Guidance Regarding Dispositions of Tangible Depreciable Property, 57547-57567 [2013-21753]

Download as PDF Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules 26 CFR Part 1 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). [REG–110732–13] SUPPLEMENTARY INFORMATION: RIN 1545–BL52 Background Guidance Regarding Dispositions of Tangible Depreciable Property 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 § 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, DEPARTMENT OF THE TREASURY Internal Revenue Service Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking, notice of public hearing, and partial withdrawal of previously proposed regulations. AGENCY: 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 § 1.168(i)–1 and the accounting for MACRS property regulations under § 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 tkelley on DSK3SPTVN1PROD with PROPOSALS SUMMARY: VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 PO 00000 Frm 00010 Fmt 4702 Sfmt 4702 57547 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 §§ 1.168(i)–1 and 1.168(i)–8 and to propose new regulations. This document contains the new proposed regulations under §§ 1.168(i)–1 and 1.168(i)–8 as well as new proposed regulations under § 1.168(i)–7. The temporary regulations under §§ 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 §§ 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 §§ 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 §§ 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 §§ 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 §§ 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. E:\FR\FM\19SEP1.SGM 19SEP1 57548 Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS A. Determination of Asset Disposed of and Partial Dispositions 1. The Temporary Regulations The temporary regulations under § 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 § 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, § 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 § 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, § 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 §§ 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 asset. In general, the asset for disposition purposes cannot be larger than the unit of property as determined under § 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 §§ 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 § 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 § 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 PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 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 § 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 §§ 1.263(a)–3(k)(1)(vi) and 1.263(a)–3(k)(6)(ii). Further, because some structural components are defined in § 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 §§ 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. E:\FR\FM\19SEP1.SGM 19SEP1 Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules 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 tkelley on DSK3SPTVN1PROD with PROPOSALS A. Assets Not Included in General Asset Accounts The proposed regulations under § 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 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 § 1.263(a)–2 or § 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 § 1.168(i)–1 also provide that the PO 00000 Frm 00012 Fmt 4702 Sfmt 4702 57549 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 §§ 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 §§ 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 §§ 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). E:\FR\FM\19SEP1.SGM 19SEP1 57550 Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules 7. General Asset Accounts Finally, these proposed regulations change the temporary regulation definition of a qualifying disposition under § 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 § 1.168(i)–1 (as in effect before the temporary regulations under § 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 § 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 § 1.168(i)– 1 (as in effect before the temporary regulations under § 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. tkelley on DSK3SPTVN1PROD with PROPOSALS B. Determination of Basis and Identification of Disposed or Converted Asset The temporary regulations under §§ 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 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 thirdparty 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 §§ 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 §§ 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 PO 00000 Frm 00013 Fmt 4702 Sfmt 4702 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 § 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 § 1.168(i)–7. The proposed regulations under §§ 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 § 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 §§ 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 E:\FR\FM\19SEP1.SGM 19SEP1 Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS 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. Internal Revenue Bulletin or Cumulative Bulletin please visit the IRS Web site at http://www.irs.gov. 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. Partial Withdrawal of Proposed Amendments to the Regulations Statement of Availability for IRS Document For copies of recently issued Revenue Procedures, Revenue Rulings, notices and other guidance published in the VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 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. Accordingly, under the authority of 26 U.S.C. 7805, §§ 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 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). * * * ■ Par. 2. In § 1.168(i)–0, the entries under § 1.168(i)–1 are amended by: ■ 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). ■ 2. Adding entries for paragraphs (b)(4), (b)(8), and (b)(9). ■ 3. Revising the entries for newlydesignated paragraphs (b)(6) and (b)(7). ■ 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). ■ 5. Removing the entry for paragraph (h)(2). ■ 6. Redesignating the entries for paragraph (h)(3) as newly-designated entries for paragraph (h)(2). The additions and revisions read as follows: § 1.168(i)–0 Table of contents for the general asset account rules. * * * § 1.168(i)–1 * * General asset accounts. * * * (b) * * * (4) Building. PO 00000 Frm 00014 * Fmt 4702 * Sfmt 4702 57551 * * * (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. ■ Par. 3. Section 1.168(i)–1 is amended by revising paragraphs (a) through (l)(1), and paragraph (m), to read as follows: § 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 § 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 § 1.48–1(e)(1). (5) Expensed cost is the amount of any allowable credit or deduction E:\FR\FM\19SEP1.SGM 19SEP1 tkelley on DSK3SPTVN1PROD with PROPOSALS 57552 Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules 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 § 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 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 § 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 § 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), PO 00000 Frm 00015 Fmt 4702 Sfmt 4702 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 § 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 § 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 E:\FR\FM\19SEP1.SGM 19SEP1 tkelley on DSK3SPTVN1PROD with PROPOSALS Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules 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 5year 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 5year 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 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-inservice 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 PO 00000 Frm 00016 Fmt 4702 Sfmt 4702 57553 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 E:\FR\FM\19SEP1.SGM 19SEP1 tkelley on DSK3SPTVN1PROD with PROPOSALS 57554 Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules 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 § 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 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 § 1.162–3(d) to treat the cost of any rotable spare part, temporary spare part, or standby emergency spare part (as defined in § 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 § 1.162– 3(d) election. See § 1.162–3(d)(3) for the procedures for revoking a § 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 PO 00000 Frm 00017 Fmt 4702 Sfmt 4702 (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 § 1.263(a)–3(e) or in published guidance in the Internal Revenue Bulletin under section 263(a) (see § 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 § 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 § 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 § 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 E:\FR\FM\19SEP1.SGM 19SEP1 Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS 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 § 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 § 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 § 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 § 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 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 × 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 × 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 × 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 PO 00000 Frm 00018 Fmt 4702 Sfmt 4702 57555 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 § 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. E:\FR\FM\19SEP1.SGM 19SEP1 tkelley on DSK3SPTVN1PROD with PROPOSALS 57556 Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules 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, VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 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 § 1.168(i)–8 or § 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; PO 00000 Frm 00019 Fmt 4702 Sfmt 4702 (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 § 1.168(i)–7(b) or § 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 E:\FR\FM\19SEP1.SGM 19SEP1 tkelley on DSK3SPTVN1PROD with PROPOSALS Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules 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 × 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 × 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 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 × 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 × 2.564%) × 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 § 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 § 1.168(i)– 7, the replacement roof is a separate asset for disposition purposes pursuant to § 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 PO 00000 Frm 00020 Fmt 4702 Sfmt 4702 57557 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 § 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 E:\FR\FM\19SEP1.SGM 19SEP1 tkelley on DSK3SPTVN1PROD with PROPOSALS 57558 Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules (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 § 1.168(i)–7 or § 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 § 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 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 § 1.168(i)–7 or § 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 § 1.168– 6(b)(11)) or in an involuntary conversion (as defined under § 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 § 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 PO 00000 Frm 00021 Fmt 4702 Sfmt 4702 of disposition (as defined in § 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 § 1.168(i)–6(b)(2)) in the year of disposition is determined under § 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 § 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 § 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 § 1.168(i)– 6(b)(2)) in the year of disposition is determined under § 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 E:\FR\FM\19SEP1.SGM 19SEP1 Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules (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 tkelley on DSK3SPTVN1PROD with PROPOSALS Foreign Source Income, Gain, or Loss from The Disposition of an Asset = Total Ordinary Income, Gain, or Loss from the Disposition of an Asset (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, VerDate Mar<15>2010 16:59 Sep 18, 2013 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) (antiabuse 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 Jkt 229001 × Frm 00022 Fmt 4702 (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: Allowed Depreciation Deductions Allocated and Apportioned to Foreign Source Income/Total Allowed Depreciation Deductions for the General Asset Account or for the Asset Disposed of (as applicable). 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 PO 00000 57559 Sfmt 4702 ‘‘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 E:\FR\FM\19SEP1.SGM 19SEP1 57560 Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules categories under the formula in this paragraph (f)(3). For purposes of this formula, the allowed depreciation tkelley on DSK3SPTVN1PROD with PROPOSALS Foreign Source Income, Gain, or Loss in a Separate Cateogory = deductions are determined for the applicable time period provided in Foreign Source Income, Gain, or Loss from The Disposition of an Asset (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 § 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 § 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 § 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 § 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 × Allowed Depreciation Deductions Allocated and Apportioned to a Separate Category Total/Allowed Depreciation Deductions and Apportioned to Foreign Source Income. change in use had not occurred pursuant to § 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 § 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 § 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 § 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 § 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 PO 00000 Frm 00023 Fmt 4702 paragraph (f)(2)(i) of this section. The formula is: Sfmt 4702 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; E:\FR\FM\19SEP1.SGM 19SEP1 tkelley on DSK3SPTVN1PROD with PROPOSALS Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules (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-inservice 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 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 § 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. PO 00000 Frm 00024 Fmt 4702 Sfmt 4702 57561 (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 § 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, § 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 § 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 § 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. E:\FR\FM\19SEP1.SGM 19SEP1 57562 Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules (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. ■ Par. 4. Section 1.168(i)–7 is amended by: ■ 1. Adding a new sentence at end of paragraph (b). ■ 2. Revising paragraph (e). The addition and revision read as follows: § 1.168(i)–7 property. Accounting for MACRS tkelley on DSK3SPTVN1PROD with PROPOSALS * * * * * (b) * * * If a taxpayer disposes of a portion of an asset and § 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 § 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 § 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 § 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. VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 (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. ■ Par. 5. Section 1.168(i)–8 is added to read as follows: § 1.168(i)–8 property. Dispositions of MACRS (a) Scope. This section provides rules applicable to dispositions of MACRS property (as defined in § 1.168(b)– 1(a)(2)) or to depreciable property (as defined in § 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 § 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 § 1.168(i)–1(e) or § 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 § 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). PO 00000 Frm 00025 Fmt 4702 Sfmt 4702 (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 § 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 § 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 § 1.162–3(d) to treat the cost of any rotable spare part, temporary spare part, or standby emergency spare part (as defined in § 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 § 1.162–3(d) election. See § 1.162– 3(d)(3) for the procedures for revoking a § 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 E:\FR\FM\19SEP1.SGM 19SEP1 tkelley on DSK3SPTVN1PROD with PROPOSALS Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules 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 § 1.263(a)–3(e) or in published guidance in the Internal Revenue Bulletin (see § 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 § 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 § 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 § 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 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 § 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 § 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 PO 00000 Frm 00026 Fmt 4702 Sfmt 4702 57563 § 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 § 1.263(a)–2 or § 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 § 301.9100– 3 of this chapter. The election specified in paragraph (d)(2)(i) of this section may E:\FR\FM\19SEP1.SGM 19SEP1 tkelley on DSK3SPTVN1PROD with PROPOSALS 57564 Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules 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 § 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 § 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 § 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 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-inservice 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 § 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-inservice 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 PO 00000 Frm 00027 Fmt 4702 Sfmt 4702 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 E:\FR\FM\19SEP1.SGM 19SEP1 tkelley on DSK3SPTVN1PROD with PROPOSALS Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules 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 § 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 § 1.167(a)–10(b). If the asset disposed of is in a single asset account initially or as a result of § 1.168(i)– 8(h)(2)(i) or § 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 is placed into a single asset account. See § 1.168(i)–7(b) or § 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 § 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 PO 00000 Frm 00028 Fmt 4702 Sfmt 4702 57565 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 § 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 § 1.263(a)– 3(k)(1)(i), and the replacement elevator is a E:\FR\FM\19SEP1.SGM 19SEP1 tkelley on DSK3SPTVN1PROD with PROPOSALS 57566 Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules 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 § 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 § 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 § 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 § 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 § 1.263(a)–3(e)(3) and each engine is a major component or substantial structural part of the truck as determined under § 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 VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 pursuant to § 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 § 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 § 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 § 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 § 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). PO 00000 Frm 00029 Fmt 4702 Sfmt 4702 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 × depreciation rate of 2.564% for 2014) × 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 E:\FR\FM\19SEP1.SGM 19SEP1 tkelley on DSK3SPTVN1PROD with PROPOSALS Federal Register / Vol. 78, No. 182 / Thursday, September 19, 2013 / Proposed Rules December 31, 2013). Consequently, the depreciation allowance for the building for 2014 is $508,954 ($19,850,000 × depreciation rate of 2.564% for 2014). (v) E also must capitalize the amount paid for the replacement elevator pursuant to § 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 5year 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 × (1/100)) to each disposed of mass asset and depreciation allowed or allowable of $130 ($13,000 × (1/100)) to each disposed of mass asset. The depreciation allowed or allowable in 2014 for each disposed of mass asset is $24 (($250 × 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 × 19.2%). VerDate Mar<15>2010 16:59 Sep 18, 2013 Jkt 229001 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 firstin, first-out method beginning with the taxable year beginning on January 1, 2015, on a modified cut-off basis. See § 1.446– 1(e)(2)(ii)(d)(2)(vii). Under the first-in, firstout 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 × (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 × 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 PO 00000 Frm 00030 Fmt 4702 Sfmt 4702 57567 § 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 § 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 DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 165 [Docket No. USCG–2012–1045] RIN 1625AA00 Safety Zone; Military Munitions Recovery, Raritan River, Raritan, NJ Coast Guard, DHS. Notice of proposed rulemaking. AGENCY: ACTION: The Coast Guard proposes to establish a permanent safety zone within the waters of the Raritan River upstream of the Perth Amboy Railroad Bridge. This proposed safety zone is necessary to provide for the protection of the maritime public and safety of navigation during removal of underwater explosive hazards in the Raritan River. This action is intended to protect the public from the dangers posed by underwater explosives by restricting unauthorized persons and vessels from traveling through or conducting underwater activities within a portion of the Raritan River while military munitions are rendered safe, SUMMARY: E:\FR\FM\19SEP1.SGM 19SEP1

Agencies

[Federal Register Volume 78, Number 182 (Thursday, September 19, 2013)]
[Proposed Rules]
[Pages 57547-57567]
From the Federal Register Online via the Government Printing 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