A curtailment was intended to be limited to a genuine
business contraction and not to include transactions involving the sale
of an undivided interest, other than the taxpayer's entire interest in
assets. To avoid any further misinterpretation, the final regulations
delete the term ``curtailment.'' The final regulations also clarify
that a taxpayer adopts the rule to terminate general asset account
treatment for an asset in a qualifying disposition by reporting the
gain, loss, or other deduction on the taxpayer's income tax return for
the taxable year in which the qualifying disposition occurs.
Anti-abuse rule. The final regulations add examples of transactions
subject to the anti-abuse rule.
Election. Some commentators noted that the proposed regulations do
not address whether the election is made by the common parent
corporation or each member of an affiliated group, by a partnership or
its partners, or by an S corporation or the S corporation shareholders.
The final regulations clarify that the election is made by each member
of an affiliated group, by the partnership, or by the S corporation,
respectively.
The proposed regulations provide that the election to apply the
regulations generally is binding on the taxpayer for computing taxable
income as well as computing alternative minimum taxable income. A
commentator suggested that the final regulations should allow taxpayers
the option to make the election for either the regular income tax, the
alternative minimum tax, or both. This rule was not adopted because of
the separate and parallel nature of the regular tax and alternative
minimum tax systems. Except as otherwise provided by statute or
regulations, all Code provisions that apply in determining the regular
taxable income of a taxpayer also apply in determining the alternative
minimum taxable income of the taxpayer. The final regulations have not
been expanded to include any exceptions. Consequently, an election to
apply section 168(i)(4) for determining regular taxable income also
applies for determining alternative minimum taxable income. Therefore,
the language ``as well as alternative minimum taxable income'' in the
proposed rule is redundant and has been deleted from the final
regulations.
Effective Date. For assets placed in service after December 31,
1986, in taxable years ending before the effective date of the final
regulations, one commentator recommended that the final regulations
should provide a retroactive election or, alternatively, a prospective
election. Another commentator also requested a provision allowing a
prospective election. The final regulations retain the rule of the
proposed regulations that, for prior periods, a taxpayer may use any
reasonable method that is consistently applied to the taxpayer's
general asset accounts.
Dates
The final regulations are effective for property placed in service
in taxable years ending on or after October 11, 1994. For property
placed in service after December 31, 1986, in taxable years ending
before October 11, 1994, the IRS will allow any reasonable method that
is consistently applied to the taxpayer's general asset accounts.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Small Business Administration for comment on its
impact on small business.
Drafting Information
The principal author of these regulations is Kathleen Reed, Office
of Assistant Chief Counsel (Passthroughs and Special Industries), IRS.
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.168(i)-1 also issued under 26 U.S.C. 168(i)(4). * * *
Par. 2. Section 1.56(g)-1 is amended by adding a sentence at the
end of paragraph (b), introductory text, to read as follows:
Sec. 1.56(g)-1 Adjusted current earnings.
* * * * *
(b) * * * See Sec. 1.168(i)-1(k) for an election to use general
asset accounts.
* * * * *
Par. 3. Sections 1.168(i)-0 and 1.168(i)-1 are added to read as
follows:
Sec. 1.168(i)-0 Table of contents for the general asset account rules.
This section lists the major paragraphs contained in Sec. 1.168(i)-
1.
Sec. 1.168(i)-1 General asset accounts.
(a) Scope.
(b) Definitions.
(1) Unadjusted depreciable basis.
(2) Unadjusted depreciable basis of the general asset account.
(3) Adjusted depreciable basis of the general asset account.
(4) Expensed cost.
(c) Establishment of general asset accounts.
(1) Assets eligible for general asset accounts.
(i) General rules.
(ii) Special rules for assets generating foreign source income.
(2) Grouping assets in general asset accounts.
(i) General rules.
(ii) Special rules.
(d) Determination of depreciation allowance.
(1) In general.
(2) Special rule for passenger automobiles.
(e) Disposition of an asset from a general asset account.
(1) Scope.
(2) General rules for a disposition.
(i) No immediate recovery of basis.
(ii) Treatment of amount realized.
(iii) Effect of disposition on a general asset account.
(iv) Coordination with nonrecognition provisions.
(v) Examples.
(3) Special rules.
(i) In general.
(ii) Disposition of all assets remaining in a general asset
account.
(iii) Disposition of an asset in a qualifying disposition.
(iv) Transactions subject to section 168(i)(7).
(v) Anti-abuse rule.
(f) Assets generating foreign source income.
(1) In general.
(2) Source of ordinary income, gain, or loss.
(i) Source determined by allocation and apportionment of
depreciation allowed.
(ii) Formula for determining foreign source income, gain, or loss.
(3) Section 904(d) separate categories.
(g) Assets subject to recapture.
(h) Changes in use.
(1) Conversion to personal use.
(2) Other changes in use.
(i) Identification of disposed or converted asset.
(j) Effect of adjustments on prior dispositions.
(k) Election.
(1) Irrevocable election.
(2) Time for making election.
(3) Manner of making election.
(l) Effective date.
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 (k) of this
section.
(b) Definitions. For purposes of this section, the following
definitions apply:
(1) Unadjusted depreciable basis is the basis of an asset for
purposes of section 1011 without regard to any adjustments described in
sections 1016(a)(2) and (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 sections 1016(a)(2) and (3).
(4) Expensed cost is the amount of any allowable credit or
deduction 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).
(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 may be included in a
general asset account only to the extent of the asset's unadjusted
depreciable basis (for example, if, in 1995, a taxpayer places in
service an asset that costs $20,000 and elects under section 179 to
expense $17,500 of that asset's cost, the unadjusted depreciable basis
of the asset is $2,500 and, therefore, only $2,500 of the asset's cost
may be included in a general asset account). 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
first placed in service by the taxpayer.
(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 FSC (as defined in
section 922), 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 (k) 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 asset class (for further guidance, see Rev. Proc.
87-56, 1987-2 C.B. 674, and Sec. 601.601(d)(2)(ii)(b) of this chapter);
(B) Have the same applicable depreciation method;
(C) Have the same applicable recovery period;
(D) Have the same applicable convention; and
(E) 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 without an asset class, but with the same
characteristics described in paragraphs (c)(2)(i)(B), (C), (D), and (E)
of this section, may be grouped into a general asset account;
(B) 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;
(C) 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; and
(D) Passenger automobiles for which the depreciation allowance is
limited under section 280F(a) must be grouped into a separate general
asset account.
(d) Determination of depreciation allowance--(1) In general.
Depreciation allowances are determined for each general asset account
by using the applicable depreciation method, recovery period, and
convention for the assets in the account. The depreciation allowances
are 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) 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
paragraph (e)(3)(iii) (disposition of an asset in a qualifying
disposition), (e)(3)(iv) (transactions subject to section 168(i)(7)),
(e)(3)(v) (anti-abuse rule), (g) (assets subject to recapture), or
(h)(1) (conversion to personal use) of this section.
(e) Disposition of an asset from a general asset account--(1)
Scope. 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. A disposition does not include, however, the
retirement of a structural component of real property.
(2) General rules for a disposition--(i) No immediate recovery of
basis. Immediately before a disposition of any asset in a general asset
account, the asset is treated as having an adjusted basis of zero for
purposes of section 1011. Therefore, no loss is realized upon the
disposition of an asset from the general asset account. Similarly,
where an asset is disposed of by transfer to a supplies, scrap, or
similar account, the basis of the asset 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 (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)(4) 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. The recognition and character of any excess amount
realized are determined under other applicable provisions of the Code
(other than sections 1245 and 1250 or provisions of the Code that treat
gain on a disposition as subject to section 1245 or 1250).
(iii) Effect of disposition on a general asset account. 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.
(iv) Coordination with nonrecognition provisions. For purposes of
determining the basis of an asset acquired in a transaction described
in paragraph (e)(3)(iii)(B)(4) of this section (relating to certain
nonrecognition provisions), the amount of ordinary income recognized
under this paragraph (e)(2) is treated as the amount of gain recognized
on the disposition.
(v) Examples. The following examples illustrate the application of
this paragraph (e)(2).
Example 1. (i) R, a calendar-year corporation, maintains one
general asset account for ten machines. The machines cost a total of
$10,000 and were placed in service in June 1995. Of the ten
machines, one machine costs $8,200 and nine machines cost a total of
$1,800. Assume this general asset account has a depreciation method
of 200 percent declining balance, a recovery period of 5 years, and
a half-year convention. R does not make a section 179 election for
any of the machines. As of January 1, 1996, the depreciation reserve
of the account is $2,000 [(($10,000-$0) x 40%)/2].
(ii) On February 8, 1996, 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 basis of zero.
(iii) On its 1996 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 1996 is $3,200
(($10,000-$2,000) x 40%).
Example 2. (i) The facts are the same as in Example 1. In
addition, on June 4, 1997, 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 basis of zero.
(ii) On its 1997 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 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 1997 is $1,920 (($10,000-$5,200) x 40%).
(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)
and (v) of this section are mandatory rules. A taxpayer applies
paragraph (e)(3)(ii) or (iii) of this section by reporting the gain,
loss, or other deduction on the taxpayer's timely filed (including
extensions) income tax return for the taxable year in which the
disposition occurs. For purposes of applying paragraph (e)(3)(iii)
through (v) of this section, see paragraph (i) of this section for
identifying the unadjusted depreciable basis of a disposed asset.
(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, or 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. The recognition
and character of the gain or loss are determined under other applicable
provisions of the 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) Example. The following example illustrates the application of
this paragraph (e)(3)(ii).
Example. (i) T, a calendar-year corporation, maintains a general
asset account for 1,000 calculators. The calculators cost a total of
$60,000 and were placed in service in 1995. Assume this general
asset account has a depreciation method of 200 percent declining
balance, a recovery period of 5 years, and a half-year convention. T
does not make a section 179 election for any of the calculators. In
1996, 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, 1997, T sells the remaining calculators in the
general asset account to an unrelated party for $35,000. T chooses
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
1997, 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.
(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 of an asset (described in
paragraph (e)(3)(iii)(B) of this section), a taxpayer may 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 by taking
into account the asset's adjusted basis. The adjusted basis of the
asset at the time of the 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. The recognition and character of the gain, loss, or other
deduction are determined under other applicable provisions of the 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) of this section (pertaining to transactions subject to
section 168(i)(7)), to which a nonrecognition section of the Code
applies (determined without regard to this section), such as section
1031 or 1033.
(C) Effect of a qualifying disposition on a general asset account.
If the taxpayer applies 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;
(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
(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) Example. The provisions of this paragraph (e)(3)(iii) are
illustrated by the following example.
Example. (i) Z, a calendar-year corporation, maintains one
general asset account for 12 machines. Each machine costs $15,000
and was placed in service in 1995. 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 this general asset account has a depreciation method
of 200 percent declining balance, a recovery period of 5 years, and
a half-year convention. Z does not make a section 179 election for
any of the machines. As of January 1, 1997, the depreciation reserve
for the account is $93,600.
(ii) On May 27, 1997, 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. Because this
transaction is a qualifying disposition under paragraph
(e)(3)(iii)(B)(3) of this section, Z chooses to apply paragraph
(e)(3)(iii) of this section.
(iii) For Z's 1997 return, the depreciation allowance for the
account is computed as follows. As of December 31, 1996, the
depreciation allowed or allowable for the three machines at the Ohio
plant is $23,400. Thus, as of January 1, 1997, 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 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, 1996). Consequently, the depreciation allowance for the
account in 1997 is $25,920 (($135,000 - $70,200) x 40%).
(iv) For Z's 1997 return, gain or loss for each of the three
machines at the Ohio plant is determined as follows. The
depreciation allowed or allowable in 1997 for each machine is $1,440
[(($15,000 - $7,800) x 40%) / 2]. Thus, the adjusted 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 1997). As a result, the loss recognized in
1997 for each machine is $760 ($5,000 - $5,760), which is subject to
section 1231.
(iv) Transactions subject to section 168(i)(7). If an asset in a
general asset account is transferred in a transaction described in
section 168(i)(7)(B) (pertaining to treatment of transferees in certain
nonrecognition transactions), the transferor must remove the
transferred asset from the general asset account as of the first day of
the taxable year in which the transaction occurs. In addition, the
adjustments to the general asset account described in paragraph
(e)(3)(iii)(C)(2) through (4) of this section must be made. The
transferee is bound by the transferor's election under paragraph (k) of
this section with respect to so much of the asset's basis in the hands
of the transferee as does not exceed the asset's adjusted basis in the
hands of the transferor. If all of the assets, or the last asset, in a
general asset account are transferred, the transferee's basis in the
assets or asset transferred is equal to the adjusted depreciable basis
of the general asset 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.
(v) 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)(v)(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 paragraph (e)(3)(iii)(C)(1) through (4) of this
section.
(B) Abusive transactions. A transaction is described in this
paragraph (e)(3)(v)(B) if the transaction is not described in paragraph
(e)(3)(iv) of this section and 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 in order 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 in order to utilize
an expiring net operating loss or credit. 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)(v)(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
paragraph (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), or (e)(3)(v)
(anti-abuse rule) of this section applies.
(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 the disposition if the taxpayer applies paragraph (e)(3)(ii) of
this section to the disposition of all of the assets, or the last
asset, in the general asset account; or
(C) Depreciation allowed for the disposed asset for only the
taxable year in which the disposition occurs if the taxpayer applies
paragraph (e)(3)(iii) to the disposition of the asset in a qualifying
disposition or if the asset is disposed in a transaction described in
paragraph (e)(3)(v) (anti-abuse rule) of this section.
(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:
Allowed Depreciation Deductions
Allocated and Apportioned to
Foreign Source Income, Gain, or Total Ordinary Income, Gain, or Foreign Source Income Total
Loss from the Disposition of an = Loss from Disposition of an Asset x Allowed Depreciation Deductions
Asset for the General Asset Account or
for the Disposed Asset (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
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 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:
Allowed Depreciation Deductions
Allocated and Apportioned to a
Foreign Source Income, Gain, or = Forign Source Income, Gain, or x Separate Category Total Allowed
Loss In a Separate Category Loss from the Disposition of an Depreciation Deductions and
Asset 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), 179(d)(10), or
179A(e)(4)), 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 paragraph (e)(3)(iii)(C)(2)
through (4) of this section.
(h) Changes in use--(1) Conversion to personal use. An asset in a
general asset account becomes ineligible for general asset account
treatment if a taxpayer uses the asset in a personal activity during a
taxable year. Upon a conversion to 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 and must make the
adjustments to the general asset account described in paragraph
(e)(3)(iii)(C)(2) through (4) of this section.
(2) Other changes in use. [Reserved].
(i) Identification of disposed or converted asset. A taxpayer may
use any reasonable method that is consistently applied to the
taxpayer's general asset accounts for purposes of determining the
unadjusted depreciable basis of a disposed or converted asset in a
transaction described in paragraph (e)(3)(iii) (disposition of an asset
in a qualifying disposition), (e)(3)(iv) (transactions subject to
section 168(i)(7)), (e)(3)(v) (anti-abuse rule), (g) (assets subject to
recapture), or (h)(1) (conversion to personal use) of this section.
(j) Effect of adjustments on prior dispositions. The adjustments to
a general asset account under paragraph (e)(3)(iii), (e)(3)(iv),
(e)(3)(v), (g), or (h)(1) of this section have no effect on the
recognition and character of prior dispositions subject to paragraph
(e)(2) of this section.
(k) Election--(1) Irrevocable election. If a taxpayer makes an
election under this paragraph (k), 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 paragraph
(c)(1)(ii)(A), (e)(3), (g), or (h)(1) of this section, 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 (k) 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)).
(2) Time for making election. The election to apply this section
shall be made on the taxpayer's timely filed (including extensions)
income tax return for the taxable year in which the assets included in
the general asset account are placed in service by the taxpayer.
(3) Manner of making election. In the year of election, a taxpayer
makes the election under this section by typing or legibly printing at
the top of the Form 4562, ``GENERAL ASSET ACCOUNT ELECTION MADE UNDER
SECTION 168(i)(4),'' or in the manner provided for on Form 4562 and its
instructions. The taxpayer shall maintain records (for example,
``General Asset Account #1 - all 1995 additions in asset class 00.11
for Salt Lake City, Utah facility'') that identify the assets included
in each general asset account, that establish the unadjusted
depreciable basis and depreciation reserve of the general asset
account, and that reflect the amount realized during the taxable year
upon dispositions from each general asset account. (But see section
179(c) and Sec. 1.179-5 for the recordkeeping requirements for section
179 property.) The taxpayer's recordkeeping practices should be
consistently applied to the general asset accounts. If Form 4562 is
revised or renumbered, any reference in this section to that form shall
be treated as a reference to the revised or renumbered form.
(l) Effective date. This section applies to depreciable assets
placed in service in taxable years ending on or after October 11, 1994.
For depreciable assets placed in service after December 31, 1986, in
taxable years ending before October 11, 1994, the Internal Revenue
Service will allow any reasonable method that is consistently applied
to the taxpayer's general asset accounts.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Sec. 602.101(c) [Amended]
Par. 5. Section 602.101(c) is amended by adding the entry
``1.168(i)-1....1545-1331'' in numerical order to the table.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: September 9, 1994
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-24949 Filed 10-7-94; 8:45 am]
BILLING CODE 4830-01-U
