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9529

Action

When

In accordance with

(5) Inspect the wing spar assemblies for cracks

Initially inspect within the next 80 hours timein-service (TIS) after August 16, 2001 (the
effective date of AD 2001–13–18) or within
12 months after August 16, 2001 (the effective date of AD 2001–13–18), whichever occurs later, unless already accomplished. Inspect thereafter at intervals not to exceed
80 hours TIS.
Prior to further flight after the required inspection where the cracked wing spar assembly
is found.

Raytheon Aircraft Mandatory Service Bulletin
No. SB 57–3329, Issued: February, 2000.

(6) Replace any cracked wing spar assembly. A
crack indication in the filler strip is allowed if
the direction of the crack is toward the outside edge of the filler strip. If the direction of
the crack is toward the inside edge of the
filler strip or any crack is found in any other
area, you must replace the cracked wing
spar assembly.
(7) Submit a report to FAA that describes the
damage found on the wing spar. Use the
chart on pages 58 through 60 of Raytheon
Aircraft Mandatory Service Bulletin No. SB
57–3329, Issued: February, 2000.
(i) Submit this report even if no cracks are
found.
(ii) Submit this report to FAA at the address
found in paragraph (g) of this AD.

Within 10 days after the initial inspection or
within 10 days after August 16, 2001 (the
effective date of AD 2001–13–18), whichever occurs later, unless already accomplished.

Are Any Other ADs Affected by This Action?
(e) This AD revises AD 2001–13–18,
Amendment 39–12300.

Kansas City, Missouri 64106; or at the Office
of the Federal Register, 800 North Capitol
Street, NW., suite 700, Washington, DC.

What About Alternative Methods of
Compliance?
(f) As of March 15, 2004 (the effective date
of this AD), all alternative methods of
compliance approved under AD 2001–13–18
are not approved for this AD and are no
longer valid. Any alternative method of
compliance must reference ‘‘AD 2001–13–18
R1’’ in order to be valid.
(g) You may request a different method of
compliance or a different compliance time
for this AD by following the procedures in 14
CFR 39.19. Unless FAA authorizes otherwise,
send your request to your principal
inspector. The principal inspector may add
comments and will send your request to the
Manager, Wichita Aircraft Certification Office
(ACO), FAA. For information on any already
approved alternative methods of compliance
for this AD, contact Paul Nguyen, Aerospace
Engineer, FAA, Wichita Aircraft Certification
Office, 1801 Airport Road, Mid-Continent
Airport, Wichita, Kansas 67209; telephone:
(316) 946–4125; facsimile: (316) 946–4107.

Issued in Kansas City, Missouri, on
February 23, 2004.
Dorenda D. Baker,
Manager, Small Airplane Directorate, Aircraft
Certification Service.
[FR Doc. 04–4372 Filed 2–27–04; 8:45 am]

Does This AD Incorporate Any Material by
Reference?
(h) You must do the actions required by
this AD following the instructions in
Raytheon Aircraft Mandatory Service
Bulletin No. SB 57–3329, Issued: February,
2000. On August 16, 2001 (66 FR 34802, July
2, 2001), the Director of the Federal Register
previously approved the incorporation by
reference of this service bulletin in
accordance with 5 U.S.C. 552(a) and 1 CFR
part 51. You may get a copy from Raytheon
Aircraft Company, P.O. Box 85, Wichita,
Kansas 67201–0085; telephone: (800) 625–
7043 or (316) 676–4556. You may review
copies at FAA, Central Region, Office of the
Regional Counsel, 901 Locust, Room 506,

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BILLING CODE 4910–13–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9115]
RIN 1545–BC27

Depreciation of MACRS Property That
Is Acquired in a Like-Kind Exchange or
as a Result of an Involuntary
Conversion
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary
regulations.
SUMMARY: This document contains
regulations relating to the depreciation
of property subject to section 168 of the
Internal Revenue Code (MACRS
property). Specifically, these temporary
regulations provide guidance on how to
depreciate MACRS property acquired in
a like-kind exchange under section 1031
or as a result of an involuntary
conversion under section 1033 when
both the acquired and relinquished

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The applicable maintenance manual.

Pages 58 through 60 of Raytheon Aircraft
Mandatory Service Bulletin No. SB 57–
3329, Issued: February, 2000.

property are subject to MACRS in the
hands of the acquiring taxpayer. These
temporary regulations will affect
taxpayers involved in a like-kind
exchange under section 1031 or an
involuntary conversion under section
1033. The text of these temporary
regulations also serves as the text of the
proposed regulations set forth in the
notice of proposed rulemaking on this
subject in the proposed rules section in
this issue of the Federal Register.
DATES: Effective Dates: These
regulations are effective March 1, 2004.
Applicability Dates: For dates of
applicability, see §§ 1.168(a)–1T(b) and
(c), 1.168(b)–1T(b), 1.168(d)–1T(d),
1.168(i)–1T(l), 1.168(i)–6T(k), and
1.168(k)–1T(g).
FOR FURTHER INFORMATION CONTACT:
Charles J. Magee, (202) 622–3110 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to 26 CFR part 1 under section 168 of
the Internal Revenue Code (Code).
Section 168 has been modified by
several Acts, including section 201 of
the Tax Reform Act of 1986, Public Law
99–514 (100 Stat. 2085, 2121), section
101 of the Job Creation and Worker
Assistance Act of 2002, Public Law 107–
147 (116 Stat. 21), and section 201 of the
Jobs and Growth Tax Relief
Reconciliation Act of 2003, Public Law
108–27 (117 Stat. 752). Section 168
provides the depreciation deduction for
tangible property generally placed in
service after December 31, 1986.

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Explanation of Provisions
Background
Section 167 allows as a depreciation
deduction a reasonable allowance for
the exhaustion, wear, and tear of
property used in a trade or business or
held for the production of income. The
depreciation allowable for depreciable
tangible property placed in service after
1986 generally is determined under
section 168 (MACRS property). Under
section 1031(a)(1), no gain or loss is
recognized on an exchange of property
held for productive use in a trade or
business or for investment if the
property is exchanged solely for
property of like kind that is to be held
either for productive use in a trade or
business or for investment. Section
1031(b) provides that if an exchange
would be within the provision of
section 1031(a) were it not for the fact
that the property received in the
exchange consists not only of property
permitted to be received in such an
exchange, but also of other property or
money, then the gain, if any, to the
recipient shall be recognized, but in an
amount not in excess of the sum of such
money and the fair market value of such
other property. Under section 1031(c),
no loss from such a transaction is
recognized. Under section 1031(d), the
basis of property acquired in an
exchange described in section 1031 is
the same as that of the property
exchanged, decreased by the amount of
any money received by the taxpayer and
increased by the amount of gain (or
decreased by the amount of loss) that
was recognized on such exchange.
Section 1033(a)(1) provides that if
property (as a result of its destruction in
whole or in part, theft, seizure, or
requisition or condemnation or threat or
imminence thereof) is compulsorily or
involuntarily converted into property
similar or related in service or use to the
property so converted, no gain is
recognized. Under section 1033(b)(1),
the basis of property acquired by the
taxpayer in such a transaction is the
basis of the converted property. Under
section 1033(a)(2)(A), if property is
compulsorily or involuntarily converted
into money or into property not similar
or related in service or use to the
converted property, and, within the
time frame described in section
1033(a)(2)(B), the taxpayer purchases
property that is related in service or use
to the converted property or purchases
stock in the acquisition of control of a
corporation owning such property, then
the taxpayer may elect to recognize gain
only to the extent that the amount
realized upon such conversion exceeds
the cost of such other property. Under

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section 1033(b)(2), if such an election is
made, the basis of the replacement
property acquired by the taxpayer
generally is the cost of that property
decreased by any gain not recognized by
reason of section 1033(a)(2).
The IRS became aware of inconsistent
depreciation treatment by taxpayers of
property that has a basis determined
under section 1031(d) or section 1033(b)
(replacement property). Certain
taxpayers were depreciating the
replacement property using the same
depreciation method, recovery period,
and convention as the exchanged or
involuntarily converted property
(relinquished property) while other
taxpayers were depreciating the
replacement property as if it were newly
placed in service.
In response, the IRS and Treasury
issued Notice 2000–4 (2000–1 C.B. 313),
published January 18, 2000. Notice
2000–4 instructed taxpayers how to
depreciate MACRS property that has a
basis determined under section 1031(d)
or section 1033(b) (replacement MACRS
property), provided that the exchanged
or involuntarily converted property was
also MACRS property (relinquished
MACRS property). The notice stated
that replacement MACRS property
placed in service after January 3, 2000,
is depreciated over the remaining
recovery period of, and using the same
depreciation method and convention as,
the relinquished MACRS property and
that any excess of the basis in the
replacement MACRS property over the
adjusted basis in the relinquished
MACRS property is treated as newly
purchased MACRS property. Notice
2000–4 also stated that the IRS and
Treasury intended to issue regulations
to address these transactions. Public
comments on the nature and scope of
these temporary regulations were
requested.
Scope
The temporary regulations instruct
taxpayers how to determine the annual
depreciation allowance under section
168 for replacement MACRS property.
Generally, MACRS property, which is
defined in § 1.168(b)–1T(a)(2), is
tangible property of a character subject
to the allowance for depreciation
provided in section 167(a) that is placed
in service after December 31, 1986, and
subject to section 168. The temporary
regulations also apply to a transaction to
which section 1031(a), (b), or (c) applies
(like-kind exchange) or a transaction in
which gain or loss is not recognized
pursuant to section 1033 (involuntary
conversion) involving MACRS property
that is replaced with other MACRS

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property in a transaction between
members of the same affiliated group.
Property acquired in a like-kind
exchange or involuntary conversion to
replace property whose depreciation
allowance is computed under a
depreciation system other than MACRS,
or to replace property for which a
taxpayer made a valid election under
section 168(f)(1) to exclude it from the
application of section 168 (MACRS), is
not within the scope of the temporary
regulations. Additionally, this
regulation does not provide guidance for
a taxpayer acquiring property in an
exchange for property that the taxpayer
depreciated under the Accelerated Cost
Recovery System (ACRS) or for a
taxpayer acquiring an automobile for
another automobile for which the
taxpayer used the Standard Mileage
Rate method of deducting expenses.
Comments are requested on the
depreciation treatment of like-kind
exchange or involuntary conversion
transactions described above and
whether the depreciation treatment of
these transactions should fall within the
scope of this regulation.
The depreciation treatment used by
previous owners in determining
depreciation allowances for the
replacement MACRS property is not
relevant. For example, a taxpayer
exchanging MACRS property for
property that was depreciated under
ACRS by the person relinquishing the
property may use this regulation
(because the acquired property will
become MACRS property in the hands
of the acquiring taxpayer). In addition,
elections made by previous owners in
determining depreciation allowances of
the replacement MACRS property have
no effect on the acquiring taxpayer. For
example, a taxpayer exchanging MACRS
property that the taxpayer depreciates
under the general depreciation system
for other MACRS property that the
previous owner elected to depreciate
under the alternative depreciation
system pursuant to section 168(g)(7)
does not have to continue using the
alternative depreciation system for the
replacement MACRS property.
Finally, the IRS has learned that some
taxpayers question whether Notice
2000–4 allows depreciation of land, if
the land is acquired in a like-kind
exchange or involuntary conversion for
MACRS property. As explained in
further detail below, neither the
temporary regulations nor Notice 2000–
4 allow taxpayers to depreciate land or
other nondepreciable property.

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Federal Register / Vol. 69, No. 40 / Monday, March 1, 2004 / Rules and Regulations
General Rule
Exchanged Basis
The temporary regulations provide
rules for determining the applicable
recovery period, depreciation method,
and convention used to determine the
depreciation allowances for the
replacement MACRS property with
respect to so much of the taxpayer’s
basis (as determined under section
1031(d) and the regulations under
section 1031(d) or section 1033(b) and
the regulations under section 1033(b)) in
the replacement MACRS property as
does not exceed the taxpayer’s adjusted
depreciable basis in the relinquished
MACRS property (exchanged basis). In
general, the exchanged basis is
depreciated over the remaining recovery
period of, and using the depreciation
method and convention of, the
relinquished MACRS property (general
rule).
This general rule applies if the
replacement MACRS property has the
same or a shorter recovery period or the
same or a more accelerated depreciation
method than the relinquished MACRS
property. Under certain circumstances,
this rule could adversely affect
taxpayers engaging in like-kind
exchanges or involuntary conversions.
For example, under the general rule, a
taxpayer must depreciate replacement
MACRS property with a shorter
recovery period over the longer recovery
period of the relinquished MACRS
property even if the taxpayer could
depreciate the replacement MACRS
property over a shorter recovery period
by treating such property as newly
acquired MACRS property. Accordingly,
the temporary regulations provide an
election not to apply the temporary
regulations and to treat the replacement
MACRS property as MACRS property
placed in service by the acquiring
taxpayer at the time of replacement.
Taxpayers may use this election to
ameliorate the possible adverse effects
of applying the general rule to this type
of transaction.
The general rule does not apply if the
replacement MACRS property has a
longer recovery period or less
accelerated depreciation method than
the relinquished property. If the
recovery period of the replacement
MACRS property is longer than that of
the relinquished MACRS property, the
taxpayer’s exchanged basis in the
relinquished MACRS property is
depreciated beginning in the year of
replacement over the remainder of the
recovery period that would have
applied to the replacement MACRS
property if the replacement MACRS
property had originally been placed in

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service when the relinquished MACRS
property was placed in service by the
acquiring taxpayer. Similarly, if the
depreciation method of the replacement
MACRS property is less accelerated
than that of the relinquished MACRS
property, then the taxpayer’s exchanged
basis in the relinquished MACRS
property is depreciated beginning in the
year of replacement using the less
accelerated depreciation method of the
replacement MACRS property that
would have applied to the replacement
MACRS property if the replacement
MACRS property had originally been
placed in service when the relinquished
MACRS property was placed in service
by the acquiring taxpayer.
For taxpayers who wish to use the
optional depreciation tables to
determine the depreciation allowances
for the replacement MACRS property
instead of the formulas (for example, see
section 6 of Rev. Proc. 87–57 (1987–2
C.B. 687, 692)), the temporary
regulations provide guidance on
choosing the applicable optional table
as well as how to modify the calculation
for computing the depreciation
allowances for the replacement MACRS
property.
Excess Basis
Any excess of the taxpayer’s basis in
the replacement MACRS property over
the taxpayer’s exchanged basis in the
relinquished MACRS property is
referred to as the excess basis.
Generally, the excess basis in the
replacement MACRS property is treated
as property that is placed in service by
the acquiring taxpayer in the taxable
year in which the replacement MACRS
property is placed in service by the
acquiring taxpayer or, if later, the
taxable year of the disposition of the
relinquished MACRS property (time of
replacement). The depreciation
allowances for the excess basis are
determined by using the applicable
recovery period, depreciation method,
and convention prescribed under
section 168 for the replacement MACRS
property at the time of replacement. In
addition, the excess basis may be taken
into account for purposes of computing
the deduction allowed under section
179.
Special Rules
Deferred Exchanges
Because of the complex nature of
certain like-kind exchange and
involuntary conversion transactions, the
temporary regulations provide special
rules for certain circumstances. If a
taxpayer disposes of the relinquished
MACRS property prior to the

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9531

acquisition of the replacement MACRS
property, the temporary regulations do
not allow the taxpayer to take
depreciation on the relinquished
MACRS property during the period
between the disposition of the
relinquished MACRS property and the
acquisition of the replacement MACRS
property. This results because, in a
deferred exchange under § 1.1031(k)–1,
or if a taxpayer does not replace
converted property until after the
taxpayer no longer owns the converted
property, the taxpayer has no property
to depreciate during that intervening
period. Accordingly, the recovery
period for the replacement MACRS
property is suspended during this
period. The temporary regulations do
not address the issue of whether an
intermediary (such as an exchange
accommodation titleholder) is entitled
to depreciation.
Acquisition Prior to Disposition
When replacement MACRS property
is acquired and placed in service by a
taxpayer before the relinquished
MACRS property is disposed of by the
taxpayer (for example, under threat of
condemnation), the regulations allow
the taxpayer to depreciate the
unadjusted depreciable basis of the
replacement MACRS property until the
time of disposition of the relinquished
MACRS property by the taxpayer. The
taxpayer must include in taxable
income in the year of disposition of the
relinquished MACRS property the
excess of the depreciation allowable on
the unadjusted depreciable basis of the
replacement MACRS property over the
depreciation that would be allowable on
the excess basis of the replacement
MACRS property from the date the
replacement MACRS property was
placed in service by the taxpayer to the
time of disposition of the relinquished
MACRS property. The depreciation of
the depreciable excess basis of the
replacement MACRS property continues
to be depreciated by the taxpayer. The
IRS and Treasury may consider
providing additional future guidance
with respect to this issue and request
comments relating thereto. The IRS and
Treasury also invite taxpayers to
comment on whether the allowance of
depreciation for the replacement
MACRS property should be followed by
basis reduction at the time of
disposition of the relinquished MACRS
property, or whether some other
approach should be taken.
Transactions Involving Nondepreciable
Property
Because land or other nondepreciable
property acquired in a like-kind

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exchange or involuntary conversion for
MACRS property is not depreciable,
such property is not within the scope of
the temporary regulations. Further, if
MACRS property or both MACRS
property and land or other
nondepreciable property are acquired in
a like-kind exchange or involuntary
conversion for land or other
nondepreciable property, the basis of
the replacement MACRS property is
treated as property placed in service by
the acquiring taxpayer in the year of
replacement.
Automobiles
The IRS received many comments
concerning the like-kind exchange of
automobiles. In response, the temporary
regulations contain detailed rules
regarding the annual allowable
depreciation for automobiles acquired
in a like-kind exchange or involuntary
conversion. The temporary regulations
provide that if the replacement MACRS
property consists of a passenger
automobile that is subject to the
depreciation limitations of section
280F(a), then the depreciation limitation
that applies for the taxable year is based
on the date the replacement MACRS
automobile is placed in service by the
acquiring taxpayer. In allocating the
depreciation limitation, the depreciation
allowance for the exchanged basis in the
replacement MACRS automobile
generally is limited to the amount that
would have been allowable under
section 280F(a) for the relinquished
MACRS automobile had the transaction
not occurred. The depreciation
allowance for the excess basis is
generally limited to the section 280F(a)
limitation that applies for that taxable
year less the amount of the depreciation
allowance for the exchanged basis.
Election Not To Apply Temporary
Regulations
Commentators suggested that
implementing the general rule for all
depreciable property was burdensome
because taxpayers would have onerous
computational and administrative
difficulties due to the possibility of
having to track different depreciation
components of one asset. Responding to
these comments, the temporary
regulations include a provision by
which taxpayers may elect not to apply
these temporary regulations. If a
taxpayer elects not to apply the
temporary regulations, the taxpayer
must treat the entire basis (i.e., both the
exchanged and excess basis) of the
replacement MACRS property as being
placed in service by the acquiring
taxpayer at the time of replacement.
Consistent with this treatment, the

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taxpayer treats the relinquished MACRS
property as disposed of at the time of
the disposition of the relinquished
MACRS property. The election must be
made by typing or legibly printing at the
top of Form 4562, Depreciation and
Amortization, ‘‘ELECTION MADE
UNDER SECTION 1.168(i)–6T(i),’’ or in
the manner provided for on Form 4562
and its instructions.
Additional First Year Depreciation
Temporary regulations issued under
§§ 1.168(k)–1T and 1.1400L(b)–1T (TD
9091, 68 FR 52986 (September 8, 2003))
provide that the exchanged basis
(referred to as the ‘‘carryover basis’’ in
such regulations) and the excess basis,
if any, of the replacement MACRS
property (referred to as the ‘‘acquired
MACRS property’’ in such regulations)
is eligible for the additional first year
depreciation deduction provided under
section 168(k) or 1400L(b) if the
replacement MACRS property is
qualified property under section
168(k)(2), 50-percent bonus depreciation
property under section 168(k)(4), or
qualified New York Liberty Zone
property under section 1400L(b)(2).
However, if qualified property, 50percent bonus depreciation property, or
qualified New York Liberty Zone
property is placed in service by the
taxpayer and then disposed of by that
taxpayer in a like-kind exchange or
involuntary conversion in the same
taxable year, the relinquished MACRS
property (referred to as the ‘‘exchanged
or involuntarily converted MACRS
property’’ in such regulations) is not
eligible for the additional first year
depreciation deduction under section
168(k) or 1400L(b), as applicable.
However, the exchanged basis (and
excess basis, if any) of the replacement
MACRS property may be eligible for the
additional first year depreciation
deduction under section 168(k) or
1400L(b), as applicable, subject to the
requirements of section 168(k) or
1400L(b), as applicable. The rules
provided under §§ 1.168(k)–1T and
1.1400L(b)–1T apply even if the
taxpayer elects not to apply these
temporary regulations.
These temporary regulations amend
the definition of time of replacement in
§ 1.168(k)–1T(f)(5)(ii)(F) to be consistent
with the definition of that term under
these temporary regulations. In
addition, these temporary regulations
modify the like-kind exchange or
involuntary conversion examples
contained in § 1.168(k)–1T(f)(5)(v) to
reflect the placed in service date (taking
into account the convention as
determined under these temporary
regulations) for the relinquished

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MACRS property and the replacement
MACRS property in the year of
disposition and year of replacement.
Since the publication of § 1.168(k)–1T
and 1.1400L(b)–1T, we have received
comments regarding the application of
the additional first year depreciation
deduction rules in §§ 1.168(k)–1T(f)(5)
and 1.1400L(b)–1T(f)(5) to qualified
property, 50-percent bonus depreciation
property, or qualified New York Liberty
Zone property acquired in a like-kind
exchange or an involuntary conversion.
We will consider these comments when
§§ 1.168(k)–1T and 1.1400L(b)–1T are
finalized.
General Asset Accounts
Some commentators questioned how
the general rule set forth in Notice
2000–4 affects the tax treatment of likekind exchanges or involuntary
conversions involving MACRS assets
contained in general asset accounts as
described in § 1.168(i)–1.
Section 1.168(i)–1(e)(2) treats likekind exchanges or involuntary
conversions as dispositions of the
relinquished MACRS property and
acquisitions of the replacement MACRS
property. As a result, any amount
realized on a like-kind exchange or
involuntary conversion is recognized as
ordinary income and the basis of the
relinquished MACRS property in the
general asset account continues to be
depreciated. However, § 1.168(i)–
1(e)(3)(iii) allows a taxpayer to elect to
terminate general asset account
treatment for the relinquished MACRS
property, and, as a result, the tax
treatment of the like-kind exchange or
involuntary conversion is determined
under section 1031 or section 1033, as
applicable.
These temporary regulations amend
the final regulations under section
168(i)(4) (TD 8566, 59 FR 51369 (1994))
to address the like-kind exchange or
involuntary conversion of MACRS
property contained in a general asset
account. Under the temporary
regulations, general asset account
treatment terminates for the
relinquished MACRS property as of the
first day of the year of disposition.
Because this rule would require
taxpayers to track each property in a
general asset account, the IRS and
Treasury request comments on
alternative methods to account for a
like-kind exchange or involuntary
conversion involving MACRS property
contained in a general asset account
when the replacement MACRS property
has a longer recovery period or less
accelerated depreciation method than
the relinquished MACRS property or
when the basis of the general asset

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account would change as a result of the
like-kind exchange or involuntary
conversion.
Exchanges of Multiple Properties
The determination of the basis of
property acquired in a like-kind
exchange involving multiple properties
is described in § 1.1031(j)–1 and the
determination of the basis of multiple
properties acquired as a result of an
involuntary conversion is described in
§ 1.1033(b)–1. Commentators question
how the rules set forth in Notice 2000–
4 affects the depreciation treatment of a
like-kind exchange or an involuntary
conversion involving multiple
properties. At this time, taxpayers may
apply the principles of this temporary
regulation to determine the depreciation
treatment of MACRS property acquired
in these transactions. The IRS and
Treasury may consider providing future
guidance with respect to this issue and
request comments relating thereto.
Specifically, comments are requested on
the depreciation treatment of these
transactions when the depreciation
methods or recovery periods of the
replacement MACRS properties differ
from those of the relinquished MACRS
properties.
Effect on Other Documents
The following publication is obsolete
after February 27, 2004: Notice 2000–4
(2000–1 C.B. 313).
Taxpayers who have either
relinquished or an acquired MACRS
property in a like-kind exchange or
involuntary conversion between January
3, 2000, and February 27, 2004, may
rely on Notice 2000–4.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations. For the
applicability of the Regulatory
Flexibility Act (5 U.S.C. chapter 6), refer
to the Special Analyses section of the
preamble to the cross-reference notice of
proposed rulemaking published in the
proposed rules section in this issue of
the Federal Register. Pursuant to
section 7805(f) of the Code, these
temporary regulations will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for
comment on its impact on small
business.

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Drafting Information

9533

determined under section 167 and the
regulations under section 167.
The principal authors of these
(2) MACRS property is tangible,
regulations are Alan H. Cooper, Office of
depreciable property that is placed in
the Chief Counsel (Small Business/Self
service after December 31, 1986 (or after
Employed), and Charles J. Magee, Office
July 31, 1986, if the taxpayer made an
of the Associate Chief Counsel
election under section 203(a)(1)(B) of
(Passthroughs and Special Industries).
the Tax Reform Act of 1986; 100 Stat.
However, other personnel from the IRS
2143) and subject to section 168, except
and Treasury Department participated
for property excluded from the
in their development.
application of section 168 as a result of
section 168(f) or as a result of a
List of Subjects in 26 CFR Part 1
transitional rule.
Income taxes, Reporting and
(3) Unadjusted depreciable basis is
recordkeeping requirements.
the basis of property for purposes of
section 1011 without regard to any
Temporary Amendments to the
adjustments described in section
Regulations
1016(a)(2) and (3). This basis reflects the
■ Accordingly, 26 CFR part 1 is amended reduction in basis for the percentage of
as follows:
the taxpayer’s use of property for the
taxable year other than in the taxpayer’s
PART 1—INCOME TAXES
trade or business (or for the production
of income), for any portion of the basis
■ Paragraph 1. The authority citation for
the taxpayer properly elects to treat as
part 1 continues to read in part as
an expense under section 179, and for
follows:
any adjustments to basis provided by
Authority: 26 U.S.C. 7805 * * * § 1.168(i)–
other provisions of the Internal Revenue
1T also issued under 26 U.S.C. 168(i)(4).
Code and the regulations under the
Code (other than section 1016(a)(2) and
■ Par. 2. Sections 1.168(a)–1T and
1.168(b)–1T are added to read as follows: (3)) (for example, a reduction in basis by
the amount of the disabled access credit
§ 1.168(a)–1T Modified accelerated cost
pursuant to section 44(d)(7)). For
recovery system (temporary).
property subject to a lease, see section
(a) Section 168 determines the
167(c)(2).
depreciation allowance for tangible
(4) Adjusted depreciable basis is the
property that is of a character subject to
unadjusted depreciable basis of the
the allowance for depreciation provided property, as defined in § 1.168(b)–
in section 167(a) and that is placed in
1T(a)(3), less the adjustments described
service after December 31, 1986 (or after in section 1016(a)(2) and (3).
(b) Effective date. (1) This section is
July 31, 1986, if the taxpayer made an
applicable on February 27, 2004.
election under section 203(a)(1)(B) of
(2) The applicability of this section
the Tax Reform Act of 1986; 100 Stat.
expires on or before February 27, 2007.
2143). Except for property excluded
■ Par. 3. Section 1.168(d)–1 is amended
from the application of section 168 as a
by:
result of section 168(f) or as a result of
■ 1. Revising paragraph (b)(3).
a transitional rule, the provisions of
■ 2. Adding paragraph (d)(3).
section 168 are mandatory for all
The addition and revision read as
eligible property. The allowance for
follows:
depreciation under section 168
constitutes the amount of depreciation
§ 1.168(d)–1 Applicable conventions—halfallowable under section 167(a). The
year and mid-quarter conventions.
determination of whether tangible
*
*
*
*
*
property is property of a character
(b) * * *
subject to the allowance for depreciation
(3) * * * (i) and (ii) [Reserved] For
is made under section 167 and the
further guidance, see § 1.168(d)–
regulations under section 167.
1T(b)(3)(i) and (ii).
(b) This section is applicable on and
*
*
*
*
*
after February 27, 2004.
(d) * * *
(c) The applicability of this section
(3) Like-kind exchanges and
involuntary conversions. [Reserved] For
expires on or before February 27, 2007.
further guidance, see § 1.168(d)–
§ 1.168(b)–1T Definitions (temporary).
1T(d)(3)(i).
(a) Definitions. For purposes of
■ Par. 4. Section 1.168(d)–1T is
section 168 and the regulations under
amended by:
section 168, the following definitions
■ 1. Revising paragraphs (a) through
apply:
(b)(3)(ii).
(1) Depreciable property is property
■ 2. Adding paragraph (d)(3).
that is of a character subject to the
The addition and revisions read as
allowance for depreciation as
follows:

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Federal Register / Vol. 69, No. 40 / Monday, March 1, 2004 / Rules and Regulations

§ 1.168(d)–1T Applicable conventions—
half-year and mid-quarter conventions
(temporary).

(a) through (b)(2) [Reserved]. For
further guidance, see § 1.168(d)–1(a)
through (b)(2).
(b)(3) Property placed in service and
disposed of in the same taxable year—
(i) Under section 168(d)(3)(B)(ii), the
depreciable basis of property placed in
service and disposed of in the same
taxable year is not taken into account in
determining whether the 40-percent test
is satisfied. However, the depreciable
basis of property placed in service,
disposed of, subsequently reacquired,
and again placed in service, by the
taxpayer in the same taxable year must
be taken into account in applying the
40-percent test, but the basis of the
property is only taken into account on
the later of the dates that the property
is placed in service by the taxpayer
during the taxable year. Further, see
§ 1.168(i)–6T(c)(4)(v)(B) and § 1.168(i)–
6T(f) for rules relating to property
placed in service and exchanged or
involuntarily converted during the same
taxable year.
(ii) The applicable convention, as
determined under this section, applies
to all depreciable property (except
nonresidential real property, residential
rental property, and any railroad
grading or tunnel bore) placed in service
by the taxpayer during the taxable year,
excluding property placed in service
and disposed of in the same taxable
year. However, see § 1.168(i)–
6T(c)(4)(v)(A) and § 1.168(i)–6T(f) for
rules relating to MACRS property that
has a basis determined under section
1031(d) or section 1033(b). No
depreciation deduction is allowed for
property placed in service and disposed
of during the same taxable year.
However, see § 1.168(k)–1T(f)(1) for
rules relating to qualified property or
50-percent bonus depreciation property,
and § 1.1400L(b)–1T(f)(1) for rules
relating to qualified New York Liberty
Zone property, that is placed in service
by the taxpayer in the same taxable year
in which either a partnership is
terminated as a result of a technical
termination under section 708(b)(1)(B)
or the property is transferred in a
transaction described in section
168(i)(7).
*
*
*
*
*
(d)(2) * * *
(3) Like-kind exchanges and
involuntary conversions. (i) The last
sentence in paragraph (b)(3)(i) and the
second sentence in paragraph (b)(3)(ii)
of this section apply to exchanges to
which section 1031 applies, and
involuntary conversions to which
section 1033 applies, of MACRS

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property for which the time of
disposition and the time of replacement
both occur after February 27, 2004.
(ii) The applicability of this section
expires on or before February 27, 2007.
■ Par. 5. In § 1.168(i)–0, the entries for
§ 1.168(i)–1(d)(2), (e)(3)(i), (f), (f)(1),
(f)(2), (f)(2)(i), (i), (j) and (l) are revised,
the entry for (e)(3)(v) is removed and a
new entry for (e)(3)(v) and (vi) is added.
§ 1.168(i)–0 Table of contents for the
general asset account rules.

*

*

*

§ 1.168(i)–1

*

*

General asset accounts.

*

*
*
*
*
(d) * * *
(2) [Reserved]. For further guidance
see the entry for § 1.168(i)–1T(d)(2).
*
*
*
*
*
(e) * * *
(3) * * *
(i) [Reserved]. For further guidance
see the entry for § 1.168(i)–1T(e)(3)(i).
*
*
*
*
*
(v) and (vi) [Reserved]. For further
guidance see the entries for § 1.168(i)–
1T(e)(3)(v) and (vi).
*
*
*
*
*
(f) through (f)(2)(i) [Reserved]. For
further guidance see the entries for
§ 1.168(i)–1T(f) through (f)(2)(i).
*
*
*
*
*
(i) and (j). [Reserved]. For further
guidance, see the entries for § 1.168(i)–
1T(i) and (j).
*
*
*
*
*
(l) [Reserved]. For further guidance,
see the entry for § 1.168(i)–1T(l).
■ Par. 6. Section 1.168(i)–0T is added to
read as follows:
§ 1.168(i)–0T Table of contents for the
general asset account rules (temporary).

This section lists the major
paragraphs contained in § 1.168(i)–1T.
§ 1.168(i)–1T
(temporary).

General asset accounts

(a) through (d)(1) [Reserved]. For
further guidance, see the entries for
§ 1.168(i)–1(a) through (d)(1).
(2) Special rule for passenger
automobiles.
(e) through (e)(3) [Reserved]. For
further guidance, see the entries for
§ 1.168(i)–1(e) through (e)(3).
(i) In general.
(e)(3)(ii) through (e)(3)(iv) [Reserved].
For further guidance, see the entries for
§ 1.168(i)–1(e)(3)(ii) through (iv).
(v) Transactions subject to section
1031 or 1033.
(vi) Anti-abuse rule.
(f) Assets generating foreign source
income.
(1) In general.
(2) Source of ordinary income, gain,
or loss.

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(i) Source determined by allocation
and apportionment of depreciation
allowed.
(f)(2)(ii) through (h)(2) [Reserved]. For
further guidance, see the entries for
§ 1.168(i)–1(f)(2)(ii) through (h)(2).
(i) Identification of disposed or
converted asset.
(j) Effect of adjustments on prior
dispositions.
(k)(1) through (k)(3) [Reserved]. For
further guidance, see the entries for
§ 1.168(i)–1 (k)(1) through (k)(3).
(l) Effective date.
(l)(1) through (l)(3) [Reserved]. For
further guidance, see the entries for
§ 1.168(i)–1(l)(1) through (l)(3).
Par. 7. Section 1.168(i)–1 is amended
by:
■ 1. Redesignating paragraph (e)(3)(v) as
paragraph (e)(3)(vi).
■ 2. Adding paragraphs (c)(2)(ii)(E) and
(e)(3)(v).
■ 3. Revising paragraphs (d)(2), (e)(3)(i),
(e)(3)(iii)(B)(4), newly designated
(e)(3)(vi), (f)(1), (f)(2)(i), (i), (j), and (l).
The additions and revisions read as
follows:
■

§ 1.168(i)–1

*

General asset accounts.

*
*
*
*
(c) * * *
(2) * * * (ii) * * *
(E) [Reserved]. For further guidance,
see § 1.168(i)–1T(c)(2)(ii)(E).
(d) * * *
(2) [Reserved]. For further guidance,
see § 1.168(i)–1T(d)(2).
(e) * * *
(3) * * *
(i) [Reserved]. For further guidance,
see § 1.168(i)–1T(e)(3)(i).
*
*
*
*
*
(iii) * * *
(B) * * *
(4) [Reserved]. For further guidance,
see § 1.168(i)–1T(e)(3)(iii)(B)(4).
*
*
*
*
*
(e)(3)(v) [Reserved]. For further
guidance, see § 1.168(i)–1T(e)(3)(v).
(vi) Anti-abuse rule—[Reserved]. For
further guidance, see § 1.168(i)–
1T(e)(3)(vi).
(f) * * * (1) In general. [Reserved].
For further guidance, see § 1.168(i)–
1T(f)(1).
(2) * * *(i) [Reserved]. For further
guidance, see § 1.168(i)–1T(f)(2)(i).
*
*
*
*
*
(i) Identification of disposed or
converted asset. [Reserved]. For further
guidance, see § 1.168(i)–1T(i).
(j) Effect of adjustments on prior
dispositions. [Reserved]. For further
guidance, see § 1.168(i)–1T(j).
*
*
*
*
*
(l) Effective date—[Reserved]. For
further guidance, see § 1.168(i)–1T(l).

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Federal Register / Vol. 69, No. 40 / Monday, March 1, 2004 / Rules and Regulations
Par. 8. Section 1.168(i)–1T is added to
read as follows:

■

§ 1.168(i)–1T
(temporary).

General asset accounts

(a) through (c)(2)(ii)(D) [Reserved]. For
further guidance, see § 1.168(i)–1(a)
through (c)(2)(ii)(D).
(c)(2)(ii)(E) [Reserved].
(d)(1) [Reserved]. For further
guidance, see § 1.168(i)–1(d)(1).
(d)(2) Special rule for passenger
automobiles. For purposes of applying
section 280F(a), the depreciation
allowance for a general asset account
established for passenger automobiles is
limited for each taxable year to the
amount prescribed in section 280F(a)
multiplied by the excess of the number
of automobiles originally included in
the account over the number of
automobiles disposed of during the
taxable year or in any prior taxable year
in a transaction described in paragraph
(e)(3)(iii) (disposition of an asset in a
qualifying disposition), (e)(3)(iv)
(transactions subject to section
168(i)(7)), (e)(3)(v) (transactions subject
to section 1031 or 1033), (e)(3)(vi) (antiabuse rule), (g) (assets subject to
recapture), or (h)(1) (conversion to
personal use) of this section.
(e)(1) through (e)(2) [Reserved]. For
further guidance, see § 1.168(i)–1(e)(1)
through (e)(2).
(e)(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), and (vi) of this
section are mandatory rules. A taxpayer
applies paragraph (e)(3)(ii) or (iii) of this
section by reporting the gain, loss, or
other deduction on the taxpayer’s timely
filed Federal income tax return
(including extensions) for the taxable
year in which the disposition occurs.
For purposes of applying paragraph
(e)(3)(iii) through (vi) of this section, see
paragraph (i) of this section for
identifying the unadjusted depreciable
basis of a disposed asset.
(e)(3)(ii) through (e)(3)(iii)(B)(3)
[Reserved]. For further guidance, see
§ 1.168(i)–1(e)(3)(ii) through
(e)(3)(iii)(B)(3).
(e)(3)(iii)(B)(4) A transaction, other
than a transaction described in
paragraph (e)(3)(iv) of this section
(pertaining to transactions subject to
section 168(i)(7)) and (e)(3)(v) of this
section (pertaining to transactions
subject to section 1031 or 1033), to
which a nonrecognition section of the
Code applies (determined without
regard to this section).

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(e)(3)(iii)(C) through (e)(3)(iv)
[Reserved]. For further guidance, see
§ 1.168(i)–1(e)(iii)(C) through (e)(3)(iv).
(e)(3)(v) Transactions subject to
section 1031 or section 1033—(A) Likekind exchange or involuntary
conversion of all assets remaining in a
general asset account. If all the assets,
or the last asset, in a general asset
account are transferred by a taxpayer in
a like-kind exchange (as defined under
§ 1.168–6T(b)(11)) or in an involuntary
conversion (as defined under § 1.168–
6T(b)(12)), the taxpayer must apply this
paragraph (e)(3)(v)(A) (instead of
applying paragraph (e)(2), (e)(3)(ii), or
(e)(3)(iii) of this section). Under this
paragraph (e)(3)(v)(A), the general asset
account terminates as of the first day of
the year of disposition (as defined in
§ 1.168(i)–6T(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 § 1.168(i)–
6T(b)(3)). The depreciation allowance
for the general asset account in the year
of disposition is determined in the same
manner as the depreciation allowance
for the relinquished MACRS property
(as defined in § 1.168(i)–6T(b)(2)) in the
year of disposition is determined under
§ 1.168(i)–6T. The recognition and
character of gain or loss are determined
in accordance with paragraph
(e)(3)(ii)(A) of this section
(notwithstanding that paragraph
(e)(3)(ii) of this section is an optional
rule); and
(2) The adjusted depreciable basis of
the general asset account at the time of
disposition is treated as the adjusted
depreciable basis of the relinquished
MACRS property.
(B) Like-kind exchange or involuntary
conversion of less than all assets
remaining in a general asset account. If
an asset in a general asset account is
transferred by a taxpayer in a like-kind
exchange or in an involuntary
conversion and if paragraph (e)(3)(v)(A)
of this section does not apply to this
asset, the taxpayer must apply this
paragraph (e)(3)(v)(B) (instead of
applying paragraph (e)(2), (e)(3)(ii), or
(e)(3)(iii) of this section). Under this
paragraph (e)(3)(v)(B), general asset
account treatment for the asset
terminates as of the first day of the year
of disposition (as defined in § 1.168(i)–
6T(b)(5)), and—
(1) The amount of gain or loss for the
asset is determined by taking into
account the asset’s adjusted basis at the
time of disposition (as defined in
§ 1.168(i)–6T(b)(3)). The adjusted basis
of the asset at the time of disposition

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9535

equals the unadjusted depreciable basis
of the asset less the depreciation
allowed or allowable for the asset,
computed by using the depreciation
method, recovery period, and
convention applicable to the general
asset account in which the asset was
included. The depreciation allowance
for the asset in the year of disposition
is determined in the same manner as the
depreciation allowance for the
relinquished MACRS property (as
defined in § 1.168(i)–6T(b)(2)) in the
year of disposition is determined under
§ 1.168(i)–6T. 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
paragraph (e)(3)(iii)(C)(2) through (4) of
this section.
(e)(3)(vi) 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)(vi)(B) of this section, general asset
account treatment for the asset
terminates as of the first day of the
taxable year in which the disposition
occurs. Consequently, the taxpayer must
determine the amount of gain, loss, or
other deduction attributable to the
disposition in the manner described in
paragraph (e)(3)(iii)(A) of this section
(notwithstanding that paragraph
(e)(3)(iii)(A) of this section is an
optional rule) and must make the
adjustments to the general asset account
described in paragraph (e)(3)(iii)(C)(1)
through (4) of this section.
(B) Abusive transactions. A
transaction is described in this
paragraph (e)(3)(vi)(B) if the transaction
is not described in paragraph (e)(3)(iv)
or (e)(3)(v) of this section and the
transaction is entered into, or made,
with a principal purpose of achieving a
tax benefit or result that would not be
available absent an election under this
section. Examples of these types of
transactions include—
(1) A transaction entered into with a
principal purpose of shifting income or
deductions among taxpayers in a
manner that would not be possible
absent an election under this section in
order to take advantage of differing
effective tax rates among the taxpayers;
or
(2) An election made under this
section with a principal purpose of
disposing of an asset from a general

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asset account in order to utilize an
expiring net operating loss or credit.
The fact that a taxpayer with a net
operating loss carryover or a credit
carryover transfers an asset to a related
person or transfers an asset pursuant to
an arrangement where the asset
continues to be used (or is available for
use) by the taxpayer pursuant to a lease
(or otherwise) indicates, absent strong
evidence to the contrary, that the
transaction is described in this
paragraph (e)(3)(vi)(B).
(f) Assets generating foreign source
income—(1) In general. This paragraph
(f) provides the rules for determining
the source of any income, gain, or loss
recognized, and the appropriate section
904(d) separate limitation category or
categories for any foreign source
income, gain, or loss recognized, on a
disposition (within the meaning of
paragraph (e)(1) of this section) of an
asset in a general asset account that
consists of assets generating both United
States and foreign source income. These
rules apply only to a disposition to
which paragraph (e)(2) (general
disposition rules), (e)(3)(ii) (disposition
of all assets remaining in a general asset
account), (e)(3)(iii) (disposition of an
asset in a qualifying disposition),
(e)(3)(v) (transactions subject to section
1031 or 1033), or (e)(3)(vi) (anti-abuse
rule) of this section applies.
(2) Source of ordinary income, gain or
loss—(i) Source determined by
allocation and apportionment of
depreciation allowed. The amount of
any ordinary income, gain, or loss that
is recognized on the disposition of an
asset in a general asset account must be
apportioned between United States and
foreign sources based on the allocation
and apportionment of the—
(A) Depreciation allowed for the
general asset account as of the end of
the taxable year in which the
disposition occurs if paragraph (e)(2) of
this section applies to the disposition;
(B) Depreciation allowed for the
general asset account as of the time of
disposition if the taxpayer applies
paragraph (e)(3)(ii) of this section to the
disposition of all assets, or the last asset,
in the general asset account, or if all the
assets, or 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
disposed asset 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

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involuntary conversion), or if the asset
is disposed in a transaction described in
paragraph (e)(3)(vi) of this section (antiabuse rule).
(f)(2)(ii) through (h) [Reserved]. For
further guidance, see § 1.168(i)–
1(f)(2)(ii) through (h).
(i) Identification of disposed or
converted asset. A taxpayer may use any
reasonable method that is consistently
applied to the taxpayer’s general asset
accounts for purposes of determining
the unadjusted depreciable basis of a
disposed or converted asset in a
transaction described in paragraph
(e)(3)(iii) (disposition of an asset in a
qualifying disposition), (e)(3)(iv)
(transactions subject to section
168(i)(7)), (e)(3)(v) (transactions subject
to section 1031 or 1033), (e)(3)(vi) (antiabuse rule), (g) (assets subject to
recapture), or (h)(1) (conversion to
personal use) of this section.
(j) Effect of adjustments on prior
dispositions. The adjustments to a
general asset account under paragraph
(e)(3)(iii), (e)(3)(iv), (e)(3)(v), (e)(3)(vi),
(g), or (h)(1) of this section have no
effect on the recognition and character
of prior dispositions subject to
paragraph (e)(2) of this section.
(k) [Reserved]. For further guidance,
see § 1.168(i)–1(k).
(l) Effective date—(1) In general.
Except as provided in paragraphs (l)(2)
and (l)(3) of this section, this section
applies to depreciable assets placed in
service in taxable years ending on or
after October 11, 1994. For depreciable
assets placed in service after December
31, 1986, in taxable years ending before
October 11, 1994, the Internal Revenue
Service will allow any reasonable
method that is consistently applied to
the taxpayer’s general asset accounts.
(2) [Reserved].
(3) Like-kind exchanges and
involuntary conversions. (i) This section
applies for an asset transferred by a
taxpayer in a like-kind exchange (as
defined under § 1.168–6T(b)(11)) or in
an involuntary conversion (as defined
under § 1.168–6T(b)(12)) for which the
time of disposition (as defined in
§ 1.168(i)–6T(b)(3)) and the time of
replacement (as defined in § 1.168(i)–
6T(b)(4)) both occur after February 27,
2004. For an asset transferred by a
taxpayer in a like-kind exchange or in
an involuntary conversion for which the
time of disposition, the time of
replacement, or both occur on or before
February 27, 2004, see § 1.168(i)–1 in
effect prior to February 27, 2004,
(§ 1.168(i)–1 as contained in 26 CFR part
1 edition revised as of April 1, 2003).
(ii) The applicability of this section
expires on or before February 27, 2007.

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Par. 9. Section 1.168(i)–5T is added to
read as follows:

■

§ 1.168(i)–5T
(temporary).

Table of contents

This section lists the major
paragraphs contained in § 1.168(i)–6T.
§ 1.168(i)–6T Like-kind exchanges and
involuntary conversions (temporary).
(a) Scope.
(b) Definitions.
(1) Replacement MACRS property.
(2) Relinquished MACRS property.
(3) Time of disposition.
(4) Time of replacement.
(5) Year of disposition.
(6) Year of replacement.
(7) Exchanged basis.
(8) Excess basis.
(9) Depreciable exchanged basis.
(10) Depreciable excess basis.
(11) Like-kind exchange.
(12) Involuntary conversion.
(c) Determination of depreciation
allowance.
(1) Computation of the depreciation
allowance for depreciable exchanged basis
beginning in the year of replacement.
(i) In general.
(ii) Applicable recovery period,
depreciation method, and convention.
(2) Effect of depreciation treatment of the
replacement MACRS property by previous
owners of the acquired property.
(3) Recovery period and/or depreciation
method of the properties are the same, or
both are not the same.
(i) In general.
(ii) Both the recovery period and the
depreciation method are the same.
(iii) Either the recovery period or the
depreciation method is the same, or both are
not the same.
(4) Recovery period or depreciation
method of the properties is not the same.
(i) Longer recovery period.
(ii) Shorter recovery period.
(iii) Less accelerated depreciation method.
(iv) More accelerated depreciation method.
(v) Convention.
(A) In general.
(B) Mid-quarter convention.
(5) Year of disposition and year of
replacement.
(i) Relinquished MACRS property.
(ii) Replacement MACRS property.
(A) Year of replacement is 12 months.
(B) Year of replacement is less than 12
months.
(iii) Deferred transactions.
(A) In general.
(B) Allowable depreciation for a qualified
intermediary.
(iv) Remaining recovery period.
(6) Examples.
(d) Special rules for determining
depreciation allowances.
(1) Excess basis.
(i) In general.
(ii) Example.
(2) Depreciable and nondepreciable
property.
(3) Depreciation limitations for
automobiles.
(i) In general.

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(ii) Order in which limitations on
depreciation under section 280F(a) are
applied.
(iii) Depreciation allowance for depreciable
excess basis.
(iv) Examples.
(4) Replacement MACRS property acquired
and placed in service before disposition of
relinquished MACRS property.
(e) Use of optional depreciation tables.
(1) Taxpayer not bound by prior use of
table.
(2) Determination of the depreciation
deduction.
(i) Relinquished MACRS property.
(ii) Replacement MACRS property.
(A) Determination of the appropriate
optional depreciation table.
(B) Calculating the depreciation deduction
for the replacement MACRS property.
(iii) Unrecovered basis.
(3) Excess basis.
(4) Examples.
(f) Mid-quarter convention.
(1) Exchanged basis.
(2) Excess basis.
(3) Depreciable property acquired for
nondepreciable property.
(g) Section 179 election.
(h) Additional first year depreciation
deduction.
(i) Election not to apply this section.
(j) Time and manner of making elections.
(1) In general.
(2) Time for making election.
(3) Manner of making election.
(4) Revocation.
(k) Effective date.
(1) In general.
(2) Application to pre-effective date likekind exchanges and involuntarily
conversions.

Par. 10. Section 1.168(i)–6T is added
to read as follows:

■

§ 1.168(i)–6T Like-kind exchanges and
involuntary conversions (temporary).

(a) Scope. This section provides the
rules for determining the depreciation
allowance for MACRS property acquired
in a like-kind exchange or an
involuntary conversion, including a
like-kind exchange or an involuntary
conversion of MACRS property that is
exchanged or replaced with other
MACRS property in a transaction
between members of the same affiliated
group. The allowance for depreciation
under this section constitutes the
amount of depreciation allowable under
section 167(a) for the year of
replacement and any subsequent taxable
year for the replacement MACRS
property and for the year of disposition
of the relinquished MACRS property.
The provisions of this section apply
only to MACRS property to which
§ 1.168(h)–1 (like-kind exchanges of taxexempt use property) does not apply.
Additionally, paragraphs (c) through (f)
of this section apply only to MACRS
property for which an election has not

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been made under paragraph (i) of this
section.
(b) Definitions. For purposes of this
section, the following definitions apply:
(1) Replacement MACRS property is
MACRS property (as defined in
§ 1.168(b)–1T(a)(2)) in the hands of the
acquiring taxpayer that is acquired for
other MACRS property in a like-kind
exchange or an involuntary conversion.
(2) Relinquished MACRS property is
MACRS property that is transferred by
the taxpayer in a like-kind exchange, or
in an involuntary conversion.
(3) Time of disposition is when the
disposition of the relinquished MACRS
property takes place under the
convention, as determined under
§ 1.168(d)–1T, that applies to the
relinquished MACRS property.
(4) Time of replacement is the later of:
(i) When the replacement MACRS
property is placed in service under the
convention, as determined under this
section, that applies to the replacement
MACRS property; or
(ii) The time of disposition of the
exchanged or involuntarily converted
property.
(5) Year of disposition is the taxable
year that includes the time of
disposition.
(6) Year of replacement is the taxable
year that includes the time of
replacement.
(7) Exchanged basis is determined
after the depreciation deductions for the
year of disposition are determined
under paragraph (c)(5)(i) of this section
and is the lesser of—
(i) The basis in the replacement
MACRS property, as determined under
section 1031(d) and the regulations
under section 1031(d) or section 1033(b)
and the regulations under section
1033(b); or
(ii) The adjusted depreciable basis (as
defined in § 1.168(b)–1T(a)(4)) of the
relinquished MACRS property.
(8) Excess basis is any excess of the
basis in the replacement MACRS
property, as determined under section
1031(d) and the regulations under
section 1031(d) or section 1033(b) and
the regulations under section 1033(b),
over the exchanged basis as determined
under paragraph (b)(7) of this section.
(9) Depreciable exchanged basis is the
exchanged basis as determined under
paragraph (b)(7) of this section reduced
by—
(i) The percentage of such basis
attributable to the taxpayer’s use of
property for the taxable year other than
in the taxpayer’s trade or business (or
for the production of income); and
(ii) Any adjustments to basis provided
by other provisions of the Internal
Revenue Code and the regulations under

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9537

the Code (including section 1016(a)(2)
and (3), for example, depreciation
deductions in the year of replacement
allowable under section 168(k) or
1400L(b)).
(10) Depreciable excess basis is the
excess basis as determined under
paragraph (b)(8) of this section reduced
by—
(i) The percentage of such basis
attributable to the taxpayer’s use of
property for the taxable year other than
in the taxpayer’s trade or business (or
for the production of income);
(ii) Any portion of the basis the
taxpayer properly elects to treat as an
expense under section 179; and
(iii) Any adjustments to basis
provided by other provisions of the
Internal Revenue Code and the
regulations under the Code (including
section 1016(a)(2) and (3), for example,
depreciation deductions in the year of
replacement allowable under section
168(k) or 1400L(b)).
(11) Like-kind exchange is an
exchange of property for other property
(or money) in a transaction to which
section 1031(a)(1), (b), or (c) applies.
(12) Involuntary conversion is a
transaction described in section
1033(a)(1) or (2) that resulted in the
nonrecognition of any part of the gain
realized as the result of the conversion.
(c) Determination of depreciation
allowance—(1) Computation of the
depreciation allowance for depreciable
exchanged basis beginning in the year of
replacement—(i) In general. This
paragraph (c) provides rules for
determining the applicable recovery
period, the applicable depreciation
method, and the applicable convention
used to determine the depreciation
allowances for the depreciable
exchanged basis beginning in the year of
replacement. See paragraph (c)(5) of this
section for rules relating to the
computation of the depreciation
allowance for the year of disposition
and for the year of replacement. See
paragraph (d)(1) of this section for rules
relating to the computation of the
depreciation allowance for depreciable
excess basis. See paragraph (d)(4) of this
section if the replacement MACRS
property is acquired before disposition
of the relinquished MACRS property in
a transaction to which section 1033
applies. See paragraph (e) of this section
for rules relating to the computation of
the depreciation allowance using the
optional depreciation tables.
(ii) Applicable recovery period,
depreciation method, and convention.
The recovery period, depreciation
method, and convention determined
under this paragraph (c) are the only
permissible methods of accounting for

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MACRS property within the scope of
this section unless the taxpayer makes
the election under paragraph (i) of this
section not to apply this section.
(2) Effect of depreciation treatment of
the replacement MACRS property by
previous owners of the acquired
property. If replacement MACRS
property is acquired by a taxpayer in a
like-kind exchange or an involuntary
conversion, the depreciation treatment
of the replacement MACRS property by
previous owners has no effect on the
determination of depreciation
allowances for the replacement MACRS
property in the hands of the acquiring
taxpayer. For example, a taxpayer
exchanging, in a like-kind exchange,
MACRS property for property that was
depreciated under ACRS by the
previous owner must use this section
because the replacement property will
become MACRS property in the hands
of the acquiring taxpayer. In addition,
elections made by previous owners in
determining depreciation allowances for
the replacement MACRS property have
no effect on the acquiring taxpayer. For
example, a taxpayer exchanging, in a
like-kind exchange, MACRS property
that the taxpayer depreciates under the
general depreciation system for other
MACRS property that the previous
owner elected to depreciate under the
alternative depreciation system (ADS)
pursuant to section 168(g)(7) does not
have to continue using the ADS for the
replacement MACRS property.
(3) Recovery period and/or
depreciation method of the properties
are the same, or both are not the same—
(i) In general. For purposes of
paragraphs (c)(3) and (c)(4) of this
section in determining whether the
recovery period and the depreciation
method prescribed under section 168 for
the replacement MACRS property are
the same as the recovery period and the
depreciation method prescribed under
section 168 for the relinquished MACRS
property, the recovery period and the
depreciation method for the
replacement MACRS property are
considered to be the recovery period
and the depreciation method that would
have applied, taking into account any
elections made by the acquiring
taxpayer under section 168(b)(5) or
168(g)(7), had the replacement MACRS
property been placed in service by the
acquiring taxpayer at the same time as
the relinquished MACRS property.
(ii) Both the recovery period and the
depreciation method are the same. If
both the recovery period and the
depreciation method prescribed under
section 168 for the replacement MACRS
property are the same as the recovery
period and the depreciation method

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prescribed under section 168 for the
relinquished MACRS property, the
depreciation allowances for the
replacement MACRS property beginning
in the year of replacement are
determined by using the same recovery
period and depreciation method that
were used for the relinquished MACRS
property. Thus, the replacement
MACRS property is depreciated over the
remaining recovery period (taking into
account the applicable convention), and
by using the depreciation method, of the
relinquished MACRS property. Except
as provided in paragraph (c)(5) of this
section, the depreciation allowances for
the depreciable exchanged basis for any
12-month taxable year beginning with
the year of replacement are determined
by multiplying the depreciable
exchanged basis by the applicable
depreciation rate for each taxable year
(for further guidance, for example, see
section 6 of Rev. Proc. 87–57 (1987–2
C.B. 687, 692) and § 601.601(d)(2)(ii)(b)
of this chapter).
(iii) Either the recovery period or the
depreciation method is the same, or
both are not the same. If either the
recovery period or the depreciation
method prescribed under section 168 for
the replacement MACRS property is the
same as the recovery period or the
depreciation method prescribed under
section 168 for the relinquished MACRS
property, the depreciation allowances
for the depreciable exchanged basis
beginning in the year of replacement are
determined using the recovery period or
the depreciation method that is the
same as the relinquished MACRS
property. See paragraph (c)(4) of this
section to determine the depreciation
allowances when the recovery period or
the depreciation method of the
replacement MACRS property is not the
same as that of the relinquished MACRS
property.
(4) Recovery period or depreciation
method of the properties is not the
same. If the recovery period prescribed
under section 168 for the replacement
MACRS property (as determined under
paragraph (c)(3)(i) of this section) is not
the same as the recovery period
prescribed under section 168 for the
relinquished MACRS property, the
depreciation allowances for the
depreciable exchanged basis beginning
in the year of replacement are
determined under this paragraph (c)(4).
Similarly, if the depreciation method
prescribed under section 168 for the
replacement MACRS property (as
determined under paragraph (c)(3)(i) of
this section) is not the same as the
depreciation method prescribed under
section 168 for the relinquished MACRS
property, the depreciation method used

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to determine the depreciation
allowances for the depreciable
exchanged basis beginning in the year of
replacement is determined under this
paragraph (c)(4).
(i) Longer recovery period. If the
recovery period prescribed under
section 168 for the replacement MACRS
property (as determined under
paragraph (c)(3)(i) of this section) is
longer than that prescribed for the
relinquished MACRS property, the
depreciation allowances for the
depreciable exchanged basis beginning
in the year of replacement are
determined as though the replacement
MACRS property had originally been
placed in service by the acquiring
taxpayer in the same taxable year the
relinquished MACRS property was
placed in service by the acquiring
taxpayer, but using the longer recovery
period of the replacement MACRS
property (as determined under
paragraph (c)(3)(i) of this section) and
the convention determined under
paragraph (c)(4)(v) of this section. Thus,
the depreciable exchanged basis is
depreciated over the remaining recovery
period (taking into account the
applicable convention) of the
replacement MACRS property.
(ii) Shorter recovery period. If the
recovery period prescribed under
section 168 for the replacement MACRS
property (as determined under
paragraph (c)(3)(i) of this section) is
shorter than that of the relinquished
MACRS property, the depreciation
allowances for the depreciable
exchanged basis beginning in the year of
replacement are determined using the
same recovery period as that of the
relinquished MACRS property. Thus,
the depreciable exchanged basis is
depreciated over the remaining recovery
period (taking into account the
applicable convention) of the
relinquished MACRS property.
(iii) Less accelerated depreciation
method—(A) If the depreciation method
prescribed under section 168 for the
replacement MACRS property (as
determined under paragraph (c)(3)(i) of
this section) is less accelerated than that
of the relinquished MACRS property at
the time of disposition, the depreciation
allowances for the depreciable
exchanged basis beginning in the year of
replacement are determined as though
the replacement MACRS property had
originally been placed in service by the
acquiring taxpayer at the same time the
relinquished MACRS property was
placed in service by the acquiring
taxpayer, but using the less accelerated
depreciation method. Thus, the
depreciable exchanged basis is

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depreciated using the less accelerated
depreciation method.
(B) Except as provided in paragraph
(c)(5) of this section, the depreciation
allowances for the depreciable
exchanged basis for any 12-month
taxable year beginning in the year of
replacement are determined by
multiplying the adjusted depreciable
basis by the applicable depreciation rate
for each taxable year. If, for example, the
depreciation method of the replacement
MACRS property in the year of
replacement is the 150-percent
declining balance method and the
depreciation method of the relinquished
MACRS property in the year of
replacement is the 200-percent
declining balance method, and neither
method had been switched to the
straight line method in the year of
replacement or any prior taxable year,
the applicable depreciation rate for the
year of replacement and subsequent
taxable years is determined by using the
depreciation rate of the replacement
MACRS property as if the replacement
MACRS property was placed in service
by the acquiring taxpayer at the same
time the relinquished MACRS property
was placed in service by the acquiring
taxpayer, until the 150-percent
declining balance method has been
switched to the straight line method. If,
for example, the depreciation method of
the replacement MACRS property is the
straight line method, the applicable
depreciation rate for the year of
replacement is determined by using the
remaining recovery period at the
beginning of the year of disposition (as
determined under this paragraph (c)(4)
and taking into account the applicable
convention).
(iv) More accelerated depreciation
method—(A) If the depreciation method
prescribed under section 168 for the
replacement MACRS property (as
determined under paragraph (c)(3)(i) of
this section) is more accelerated than
that of the relinquished MACRS
property at the time of disposition, the
depreciation allowances for the
replacement MACRS property beginning
in the year of replacement are
determined using the same depreciation
method as the relinquished MACRS
property.
(B) Except as provided in paragraph
(c)(5) of this section, the depreciation
allowances for the depreciable
exchanged basis for any 12-month
taxable year beginning in the year of
replacement are determined by
multiplying the adjusted depreciable
basis by the applicable depreciation rate
for each taxable year. If, for example, the
depreciation method of the relinquished
MACRS property in the year of

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replacement is the 150-percent
declining balance method and the
depreciation method of the replacement
MACRS property in the year of
replacement is the 200-percent
declining balance method, and neither
method had been switched to the
straight line method in the year of
replacement or any prior taxable year,
the applicable depreciation rate for the
year of replacement and subsequent
taxable years is the same depreciation
rate that applied to the relinquished
MACRS property in the year of
replacement, until the 150-percent
declining balance method has been
switched to the straight line method. If,
for example, the depreciation method is
the straight line method, the applicable
depreciation rate for the year of
replacement is determined by using the
remaining recovery period at the
beginning of the year of disposition (as
determined under this paragraph (c)(4)
and taking into account the applicable
convention).
(v) Convention—(A) In general. The
applicable convention for the exchanged
basis is determined under this
paragraph (c)(4)(v). The applicable
convention for the exchanged basis is
deemed to be the mid-month
convention for replacement MACRS
property that is nonresidential real
property, residential rental property, or
any railroad grading or tunnel bore.
Thus, if the relinquished MACRS
property was depreciated using the midmonth convention, then the
replacement MACRS property is
deemed to have been placed in service
by the acquiring taxpayer in the same
month as the relinquished MACRS
property and must continue to be
depreciated using the mid-month
convention. If nonresidential real
property, residential rental property, or
any railroad grading or tunnel bore is
received as a result of an exchange or an
involuntarily conversion of MACRS
property that was depreciated using the
mid-quarter convention, the
replacement MACRS property is
deemed to have been placed in service
by the acquiring taxpayer in the month
that includes the mid-point of the
quarter that the relinquished MACRS
property was placed in service and must
be depreciated using the mid-month
convention. If nonresidential real
property, residential rental property, or
any railroad grading or tunnel bore is
received as a result of an exchange or an
involuntarily conversion of MACRS
property that was depreciated using the
half-year convention, the replacement
MACRS property is deemed to have
been placed in service by the acquiring

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9539

taxpayer in the month that includes the
mid-point of the placed-in-service year
and must be depreciated using the midmonth convention (for example, for a
calendar-year taxpayer with a full 12month taxable year, the mid-point is the
first day of the second half of the taxable
year (the seventh month)). For all other
replacement MACRS property, the
applicable convention is the half-year
convention, unless the applicable
convention for the relinquished MACRS
property is the mid-quarter convention,
in which case the mid-quarter
convention is applied to the
replacement MACRS property.
(B) Mid-quarter convention. See
paragraph (f) of this section for purposes
of applying the 40-percent test of
section 168(d)(3) to any replacement
MACRS property.
(5) Year of disposition and year of
replacement. No depreciation deduction
is allowable for MACRS property
disposed of by a taxpayer in a like-kind
exchange or involuntary conversion in
the same taxable year that such property
was placed in service by the taxpayer.
If replacement MACRS property is
disposed of by a taxpayer during the
same taxable year that the relinquished
MACRS property is placed in service by
the taxpayer, no depreciation deduction
is allowable for either MACRS property.
Otherwise, the depreciation allowances
for the year of disposition and for the
year of replacement are determined as
follows:
(i) Relinquished MACRS property.
Except as provided in paragraphs (e)
and (i) of this section, the depreciation
allowance in the year of disposition for
the relinquished MACRS property is
computed by multiplying the allowable
depreciation deduction for the property
for that year by a fraction, the numerator
of which is the number of months
(including fractions of months) the
property is deemed to be placed in
service during the year of disposition
(taking into account the applicable
convention of the relinquished MACRS
property), and the denominator of
which is 12. However, if the year of
disposition is less than 12 months, the
depreciation allowance determined
under this paragraph (c)(5)(i) must be
adjusted for a short taxable year (for
further guidance, for example, see Rev.
Proc. 89–15 (1989–1 C.B. 816) and
§ 601.601(d)(2)(ii)(b) of this chapter). In
the case of termination under § 1.168(i)–
1T(e)(3)(v) of general asset account
treatment of an asset, or of all the assets
remaining, in a general asset account,
the allowable depreciation deduction in
the year of disposition for the asset or
assets for which general asset account
treatment is terminated is determined

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using the depreciation method, recovery
period, and convention of the general
asset account. This allowable
depreciation deduction is adjusted to
account for the period the asset or assets
is deemed to be in service in accordance
with this paragraph (c)(5)(i).
(ii) Replacement MACRS property—
(A) Year of replacement is 12 months.
Except as provided in paragraphs
(c)(5)(iii), (e), and (i) of this section, the
depreciation allowance in the year of
replacement for the depreciable
exchanged basis is determined by—
(1) Calculating the applicable
depreciation rate for that taxable year by
taking into account the recovery period
and depreciation method prescribed for
the replacement MACRS property under
paragraph (c)(3) or (4) of this section;
(2) Calculating the depreciable
exchanged basis of the replacement
MACRS property, and adding to that
amount the amount determined under
paragraph (c)(5)(i) of this section for the
year of disposition; and
(3) Multiplying the product of the
amounts determined under § 1.168(i)–
6T(c)(5)(ii)(A)(1) and (A)(2) by a
fraction, the numerator of which is the
number of months (including fractions
of months) the property is deemed to be
in service during the year of
replacement (in the year of replacement
the replacement MACRS property is
deemed to be placed in service by the
acquiring taxpayer at the time of
replacement under the convention
determined under paragraph (c)(4)(v) of
this section), and the denominator of
which is 12.
(B) Year of replacement is less than
12 months. If the year of replacement is
less than 12 months, the depreciation
allowance determined under paragraph
(c)(5)(ii)(A) of this section must be
adjusted for a short taxable year (for
further guidance, for example, see Rev.
Proc. 89–15 (1989–1 C.B. 816) and
§ 601.601(d)(2)(ii)(b) of this chapter).
(iii) Deferred transactions—(A) In
general. If the replacement MACRS
property is not acquired until after the
disposition of the relinquished MACRS
property, depreciation is not allowable
during the period between the
disposition of the relinquished MACRS
property and the acquisition of the
replacement MACRS property. The
recovery period for the replacement
MACRS property is suspended during
this period. For purposes of paragraph
(c)(5)(ii) of this section, only the
depreciable exchanged basis of the
replacement MACRS property is taken
into account for calculating the amount
in paragraph (c)(5)(ii)(A)(2) of this
section if the year of replacement is a

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taxable year subsequent to the year of
disposition.
(B) Allowable depreciation for a
qualified intermediary. [Reserved].
(iv) Remaining recovery period. The
remaining recovery period of the
replacement MACRS property is
determined as of the beginning of the
year of disposition of the relinquished
MACRS property. For purposes of
determining the remaining recovery
period of the replacement MACRS
property, the replacement MACRS
property is deemed to have been
originally placed in service under the
convention determined under paragraph
(c)(4)(v) of this section but at the time
the relinquished MACRS property was
deemed to be placed in service under
the convention that applied to it when
it was placed in service.
(6) Examples. The application of this
paragraph (c) is illustrated by the
following examples:
Example 1. A1, a calendar-year taxpayer,
exchanges Building M, an office building, for
Building N, a warehouse in a like-kind
exchange. Building M is relinquished in July
2004 and Building N is acquired and placed
in service in October 2004. A1 did not make
any elections under section 168 for either
Building M or Building N. The unadjusted
depreciable basis of Building M was
$4,680,000 when placed in service in July
1997. Since the recovery period and
depreciation method prescribed under
section 168 for Building N (39 years, straight
line method) are the same as the recovery
period and depreciation method prescribed
under section 168 for Building M (39 years,
straight line method), Building N is
depreciated over the remaining recovery
period of, and using the same depreciation
method and convention as that of, Building
M. Thus, Building N will be depreciated
using the straight line method over a
remaining recovery period of 32 years
beginning in October 2004 (the remaining
recovery period of 32 years and 6.5 months
at the beginning of 2004, less the 6.5 months
of depreciation taken prior to the disposition
of the exchanged MACRS property (Building
M) in 2004). For 2004, the year in which the
transaction takes place, the depreciation
allowance for Building M is ($120,000)(6.5/
12) which equals $65,000. The depreciation
allowance for Building N for 2004 is
($120,000)(2.5/12) which equals $25,000. For
2005 and subsequent years, Building N is
depreciated over the remaining recovery
period of, and using the same depreciation
method and convention as that of, Building
M. Thus, the depreciation allowance for
Building N is the same as Building M,
namely $10,000 per month.
Example 2. B, a calendar-year taxpayer,
placed in service Bridge P in January 1998.
Bridge P is depreciated using the half-year
convention. In January 2004, B exchanges
Bridge P for Building Q, an apartment
building, in a like-kind exchange. B did not
make any elections under section 168 for
either Bridge P or Building Q. Since the

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recovery period prescribed under section 168
for Building Q (27.5 years) is longer than that
of Bridge P (15 years), Building Q is
depreciated as if it had originally been placed
in service in July 1998 and disposed of in
July 2004 using a 27.5 year recovery period.
Additionally, since the depreciation method
prescribed under section 168 for Building Q
(straight line method) is less accelerated than
that of Bridge P (150-percent declining
balance method), then the depreciation
allowance for Building Q is computed using
the straight line method. Thus, when
Building Q is acquired and placed in service
in 2004, its basis is depreciated over the
remaining 21.5 year recovery period using
the straight line method of depreciation and
the mid-month convention beginning in July
2004.
Example 3. C, a calendar-year taxpayer,
placed in service Building R, a restaurant, in
January 1996. In January 2004, C exchanges
Building R for Tower S, a radio transmitting
tower, in a like-kind exchange. C did not
make any elections under section 168 for
either Building R or Tower S. Since the
recovery period prescribed under section 168
for Tower S (15 years) is shorter than that of
Building R (39 years), Tower S is depreciated
over the remaining recovery period of
Building R. Additionally, since the
depreciation method prescribed under
section 168 for Tower S (150% declining
balance method) is more accelerated than
that of Building R (straight line method), then
the depreciation allowance for Tower S is
also computed using the same depreciation
method as Building R. Thus, Tower S is
depreciated over the remaining 31 year
recovery period of Building R using the
straight line method of depreciation and the
mid-month convention. Alternatively, C may
elect under paragraph (i) of this section to
treat Tower S as though it is placed in service
in January 2004. In such case, C uses the
applicable recovery period, depreciation
method, and convention prescribed under
section 168 for Tower S.
Example 4. (i) In February 2001, D, a
calendar-year taxpayer and manufacturer of
rubber products, acquired for $60,000 and
placed in service Asset T (a special tool) and
depreciated Asset T using the straight line
method election under section 168(b)(5) and
the mid-quarter convention over its 3-year
recovery period. In June 2004, D exchanges
Asset T for Asset U (not a special tool) in a
like-kind exchange. D elected not to deduct
the additional first year depreciation for 7year property placed in service in 2004.
Since the recovery period prescribed under
section 168 for Asset U (7 years) is longer
than that of Asset T (3 years), Asset U is
depreciated as if it had originally been placed
in service in February 2001 using a 7-year
recovery period. Additionally, since the
depreciation method prescribed under
section 168 for Asset U (200-percent
declining balance method) is more
accelerated than that of Asset T (straight line
method) at the time of disposition, the
depreciation allowance is computed using
the straight line method. Asset U is
depreciated over its remaining recovery
period of 3.75 years using the straight line
method of depreciation and the mid-quarter
convention.

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(ii) The 2004 depreciation allowance for
Asset T is $938 ($2,500 allowable
depreciation deduction ($60,000 original
basis minus $17,500 depreciation deduction
for 2001 minus $20,000 depreciation
deduction for 2002 minus $20,000
depreciation deduction for 2003) × 4.5
months ÷ 12).
(iii) The depreciation rate in 2004 for Asset
U is 0.2424 (1 ÷ 4.125 years (the length of the
applicable recovery period remaining as of
the beginning of 2004)). Therefore, the
depreciation allowance in 2004 is $379
(0.2424 × $2,500 (the sum of the $1,562
depreciable exchanged basis of Asset U
($2,500 basis at the beginning of 2004 for
Asset T, less the $938 depreciation allowable
for Asset T for 2004) and the $938
depreciation allowable for Asset T for 2004)
× 7.5 months ÷ 12).
Example 5. On January 1, 2004, E, a
calendar-year taxpayer, acquired and placed
in service Canopy V, a gas station canopy.
The purchase price of Canopy V was $60,000.
On August 1, 2004, Canopy V was destroyed
in a hurricane and was therefore no longer
usable in E’s business. On October 1, 2004,
as part of the involuntary conversion, E
acquired and placed in service Canopy W
with the insurance proceeds E received due
to the loss of Canopy V. E elected not to
deduct the additional first year depreciation
for 5-year property placed in service in 2004.
E depreciates both canopies under the
general depreciation system of section 168(a)
by using the 200-percent declining balance
method of depreciation, a 5-year recovery
period, and the half-year convention. No
depreciation deduction is allowable for
Canopy V. The depreciation deduction
allowable for Canopy W for 2004 is $12,000
($60,000 × the annual depreciation rate of .40
× 1⁄2 year).
Example 6. Same facts as in Example 5,
except that E did not make the election out
of the additional first year depreciation for 5year property placed in service in 2004. E
depreciates both canopies under the general
depreciation system of section 168(a) by
using the 200-percent declining balance
method of depreciation, a 5-year recovery
period, and the half-year convention. No
depreciation deduction is allowable for
Canopy V. For 2004, E is allowed a 50percent additional first year depreciation
deduction of $30,000 for Canopy W (the
unadjusted depreciable basis of $60,000
multiplied by .50), and a regular MACRS
depreciation deduction of $6,000 for Canopy
W (the depreciable exchanged basis of
$30,000 multiplied by the annual
depreciation rate of .40 × 1⁄2 year). For 2005,
E is allowed a regular MACRS depreciation
deduction of $9,600 for Canopy W (the
depreciable exchanged basis of $24,000
($30,000 minus regular 2003 depreciation of
$6,000) multiplied by the annual
depreciation rate of .40).

(d) Special rules for determining
depreciation allowances—(1) Excess
basis—(i) In general. Any excess basis in
the replacement MACRS property is
treated as property that is placed in
service by the acquiring taxpayer in the
year of replacement. Thus, the

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depreciation allowances for the
depreciable excess basis are determined
by using the applicable recovery period,
depreciation method, and convention
prescribed under section 168 for the
property at the time of replacement.
However, if replacement MACRS
property is disposed of during the same
taxable year the relinquished MACRS
property is placed in service by the
acquiring taxpayer, no depreciation
deduction is allowable for either
MACRS property. See paragraph (g) of
this section regarding the application of
section 179. See paragraph (h) of this
section regarding the application of
section 168(k) or 1400L(b).
(ii) Example. The application of this
paragraph (d)(1) is illustrated by the
following example:
Example. In 1989, G placed in service a
hospital. On January 16, 2004, G exchanges
this hospital plus $2,000,000 cash for an
office building in a like-kind exchange. On
January 16, 2004, the hospital has an
adjusted depreciable basis of $1,500,000.
After the exchange, the basis of the office
building is $3,500,000. The depreciable
exchanged basis of the office building is
depreciated in accordance with paragraph (c)
of this section. The depreciable excess basis
of $2,000,000 is treated as being placed in
service by G in 2004 and, as a result, is
depreciated using the applicable depreciation
method, recovery period, and convention
prescribed for the office building under
section 168 at the time of replacement.

(2) Depreciable and nondepreciable
property—(i) If land or other
nondepreciable property is acquired in
a like-kind exchange for, or as a result
of an involuntary conversion of,
depreciable property, the land or other
nondepreciable property is not
depreciated. If both MACRS and
nondepreciable property are acquired in
a like-kind exchange for, or as part of an
involuntary conversion of, MACRS
property, the basis allocated to the
nondepreciable property (as determined
under section 1031(d) and the
regulations under section 1031(d) or
section 1033(b) and the regulations
under section 1033(b)) is not
depreciated and the basis allocated to
the replacement MACRS property (as
determined under section 1031(d) and
the regulations under section 1031(d) or
section 1033(b) and the regulations
under section 1033(b)) is depreciated in
accordance with this section.
(ii) If MACRS property is acquired, or
if both MACRS and nondepreciable
property are acquired, in a like-kind
exchange for, or as part of an
involuntary conversion of, land or other
nondepreciable property, the basis in
the replacement MACRS property that is
attributable to the relinquished
nondepreciable property is treated as

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9541

though the replacement MACRS
property is placed in service by the
acquiring taxpayer in the year of
replacement. Thus, the depreciation
allowances for the replacement MACRS
property are determined by using the
applicable recovery period, depreciation
method, and convention prescribed
under section 168 for the replacement
MACRS property at the time of
replacement. See paragraph (g) of this
section regarding the application of
section 179. See paragraph (h) of this
section regarding the application of
section 168(k) or 1400L(b).
(3) Depreciation limitations for
automobiles—(i) In general.
Depreciation allowances under section
179 and section 167 (including
allowances under sections 168 and
1400L(b)) for a passenger automobile, as
defined in section 280F(d)(5), are
subject to the limitations of section
280F(a). The depreciation allowances
for a passenger automobile that is
replacement MACRS property
(replacement MACRS passenger
automobile) generally are limited in any
taxable year to the replacement
automobile section 280F limit for the
taxable year. The taxpayer’s basis in the
replacement MACRS passenger
automobile is treated as being
comprised of two separate components.
The first component is the exchanged
basis and the second component is the
excess basis, if any. The depreciation
allowances for a passenger automobile
that is relinquished MACRS property
(relinquished MACRS passenger
automobile) for the taxable year
generally are limited to the relinquished
automobile section 280F limit for that
taxable year. For purposes of this
paragraph (d)(3), the following
definitions apply:
(A) Replacement automobile section
280F limit is the limit on depreciation
deductions under section 280F(a) for the
taxable year based on the time of
replacement of the replacement MACRS
passenger automobile (including the
effect of any elections under section
168(k) or section 1400L(b), as
applicable).
(B) Relinquished automobile section
280F limit is the limit on depreciation
deductions under section 280F(a) for the
taxable year based on when the
relinquished MACRS passenger
automobile was placed in service by the
taxpayer.
(ii) Order in which limitations on
depreciation under section 280F(a) are
applied. Generally, depreciation
deductions allowable under section
280F(a) reduce the basis in the
relinquished MACRS passenger
automobile and the exchanged basis of

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the replacement MACRS passenger
automobile, before the excess basis of
the replacement MACRS passenger
automobile is reduced. The depreciation
deductions for the relinquished MACRS
passenger automobile in the year of
disposition and the replacement
MACRS passenger automobile in the
year of replacement and each
subsequent taxable year are allowable in
the following order:
(A) The depreciation deduction
allowable for the relinquished MACRS
passenger automobile as determined
under paragraph (c)(5)(i) of this section
for the year of disposition to the extent
of the smaller of the replacement
automobile section 280F limit and the
relinquished automobile section 280F
limit, if the year of disposition is the
year of replacement. If the year of
replacement is a taxable year
subsequent to the year of disposition,
the depreciation deduction allowable
for the relinquished MACRS passenger
automobile for the year of disposition is
limited to the relinquished automobile
section 280F limit.
(B) The additional first year
depreciation allowable on the remaining
exchanged basis (remaining carryover
basis as determined under § 1.168(k)–
1T(f)(5) or § 1.1400L(b)–1T(f)(5), as
applicable) of the replacement MACRS
passenger automobile, as determined
under § 1.168(k)–1T(f)(5) or
§ 1.1400L(b)–1T(f)(5), as applicable, to
the extent of the excess of the
replacement automobile section 280F
limit over the amount allowable under
paragraph (d)(3)(ii)(A) of this section.
(C) The depreciation deduction
allowable for the taxable year on the
depreciable exchanged basis of the
replacement MACRS passenger
automobile determined under paragraph
(c) of this section to the extent of any
excess of the sum of the amounts
allowable under paragraphs (d)(3)(ii)(A)
and (B) of this section over the smaller
of the replacement automobile section
280F limit and the relinquished
automobile section 280F limit.
(D) Any section 179 deduction
allowable in the year of replacement on
the excess basis of the replacement
MACRS passenger automobile to the
extent of the excess of the replacement
automobile section 280F limit over the
sum of the amounts allowable under
paragraphs (d)(3)(ii)(A), (B), and (C) of
this section.
(E) The additional first year
depreciation allowable on the remaining
excess basis of the replacement MACRS
passenger automobile, as determined
under § 1.168(k)–1T(f)(5) or
§ 1.1400L(b)–1T(f)(5), as applicable, to
the extent of the excess of the

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replacement automobile section 280F
limit over the sum of the amounts
allowable under paragraphs (d)(3)(ii)(A),
(B), (C), and (D) of this section.
(F) The depreciation deduction
allowable under paragraph (d) of this
section for the depreciable excess basis
of the replacement MACRS passenger
automobile to the extent of the excess of
the replacement automobile section
280F limit over the sum of the amounts
allowable under paragraphs (d)(3)(ii)(A),
(B), (C), (D), and (E) of this section.
(iii) Examples. The application of this
paragraph (d)(3) is illustrated by the
following examples:
Example 1. H, a calendar-year taxpayer,
acquired and placed in service Automobile X
in January 2000 for $30,000 to be used solely
for H’s business. In December 2003, H
exchanges, in a like-kind exchange,
Automobile X plus $15,000 cash for new
Automobile Y that will also be used solely
in H’s business. Automobile Y is 50-percent
bonus depreciation property for purposes of
section 168(k)(4). Both automobiles are
depreciated using the double declining
balance method, the half-year convention,
and a five-year recovery period. The
relinquished automobile section 280F limit
for 2003 for Automobile X is $1,775. The
replacement automobile section 280F limit
for Automobile Y is $10,710. The exchanged
basis for Automobile Y is $17,315 ($30,000
less total depreciation allowable of $12,685
(($3,060 for 2000, $4,900 for 2001, $2,950 for
2002, and $1,775 for 2003)). Without taking
section 280F into account, the additional first
year depreciation deduction for the
remaining exchanged basis is $8,658 ($17,315
× 0.5). Because this amount is less than
$8,935 ($10,710 (the replacement automobile
section 280F limit for 2003 for the
Automobile Y)¥$1,775 (the depreciation
allowable for Automobile X for the 2003)) the
additional first year depreciation deduction
for the exchanged basis is $8,658. No
depreciation deduction is allowable in 2003
for the depreciable exchanged basis because
the depreciation deductions taken for
Automobile X and the remaining exchanged
basis exceed the exchanged automobile
section 280F limit. An additional first year
depreciation deduction of $278 is allowable
for the excess basis of $15,000 in Automobile
Y. Thus at the end of 2003 the adjusted
depreciable basis in Automobile Y is $23,379
comprised of adjusted depreciable exchanged
basis of $8,657 ($17,315 (exchanged basis)
¥$8,658 (additional first year depreciation
for exchanged basis)) and of an adjusted
depreciable excess basis of $14,722 ($15,000
(excess basis)¥$278 (additional first year
depreciation for 2003)).
Example 2. Same facts as in Example 1,
except that H placed in service Automobile
X in January 2002, and H elected not to claim
the additional first year depreciation
deduction for 5-year property placed in
service in 2002 and 2003. The relinquished
automobile section 280F limit for
Automobile X for 2003 is $4,900. Because the
replacement automobile section 280F limit
for 2003 for Automobile Y ($3,060) is less

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than the relinquished automobile section
280F limit for Automobile X for 2003 and is
less than $5,388 (($30,000 (cost)¥$3,060
(depreciation allowable for 2002)) × 0.4 × 6/
12), the depreciation allowable that would be
allowable for Automobile X (determined
without regard to section 280F) in the year
of disposition, the depreciation for
Automobile X in the year of disposition is
limited to $3,060. For 2003 no depreciation
is allowable for the excess basis and the
exchanged basis in Automobile Y.
Example 3. AB, a calendar-year taxpayer,
purchased and placed in service Automobile
X1 in February 2000 for $10,000. X1 is a
passenger automobile subject to section
280F(a) and is used solely for AB’s business.
AB depreciated X1 using a five year recovery
period, the double declining balance method
and the half-year convention. As of January
1, 2003, the adjusted basis of X1 was $2,880
($10,000 original cost minus $2,000
depreciation deduction for 2000, minus
$3,200 depreciation deduction for 2001, and
$1,920 depreciation deduction for 2002). In
November 2003, AB exchanges, in a like-kind
exchange, Automobile X1 plus $14,000 cash
for new Automobile Y1 that will be used
solely in AB’s business. Automobile Y1 is 50percent bonus depreciation property for
purposes of section 168(k)(4) and qualifies
for the expensing election under section 179.
Pursuant to paragraph § 1.168(k)–1T(g)(3)(ii)
and paragraph (k)(2)(i) of this section, AB
decided to apply § 1.168(i)–6T to the
exchange of Automobile X1 for Automobile
Y1, the replacement MACRS property. AB
also makes the election under section 179 for
the excess basis of Automobile Y1. AB
depreciates Y1 using a five-year recovery
period, the double declining balance method
and the half-year convention. For 2003, the
relinquished automobile section 280F limit
for Automobile X1 is $1,775 and the
replacement automobile section 280F limit
for 2003 for Automobile Y1 is $10,710.
(i) The 2003 depreciation deduction for
Automobile X1 is $576. The depreciation
deduction calculated for X1 is $576 (the
adjusted depreciable basis of Automobile X1
at the beginning of 2003 of $2,880 × 40% ×
1⁄2 year), which is less than the relinquished
automobile section 280F limit and the
replacement automobile section 280F limit.
(ii) The additional first year depreciation
deduction for the exchanged basis is $1,152.
The additional first year depreciation
deduction of $1,152 (remaining exchanged
basis of $2,304 ($2,880 adjusted basis of
Automobile X1 at the beginning of 2003
minus $576) × 0.5)) is less than the
replacement automobile section 280F limit
minus $576.
(iii) AB’s MACRS depreciation deduction
allowable in 2003 for the remaining
exchanged basis of $1,152 is $47 (the
relinquished automobile section 280F limit
of $1,775 less the depreciation deduction of
$576 taken for Automobile X1 less the
additional first year depreciation deduction
of $1,152 taken for the exchanged basis)
which is less than the depreciation deduction
calculated for the depreciable exchanged
basis.
(iv) For 2003, AB takes a $1,400 section
179 deduction for the excess basis of

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Automobile Y1. AB must reduce the excess
basis of $14,000 by the section 179 deduction
of $1,400 to determine the remaining excess
basis of $12,600.
(v) For 2003, AB is allowed a 50-percent
additional first year depreciation deduction
of $6,300 (the remaining excess basis of
$12,600 multiplied by .50).
(vi) For 2003, AB’s depreciation deduction
for the depreciable excess basis is limited to
$1,235. The depreciation deduction
computed without regard to the replacement
automobile section 280F limit is $1,260
($6,300 depreciable excess basis x 0.4 × 6/
12). However the depreciation deduction for
the depreciable excess basis is limited to
$1,235 ($10,710 (replacement automobile
section 280F limit)¥$576 (depreciation
deduction for Automobile X1)¥$1,152
(additional first year depreciation deduction
for the exchanged basis)¥$47 (depreciation
deduction for exchanged basis) ¥$1,400
(section 179 deduction) ¥$6,300 (additional
first year depreciation deduction for
remaining excess basis)).

(4) Replacement MACRS property
acquired and placed-in-service before
disposition of relinquished MACRS
property. If, in an involuntary
conversion, a taxpayer acquires and
places in service the replacement
MACRS property before the date of
disposition of the relinquished MACRS
property, the taxpayer depreciates the
unadjusted depreciable basis of the
replacement MACRS property under
section 168 beginning in the taxable
year when the replacement MACRS
property is placed in service by the
taxpayer and by using the applicable
depreciation method, recovery period,
and convention prescribed under
section 168 for the replacement MACRS
property at the placed-in-service date.
However, at the time of disposition of
the relinquished MACRS property, the
taxpayer determines the exchanged
basis and the excess basis of the
replacement MACRS property and
begins to depreciate the depreciable
exchanged basis of the replacement
MACRS property in accordance with
paragraph (c) of this section. The
depreciable excess basis of the
replacement MACRS property continues
to be depreciated by the taxpayer in
accordance with the first sentence of
this paragraph (d)(4). Further, in the
year of disposition of the relinquished
MACRS property, the taxpayer must
include in taxable income the excess of
the depreciation deductions allowable
on the unadjusted depreciable basis of
the replacement MACRS property over
the depreciation deductions that would
have been allowable to the taxpayer on
the depreciable excess basis of the
replacement MACRS property from the
date the replacement MACRS property
was placed in service by the taxpayer
(taking into account the applicable

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convention) to the time of disposition of
the relinquished MACRS property.
(e) Use of optional depreciation
tables—(1) Taxpayer not bound by prior
use of table. If a taxpayer used an
optional depreciation table for the
relinquished MACRS property, the
taxpayer is not required to use an
optional table for the depreciable
exchanged basis of the replacement
MACRS property. Conversely, if a
taxpayer did not use an optional
depreciation table for the relinquished
MACRS property, the taxpayer may use
the appropriate table for the depreciable
exchanged basis of the replacement
MACRS property. If a taxpayer decides
not to use the table for the depreciable
exchanged basis of the replacement
MACRS property, the depreciation
allowance for this property for the year
of replacement and subsequent taxable
years is determined under paragraph (c)
of this section. If a taxpayer decides to
use the optional depreciation tables, no
depreciation deduction is allowable for
MACRS property placed in service by
the acquiring taxpayer and subsequently
exchanged or involuntarily converted by
such taxpayer in the same taxable year,
and, if, during the same taxable year,
MACRS property is placed in service by
the acquiring taxpayer, exchanged or
involuntarily converted by such
taxpayer, and the replacement MACRS
property is disposed of by such
taxpayer, no depreciation deduction is
allowable for either MACRS property.
(2) Determination of the depreciation
deduction—(i) Relinquished MACRS
property. In the year of disposition, the
depreciation allowance for the
relinquished MACRS property is
computed by multiplying the
unadjusted depreciable basis (less the
amount of the additional first year
depreciation deduction allowed or
allowable, whichever is greater, under
section 168(k) or section 1400L(b), as
applicable) of the relinquished MACRS
property by the annual depreciation rate
(expressed as a decimal equivalent)
specified in the appropriate table for the
recovery year corresponding to the year
of disposition. This product is then
multiplied by a fraction, the numerator
of which is the number of months
(including fractions of months) the
property is deemed to be placed in
service during the year of the exchange
or involuntary conversion (taking into
account the applicable convention) and
the denominator of which is 12.
However, if the year of disposition is
less than 12 months, the depreciation
allowance determined under this
paragraph (e)(2)(i) must be adjusted for
a short taxable year (for further
guidance, for example, see Rev. Proc.

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89–15 (1989–1 C.B. 816) and
§ 601.601(d)(2)(ii)(b) of this chapter).
(ii) Replacement MACRS property—
(A) Determination of the appropriate
optional depreciation table. If a taxpayer
chooses to use the appropriate optional
depreciation table for the depreciable
exchanged basis, the depreciation
allowances for the depreciable
exchanged basis beginning in the year of
replacement are determined by choosing
the optional depreciation table that
corresponds to the recovery period,
depreciation method, and convention of
the replacement MACRS property
determined under paragraph (c) of this
section.
(B) Calculating the depreciation
deduction for the replacement MACRS
property—(1) The depreciation
deduction for the taxable year is
computed by first determining the
appropriate recovery year in the table
identified under paragraph (e)(2)(ii)(A)
of this section. The appropriate recovery
year for the year of replacement is the
same as the recovery year for the year
of disposition, regardless of the taxable
year in which the replacement property
is acquired. For example, if the recovery
year for the year of disposition would
have been Year 4 in the table that
applied before the disposition of the
relinquished MACRS property, then the
recovery year for the year of
replacement is Year 4 in the table
identified under paragraph (e)(2)(ii)(A)
of this section.
(2) Next, the annual depreciation rate
(expressed as a decimal equivalent) for
each recovery year is multiplied by a
transaction coefficient. The transaction
coefficient is the formula (1/(1¥x))
where x equals the sum of the annual
depreciation rates from the table
identified under paragraph (e)(2)(ii)(A)
of this section (expressed as a decimal
equivalent) corresponding to the
replacement MACRS property (as
determined under paragraph (e)(2)(ii)(A)
of this section) for the taxable years
beginning with the placed-in-service
year of the relinquished MACRS
property through the taxable year
immediately prior to the year of
disposition. The product of the annual
depreciation rate and the transaction
coefficient is multiplied by the
depreciable exchanged basis (taking into
account paragraph (e)(2)(i) of this
section). In the year of replacement, this
product is then multiplied by a fraction,
the numerator of which is the number
of months (including fractions of
months) the property is deemed to be
placed in service by the acquiring
taxpayer during the year of replacement
(taking into account the applicable
convention) and the denominator of

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which is 12. However, if the year of
replacement is the year the relinquished
MACRS property is placed in service by
the acquiring taxpayer, the preceding
sentence does not apply. In addition, if
the year of replacement is less than 12
months, the depreciation allowance
determined under paragraph (e)(2)(ii) of
this section must be adjusted for a short
taxable year (for further guidance, for
example, see Rev. Proc. 89–15 (1989–1
C.B. 816) and § 601.601(d)(2)(ii)(b) of
this chapter).
(iii) Unrecovered basis. If the
replacement MACRS property would
have unrecovered depreciable basis after
the final recovery year (for example, due
to a deferred exchange), the unrecovered
basis is an allowable depreciation
deduction in the taxable year that
corresponds to the final recovery year
unless the unrecovered basis is subject
to a depreciation limitation such as
section 280F.
(3) Excess basis. As provided in
paragraph (d)(1) of this section, any
excess basis in the replacement MACRS
property is treated as property that is
placed in service by the acquiring
taxpayer at the time of replacement.
Thus, if the taxpayer chooses to use the
appropriate optional depreciation table
for the depreciable excess basis in the
replacement MACRS property, the
depreciation allowances for the
depreciable excess basis are determined
by multiplying the depreciable excess
basis by the annual depreciation rate
(expressed as a decimal equivalent)
specified in the appropriate table for
each taxable year. The appropriate table
for the depreciable excess basis is based
on the depreciation method, recovery
period, and convention applicable to the
depreciable excess basis under section
168 at the time of replacement.
However, if the year of replacement is
less than 12 months, the depreciation
allowance determined under this
paragraph (e)(3) must be adjusted for a
short taxable year (for further guidance,
for example, see Rev. Proc. 89–15
(1989–1 C.B. 816) and
§ 601.601(d)(2)(ii)(b) of this chapter).
(4) Examples. The application of this
paragraph (e) is illustrated by the
following examples:
Example 1. J, a calendar-year taxpayer,
acquired 5-year property for $10,000 and
placed it in service in January 2001. J uses
the optional tables to depreciate the property.
J uses the half-year convention and did not
make any elections for the property. In
December 2003, J exchanges the 5-year
property for used 7-year property in a likekind exchange. The depreciable exchanged
basis of the 7-year property equals the
adjusted depreciable basis of the 5-year
property at the time of disposition of the

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relinquished MACRS property, namely
$3,840 ($10,000 less $2,000 depreciation in
2001, $3,200 depreciation in 2002, and $960
depreciation in 2003). J must first determine
the appropriate optional depreciation table
pursuant to paragraph (c) of this section.
Since the replacement MACRS property has
a longer recovery period and the same
depreciation method as the relinquished
MACRS property, J uses the optional
depreciation table corresponding to a 7-year
recovery period, the 200% declining balance
method, and the half-year convention
(because the 5-year property was depreciated
using a half-year convention). Had the
replacement MACRS property been placed in
service in the same taxable year as the
placed-in-service year of the relinquished
MACRS property, the depreciation allowance
for the replacement MACRS property for the
year of replacement would be determined
using recovery year 3 of the optional table.
The depreciation allowance equals the
depreciable exchanged basis ($3,840)
multiplied by the annual depreciation rate
for the current taxable year (.1749 for
recovery year 3) as modified by the
transaction coefficient [1 / (1¥(.1429 +
.2449))] which equals 1.6335. Thus, J
multiplies $3,840, its depreciable exchanged
basis in the replacement MACRS property, by
the product of .1749 and 1.6335, and then by
one-half, to determine the depreciation
allowance for 2003, $549. For 2004, J
multiplies its depreciable exchanged basis in
the replacement MACRS property
determined at the time of replacement of
$3,840 by the product of the modified annual
depreciation rate for the current taxable year
(.1249 for recovery year 4) and the
transaction coefficient (1.6335) to determine
its depreciation allowance of $783.
Example 2. K, a calendar-year taxpayer,
acquired used Asset V for $100,000 and
placed it in service in January 1999. K
depreciated Asset V under the general
depreciation system of section 168(a) by
using a 5-year recovery period, the 200percent declining balance method of
depreciation, and the half-year convention.
In December 2003, as part of the involuntary
conversion, Asset V is involuntarily
converted due to an earthquake. In October
2005, K purchases used Asset W with the
insurance proceeds from the destruction of
Asset V and places Asset W in service to
replace Asset V. If Asset W had been placed
in service when Asset V was placed in
service, it would have been depreciated using
a 7-year recovery period, the 200-percent
declining balance method, and the half-year
convention. K uses the optional depreciation
tables to depreciate Asset V and Asset W. For
2003 (recovery year 5 on the optional table),
the depreciation deduction for Asset V is
$5,760 ((0.1152)($100,000)(1/2)). Thus, the
adjusted depreciable basis of Asset V at the
time of replacement is $11,520 ($100,000 less
$20,000 depreciation in 1999, $32,000
depreciation in 2000, $19,200 depreciation in
2001, $11,520 depreciation in 2002, and
$5,760 depreciation in 2003). Under the table
that applied to Asset V, the year of
disposition was recovery year 5 and the
depreciation deduction was determined
under the straight line method. The table that

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applies for Asset W is the table that applies
the straight line depreciation method, the
half-year convention, and a 7-year recovery
period. The appropriate recovery year under
this table is recovery year 5. The depreciation
deduction for Asset W for 2005 is $1,646
(($11,520)(0.1429)(1/(1¥0.5))(1/2)). Thus, the
depreciation deduction for Asset W in 2006
(recovery year 6) is $3,290
($11,520)(0.1428)(1/(1¥0.5)). The
depreciation deduction for 2007 (recovery
year 7) is $3,292 (($11,520)(.1429)(1/(1¥.5))).
The depreciation deduction for 2008
(recovery year 8) is $3292 ($11,520 less
allowable depreciation for Asset W for 2005
through 2007 ($1,646 + $3,290 + $3,292)).
Example 3. L, a calendar-year taxpayer,
placed in service used Computer X in
January 2002 for $5,000. L depreciated
Computer X under the general depreciation
system of section 168(a) by using the 200percent declining balance method of
depreciation, a 5-year recovery period, and
the half-year convention. Computer X is
destroyed in a fire in March 2004. For 2004,
the depreciation deduction allowable for
Computer X equals $480 ([($5,000)(.1920)] ×
(1/2)). Thus, the adjusted depreciable basis of
Computer X was $1,920 when it was
destroyed ($5,000 unadjusted depreciable
basis less $1,000 depreciation for 2002,
$1,600 depreciation for 2003, and $480
depreciation for 2004). In April 2004, as part
of the involuntary conversion, L acquired
and placed in service used Computer Y with
insurance proceeds received due to loss of
Computer X. Computer Y will be depreciated
using the same depreciation method,
recovery period, and convention as Computer
X. L elected to use the optional depreciation
tables to compute the depreciation allowance
for Computer X and Computer Y. The
depreciation deduction allowable for 2004
for Computer Y equals $384 ([$1,920 ×
(.1920)(1/(1¥.52))] × (1/2)).

(f) Mid-quarter convention. For
purposes of applying the 40-percent test
under section 168(d) and the regulations
under section 168(d), the following
rules apply:
(1) Exchanged basis. If, in a taxable
year, MACRS property is placed in
service by the acquiring taxpayer (but
not as a result of a like-kind exchange
or involuntary conversion) and—
(i) In the same taxable year, is
disposed of by the acquiring taxpayer in
a like-kind exchange or an involuntary
conversion and replaced by the
acquiring taxpayer with replacement
MACRS property, the exchanged basis
(determined without any adjustments
for depreciation deductions during the
taxable year) of the replacement MACRS
property is taken into account in the
year of replacement in the quarter the
relinquished MACRS property was
placed in service by the acquiring
taxpayer; or
(ii) In the same taxable year, is
disposed of by the acquiring taxpayer in
a like-kind exchange or an involuntary
conversion, and in a subsequent taxable

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year is replaced by the acquiring
taxpayer with replacement MACRS
property, the exchanged basis
(determined without any adjustments
for depreciation deductions during the
taxable year) of the replacement MACRS
property is taken into account in the
year of replacement in the quarter the
replacement MACRS property was
placed in service by the acquiring
taxpayer; or
(iii) In a subsequent taxable year,
disposed of by the acquiring taxpayer in
a like-kind exchange or involuntary
conversion, the exchanged basis of the
replacement MACRS property is not
taken into account in the year of
replacement.
(2) Excess basis. Any excess basis is
taken into account in the quarter the
replacement MACRS property is placed
in service by the acquiring taxpayer.
(3) Depreciable property acquired for
nondepreciable property. Both the
exchanged basis and excess basis of the
replacement MACRS property described
in paragraph (d)(2)(ii) of this section
(depreciable property acquired for
nondepreciable property), are taken into
account for determining whether the
mid-quarter convention applies in the
year of replacement.
(g) Section 179 election. In applying
the section 179 election, only the excess
basis, if any, in the replacement MACRS
property is taken into account. If the
replacement MACRS property is
described in paragraph (d)(2)(ii) of this
section (depreciable property acquired
for nondepreciable property), only the
excess basis in the replacement MACRS
property is taken into account.
(h) Additional first year depreciation
deduction. See § 1.168(k)–1T(f)(5) (for
qualified property or 50-percent bonus
depreciation property) and
§ 1.1400L(b)–1T(f)(5) (for qualified New
York Liberty Zone property).
(i) Election not to apply this section.
A taxpayer may elect not to apply this
section for any MACRS property
involved in a like-kind exchange or
involuntary conversion. An election
under this paragraph (i) applies only to
the taxpayer making the election and
the election applies to both the
relinquished MACRS property and the
replacement MACRS property. If an
election is made under this paragraph
(i), the depreciation allowances for the
replacement MACRS property beginning
in the year of replacement and for the
relinquished MACRS property in the
year of disposition are not determined
under this section. Instead, for
depreciation purposes, the exchanged
basis and excess basis, if any, in the
replacement MACRS property are
treated as being placed in service by the

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taxpayer at the time of replacement and
the adjusted depreciable basis of the
relinquished MACRS property is treated
as being disposed of by the taxpayer at
the time of disposition. Paragraphs
(c)(5)(i) (determination of depreciation
for relinquished MACRS property in the
year of disposition), (c)(5)(iii) (rules for
deferred transactions), (g) (section 179
election), and (h) (additional first year
depreciation deduction) of this section
apply to property to which this
paragraph (i) applies. See paragraph (j)
of this section for the time and manner
of making the election under this
paragraph (i).
(j) Time and manner of making
elections—(1) In general. The election
provided in paragraph (i) of this section
is made separately by each person
acquiring replacement MACRS
property. The election is made for each
member of a consolidated group by the
common parent of the group, by the
partnership (and not by the partners
separately) in the case of a partnership,
or by the S corporation (and not by the
shareholders separately) in the case of
an S corporation. A separate election
under paragraph (i) of this section is
required for each like-kind exchange or
involuntary conversion. The election
provided in paragraph (i) of this section
must be made within the time and
manner provided in paragraph (j)(2) and
(3) of this section and may not be made
by the taxpayer in any other manner (for
example, the election cannot be made
through a request under section 446(e)
to change the taxpayer’s method of
accounting), except as provided in
paragraph (k)(2) of this section.
(2) Time for making election. The
election provided in paragraph (i) of this
section is made by the due date
(including extensions) of the taxpayer’s
Federal tax return for the year of
replacement.
(3) Manner of making election. The
election provided in paragraph (i) of this
section is made by typing or legibly
printing at the top of Form 4562,
Depreciation and Amortization,
‘‘ELECTION MADE UNDER SECTION
1.168(i)–6T(i),’’ or in the manner
provided for on Form 4562 and its
instructions. If Form 4562 is revised or
renumbered, any reference in this
section to that form is treated as a
reference to the revised or renumbered
form.
(4) Revocation. The election provided
in paragraph (i) of this section, once
made, may be revoked only with the
consent of the Commissioner of Internal
Revenue. Such consent will be granted
only in extraordinary circumstances.
Requests for consent are requests for a
letter ruling and must be filed with the

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9545

Commissioner of Internal Revenue,
Washington, DC 20224. Requests for
consent may not be made in any other
manner (for example, through a request
under section 446(e) to change the
taxpayer’s method of accounting).
(k) Effective date—(1) In general. (i)
This section applies to a like-kind
exchange or an involuntary conversion
of MACRS property for which the time
of disposition and the time of
replacement both occur after February
27, 2004.
(ii) The applicability of this section
expires February 27, 2007.
(2) Application to pre-effective date
like-kind exchanges and involuntary
conversions. For a like-kind exchange or
an involuntary conversion of MACRS
property for which the time of
disposition, the time of replacement, or
both occur on or before February 27,
2004, a taxpayer may:
(i) Apply the provisions of this
section. If a taxpayer’s applicable
federal income tax return has been filed
on or before February 27, 2004, and the
taxpayer has treated the replacement
MACRS property as acquired, and the
relinquished MACRS property as
disposed of, in a like-kind exchange or
an involuntary conversion, the taxpayer
changes its method of accounting for
depreciation of the replacement MACRS
property and relinquished MACRS
property in accordance with this
paragraph (k)(2)(i) by following the
applicable administrative procedures
issued under § 1.446–1T(e)(3)(ii) for
obtaining the Commissioner’s automatic
consent to a change in method of
accounting (for further guidance, see
Rev. Proc. 2002–9 (2002–1 C.B. 327) and
§ 601.601(d)(2)(ii)(b) of this chapter); or
(ii) Rely on prior guidance issued by
the Internal Revenue Service for
determining the depreciation
deductions of replacement MACRS
property and relinquished MACRS
property (for further guidance, for
example, see Notice 2000–4 (2001–1
C.B. 313) and § 601.601(d)(2)(ii)(b) of
this chapter). In relying on such
guidance, a taxpayer may use any
reasonable, consistent method of
determining depreciation in the year of
disposition and the year of replacement.
If a taxpayer’s applicable federal income
tax return has been filed on or before
February 27, 2004, and the taxpayer has
treated the replacement MACRS
property as acquired, and the
relinquished MACRS property as
disposed of, in a like-kind exchange or
an involuntary conversion, the taxpayer
changes its method of accounting for
depreciation of the replacement MACRS
property and relinquished MACRS
property in accordance with this

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paragraph (k)(2)(ii) by following the
applicable administrative procedures
issued under § 1.446–1T(e)(3)(ii) for
obtaining the Commissioner’s automatic
consent to a change in method of
accounting (for further guidance, see
Rev. Proc. 2002–9 (2002–1 C.B. 327) and
§ 601.601(d)(2)(ii)(b) of this chapter).
■ Par. 11. Section 1.168(k)–1T is
amended by:
■ 1. Revising paragraphs (f)(5)(ii)(F)(2)
and (f)(5)(v).
■ 2. Redesignating paragraph (g)(1) as
paragraph (g)(1)(i).
■ 3. Revising the last sentence in newly
designated paragraph (g)(1)(i) and
redesignating as new paragraph (g)(1)(ii).
■ 4. Redesignating paragraph (g)(3) as
paragraph (g)(3)(i).
■ 5. Adding paragraph (g)(3)(ii).
The addition and revisions read as
follows:
§ 1.168(k)–1T Additional first year
depreciation (temporary).

*

*
*
*
*
(f) * * *
(5) * * *
(ii) * * *
(F) * * *
(2) The time of disposition of the
exchanged or involuntarily converted
property.
*
*
*
*
*
(v) Examples. The application of this
paragraph (f)(5) is illustrated by the
following examples:
Example 1. (i) In December 2002, EE, a
calendar-year corporation, acquired for
$200,000 and placed in service Canopy V1,
a gas station canopy. Canopy V1 is qualified
property under section 168(k)(1) and is 5year property under section 168(e). EE
depreciated Canopy V1 under the general
depreciation system of section 168(a) by
using the 200-percent declining balance
method of depreciation, a 5-year recovery
period, and the half-year convention. EE
elected to use the optional depreciation
tables to compute the depreciation allowance
for Canopy V1. On January 1, 2003, Canopy
V1 was destroyed in a fire and was no longer
usable in EE’s business. On June 1, 2003, in
an involuntary conversion, EE acquired and
placed in service Canopy W1 with all of the
$160,000 of insurance proceeds EE received
due to the loss of Canopy V1. Canopy W1 is
50-percent bonus depreciation property
under section 168(k)(4) and is 5-year
property under section 168(e). Pursuant to
paragraph (g)(3)(ii) of this section and
§ 1.168(i)–6T(k)(2)(i), EE decided to apply
§ 1.168(i)–6T to the involuntary conversion
of Canopy V1 with the replacement of
Canopy W1, the acquired MACRS property.
(ii) For 2002, EE is allowed a 30-percent
additional first year depreciation deduction
of $60,000 for Canopy V1 (the unadjusted
depreciable basis of $200,000 multiplied by
.30), and a regular MACRS depreciation
deduction of $28,000 for Canopy V1 (the
remaining adjusted depreciable basis of

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$140,000 multiplied by the annual
depreciation rate of .20 for recovery year 1).
(iii) For 2003, EE is allowed a regular
MACRS depreciation deduction of $22,400
for Canopy V1 (the remaining adjusted
depreciable basis of $140,000 multiplied by
the annual depreciation rate of .32 for
recovery year 2 × 1⁄2 year).
(iv) Pursuant to paragraph (f)(5)(iii)(A) of
this section, the additional first year
depreciation deduction allowable for Canopy
W1 equals $44,800 (.50 of Canopy W1’s
remaining carryover basis at the time of
replacement of $89,600 (Canopy V1’s
remaining adjusted depreciable basis of
$140,000 minus 2002 regular MACRS
depreciation deduction of $28,000 minus
2003 regular MACRS depreciation deduction
of $22,400).
Example 2. (i) Same facts as in Example 1,
except EE elected not to deduct the
additional first year depreciation for 5-year
property placed in service in 2002. EE
deducted the additional first year
depreciation for 5-year property placed in
service in 2003.
(ii) For 2002, EE is allowed a regular
MACRS depreciation deduction of $40,000
for Canopy V1 (the unadjusted depreciable
basis of $200,000 multiplied by the annual
depreciation rate of .20 for recovery year 1).
(iii) For 2003, EE is allowed a regular
MACRS depreciation deduction of $32,000
for Canopy V1 (the unadjusted depreciable
basis of $200,000 multiplied by the annual
depreciation rate of .32 for recovery year 2 ×
1⁄2 year).
(iv) Pursuant to paragraph (f)(5)(iii)(A) of
this section, the additional first year
depreciation deduction allowable for Canopy
W1 equals $64,000 (.50 of Canopy W1’s
remaining carryover basis at the time of
replacement of $128,000 (Canopy V1’s
unadjusted depreciable basis of $200,000
minus 2002 regular MACRS depreciation
deduction of $40,000 minus 2003 regular
MACRS depreciation deduction of $32,000)).
Example 3. (i) In December 2001, FF, a
calendar-year corporation, acquired for
$10,000 and placed in service Computer X2.
Computer X2 is qualified property under
section 168(k)(1) and is 5-year property
under section 168(e). FF depreciated
Computer X2 under the general depreciation
system of section 168(a) by using the 200percent declining balance method of
depreciation, a 5-year recovery period, and
the half-year convention. FF elected to use
the optional depreciation tables to compute
the depreciation allowance for Computer X2.
On January 1, 2002, FF acquired Computer
Y2 by exchanging Computer X2 and $1,000
cash in a like-kind exchange. Computer Y2
is qualified property under section 168(k)(1)
and is 5-year property under section 168(e).
Pursuant to paragraph (g)(3)(ii) of this section
and § 1.168(i)–6T(k)(2)(i), FF decided to
apply § 1.168(i)–6T to the exchange of
Computer X2 for Computer Y2, the acquired
MACRS property.
(ii) For 2001, FF is allowed a 30-percent
additional first year depreciation deduction
of $3,000 for Computer X2 (unadjusted basis
of $10,000 multiplied by .30), and a regular
MACRS depreciation deduction of $1,400 for
Computer X2 (the remaining adjusted

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depreciable basis of $7,000 multiplied by the
annual depreciation rate of .20 for recovery
year 1).
(iii) For 2002, FF is allowed a regular
MACRS depreciation deduction of $1,120 for
Computer X2 (the remaining adjusted
depreciable basis of $7,000 multiplied by the
annual depreciation rate of .32 for recovery
year 2 × 1⁄2 year).
(iv) Pursuant to paragraph (f)(5)(iii)(A) of
this section, the 30-percent additional first
year depreciation deduction for Computer Y2
is allowable for the remaining carryover basis
at the time of replacement of $4,480
(Computer X2’s unadjusted depreciable basis
of $10,000 minus additional first year
depreciation deduction allowable of $3,000
minus 2001 regular MACRS depreciation
deduction of $1,400 minus 2002 regular
MACRS depreciation deduction of $1,120)
and for the remaining excess basis at the time
of replacement of $1,000 (cash paid for
Computer Y2). Thus, the 30-percent
additional first year depreciation deduction
for the remaining carryover basis at the time
of replacement equals $1,344 ($4,480
multiplied by .30) and for the remaining
excess basis at the time of replacement equals
$300 ($1,000 multiplied by .30), which totals
$1,644.
Example 4. (i) In September 2002, GG, a
June 30 year-end corporation, acquired for
$20,000 and placed in service Equipment X3.
Equipment X3 is qualified property under
section 168(k)(1) and is 5-year property
under section 168(e). GG depreciated
Equipment X3 under the general depreciation
system of section 168(a) by using the 200percent declining balance method of
depreciation, a 5-year recovery period, and
the half-year convention. GG elected to use
the optional depreciation tables to compute
the depreciation allowance for Equipment
X3. In December 2002, GG acquired
Equipment Y3 by exchanging Equipment X3
and $5,000 cash in a like-kind exchange.
Equipment Y3 is qualified property under
section 168(k)(1) and is 5-year property
under section 168(e). Pursuant to paragraph
(g)(3)(ii) of this section and § 1.168(i)–
6T(k)(2)(i), GG decided to apply § 1.168(i)–6T
to the exchange of Equipment X3 for
Equipment Y3, the acquired MACRS
property.
(ii) Pursuant to paragraph (f)(5)(iii)(B) of
this section, no additional first year
depreciation deduction is allowable for
Equipment X3 and, pursuant to § 1.168(d)–
1T(b)(3)(ii), no regular depreciation
deduction is allowable for Equipment X3, for
the taxable year ended June 30, 2003.
(iii) Pursuant to paragraph (f)(5)(iii)(A) of
this section, the 30-percent additional first
year depreciation deduction for Equipment
Y3 is allowable for the remaining carryover
basis at the time of replacement of $20,000
(Equipment X3’s unadjusted depreciable
basis of $20,000) and for the remaining
excess basis at the time of replacement of
$5,000 (cash paid for Equipment Y3). Thus,
the 30-percent additional first year
depreciation deduction for the remaining
carryover basis at the time of replacement
equals $6,000 ($20,000 multiplied by .30)
and for the remaining excess basis at the time
of replacement equals $1,500 ($5,000
multiplied by .30), which totals $7,500.

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Federal Register / Vol. 69, No. 40 / Monday, March 1, 2004 / Rules and Regulations
Example 5. (i) Same facts as in Example 4.
GG depreciated Equipment Y3 under the
general depreciation system of section 168(a)
by using the 200-percent declining balance
method of depreciation, a 5-year recovery
period, and the half-year convention. GG
elected to use the optional depreciation
tables to compute the depreciation allowance
for Equipment Y3. On July 1, 2003, GG
acquired Equipment Z1 by exchanging
Equipment Y3 in a like-kind exchange.
Equipment Z1 is 50-percent bonus
depreciation property under section 168(k)(4)
and is 5-year property under section 168(e).
Pursuant to paragraph (g)(3)(ii) of this section
and § 1.168(i)–6T(k)(2)(i), GG decided to
apply § 1.168(i)–6T to the exchange of
Equipment Y3 for Equipment Z3, the
acquired MACRS property.
(ii) For the taxable year ending June 30,
2003, the regular MACRS depreciation
deduction allowable for the remaining
carryover basis at the time of replacement
(after taking into account the additional first
year depreciation deduction) of Equipment
Y3 is $2,800 (the remaining carryover basis
at the time of replacement of $20,000 minus
the additional first year depreciation
deduction of $6,000, multiplied by the
annual depreciation rate of .20 for recovery
year 1) and for the remaining excess basis at
the time of replacement (after taking into
account the additional first year depreciation
deduction) of Equipment Y3 is $700 (the
remaining excess basis at the time of
replacement of $5,000 minus the additional
first year depreciation deduction of $1,500,
multiplied by the annual depreciation rate of
.20 for recovery year 1), which totals $3,500.
(iii) For the taxable year ending June 30,
2004, the regular MACRS depreciation
deduction allowable for the remaining
carryover basis (after taking into account the
additional first year depreciation deduction)
of Equipment Y3 is $2,240 (the remaining
carryover basis at the time of replacement of
$20,000 minus the additional first year
depreciation deduction of $6,000, multiplied
by the annual depreciation rate of .32 for
recovery year 2 × 1⁄2 year) and for the
remaining excess basis (after taking into
account the additional first year depreciation
deduction) of Equipment Y3 is $560 (the
remaining excess basis at the time of
replacement of $5,000 minus the additional
first year depreciation deduction of $1,500,
multiplied by the annual depreciation rate of
.32 for recovery year 2 × 1⁄2 year), which
totals $2,800.
(iv) For the taxable year ending June 30,
2004, pursuant to paragraph (f)(5)(iii)(A) of
this section, the 50-percent additional first
year depreciation deduction for Equipment
Z1 is allowable for the remaining carryover
basis at the time of replacement of $11,200
(Equipment Y3’s unadjusted depreciable
basis of $25,000 minus the total additional
first year depreciation deduction of $7,500
minus the total 2003 regular MACRS
depreciation deduction of $3,500 minus the
total 2004 regular depreciation deduction
(taking into account the half-year convention)
of $2,800). Thus, the 50-percent additional
first year depreciation deduction for the
remaining carryover basis at the time of

VerDate jul<14>2003

14:36 Feb 27, 2004

Jkt 203001

replacement equals $5,600 ($11,200
multiplied by .50).

*

*
*
*
*
(g) * * * (1) * * * (i) * * *
(ii) Except as provided in paragraph
(g)(3)(ii) of this section, the applicability
of this section expires on or before
September 4, 2006.
(2) * * *
(3) * * *—(i). * * *
(ii) Paragraph (f)(5)(ii)(F)(2) of this
section and paragraph (f)(5)(v) of this
section apply to a like-kind exchange or
an involuntary conversion of MACRS
property and computer software for
which the time of disposition and the
time of replacement both occur after
February 27, 2004. For a like-kind
exchange or an involuntary conversion
of MACRS property for which the time
of disposition, the time of replacement,
or both occur on or before February 27,
2004, see § 1.168(i)–6T(k)(2)(ii). For a
like-kind exchange or involuntary
conversion of computer software for
which the time of disposition, the time
of replacement, or both occur on or
before February 27, 2004, a taxpayer
may rely on prior guidance issued by
the Internal Revenue Service for
determining the depreciation
deductions of the acquired computer
software and the exchanged or
involuntarily converted computer
software (for further guidance, see
§ 1.168(k)–1T(f)(5) published in the
Federal Register on September 8, 2003
(68 FR 53000)). In relying on such
guidance, a taxpayer may use any
reasonable, consistent method of
determining depreciation in the year of
disposition and the year of replacement.
The applicability of paragraph (f)(5) of
this section expires on or before
February 27, 2007.
*
*
*
*
*
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
Approved: February 17, 2004.
Pamela F. Olson,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 04–3992 Filed 2–27–04; 8:45 am]
BILLING CODE 4830–01–P

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9547

DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 117
[CGD07–03–088]
RIN 1625–AA09

Drawbridge Operation Regulations;
Miami River, North Fork, Miami, FL
Coast Guard, DHS.
Final rule.

AGENCY:
ACTION:

SUMMARY: The Coast Guard is changing
the operating regulations and the name
of the Seaboard System Railroad Bridge,
across the Miami River, mile 5.3, Miami,
Florida. This rule requires the bridge to
open only after a 48-hour advance
notice to the owner. In addition, the
Coast Guard is changing the name from
Seaboard System Railroad Bridge to the
FDOT Railroad Bridge, to reflect the
current owner.
DATES: This rule is effective March 31,
2004.
ADDRESSES: Comments and material
received from the public, as well as
documents indicated in this preamble as
being available in the docket, are part of
docket (CGD07–03–088) and are
available for inspection or copying at
Commander (obr), Seventh Coast Guard
District, 909 SE. 1st Avenue, Miami,
Florida 33131 between 7:30 a.m. and 4
p.m., Monday through Friday, except
Federal holidays.
FOR FURTHER INFORMATION CONTACT: Mr.
Barry Dragon, Project Manager, Seventh
Coast Guard District, Bridge Branch,
(305) 415–6743.
SUPPLEMENTARY INFORMATION:

Regulatory History
On August 5, 2003, the Coast Guard
published a notice of proposed
rulemaking (NPRM) entitled Drawbridge
Operation Regulations; Miami River,
North Fork, Miami, Florida in the
Federal Register (68 FR 46139). We
received 1 comment on this notice of
proposed rulemaking (NPRM). No
public hearing was requested, and none
was held.
Background and Purpose
The Seaboard System Railroad Bridge
across the Miami River, mile 5.3, is a
railroad bridge with a vertical clearance
of 6 feet at mean high water and a
horizontal clearance of 60 feet. The
current operating regulations published
in 33 CFR 117.307 require the bridge to
open on signal from 8:30 a.m. to 5:30
p.m., Monday through Friday. All other
times the draw must open on signal if

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