Guidance Regarding Dispositions of Tangible Depreciable Property, 48661-48685 [2014-19403]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 79, Number 159 (Monday, August 18, 2014)]
[Rules and Regulations]
[Pages 48661-48685]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-19403]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9689]
RIN 1545-BL52


Guidance Regarding Dispositions of Tangible Depreciable Property

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final 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 final regulations also amend the general 
asset account regulations and the accounting for MACRS property 
regulations. The final regulations provide rules for determining gain 
or loss upon the disposition of MACRS property, determining the asset 
disposed of, and accounting for partial dispositions of MACRS property. 
The final regulations affect taxpayers that dispose of MACRS property. 
The final

[[Page 48662]]

regulations also remove temporary regulations under section 168 
regarding general asset accounts and disposition of MACRS property.

DATES: Effective Date: These regulations are effective on August 18, 
2014.
    Applicability Dates: These regulations apply to taxable years 
beginning on or after January 1, 2014. For dates of applicability of 
the final regulations, see Sec. Sec.  1.168(i)-1(m), 1.168(i)-7(e), and 
1.168(i)-8(j).

FOR FURTHER INFORMATION CONTACT: Kathleen Reed or Patrick Clinton, 
Office of Associate Chief Counsel (Income Tax and Accounting), (202) 
317-7005 (not a toll-free number).

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 2011 proposed regulations and held a 
public hearing on May 9, 2012.
    The temporary regulations initially applied 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 would 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 alerted taxpayers that the IRS 
and the Treasury Department intended to publish final regulations in 
2013 and expected 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 alerted taxpayers that the IRS and the Treasury 
Department intended 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 removed 
the temporary regulations under section 167 and Sec.  1.168(i)-7 and 
issued final regulations in the Federal Register on September 19, 2013 
(78 FR 57686). The final regulations under section 167 provide rules 
for depreciation of leasehold improvements and amend existing 
regulations under section 167 regarding accounting for and retirement 
of depreciable property. Section 1.168(i)-7 provides rules for how to 
account for MACRS property. On the same date, the IRS also withdrew the 
2011 proposed regulations under Sec. Sec.  1.168(i)-1 and 1.168(i)-8 
and published a notice of proposed rulemaking (REG-110732-13) under 
Sec. Sec.  1.168(i)-1, 1.168(i)-7, and 1.168(i)-8 (2013 proposed 
regulations) in the Federal Register (78 FR 57547). The 2011 proposed 
regulations under Sec.  1.168(i)-1 amended the existing regulations on 
general asset accounts, and the 2011 proposed regulations under Sec.  
1.168(i)-8 provided rules for dispositions of MACRS property. The IRS 
and the Treasury Department did not withdraw or remove the temporary 
regulations under Sec. Sec.  1.168(i)-1T and 1.168(i)-8T and taxpayers 
continued 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.
    No comments were received from the public in response to the 2013 
proposed regulations. No public hearing was requested or held. However, 
the IRS and the Treasury Department are making clarifying changes to 
the 2013 proposed regulations regarding the determination of the 
unadjusted depreciable basis of a disposed asset in a general or 
multiple asset account or a disposed portion of an asset, and the 
manner of making certain disposition elections for assets included in a 
general asset account when section 280B applies. These revisions are 
discussed in this preamble. The IRS and the Treasury Department are 
removing the temporary regulations under Sec. Sec.  1.168(i)-1T and 
1.168(i)-8T and are issuing final regulations under Sec. Sec.  
1.168(i)-1, 1.168(i)-7, and 1.168(i)-8. The 2013 proposed regulations 
are adopted as amended by this Treasury decision.

Explanation of Provisions and Revisions

I. Overview

    The final regulations under Sec. Sec.  1.168(i)-1, 1.168(i)-7, and 
1.168(i)-8 generally retain all of the provisions of the 2013 proposed 
regulations. Section 1.168(i)-1 amends the existing general asset 
account regulations regarding establishment of general asset accounts, 
depreciation of a general asset account, and dispositions of assets in 
a general asset account. Section 1.168(i)-7 amends the existing 
regulations on accounting for MACRS property to address partial 
dispositions of MACRS property. Section 1.168(i)-8 provides rules for 
dispositions of MACRS property. These final regulations generally apply 
to taxable years beginning on or after January 1, 2014.

II. Disposition Rules for MACRS Property Under Sec.  1.168(i)-8

    Section 1.168(i)-8 provides the basic rules applicable to 
dispositions of MACRS property, and Sec.  1.168(i)-1 provides special 
rules applicable to MACRS property included in a general asset account.

A. Definition of Disposition

    The final regulations retain the definition of ``disposition'' for 
MACRS property that is set forth in the 2013 proposed regulations. A 
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 includes the retirement of 
a structural component (or a portion thereof) of a building only if the 
partial disposition rule (discussed in II.C) applies to such structural 
component (or a portion thereof). Finally, the manner of disposition 
(for example, abnormal retirement or normal retirement) is not taken 
into consideration in determining whether a disposition occurs or gain 
or loss is recognized.

[[Page 48663]]

B. Determining Appropriate Disposed Asset

    The final regulations also retain the rules in the 2013 proposed 
regulations for determining the disposed asset for tax disposition 
purposes. In general, the facts and circumstances of each disposition 
are considered in determining the appropriate disposed asset. However 
and as provided in the 2013 proposed regulations, the asset for tax 
disposition purposes may not consist of items placed in service by the 
taxpayer on different dates (without taking into account the applicable 
convention). Further, the unit of property as determined under Sec.  
1.263(a)-3(e) or in published guidance in the Internal Revenue Bulletin 
under section 263(a) does not apply for purposes of determining what is 
the appropriate disposed asset.
    In addition to these general rules, the final regulations provide 
special rules for certain types of properties. The final regulations 
retain the rule in the 2013 proposed regulations that each building 
(including its structural components) is the asset for tax disposition 
purposes, unless more than one building (including its structural 
components) is treated as the asset under Sec.  1.1250-1(a)(2)(ii), 
there is an improvement or addition to an existing building (including 
its structural components), or the building includes two or more 
condominium or cooperative units. If there is an improvement or 
addition to an existing building (including its structural components), 
the improvement or addition is the asset. If a building includes two or 
more condominium or cooperative units, each condominium or cooperative 
unit (including its structural components) is the asset.
    The final regulations also provide that 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) 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 an improvement or addition to an existing 
asset.
    Finally, and consistent with section 168(i)(6), the final 
regulations 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.

C. Partial Dispositions

    The final regulations also retain the partial disposition rule in 
the 2013 proposed regulations. Consequently, the disposition rules in 
the final regulations apply to a partial disposition of an asset (for 
example, the disposition of a roof (or a portion of a roof)). The 
partial disposition 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 final 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 2013 proposed 
regulations and 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) and the 2013 proposed regulations, 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 Sec.  301.9100-3 of 
this chapter for granting extensions of time for making regulatory 
elections. If a taxpayer chooses to apply these final regulations to 
its taxable year beginning in 2012 or 2013, these final 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.
    The final regulations also provide a special partial disposition 
rule to address 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)).

D. Gain or Loss

    The final regulations also retain the rules in the 2013 proposed 
regulations for determining gain or loss upon the disposition of MACRS 
property. These rules 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 
generally have been applied to MACRS property). If an asset is disposed 
of by sale, exchange, or involuntary conversion, gain or loss is 
recognized under the applicable

[[Page 48664]]

provisions of the Code. If an asset is disposed of by physical 
abandonment, loss is recognized in the amount of the asset's adjusted 
depreciable basis at the time of the abandonment, unless an abandoned 
asset is subject to nonrecourse indebtedness in which case the asset is 
treated in the same manner as an asset disposed of by sale. Finally, if 
an asset is disposed of other than by sale, exchange, involuntary 
conversion, physical abandonment, or conversion to personal use (for 
example, when the asset is transferred to a supplies or scrap account), 
gain is not recognized but loss is recognized in the amount of the 
excess of the asset's adjusted depreciable basis over its fair market 
value at the time of disposition. The same rules apply when the partial 
disposition rule applies to a disposition of a portion of an asset.

E. Determination of Basis of Disposed Asset

    The final regulations retain the rule in the 2013 proposed 
regulations on determining the unadjusted depreciable basis of a 
disposed asset if that asset is in a multiple asset account and it is 
impracticable from the taxpayer's records to determine the unadjusted 
depreciable basis of the disposed asset. In such a situation, the final 
regulations provide that the taxpayer may use any reasonable method 
that is consistently applied to all assets in the same multiple asset 
account. 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 an expensive study.
    These final regulations also provide nonexclusive examples of 
reasonable methods. These examples are the same examples in the 2013 
proposed regulations, except that the final regulations do not include 
discounting the cost of the replacement asset by the Consumer Price 
Index as an example of a reasonable method. After further review, the 
IRS and the Treasury Department have determined that the Producer Price 
Index for Finished Goods (and its successor, the Producer Price Index 
for Final Demand) more accurately reflects inflation for capital 
expenditures. The final regulations also clarify that discounting the 
cost of the replacement asset using the Producer Price Index for 
Finished Goods is a reasonable method only if the replacement asset is 
a restoration under Sec.  1.263(a)-3(k) and is not a betterment under 
Sec.  1.263(a)-3(j) or is not an adaptation to a new or different use 
under Sec.  1.263(a)-3(l). The examples in the final regulations 
include the following: (1) Discounting the cost of the replacement 
asset to its placed-in-service year cost using the Producer Price Index 
for Finished Goods (or its successor, the Producer Price Index for 
Final Demand, or any other index designated by guidance in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2) of the chapter) for purposes 
of the final regulations) where the replacement asset is a restoration 
under Sec.  1.263(a)-3(k) and is not a betterment under Sec.  1.263(a)-
3(j) or is not an adaptation to a new or different use under Sec.  
1.263(a)-3(l); (2) a pro rata allocation of the unadjusted depreciable 
basis of the multiple asset account based on the replacement cost of 
the disposed asset and the replacement cost of all of the assets in the 
multiple asset account; and (3) a study allocating the cost of the 
asset to its individual components.
    The final regulations also provide rules to determine the 
unadjusted depreciable basis of the disposed portion of an asset when 
the partial disposition rule applies. While these rules retain most of 
the rules in the 2013 proposed regulations, the final regulations were 
changed to clarify when a taxpayer may use a reasonable method for 
determining the unadjusted depreciable basis of a disposed portion of 
an asset. The IRS and the Treasury Department intended to allow 
taxpayers to use a reasonable method under the same circumstances as 
described above for determining the unadjusted depreciable basis of a 
disposed asset in a multiple asset account. However, the 2013 proposed 
regulations did not reflect this intent. Consequently, the final 
regulations clarify that a taxpayer may use any reasonable method for 
determining the unadjusted depreciable basis of the disposed portion of 
the asset only if it is impracticable from the taxpayer's records to 
determine such unadjusted depreciable basis. If a taxpayer disposes of 
more than one portion of the same asset and it is impracticable from 
the taxpayer's records to determine the unadjusted depreciable basis of 
the first disposed portion of the asset, the reasonable method used by 
the taxpayer must be consistently applied to all portions of the same 
asset for purposes of determining the unadjusted depreciable basis of 
each disposed portion of the asset. If the asset, a portion of which is 
disposed of, is in a multiple asset account, the reasonable method used 
by the taxpayer must be consistently applied to all assets and portions 
of assets in the same multiple asset account. Finally, the final 
regulations provide nonexclusive examples of reasonable methods that 
are similar to those discussed in the preceding paragraph.

F. Identification of Disposed Asset

    The final regulations retain the rules in the 2013 proposed 
regulations for determining the placed-in-service year of a disposed 
asset. In general, a taxpayer must use the specific identification 
method. Under this method, the taxpayer can determine when the asset 
disposed of was placed in service. If an asset is in a multiple asset 
account and it is impracticable from the taxpayer's records to 
determine the particular year in which the asset was placed in service 
by the taxpayer, the final regulations allow the taxpayer to identify 
the asset by using the following: A first-in, first-out (FIFO) method, 
a 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. These rules also apply when the partial disposition rule 
applies to a disposition of a portion of an asset and 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 final regulations provide an additional example of the LIFO method, 
which is impermissible.

III. General Asset Accounts Under Sec.  1.168(i)-1

    Section 168(i)(4) provides that, under regulations, a taxpayer may 
maintain one or more general asset accounts for any MACRS property. 
Except as provided in regulations, all proceeds realized on any 
disposition of property in a general asset account shall be included in 
income as ordinary income.
    The final regulations generally retain all of the provisions in the 
2013 proposed regulations for general asset accounts. The final 
regulations apply only to assets for which the taxpayer has made an 
election to account for the assets in general asset accounts. Each 
general asset account effectively is treated as the asset.

A. Establishing General Asset Accounts

    The final regulations retain the rules in the 2013 proposed 
regulations for establishing general asset accounts. The final 
regulations provide that assets may be grouped into one or more general 
asset accounts. In general, each general asset account must include 
assets that have the same depreciation method, recovery period, and 
convention, and

[[Page 48665]]

are placed in service in the same taxable year. However and as provided 
in the 2013 proposed regulations, the final regulations provide special 
rules in certain circumstances for establishing general asset accounts. 
For example, assets eligible for the additional first year depreciation 
deduction cannot be grouped with assets ineligible for the additional 
first year depreciation deduction. Also, assets eligible for the 
additional first year depreciation deduction may be grouped only with 
assets eligible for the same percentage of the additional first year 
depreciation.

B. Depreciation of a General Asset Account

    The final regulations retain the rules in the 2013 proposed 
regulations for determining depreciation for each general asset 
account. The final regulations explain how to determine depreciation 
for a general asset account when all the assets in the account are 
eligible for the additional first year depreciation deduction and when 
all the assets in the account are not eligible for that deduction.

C. Disposition of an Asset From a General Asset Account

1. Disposition Definition
    The final regulations retain the definition of ``disposition'' that 
is set forth in the 2013 proposed regulations. This definition is the 
same as the definition of ``disposition'' that was previously discussed 
under the disposition rules for MACRS property under Sec.  1.168(i)-8. 
That is, a 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 includes 
the retirement of a structural component (or a portion thereof) of a 
building only if the partial disposition rule (discussed in III.C.4) 
applies to such structural component (or a portion thereof). Finally, 
the manner of disposition (for example, abnormal retirement or normal 
retirement) is not taken into consideration in determining whether a 
disposition occurs or gain or loss is recognized.
2. Determining the Appropriate Disposed Asset
    The final regulations also retain the rules in the 2013 proposed 
regulations for determining the disposed asset included in a general 
asset account for tax disposition purposes. These rules are the same as 
those previously discussed for determining the disposed asset for 
purposes of Sec.  1.168(i)-8.
    In general, the facts and circumstances of each disposition are 
considered in determining the appropriate disposed asset included in a 
general asset account. However, the asset for tax disposition purposes 
may not consist of items placed in service by the taxpayer on different 
dates (without taking into account the applicable convention under 
section 168(d)). Further, the unit of property as determined under 
Sec.  1.263(a)-3(e) or in published guidance in the Internal Revenue 
Bulletin under section 263(a) does not apply for purposes of 
determining what is the appropriate disposed asset.
    In addition to these general rules, the final regulations retain 
the special rules in the 2013 proposed regulations for certain types of 
properties. These special rules are the same as the previously 
discussed special rules for determining the appropriate disposed asset 
under Sec.  1.168(i)-8. The final regulations provide special rules for 
determining the appropriate disposed asset that is included in a 
general asset account and that is: (a) A building (including its 
structural components); (b) a building that includes two or more 
condominium or cooperative units; (c) an item properly included in one 
of the asset classes 00.11 through 00.4 of Rev. Proc. 87-56 (1987-2 CB 
674) or classified 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); or (d) an improvement or addition to 
an existing asset.
3. Disposition Rules
    The final regulations retain the disposition rules in the 2013 
proposed regulations. Immediately before any disposition of an asset 
(or a portion thereof) in a general asset account, the final 
regulations provide that the asset (or a portion thereof) is treated as 
having an adjusted depreciable basis of zero for purposes of section 
1011. Therefore, no loss is realized upon the disposition of the asset 
(or a portion thereof). The final regulations also provide that any 
amount realized on a disposition generally is recognized as ordinary 
income. Further, the final regulations provide that the unadjusted 
depreciable basis and depreciation reserve of the general asset account 
are not affected by the disposition. Accordingly, a taxpayer continues 
to depreciate the general asset account, including the disposed asset 
(or a portion thereof), as though no disposition occurred.
    The final regulations also allow a taxpayer to terminate general 
asset account treatment upon certain dispositions. Under the final 
regulations, a taxpayer may elect to recognize gain or loss for a 
general asset account when the taxpayer disposes of all of the assets, 
the last asset, or the remaining portion of the last asset in the 
account.
    The final regulations further allow a taxpayer to elect to 
terminate general asset account treatment for an asset in a general 
asset account when the taxpayer disposes of the asset in a qualifying 
disposition. 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. If a 
taxpayer elects to terminate general asset account treatment for an 
asset disposed of in a qualifying disposition, the taxpayer must remove 
the disposed asset from the general asset account and adjust the 
unadjusted depreciable basis and depreciation reserve of the account.
    The final regulations retain the rules in the 2013 proposed 
regulations on the manner of making (1) the election to terminate the 
general asset account upon the disposition of all of the assets, the 
last asset, or the remaining portion of the last asset in that general 
asset account, or (2) the qualifying disposition election. The final 
regulations provide that a taxpayer making either of these elections 
must apply section 280B and Sec.  1.280B-1 to determine whether and to 
what extent gain or loss is recognized. Generally, a taxpayer makes 
these elections 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.
    In the case of a loss sustained on account of the demolition of a 
structure to which section 280B and Sec.  1.280B-1 apply, however, the 
loss is capitalized to the land on which the demolished structure was 
located, and no gain or loss is reported at the time of

[[Page 48666]]

demolition. Nevertheless, a taxpayer generally will report a 
depreciation deduction for the demolished structure for the taxable 
year in which the demolition occurs. Accordingly, the final regulations 
clarify that a taxpayer makes the election to terminate the general 
asset account or the qualifying disposition election by ending 
depreciation for the demolished structure at the time of disposition 
(taking into account the applicable convention) and reporting the 
depreciation amount for that structure for the taxable year in which 
the disposition occurs on the taxpayer's timely filed original Federal 
tax return (including extensions) for that taxable year.
    For assets in general asset accounts, the final regulations also 
require a taxpayer to terminate general asset account treatment for an 
asset that is disposed of in a transaction subject to section 
167(i)(7)(B), section 1031, or section 1033, disposed of in an abusive 
transaction described under the final regulations, or used for any 
personal use. In such a case, the taxpayer must remove the disposed 
asset from the general asset account and adjust the unadjusted 
depreciable basis and depreciation reserve of the account.
    In addition, the final regulations require a partnership to 
terminate its general asset accounts upon the technical termination of 
the partnership under section 708(b)(1)(B). If there is a 
redetermination of basis of an asset in a general asset account (for 
example, due to contingent purchase price or discharge of 
indebtedness), the final regulations provide that the general asset 
account election for the asset also applies to the increase or decrease 
in basis and require the taxpayer to establish a new general asset 
account for that increase or decrease in basis.
4. Partial Dispositions
    The final regulations retain the partial disposition rule in the 
2013 proposed regulations. Similar to the partial disposition rule 
under Sec.  1.168(i)-8 that was previously discussed, the disposition 
rules in Sec.  1.168(i)-1 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 of the assets, the last 
asset, or the remaining portion of the last asset 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 either one of these two 
elections.

D. Determination of Basis of Disposed Asset

    The final regulations generally retain the rules in the 2013 
proposed regulations on determining the unadjusted depreciable basis of 
an asset for which general asset account treatment is terminated. 
Because the general asset account is the asset, the final regulations 
provide that a taxpayer may use any reasonable method that is 
consistently applied to all assets in the same general asset account to 
determine the unadjusted depreciable basis of a disposed asset in that 
account if it is impracticable from the taxpayer's records to determine 
the unadjusted depreciable basis of that asset. This rule also applies 
when the partial disposition rule applies to a disposition of a portion 
of an asset included in a general asset account. 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 an expensive study.
    These final regulations also provide nonexclusive examples of 
reasonable methods. These examples are the same examples in the 2013 
proposed regulations, except the final regulations do not include the 
Consumer Price Index as an example of a reasonable method for the 
reason previously discussed in II.E. Similar to the rules for 
determining the unadjusted depreciable basis of a disposed asset under 
Sec.  1.168(i)-8, the final regulations clarify that, when discounting 
the cost of the replacement asset, using the Producer Price Index for 
Finished Goods (or its successor, the Producer Price Index for Final 
Demand) is a reasonable method. The examples in the final regulations 
include the following: (1) Discounting the cost of the replacement 
asset to its placed-in-service year cost using the Producer Price Index 
for Finished Goods (or its successor, the Producer Price Index for 
Final Demand, or any other index designated by guidance in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2) of the chapter) only if the 
replacement asset is a restoration under Sec.  1.263(a)-3(k) and is not 
a betterment under Sec.  1.263(a)-3(j) or is not an adaptation to a new 
or different use under Sec.  1.263(a)-3(l); (2) 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 (3) a study 
allocating the cost of the asset to its individual components.

E. Identification of Disposed Asset

    The final regulations retain the rules in the 2013 proposed 
regulations for determining the placed-in-service year of an asset for 
which general asset account treatment is terminated. These rules are 
the same as those previously discussed for identifying the placed-in-
service year of the disposed asset for purposes of Sec.  1.168(i)-8: 
The specific identification method, the 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 
LIFO method is not permitted. These rules also apply when the partial 
disposition rule applies to a disposition of a portion of an asset 
included in a general asset account. The final regulations provide an 
additional example of the LIFO method, which is impermissible.

IV. Accounting for MACRS Property Under Sec.  1.168(i)-7

    The final regulations retain the rule in the 2013 proposed 
regulations regarding how to account for a disposed portion of an 
asset. The final 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 rule also is provided in the 
final regulations under Sec.  1.168(i)-7.

V. Conforming Changes

    The final regulations also amend Sec. Sec.  1.165-2, 1.168(i)-7, 
1.263(a)-3, and 1.1016-3 to replace references to the temporary 
regulations and the 2013 proposed regulations with references to these 
final regulations.

[[Page 48667]]

VI. Applicability Dates

    The final regulations apply to taxable years beginning on or after 
January 1, 2014. Alternatively, a taxpayer may choose to apply the 
final regulations to taxable years beginning on or after January 1, 
2012.
    A taxpayer also may choose to rely on the provisions of the 2013 
proposed regulations for taxable years beginning on or after January 1, 
2012, and beginning before January 1, 2014. Finally, a taxpayer may 
choose to apply the temporary regulations to taxable years beginning on 
or after January 1, 2012, and beginning before 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 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, the 2013 proposed regulations 
preceding this regulation were submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on their 
impact on small business, and no comments were received.

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 
please visit the IRS Web site at https://www.irs.gov or the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402.

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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR Part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is revised by adding an 
entry for Sec.  1.168(i)-1 to read as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.168(i)-1 also issued under 26 U.S.C. 168(i)(4).


0
Par. 2. Section 1.165-2 is amended by revising the first sentence in 
paragraph (c) to read as follows:


Sec.  1.165-2  Obsolescence of nondepreciable property.

* * * * *
    (c) Cross references. For the allowance under section 165(a) of 
losses arising from the permanent withdrawal of depreciable property 
from use in the trade or business or in the production of income, see 
Sec.  1.167(a)-8, Sec.  1.168(i)-1, or Sec.  1.168(i)-8, as applicable. 
* * *
* * * * *

0
Par. 3. Section 1.168(i)-0 is amended by:
0
a. Redesignating the entries for paragraphs (b)(4), (5), and (6) as 
paragraphs (b)(5), (6), and (7), respectively, and revising newly 
redesignated paragraphs (b)(6) and (7).
0
b. Adding entries for paragraphs (b)(4), (b)(8), and (b)(9).
0
c. Revising entries for paragraphs (c)(3), (d)(2), (d)(3), (e), (e)(1), 
(e)(2)(v) through (viii), (e)(3)(vi), (h)(1), (i), and (m).
0
d. Adding entries for paragraphs (e)(1)(i) and (ii).
0
e. Removing the entry for paragraph (h)(2) and redesignating the entry 
for paragraph (h)(3) as 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.
    (1) Scope and definition.
    (i) In general.
    (ii) Disposition of a portion of an asset.
    (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 dates.


Sec.  1.168(i)-0T  [Removed]

0
Par. 4. Section 1.168(i)-0T is removed.

0
Par. 5. Section 1.168(i)-1 is amended by revising paragraphs (a) 
through (l)(1), and (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 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,

[[Page 48668]]

section 179A, or section 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 (as defined in former section 922), domestic international 
sales corporation (as defined in section 992(a)), or possession 
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), section 168(l), section 168(m), section 
168(n), section 1400L(b), or section 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):

    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 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

[[Page 48669]]

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 
paragraph (e)(3)(iii) (disposition of an asset in a qualifying 
disposition), paragraph (e)(3)(iv) (transactions subject to section 
168(i)(7)), paragraph (e)(3)(v) (transactions subject to section 1031 
or section 1033), paragraph (e)(3)(vi) (technical termination of a 
partnership), paragraph (e)(3)(vii) (anti-abuse rule), paragraph (g) 
(assets subject to recapture), or paragraph (h)(1) (conversion to any 
personal use) 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 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 described in paragraph (e)(3)(vii)(B) of

[[Page 48670]]

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 (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 Code other than sections 1245 and 1250 or 
provisions of the Code that treat gain on a disposition as subject to 
section 1245 or section 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 paragraph (e)(3)(iv) (pertaining to transactions subject 
to section 168(i)(7)), paragraph (e)(3)(v) (pertaining to transactions 
subject to section 1031 or section 1033), and paragraph (e)(3)(vi) 
(pertaining to technical terminations of partnerships) of this section, 
to which a nonrecognition section of the 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. If a taxpayer made an election under Sec.  1.162-3T(d) to 
treat the cost of any material and supply (as defined in Sec.  1.162-
3T(c)(1)) as a capital expenditure subject to the allowance for 
depreciation and also made an election under paragraph (l) of this 
section to include that material and supply in a general asset account, 
the taxpayer can dispose of the material and supply by transferring it 
to a supplies account only if the taxpayer has obtained the consent of 
the Commissioner to revoke the Sec.  1.162-3T(d) election. See Sec.  
1.162-3(d)(3) for the procedures for revoking a Sec.  1.162-3(d) or a 
Sec.  1.162-3T(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, without 
taking into account the applicable convention. 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 (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

[[Page 48671]]

restaurant property, and qualified retail improvement property), each 
item is the asset, provided that 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 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 and, if applicable, its structural components 
are a separate asset.
    (ix) Examples. The following examples illustrate the application of 
this paragraph (e)(2):

    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 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 (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. However, if the loss is 
on account of the demolition of a structure to which section 280B and 
Sec.  1.280B-1 apply, a taxpayer elects to apply paragraph (e)(3)(ii) 
or (iii) of this section by ending depreciation for the structure at 
the time of the disposition of the structure, taking into account the 
convention applicable to the general asset account in which the 
demolished structure was included, and reporting the amount of 
depreciation for that structure for the taxable year in which the 
disposition occurs on the taxpayer's timely filed original Federal tax 
return, including extensions, for that taxable year. A taxpayer may 
revoke the election to apply paragraph (e)(3)(ii) or (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 paragraphs (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. Whether and to what extent 
gain or loss is recognized is determined under other applicable 
provisions of the Code, including section 280B and Sec.  1.280B-1. The 
character of the gain or loss is

[[Page 48672]]

determined under other applicable provisions of the Code, except that 
the amount of gain subject to section 1245 is limited to the excess of 
the depreciation allowed or allowable for the general asset account, 
including any expensed cost, over any amounts previously recognized as 
ordinary income under paragraph (e)(2) of this section, and the amount 
of gain subject to section 1250 is limited to 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):

    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 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. Whether 
and to what extent gain, loss, or other deduction is recognized is 
determined under other applicable provisions of the Code, including 
section 280B and Sec.  1.280B-1. The character of the gain, loss, or 
other deduction is determined under other applicable provisions of the 
Code, except that the amount of gain subject to section 1245 or section 
1250 is limited to the lesser of--
    (1) The depreciation allowed or allowable for the asset, including 
any expensed cost or, in the case of section 1250 property, 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, 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) A transaction, other than a transaction described in paragraph 
(e)(3)(iv) (pertaining to transactions subject to section 168(i)(7)), 
paragraph (e)(3)(v) (pertaining to transactions subject to section 1031 
or section 1033), paragraph (e)(3)(vi) (pertaining to technical 
terminations of partnerships), or paragraph (e)(3)(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);
    (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

[[Page 48673]]

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):

    Example 1. (i) Z, a calendar-year corporation, maintains one 
general asset 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, or a portion of such asset, in 
a general asset account 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 (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,

[[Page 48674]]

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, 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 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 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

[[Page 48675]]

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
    (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 
paragraph (e)(2) (general disposition rules), paragraph (e)(3)(ii) 
(disposition of all assets remaining in a general asset account), 
paragraph (e)(3)(iii) (disposition of an asset in a qualifying 
disposition), paragraph (e)(3)(v) (transactions subject to section 1031 
or section 1033), or paragraph (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 Income, Gain, or             =   Total Ordinary Income,              X   Allowed Depreciation
 Loss from The Disposition of an                 Gain, or Loss from the                  Deductions Allocated
 Asset.                                          Disposition of an Asset.                and Apportioned to
                                                                                         Foreign Source Income/
                                                                                         Total Allowed
                                                                                         Depreciation Deductions
                                                                                         for the General Asset
                                                                                         Account or for the
                                                                                         Asset Disposed of (as
                                                                                         applicable).
 


[[Page 48676]]

    (3) Section 904(d) separate categories. If the assets in the 
general asset account generate foreign source income in more than one 
separate category under section 904(d)(1) or another section of the 
Code (for example, income treated as foreign source income under 
section 904(g)(10)), or under a United States income tax treaty that 
requires the foreign tax credit limitation to be determined separately 
for specified types of income, the amount of foreign source income, 
gain, or loss from the disposition of an asset, as determined under the 
formula in paragraph (f)(2)(ii) of this section, must be allocated and 
apportioned to the applicable separate category or categories under the 
formula in this paragraph (f)(3). For purposes of this formula, the 
allowed depreciation deductions are determined for the applicable time 
period provided in paragraph (f)(2)(i) of this section. The formula is:

 
 
 
Foreign Source Income, Gain, or             =   Foreign Source Income,              X   Allowed Depreciation
 Loss in a Separate Category.                    Gain, or Loss from The                  Deductions Allocated
                                                 Disposition of an Asset.                and Apportioned to a
                                                                                         Separate Category 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(e)(5), 50(c)(2), 168(l)(6), 
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 and/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 
paragraph (e)(3)(iii) (disposition of an asset in a qualifying 
disposition), paragraph (e)(3)(iv)(B) (transactions subject to

[[Page 48677]]

section 168(i)(7)), paragraph (e)(3)(v)(B) (transactions subject to 
section 1031 or section 1033), paragraph (e)(3)(vii) (anti-abuse rule), 
paragraph (g) (assets subject to recapture), or paragraph (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;
    (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. Examples of a last-in, first-out method of 
accounting include the taxpayer identifying 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 treating the disposed of or converted asset as being from that 
general asset account, or the taxpayer treating the disposed portion of 
an asset as being from the general asset account with the most recent 
placed-in-service year that has assets that are the same as the asset 
of which the disposed portion is a part.
    (3) Basis of disposed of or converted asset. (i) 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 must 
determine the unadjusted depreciable basis of, and the depreciation 
allowed or allowable for, the disposed of or converted asset. If it is 
impracticable from the taxpayer's records to determine the unadjusted 
depreciable basis of the disposed of or converted asset, 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, the following:
    (A) If the replacement asset is a restoration (as defined in Sec.  
1.263(a)-3(k)), and is not a betterment (as defined in Sec.  1.263(a)-
3(j)) or an adaptation to a new or different use (as defined in Sec.  
1.263(a)-3(l)), discounting the cost of the replacement asset to its 
placed-in-service year cost using the Producer Price Index for Finished 
Goods or its successor, the Producer Price Index for Final Demand, or 
any other index designated by guidance in the Internal Revenue Bulletin 
(see Sec.  601.601(d)(2) of this chapter) for purposes of this 
paragraph (j)(3);
    (B) 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
    (C) A study allocating the cost of the asset to its individual 
components.
    (ii) The depreciation allowed or allowable for the disposed of or 
converted asset is computed by using the depreciation method, recovery 
period, and convention applicable to the general asset account in which 
the disposed of or converted asset was included and by including the 
additional first year depreciation deduction claimed for the disposed 
of or converted asset.
    (k) Effect of adjustments on prior dispositions. The adjustments to 
a general asset account under paragraph (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

[[Page 48678]]

provisions of this section to the assets included in a general asset 
account. Except as provided in paragraph (c)(1)(ii)(A), (e)(3), (g), or 
(h) 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 dates--(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 (2013-43 IRB 404) (see Sec.  601.601(d)(2) of 
this chapter) 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.
    (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 paragraph (e)(3)(ii), (e)(3)(iii), 
or (l) of this section, except as otherwise expressly provided by other 
guidance published in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2) of this chapter).


Sec.  1.168(i)-1T  [Removed]

0
Par. 6. Section 1.168(i)-1T is removed.

0
Par. 7. Section 1.168(i)-7 is amended by revising the last sentence in 
paragraph (a) and revising paragraphs (b), (c)(2)(ii)(H), and (e) to 
read as follows:


Sec.  1.168(i)-7  Accounting for MACRS property.

    (a) * * * For rules applicable to general asset accounts, see Sec.  
1.168(i)-1.
    (b) Required use of single asset accounts. A taxpayer must account 
for an asset in a single asset account if the taxpayer uses the asset 
both in a trade or business or for the production of income and in a 
personal activity, or if the taxpayer places in service and disposes of 
the asset during the same taxable year. Also, if general asset account 
treatment for an asset terminates under Sec.  1.168(i)-1(c)(1)(ii)(A), 
(e)(3)(iii), (e)(3)(v), (e)(3)(vii), (g), or (h)(1), as applicable, the 
taxpayer must account for the asset in a single asset account beginning 
in the taxable year in which the general asset account treatment for 
the asset terminates. If a taxpayer accounts for an asset in a multiple 
asset account or a pool and the taxpayer disposes of the asset, the 
taxpayer must account for the asset in a single asset account beginning 
in the taxable year in which the disposition occurs. See Sec.  
1.168(i)-8(h)(2)(i). 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).
    (c) * * *
    (2) * * *
    (ii) * * *
    (H) Mass assets (as defined in Sec.  1.168(i)-8(b)(3)) that are or 
will be subject to Sec.  1.168(i)-8(g)(2)(iii) (disposed of or 
converted mass asset is identified by a mortality dispersion table) 
must be grouped into a separate multiple asset account or pool.
* * * * *
    (e) Effective/applicability dates--(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 (2013-43 IRB 404) (see Sec.  601.601(d)(2) of 
this chapter) 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. 8. 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, section 
179A, section 179B, section 179C, section 179D, or section 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

[[Page 48679]]

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)(3), 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).
    (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. If a taxpayer 
made an election under Sec.  1.162-3T(d) to treat the cost of any 
material and supply (as defined in Sec.  1.162-3T(c)(1)) as a capital 
expenditure subject to the allowance for depreciation, the taxpayer can 
dispose of the material and supply by transferring it to a supplies 
account only if the taxpayer has obtained the consent of the 
Commissioner to revoke the Sec.  1.162-3T(d) election. See Sec.  1.162-
3(d)(3) for the procedures for revoking a Sec.  1.162-3(d) or a Sec.  
1.162-3T(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, or disposes of a portion 
of the improvement under paragraph (d)(1) of this section, 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, or disposes of a portion of the improvement under 
paragraph (d)(1) of this section, before or upon the termination of the 
lease.
    (4) Determination of asset disposed of--(i) General rules. For 
purposes of 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, without 
taking into account the applicable convention. 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 (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 and, if applicable, its structural components 
are 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, a 
taxpayer may make an election under this paragraph (d)(2) to apply this 
section to a disposition of a portion of

[[Page 48680]]

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 (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 (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, 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 (iv)(B) 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), 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 (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) 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 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. (i) 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, the following:
    (A) If the replacement asset is a restoration (as defined in Sec.  
1.263(a)-3(k)), and is not a betterment (as defined in Sec.  1.263(a)-
3(j)) or an adaptation to a new or different use (as defined in Sec.  
1.263(a)-3(l)), discounting the cost of the replacement asset to its 
placed-in-service year cost using the Producer Price Index for Finished 
Goods or its successor, the Producer Price Index for Final Demand, or 
any other index designated by guidance in the Internal Revenue Bulletin 
(see Sec.  601.601(d)(2) of

[[Page 48681]]

this chapter) for purposes of this paragraph (f)(2);
    (B) 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
    (C) A study allocating the cost of the asset to its individual 
components.
    (ii) To determine the adjusted depreciable basis of an asset 
disposed of in a multiple asset account or pool, 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. (i) 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. If 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 disposed portion of 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 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 first disposed portion of the 
asset, the reasonable method used by the taxpayer must be consistently 
applied to all portions of the same asset for purposes of determining 
the unadjusted depreciable basis of each disposed portion of the asset. 
If the asset, a portion of which is disposed of, is 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 disposed portion of the asset, the reasonable 
method used by the taxpayer must be 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 or any disposed 
portion of the assets. Examples of a reasonable method include, but are 
not limited to, the following:
    (A) If the replacement portion is a restoration (as defined in 
Sec.  1.263(a)-3(k)), and is not a betterment (as defined in Sec.  
1.263(a)-3(j)) or an adaptation to a new or different use (as defined 
in Sec.  1.263(a)-3(l)), discounting the cost of the replacement 
portion of the asset to its placed-in-service year cost using the 
Producer Price Index for Finished Goods or its successor, the Producer 
Price Index for Final Demand, or any other index designated by guidance 
in the Internal Revenue Bulletin (see Sec.  601.601(d)(2) of this 
chapter) for purposes of this paragraph (f)(3);
    (B) 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
    (C) A study allocating the cost of the asset to its individual 
components.
    (ii) 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 (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 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 this 
paragraph (g), a last-in, first-out method of accounting may not be 
used. Examples of a last-in, first-out method of accounting include the 
taxpayer identifying 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

[[Page 48682]]

treating the asset disposed of as being from that multiple asset 
account or pool, or the taxpayer treating the disposed portion of an 
asset as being from an asset with the most recent placed-in-service 
year that is the same as the asset of which the disposed portion is a 
part.
    (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), Sec.  1.168(i)-
8(h)(3)(i), or general asset account treatment for the asset terminated 
under Sec.  1.168(i)-1(c)(1)(ii)(A), (e)(3)(iii), (e)(3)(v), 
(e)(3)(vii), (g), or (h)(1), as applicable, 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);
    (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)(i) 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 as of the 
first day of the taxable year in which the disposition occurs. See 
paragraph (f)(3)(i) 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:

    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 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

[[Page 48683]]

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% 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% 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% of the 
replaced roof. Thus, the retirement of 60% of the roof is a 
disposition. As a result, depreciation for 60% 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% of the roof pursuant to 
Sec.  1.263(a)-3(k)(1)(i) and (vi) and the replacement 60% 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% of the roof, D replaces 55% 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% of the roof, 
is an asset and the replacement 60% of the roof is a separate asset. 
Assume D must capitalize the costs incurred for replacing 55% 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% of the replaced roof. Thus, the retirement of 55% of the 
roof is a disposition.
    (ii) However, D cannot determine from its records whether the 
replaced 55% is part of the 60% of the roof replaced ten years ago 
or whether the replaced 55% includes part or all of the remaining 
40% 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% of the original roof and 25% of the 60% of the roof 
replaced ten years ago.
    (iii) Thus, depreciation for the remaining 40% 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% of the 60% 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% of 
the roof pursuant to Sec.  1.263(a)-3(k)(1)(i) and (vi), and the 
replacement 55% 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 an existing 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 and its structural components in its tax and financial 
accounting 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 two elevators in 
the office building. E did not dispose of any other structural 
components of this building in 2014 and prior years. 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. Assume the replacement elevator is a restoration under 
Sec.  1.263(a)-3(k), and not a betterment under Sec.  1.263(a)-3(j) 
or an adaptation to a new or different use under Sec.  1.263(a)-
3(l). Because E cannot identify the cost of the elevator from its 
records and the replacement elevator is a restoration under Sec.  
1.263(a)-3(k), E determines the cost of the disposed elevator by 
discounting the cost of the replacement elevator to its placed-in-
service year cost using the Producer Price Index for Final Demand. 
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 Producer Price 
Index for Final Demand, 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 $9,458.
    (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 (the adjusted depreciable basis of 
$140,542 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 for the retired elevator in 2014.
    (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 ($1,261,000 less the depreciation allowed or allowable of 
$9,458 for the retired elevator as of 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). 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 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

[[Page 48684]]

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. This allocation is 
a reasonable method because all the items of mass assets in the pool 
are similar. Using this reasonable method, 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 dates--(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 (2013-43 IRB 404) (see Sec.  601.601(d)(2) of 
this chapter) 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 26 CFR part 1 edition revised as of 
April 1, 2014, to taxable years beginning on or after January 1, 2012. 
However, a taxpayer may not apply Sec.  1.168(i)-8T as contained in 26 
CFR part 1 edition revised as of April 1, 2014, 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 (iv)(B) of this section 
or otherwise provided by other guidance published in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2) of this chapter).


Sec.  1.168(i)-8T  [Removed]

0
Par. 9. Section 1.168(i)-8T is removed.


Sec.  1.263(a)-3  [Amended]

0
Par. 10. Section 1.263(a)-3 is amended by:
0
a. In paragraphs (g)(2)(i), (g)(2)(ii) Example 2, and (g)(2)(ii) 
Example 4, removing the language ``Prop. Reg. Sec.  1.168(i)-8(d) 
(September 19, 2013)'' and adding the language ``Sec.  1.168(i)-8(d)'' 
in its place.
0
b. In paragraph (g)(2)(i), removing the language ``Sec.  1.168(i)-
1T(e)(3) nor Prop. Reg. Sec.  1.168(i)-1(e)(3) (September 19, 2013)'' 
and adding the language ``Sec.  1.168(i)-1(e)(3)'' in its place, and 
removing the language ``Prop. Reg. Sec.  1.168(i)-1(e)(2)(ix) 
(September 19, 2013)'' and adding the language ``Sec.  1.168(i)-
1(e)(1)(ii)'' in its place.
0
c. In paragraphs (g)(2)(ii) and (g)(2)(ii) Example 1, removing the 
language ``Prop. Reg. Sec.  1.168(i)-1(e) (September 19, 2013), or 
Prop. Reg. Sec.  1.168(i)-8 (September 19, 2013)'' and adding the 
language ``Sec.  1.168(i)-1(e) or Sec.  1.168(i)-8'' in its place.
0
d. In paragraph (k)(7) Example 30, removing the language ``Prop. Reg. 
Sec.  1.168(i)-8'' and adding the language ``Sec.  1.168(i)-8'' in its 
place, and removing the language ``Prop. Reg. Sec.  1.168(i)-
8(c)(4)(ii)(A) (September 19, 2013)'' and adding the language ``Sec.  
1.168(i)-8(c)(4)(ii)(A)'' in its place.
0
e. In paragraph (k)(7) Example 30 and Example 31, removing the language 
``Prop. Reg. Sec.  1.168(i)-8(d)(2) (September 19, 2013),'' and adding 
the language ``Sec.  1.168(i)-8(d)(2)'' in its place.
0
f. In paragraph (k)(7) Example 31, removing the language ``Prop. Reg. 
Sec.  1.68(i)-8(c)(4)(ii)(D) (September 19, 2013)'' and adding the 
language ``Sec.  1.168(i)-8(c)(4)(ii)(D)'' in its place.

0
Par. 11. Section 1.1016-3 is amended by revising the fourth sentence in 
paragraph (a)(1)(ii) to read as follows:


Sec.  1.1016-3  Exhaustion, wear and tear, obsolescence, amortization, 
and depletion for periods since February 13, 1913.

    (a) * * *
    (1) * * *
    (ii) * * * For rules governing losses on retirement or disposition 
of depreciable property, including rules for determining basis, see 
Sec.  1.167(a)-8,

[[Page 48685]]

1.168(i)-1(e), or 1.168(i)-8, as applicable. * * *
* * * * *

 John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: July 11, 2014.
 Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-19403 Filed 8-14-14; 11:15 am]
BILLING CODE 4830-01-P