Td 9283

Federal Register / Vol. 71, No. 169 / Thursday, August 31, 2006 / Rules and Regulations
shall be declared when a claim is made
about them. Any other vitamins or
minerals listed in § 101.9(c)(8)(iv) or
(c)(9) may be declared, but they shall be
declared when they are added to the
product for purposes of
supplementation, or when a claim is
made about them. Any (b)(2)-dietary
ingredients that are not present, or that
are present in amounts that can be
declared as zero in § 101.9(c), shall not
be declared (e.g., amounts
corresponding to less than 2 percent of
the RDI for vitamins and minerals).
Protein shall not be declared on labels
of products that, other than ingredients
added solely for technological reasons,
contain only individual amino acids.
*
*
*
*
*
Dated: August 25, 2006.
Jeffrey Shuren,
Assistant Commissioner for Policy.
[FR Doc. 06–7306 Filed 8–30–06; 8:45 am]
BILLING CODE 4160–01–S

DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Food and Drug Administration
21 CFR Part 529
Certain Other Dosage Form New
Animal Drugs; Gentamicin Sulfate
Intrauterine Solution
AGENCY:

Food and Drug Administration,

HHS.
ACTION:

Final rule.

The Food and Drug
Administration (FDA) is amending the
animal drug regulations to reflect
approval of an abbreviated new animal
drug application (ANADA) filed by
Sparhawk Laboratories, Inc. The
ANADA provides for use of a generic
gentamicin sulfate solution as an
intrauterine infusion for the control of
bacterial metritis and as an aid in
improving conception in mares.
DATES: This rule is effective August 31,
2006.
FOR FURTHER INFORMATION CONTACT: John
K. Harshman, Center for Veterinary
Medicine (HFV–104), Food and Drug
Administration, 7500 Standish Pl.,
Rockville, MD 20855, 301–827–0169, email: john.harshman@fda.hhs.gov.
SUPPLEMENTARY INFORMATION: Sparhawk
Laboratories, Inc., 12340 Santa Fe Trail
Dr., Lenexa, KS 66215, filed ANADA
200–395 for the use of Gentamicin
Sulfate Solution for the control of
bacterial infections of the uterus
(metritis) and as an aid in improving
conception in mares with uterine

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SUMMARY:

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infections caused by bacteria sensitive
to gentamicin. Sparhawk Laboratories,
Inc.’s gentamicin sulfate solution is
approved as a generic copy of ScheringPlough Animal Health Corp.’s
GENTOCIN (gentamicin sulfate)
solution veterinary, approved under
NADA 46–724. The ANADA is
approved as of July 31, 2006, and the
regulations in 21 CFR 529.1044a are
amended to reflect the approval and a
current format. The basis of approval is
discussed in the freedom of information
summary.
In accordance with the freedom of
information provisions of 21 CFR part
20 and 21 CFR 514.11(e)(2)(ii), a
summary of safety and effectiveness
data and information submitted to
support approval of this application
may be seen in the Division of Dockets
Management (HFA–305), Food and Drug
Administration, 5630 Fishers Lane, rm.
1061, Rockville, MD 20852, between 9
a.m. and 4 p.m., Monday through
Friday.
FDA has determined under 21 CFR
25.33(a)(1) that this action is of a type
that does not individually or
cumulatively have a significant effect on
the human environment. Therefore,
neither an environmental assessment
nor an environmental impact statement
is required.
This rule does not meet the definition
of ‘‘rule’’ in 5 U.S.C. 804(3)(A) because
it is a rule of ‘‘particular applicability.’’
Therefore, it is not subject to the
congressional review requirements in 5
U.S.C. 801–808.
List of Subjects in 21 CFR Part 529
Animal drugs.
Therefore, under the Federal Food,
Drug, and Cosmetic Act and under
authority delegated to the Commissioner
of Food and Drugs and redelegated to
the Center for Veterinary Medicine, 21
CFR part 529 is amended as follows:

■

PART 529—CERTAIN OTHER DOSAGE
FORM NEW ANIMAL DRUGS
1. The authority citation for 21 CFR
part 529 continues to read as follows:

■

Authority: 21 U.S.C. 360b.

2. Revise § 529.1044a to read as
follows:

■

§ 529.1044a Gentamicin sulfate
intrauterine solution.

(a) Specifications. Each milliliter of
solution contains 50 or 100 milligrams
gentamicin sulfate.
(b) Sponsors. See Nos. 000010,
000061, 000856, 057561, 058005,
059130, and 061623 in § 510.600(c) of
this chapter.

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51727

(c) Conditions of use in horses—(1)
Amount. Infuse 2 to 2.5 grams per day
for 3 to 5 days during estrus.
(2) Indications for use. For control of
bacterial infections of the uterus
(metritis) and as an aid in improving
conception in mares with uterine
infections caused by bacteria sensitive
to gentamicin.
(3) Limitations. Do not use in horses
intended for human consumption.
Federal law restricts this drug to use by
or on the order of a licensed
veterinarian.
Dated: August 11, 2006.
Stephen F. Sundlof,
Director, Center for Veterinary Medicine.
[FR Doc. 06–7307 Filed 8–30–06; 8:45 am]
BILLING CODE 4160–01–S

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9283]
RIN 1545–BB57

Special Depreciation Allowance
Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary
regulations.
AGENCY:

SUMMARY: This document contains final
regulations relating to the depreciation
of property subject to section 168 of the
Internal Revenue Code (MACRS
property) and the depreciation of
computer software subject to section
167. Specifically, these final regulations
provide guidance regarding the
additional first year depreciation
allowance provided by sections 168(k)
and 1400L(b) for certain MACRS
property and computer software. The
regulations reflect changes to the law
made by the Job Creation and Worker
Assistance Act of 2002, the Jobs and
Growth Tax Relief Reconciliation Act of
2003, the Working Families Tax Relief
Act of 2004, the American Jobs Creation
Act of 2004, and the Gulf Opportunity
Zone Act of 2005.
DATES: Effective Dates: These
regulations are effective August 31,
2006.
Applicability Dates: For dates of
applicability, see §§ 1.167(a)–14(e),
1.168(d)–1(d), 1.168(d)–1T(d), 1.168(k)–
1(g), 1.169–3(g), and 1.1400L(b)–1(g).
FOR FURTHER INFORMATION CONTACT:
Douglas Kim, (202) 622–3110 (not a tollfree number).
SUPPLEMENTARY INFORMATION:

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Background
This document contains amendments
to 26 CFR part 1. On September 8, 2003,
the IRS and Treasury Department
published temporary regulations (TD
9091) in the Federal Register (68 FR
52986) relating to the additional first
year depreciation deduction provisions
of sections 168(k) and 1400L(b) of the
Internal Revenue Code (Code). On the
same date, the IRS published a notice of
proposed rulemaking (REG–157164–02)
cross-referencing the temporary
regulations in the Federal Register (68
FR 53008). On March 1, 2004, the
temporary regulations (TD 9091) were
amended by the temporary regulations
(TD 9115) published by the IRS and
Treasury Department in the Federal
Register (69 FR 9529) relating to the
depreciation of property acquired in a
like-kind exchange or as a result of an
involuntary conversion, and the notice
of proposed rulemaking (REG–157164–
02) was amended by the notice of
proposed rulemaking (REG–106590–00,
REG–138499–02) published by the IRS
in the Federal Register (69 FR 9560)
cross-referencing TD 9115. No public
hearing was requested or held. Several
comments responding to the notice of
proposed rulemaking (REG–157164–02)
were received. After consideration of all
the comments, the proposed regulations
(REG–157164–02) as amended by this
Treasury decision are adopted as final,
and the corresponding temporary
regulations (TD 9091) are removed. The
revisions are discussed below.
Additionally, minor changes are made
to the temporary regulations (TD 9115)
to reflect the proper cites of the final
regulations.
Section 1400N(d), which was added
to the Code by section 101(a) of the Gulf
Opportunity Zone Act of 2005, Public
Law 109–135 (119 Stat. 2577), generally
allows a 50-percent additional first year
depreciation deduction (GO Zone
additional first year depreciation
deduction) for qualified Gulf
Opportunity Zone property. Notice
2006–67 (2006–33 I.R.B. 248) provides
guidance with respect to the GO Zone
additional first year depreciation
deduction. Because Notice 2006–67
contains citations to the temporary
regulations under section 168(k) (TD
9091), the IRS intends to update Notice
2006–67 to change these citations to this
Treasury decision.
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Explanation of Provisions
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

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depreciation allowable for tangible,
depreciable property placed in service
after 1986 generally is determined under
section 168 (MACRS property). The
depreciation allowable for computer
software that is placed in service after
August 10, 1993, and is not an
amortizable section 197 intangible is
determined under section 167(f)(1).
Section 168(k)(1) allows a 30-percent
additional first year depreciation
deduction for qualified property
acquired after September 10, 2001, and,
in most cases, placed in service before
January 1, 2005. Section 168(k)(4)
allows a 50-percent additional first year
depreciation deduction for 50-percent
bonus depreciation property acquired
after May 5, 2003, and, in most cases,
placed in service before January 1, 2005.
Section 1400L(b) allows a 30-percent
additional first year depreciation
deduction for qualified New York
Liberty Zone property (Liberty Zone
property) acquired after September 10,
2001, and placed in service before
January 1, 2007 (January 1, 2010, in the
case of qualifying nonresidential real
property and residential rental
property).
The final regulations provide the
requirements that must be met for
depreciable property to qualify for the
additional first year depreciation
deduction provided by sections 168(k)
and 1400L(b). Further, the final
regulations instruct taxpayers how to
determine the additional first year
depreciation deduction and the amount
of depreciation otherwise allowable for
eligible depreciable property. Unless
specifically stated, references to the
temporary regulations are to TD 9091.
Property Eligible for the Additional First
Year Depreciation Deduction
The final regulations retain the rules
contained in the temporary regulations
providing that depreciable property
must meet four requirements to be
qualified property under section
168(k)(2) (property for which the 30percent additional first year
depreciation deduction is allowable) or
50-percent bonus depreciation property
under section 168(k)(4) (property for
which the 50-percent additional first
year depreciation deduction is
allowable). These requirements are: (1)
The depreciable property must be of a
specified type; (2) the original use of the
depreciable property must commence
with the taxpayer after September 10,
2001, for qualified property or after May
5, 2003, for 50-percent bonus
depreciation property; (3) the
depreciable property must be acquired
by the taxpayer within a specified time
period; and (4) the depreciable property

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must be placed in service by a specified
date.
Several commentators questioned
whether these requirements must be met
in the year in which the depreciable
property is placed in service by the
taxpayer. The statute is clear that
additional first year depreciation is
allowed in the taxable year in which
qualified property or 50 percent bonus
depreciation property is placed in
service by the taxpayer for use in its
trade or business or for production of
income. Therefore, only property that
meets all of these requirements in the
year in which placed in service by the
taxpayer for use in its trade or business
or for production of income is allowed
additional first year depreciation in the
year the property is placed in service by
the taxpayer for use in its trade or
business or for production of income. In
response to this comment, the final
regulations state more explicitly that all
of the requirements must be met in the
first taxable year in which the property
is subject to depreciation by the
taxpayer whether or not depreciation
deductions are allowable.
Property of a Specified Type
The final regulations retain the rules
contained in the temporary regulations
providing that qualified property or 50percent bonus depreciation property
must be one of the following: (1)
MACRS property that has a recovery
period of 20 years or less; (2) computer
software as defined in, and depreciated
under, section 167(f)(1); (3) water utility
property as defined in section 168(e)(5)
and depreciated under section 168; or
(4) qualified leasehold improvement
property depreciated under section 168.
The final regulations also retain the
rules contained in the temporary
regulations providing that qualified
property or 50-percent bonus
depreciation property does not include:
(1) Property excluded from the
application of section 168 as a result of
section 168(f); (2) property that is
required to be depreciated under the
alternative depreciation system of
section 168(g) (ADS); (3) any class of
property for which the taxpayer elects
not to deduct the 30-percent or 50percent additional first year
depreciation; or (4) qualified New York
Liberty Zone leasehold improvement
property as defined in section 1400L(c).
Property is required to be depreciated
under the ADS if the property is
described under section 168(g)(1)(A)
through (D) or if other provisions of the
Code require depreciation for the
property to be determined under the
ADS (for example, section 263A(e)(2)(A)
or section 280F(b)(1)). A commentator

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questioned whether depreciable
property held by taxpayers that made
the election under section 263A(d)(3)
should be excluded from eligibility for
the additional first year depreciation
deduction. Section 263A(e)(2)(A)
provides that if a taxpayer (or a related
person) makes an election under section
263A(d)(3) (relating to an election not to
apply section 263A to any plant
produced in any farming business
carried on by the taxpayer), the ADS
applies to all property of the taxpayer
used predominantly in the farming
business and placed in service in any
taxable year during which any such
election is in effect. Section 168(k) does
not exclude property for which the
section 263A(d)(3) election was made
from the application of section
168(k)(2)(D)(i), which provides that
property required to be depreciated
under the ADS is not qualified property
and 50-percent bonus depreciation
property. For this reason, the final
regulations do not adopt the suggestion
that depreciable property held by
taxpayers that made the election under
section 263A(d)(3) is eligible for the
additional first year depreciation
deduction. Another commentator
requested clarification as to whether the
reference to ‘‘property described in
section 263A(e)(2)(A)’’ in § 1.168(k)–
1T(b)(2)(ii)(A)(2) includes only property
held by a taxpayer that has made an
election under section 263A(d)(3). In
response to this comment, the final
regulations clarify that if the taxpayer
(or a related person) has made the
election under section 263A(d)(3), the
property described in section
263A(e)(2)(A) is not eligible for the
additional first year depreciation
deduction.
Original Use
The final regulations clarify and make
conforming changes to the original use
rules in the temporary regulations in
several respects. First, a commentator
inquired whether the rule providing that
the cost of reconditioned or rebuilt
property acquired by the taxpayer does
not satisfy the original use requirement
also applies to self-constructed
property. A few commentators inquired
whether the 20-percent test for
determining whether property is
reconditioned or rebuilt applies to selfconstructed property. The IRS and
Treasury Department intended that
these rules apply to the cost of any
reconditioned or rebuilt property,
whether the taxpayer originally
acquired the property or selfconstructed the property. Accordingly,
the final regulations clarify that the cost
of reconditioned or rebuilt property

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does not satisfy the original use
requirement and that the 20-percent test
applies to acquired or self-constructed
property.
Second, Example 2 of § 1.168(k)–
1T(b)(3)(v) provides that property held
primarily for sale to customers in the
ordinary course of a person’s business
(inventory) does not constitute a use for
purposes of the original use
requirement. A commentator noted that
this rule is not in the operative rules of
the temporary regulations. In response
to this comment, the final regulations
make the rule explicit and provide that
if a person initially acquires new
property and holds the property as
inventory and a taxpayer subsequently
acquires the property from the person
for use primarily in the taxpayer’s trade
or business or primarily for the
taxpayer’s production of income, the
taxpayer is considered the original user
of the property. The final regulations
also provide that if a taxpayer initially
acquires new property and holds the
property as inventory and then
subsequently withdraws the property
from inventory and uses the property
primarily in the taxpayer’s trade or
business or primarily for the taxpayer’s
production of income, the taxpayer is
considered the original user of the
property. In both situations, the final
regulations provide that the original use
of the property by the taxpayer
commences on the date on which the
taxpayer uses the property primarily in
the taxpayer’s trade or business or
primarily for the taxpayer’s production
of income.
A commentator questioned whether
Example 2 in § 1.168(k)–1T(b)(3)(v) is
the appropriate place to resolve the
issue of the tax treatment of
demonstrator automobiles for
depreciation and other purposes when
the issue may have a potential broader
scope and significance that may
continue to arise long after the
additional first year depreciation under
section 168(k) has ceased to be
available. The IRS and Treasury
Department believe that this example
illustrates only the concept that if
property is held by a person as
inventory and then sold to a taxpayer
for use in the taxpayer’s trade or
business, the taxpayer is the original
user of the property, and, therefore, that
this example is in the appropriate place.
Third, the final regulations retain the
special rules contained in the temporary
regulations for certain sale-leaseback
transactions and syndication
transactions. A commentator suggested
that the title of § 1.168(k)–
1T(b)(3)(iii)(B), ‘‘Syndication
transaction,’’ should be changed in the

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51729

final regulations to reflect that this rule,
by its terms, can apply to any sale of
property within three months after the
date on which it is placed in service,
regardless of whether that sale
constitutes a syndication. The final
regulations adopt this suggestion and
modify the titles of, and make
conforming changes to, the applicable
paragraphs. Similar changes also are
made to the paragraphs relating to the
placed-in-service date requirement.
Fourth, the final regulations modify
the provision in the temporary
regulations to implement section 403(a)
of the Working Families Tax Relief Act
of 2004, (Pub. L. 108–311, 118 Stat.
1166) (October 4, 2004) (WFTRA) and
section 337 of the American Jobs
Creation Act of 2004 (Pub. L. 108–357,
118 Stat. 1418) (October 22, 2004)
(AJCA). Section 403(a) of the WFTRA
amended section 168(k) by adding the
provision in section 168(k)(2)(E)(iii).
Section 403(f) of the WFTRA provides
that this amendment is effective as if
included in the provisions of the Job
Creation and Worker Assistance Act of
2002 (Pub. L. 107–147, 116 Stat. 21)
(March 9, 2002) (JCWAA). Section
337(a) of the AJCA amended the
syndication transaction provision in
section 168(k)(2)(E)(iii)(II) by adding at
the end the following: ‘‘(or, in the case
of multiple units of property subject to
the same lease, within 3 months after
the date the final unit is placed in
service, so long as the period between
the time the first unit is placed in
service and the time the last unit is
placed in service does not exceed 12
months).’’ Section 337(b) of the AJCA
provides that this amendment is
effective for property sold after June 4,
2004.
Fifth, if property placed in service by
a person is sold and leased back within
three months, and a syndication
transaction occurs within three months
after the sale-leaseback, a commentator
questioned whether the purchaser of the
property in the syndication transaction
is considered the original user of the
property and whether the property is
treated as having been placed in service
by the purchaser in the syndication
transaction. Pursuant to §§ 1.168(k)–
1T(b)(3)(iii)(C) and (5)(ii)(C), the
purchaser of the property in the
syndication transaction is considered
the original user of the property and the
property is treated as having been
placed in service by the purchaser in the
syndication transaction. The final
regulations retain this rule and provide
an example illustrating both the original
use and the placed in service aspects of
this situation.

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Finally, the final regulations retain
the rule contained in the temporary
regulations providing that if, in the
ordinary course of its business, a
taxpayer sells fractional interests in
qualified property or 50-percent bonus
depreciation property to unrelated third
parties, each first fractional owner of the
property is considered as the original
user of its proportionate share of the
property. A commentator questioned
whether the rule requiring the sale to be
to unrelated third parties means that the
purchasers must be unrelated to the
seller, the purchasers must be unrelated
to each other, or both. The IRS and
Treasury Department intended that the
purchasers be unrelated to the seller.
Accordingly, the final regulations clarify
this point.
A commentator questioned whether
there are circumstances when the
placed-in-service year of property is
before the taxable year of original use.
Pursuant to § 1.46–3(d)(1)(ii), property
is considered placed in service in the
taxable year in which the property is
placed in a condition or state of
readiness and availability for a
specifically assigned function, whether
in a trade or business, in the production
of income, in a tax-exempt activity, or
in a personal activity. Original use
begins when new property is placed in
service. Consequently, the placed-inservice year of new property cannot be
before the taxable year in which original
use of the property occurs.
Acquisition of Property
The final regulations modify the
acquisition dates in the temporary
regulations to reflect section 405 of the
Gulf Opportunity Zone Act of 2005
(Pub. L. 109–135, 119 Stat. 2577)
(December 21, 2005) (GOZA). Section
405(a)(1) of the GOZA amended section
168(k)(4)(B)(ii) to provide that 50percent bonus depreciation property is
property (I) acquired by the taxpayer
after May 5, 2003, and before January 1,
2005, but only if no written binding
contract for the acquisition of the
property was in effect before May 6,
2003, or (II) acquired by the taxpayer
pursuant to a written binding contract
which was entered into after May 5,
2003, and before January 1, 2005.
Section 405(b) provides that this
amendment is effective as if included in
section 201 of the Jobs and Growth Tax
Relief and Reconciliation Act of 2003
(Pub. L. 108–27, 117 Stat. 752) (May 28,
2003).
Binding Contracts
The final regulations also modify in
three respects the rules contained in the
temporary regulations defining a

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binding contract. First, the temporary
regulations provide that if a contract
provides for a full refund of the
purchase price in lieu of any damages
allowable by law in the event of breach
or cancellation by the seller, the
contract is not considered binding. A
commentator suggested that this rule
should apply to a breach or cancellation
by the buyer, not the seller. However,
the IRS and Treasury Department
believe that this rule relates to a breach
or cancellation by either party.
Accordingly, the final regulations
provide that if a contract provides for a
full refund of the purchase price in lieu
of any damages allowable by law in the
event of breach or cancellation, the
contract is not considered binding.
Second, with respect to a contract
subject to a condition, the temporary
regulations provide that a contract that
imposes significant obligations on the
taxpayer or a predecessor will be treated
as binding notwithstanding the fact that
insubstantial terms remain to be
negotiated by the parties to the contract.
A commentator questioned whether this
rule implies that a contract that imposes
significant obligations will not be
treated as binding if substantial terms
remain to be negotiated. The IRS and
Treasury Department believe that this
implication was not intended. As a
consequence, the final regulations
clarify this rule by providing that a
contract that imposes significant
obligations on the taxpayer or a
predecessor will be treated as binding
notwithstanding the fact that certain
terms remain to be negotiated by the
parties to the contract.
Third, with respect to a supply
agreement, a commentator suggested
that the existence of agreed pricing
terms should not be relevant in
determining whether or not a supply
agreement is a binding contract, except
to the extent that their absence causes
the contract not to be enforceable under
local law. The commentator further
suggested that if the existence of pricing
terms is considered relevant to the
result in the example of the operative
rule and in some of the examples that
illustrate the application of the rule, that
requirement should be stated in the
operative rule, and if not relevant, the
references to pricing terms should be
deleted. Pricing terms are not relevant
in determining whether a supply
agreement is a binding contract for
purposes of these regulations.
Accordingly, the final regulations adopt
the suggestion by eliminating the
reference to agreed pricing terms in the
example of the operative rule. While the
examples that illustrate the application
of the rule continue to contain the

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agreed price as a fact, the conclusions in
these examples depend upon only
whether or not the quantity and the
design specification of the property to
be purchased are specified.
Self-Constructed Property
With respect to self-constructed
property, the final regulations clarify the
rules in the temporary regulations in
several respects. First, with respect to
property described in section
168(k)(2)(B) (longer production period
property) or section 168(k)(2)(C) (certain
aircraft), the final regulations clarify that
if a taxpayer enters into a written
binding contract after September 10,
2001, and before January 1, 2005, with
another person to manufacture,
construct, or produce such property and
the manufacture, construction, or
production begins after December 31,
2004, the taxpayer has acquired the
property pursuant to a written binding
contract entered into after September
10, 2001, and before January 1, 2005 (for
qualified property) or after May 5, 2003,
and before January 1, 2005 (for 50percent bonus depreciation property).
Second, a commentator asked
whether the rules in the temporary
regulations providing for when
construction begins are intended also to
apply to manufacture and production
because self-constructed property can be
manufactured, constructed, or produced
for purposes of the additional first year
depreciation deduction. The IRS and
Treasury Department intended these
rules to apply to manufacture,
construction, or production.
Accordingly, the final regulations make
this clarification.
Third, the temporary regulations
provide that construction of property
begins when physical work of a
significant nature begins and the
determination of when physical work of
a significant nature begins depends on
the facts and circumstances. The
temporary regulations also provide that
physical work of a significant nature
will not be considered to begin before
the taxpayer incurs or pays more than
10 percent of the total cost of the
property (excluding the cost of any land
and preliminary activities). Several
commentators questioned whether this
10-percent test is a safe harbor. The
preamble to the temporary regulations
(68 FR 52987) states that the 10-percent
test is a safe harbor. Consequently, the
final regulations are clarified to provide
that the 10-percent test is a safe harbor.
Further, when another party
manufactures, constructs, or produces
property for the taxpayer, the final
regulations clarify that the safe harbor
test must be met by the taxpayer. Thus,

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under the final regulations, a taxpayer
can determine when manufacture,
construction, or production of the
property begins either (1) by using the
10 percent safe harbor or (2) by using its
own facts and circumstances.
Fourth, the final regulations retain the
rules contained in the temporary
regulations relating to components of
self-constructed property. One of these
rules is that if the binding contract to
acquire a component is entered into, or
the manufacture, construction, or
production of a component begins, after
September 10, 2001, for qualified
property, or after May 5, 2003, for 50percent bonus depreciation property,
and before January 1, 2005, but the
manufacture, construction, or
production of the larger self-constructed
property begins after December 31,
2004, the component qualifies for the
additional first year depreciation
deduction (assuming all other
requirements are met) but the larger selfconstructed property does not. In the
case of a self-constructed component
that is to be incorporated into a larger
self-constructed property, some
commentators noted that the
applicability of this rule is limited.
Specifically, one commentator stated
that if the 10 percent test mentioned in
the preceding paragraph is not a safe
harbor test, then the only case in which
self-constructed components could
qualify for the additional first year
depreciation deduction is one in which
the taxpayer’s pre-January 1, 2005, costs
are 10 percent or less of the total cost
of the larger self-constructed property
(but more than 10 percent of the total
cost of the component). Another
commentator stated that a selfconstructed component that is to be
incorporated into a larger selfconstructed property may not be placed
in service before the larger selfconstructed property. The IRS and
Treasury Department agree that the rule
has limited applicability. The rule
applies when the larger self-constructed
property is property that is
manufactured, constructed, or produced
by the taxpayer for its own use and that
is described in section 168(k)(2)(B)
(longer production period property) or
section 168(k)(2)(C) (certain aircraft)
and, therefore, the property is eligible
for the extended placed-in-service date
of January 1, 2006.
Disqualified Transactions
The final regulations clarify the
disqualified transaction rules in the
temporary regulations to reflect section
403(a) of the WFTRA. This section
amended section 168(k) by adding
section 168(k)(2)(E)(iv), which provides

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limitations related to users and related
parties (disqualified transactions).
Section 168(k)(2)(E)(iv) provides that
the term qualified property does not
include any property if: (I) the user of
such property (as of the date on which
the property is originally placed in
service) or a person that is related
(within the meaning of section 267(b) or
707(b)) to such user or to the taxpayer
had a written binding contract in effect
for the acquisition of the property at any
time on or before September 10, 2001;
or (II) in the case of property
manufactured, constructed, or produced
for such user’s or person’s own use, the
manufacture, construction, or
production of the property began at any
time on or before September 10, 2001.
Section 403(f) of the WFTRA provides
that this amendment is effective as if
included in the provisions of the
JCWAA.
Finally, the IRS and Treasury
Department decided to add new
examples to illustrate the above rules.
Further, in Example 10 of § 1.168(k)–
1T(b)(4)(v), a commentator inquired
whether the taxpayer (S) is considered
to be self-constructing the property,
acquiring the property, or both. The IRS
and Treasury Department intended to
have the taxpayer both self-constructing
and acquiring the property. The final
regulations make this clarification.
A commentator questioned whether
the result in Example 10 of § 1.168(k)–
1T(b)(4)(v) also would apply if before
September 11, 2001, a partnership began
construction of a power plant for its
own use, then after September 10, 2001,
and before completion of the plant,
there is a technical termination of the
partnership under section 708(b)(1)(B),
and then subsequently the new
partnership incurred additional
expenditures to complete the
construction of the power plant and
placed the power plant in service before
January 1, 2005. Assuming the
terminated partnership and the new
partnership are not related parties, the
new partnership is considered to have
acquired the uncompleted power plant
and completed the construction of the
power plant and, thus, the result in
Example 10 of § 1.168(k)–1T(b)(4)(v)
will apply to the new partnership in this
case. While the additional first year
depreciation deduction for Liberty Zone
property requires the property to be
acquired by purchase, the same result
would apply because for purposes of
that requirement, § 1.1400L(b)–
1T(c)(5)(ii) treats the new partnership as
acquiring the property by purchase and
the final regulations retain this rule.

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Placed-in-Service Date
The final regulations retain the rule
contained in the temporary regulations
providing, pursuant to section
168(k)(2)(A)(iv) and section
168(k)(4)(B)(iii), that qualified property
or 50-percent bonus depreciation
property is property that is placed in
service by the taxpayer before January 1,
2005. The temporary regulations also
provide that property described in
section 168(k)(2)(B) (longer production
period property) must be placed in
service before January 1, 2006. The final
regulations modify this extended
placed-in-service date requirement in
two respects. First, the final regulations
reflect that the extended placed-inservice date of before January 1, 2006,
also applies to property described in
section 168(k)(2)(C) (certain aircraft),
which was added to section 168(k) by
section 336 of the AJCA. Second, the
final regulations reflect that the
extended placed-in-service date of
before January 1, 2006, is extended for
one year to before January 1, 2007, for
property to which Announcement
2006–29 (2006–19 IRB 879) applies.
Announcement 2006–29 applies to
property described in section
168(k)(2)(B) or (C) that is either placed
in service by the taxpayer or
manufactured by a person in the Gulf
Opportunity (GO) Zone, the Rita GO
Zone, or the Wilma GO Zone, provided
the taxpayer was unable to meet the
December 31, 2005, placed-in-service
date deadline for such property as a
result of Hurricane Katrina, Hurricane
Rita, or Hurricane Wilma.
Qualified Leasehold Improvement
Property
The final regulations retain the rules
contained in the temporary regulations
relating to qualified leasehold
improvement property. The temporary
regulations provide that qualified
leasehold improvement property means
any improvement, which is section 1250
property, to an interior portion of a
building that is nonresidential real
property if, among other things, the
improvement is made under or pursuant
to a lease by the lessee (or any
sublessee) of the interior portion, or by
the lessor of that interior portion. A
commentator questioned whether this
rule means an improvement that is
permitted or required by a lease. The
IRS and Treasury Department believe
that the improvement must be made
under or pursuant to a lease, regardless
of whether the improvement is
permitted or required under the lease.

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Computation of Additional First Year
Depreciation Deduction and Otherwise
Allowable Depreciation
The final regulations retain the rules
contained in the temporary regulations
for determining the amount of the
additional first year depreciation
deduction and otherwise allowable
depreciation deduction. In addition, the
final regulations clarify that the
additional first year depreciation
deduction generally is allowable in the
first taxable year in which the qualified
property or 50-percent bonus
depreciation property is placed in
service by the taxpayer for use in its
trade or business or for the production
of income.

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Election Not To Claim Additional First
Year Depreciation Deduction
With respect to the election not to
claim the additional first year
depreciation deduction, the final
regulations retain the rules contained in
the temporary regulations for making
this election and for defining what is a
class of property for purposes of the
election. For any class of property that
is qualified property, a taxpayer may
elect out of the 30-percent additional
first year depreciation deduction for any
class of qualified property. For any class
of property that is 50-percent bonus
depreciation property, a taxpayer may
elect either to deduct the 30-percent,
instead of the 50-percent, additional
first year depreciation or to deduct no
additional first year depreciation. A
commentator asked whether a taxpayer
with 50-percent bonus depreciation
property must make two elections to
elect not to deduct any additional first
year depreciation. The final regulations
clarify that only one election is needed
to elect not to deduct both the 30percent and 50-percent additional first
year depreciation for 50-percent bonus
depreciation property.
If a taxpayer elects not to deduct any
additional first year depreciation for a
class of property, another commentator
asked whether the depreciation
adjustments under section 56 apply to
property included in such class for
purposes of computing the taxpayer’s
alternative minimum taxable income.
The non-applicability of the
depreciation adjustments under section
56 provided by section 168(k)(2)(G)
applies only to qualified property or 50percent bonus depreciation property. If
a taxpayer elects not to deduct any
additional first year depreciation for a
class of property, the property included
in such class is not qualified property or
50-percent bonus depreciation property.
Accordingly, the final regulations

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provide that if a taxpayer elects not to
deduct any additional first year
depreciation for a class of property, the
depreciation adjustments under section
56 apply to that property for purposes
of computing the taxpayer’s alternative
minimum taxable income.
The final regulations also include the
procedures provided by section 3.04 of
Rev. Proc. 2002–33 (2002–1 C.B. 963)
for revoking an election not to deduct
the additional first year depreciation for
a class of property. These procedures
provide that this election is revocable
only with the prior written consent of
the Commissioner of Internal Revenue
and, to seek the Commissioner’s
consent, the taxpayer must submit a
request for a letter ruling. However, the
final regulations also provide an
automatic 6-month extension from the
due date of the taxpayer’s Federal tax
return (excluding extensions) for the
placed-in-service year to revoke the
election, provided the taxpayer timely
filed its Federal tax return for the
placed-in-service year.
Liberty Zone Property
Generally, the requirements for
determining the eligibility of property
for the additional first year depreciation
deduction for Liberty Zone property
provided by section 1400L(b) are similar
to the requirements for the 30-percent
additional first year depreciation
deduction for qualified property
provided by section 168(k)(1) in the
final regulations. The final regulations
made several changes to the temporary
regulations with respect to the Liberty
Zone property, which are discussed
below.
The final regulations retain the rule
contained in the temporary regulations
providing that Liberty Zone property
includes the same property that is
described as qualified property or 50percent bonus depreciation property for
purposes of section 168(k). In addition,
Liberty Zone property includes
nonresidential real property or
residential rental property to the extent
such property rehabilitates real property
damaged, or replaces real property
destroyed or condemned, as a result of
the terrorist attacks of September 11,
2001. Real property is considered to
have been destroyed or condemned only
if an entire building or structure was
destroyed or condemned as a result of
the terrorist attacks of September 11,
2001. Property is treated as replacing
destroyed or condemned property if, as
part of an integrated plan, the property
replaces real property that is included
in a continuous area that includes real
property destroyed or condemned. A
commentator noted that the temporary

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regulations simply reiterate the statute
but do not define the word continuous.
The IRS and Treasury Department
believe that the common meaning of
continuous applies.
The temporary regulations define real
property as a building or its structural
components, or other tangible real
property except: (1) Property described
in section 1245(a)(3)(B) (relating to
depreciable property used as an integral
part of a specified activity or as a
specified facility); (2) property
described in section 1245(a)(3)(D)
(relating to a single purpose agricultural
or horticultural structure); and (3)
property described in section
1245(a)(3)(E) (relating to storage facility
used in connection with the distribution
of petroleum or any primary product of
petroleum). A commentator suggested
that these exclusions to the definition of
real property should be deleted in the
final regulations. As a result of this
definition, nonresidential real property
or residential rental property that
rehabilitates or replaces any of the
excluded properties that were damaged,
destroyed, or condemned, is not eligible
for the Liberty Zone additional first year
depreciation deduction. For this reason,
the IRS and Treasury Department agree.
Accordingly, the final regulations
provide that real property is a building
or its structural components, or other
tangible real property.
The temporary regulations provide
that Liberty Zone property does not
include property that is described as
qualified property or 50-percent bonus
depreciation property for purposes of
section 168(k), or property that is
described in § 1.168(k)–1T(b)(2)(ii). The
property described in § 1.168(k)–
1T(b)(2)(ii) is property that is: (1)
Described in section 168(f); (2) required
to be depreciated under the alternative
depreciation system; (3) included in any
class of property for which the taxpayer
elects out of the additional first year
depreciation deduction under section
168(k); or (4) qualified Liberty Zone
leasehold improvement property.
Instead of providing a cross-reference to
§ 1.168(k)–1(b)(2)(ii), the final
regulations list the property that is
described in § 1.168(k)–1(b)(2)(ii) with
one modification to the exclusion for
property that is included in any class of
property for which the taxpayer elects
out of the additional first year
depreciation deduction under section
168(k). In this regard, a commentator
stated that while section
1400L(b)(2)(C)(iv) provides that the
election out rules for purposes of
section 1400L(b) are to be similar to the
election out rules under section 168(k),
section 1400L(b)(2)(C)(iv) does not mean

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Federal Register / Vol. 71, No. 169 / Thursday, August 31, 2006 / Rules and Regulations
that the same election must be made
with respect to both sections 168(k) and
1400L(b). Accordingly, the commentator
suggested that a taxpayer be permitted
to elect not to apply section 168(k) to its
property of a particular class of property
to the extent that such property is not
located within the Liberty Zone, while
still being entitled to the benefits of
section 1400L(b) for its property of the
same class that is located within the
Liberty Zone. The IRS and Treasury
Department agree with this suggestion.
Accordingly, the final regulations make
clear that Liberty Zone property is not
property included in any class of
property for which the taxpayer elects
out of the additional first year
depreciation deduction under section
1400L(b).
The final regulations retain the rule
contained in the temporary regulations
providing that Liberty Zone property is
property that is acquired by the taxpayer
by purchase after September 10, 2001,
but only if no written binding contract
for the acquisition of the property was
in effect before September 10, 2001. The
term by purchase is defined in section
179(d) and § 1.179–4(c). The final
regulations also retain the rule
contained in the temporary regulations
providing that the new partnership
resulting from a technical termination
under section 708(b)(1)(B) or a
transferee in section 168(i)(7)
transactions is deemed to acquire the
depreciable property by purchase. A
commentator suggested that the rule
should apply only if the old transferor
partnership had itself acquired the
property by purchase, as the mere
existence of a technical termination
does not provide sufficient reason to
deem the statutory purchase
requirement to have been met. The final
regulations do not adopt this suggestion.
The rule is the result of the rules
provided in the temporary regulations
regarding the additional first year
depreciation deduction under sections
168(k) and 1400L(b) that allow the new
partnership resulting from a technical
termination to be entitled to the
additional first year depreciation
deduction for eligible property that was
placed in service by the terminated
partnership during the taxable year of
termination. As a result, the IRS and
Treasury Department determined that
the rule should not be changed.
The final regulations also retain the
rules contained in the temporary
regulations for electing not to deduct the
Liberty Zone additional first year
depreciation deduction for a class of
property. In addition, the final
regulations for this election include
provisions similar to those previously

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discussed relating to the alternative
minimum tax and the revocation of the
election with respect to the election not
to deduct the additional first year
depreciation deduction under section
168(k).
Special Rules
Similar to the temporary regulations,
the final regulations provide special
rules for the following situations: (1)
Qualified property, 50-percent bonus
depreciation property, or Liberty Zone
property placed in service and disposed
of in the same taxable year; (2)
redetermination of basis of qualified
property, 50-percent bonus depreciation
property, or Liberty Zone property; (3)
recapture of additional first year
depreciation for purposes of section
1245 and section 1250; (4) a certified
pollution control facility that is
qualified property, 50-percent bonus
depreciation property, or Liberty Zone
property; (5) like-kind exchanges and
involuntary conversions of qualified
property, 50-percent bonus depreciation
property, or Liberty Zone property; (6)
a change in use of qualified property,
50-percent bonus depreciation property,
or Liberty Zone property; (7) the
computation of earnings and profits; (8)
the increase in the limitation of the
amount of depreciation for passenger
automobiles; and (9) the step-up in basis
due to a section 754 election. For some
of these situations, the final regulations
modify or clarify the rules contained in
the temporary regulations. In addition,
the final regulations provide rules for
two new situations: the rehabilitation
credit under section 47 and the
computation of depreciation for
purposes of section 514(a)(3).
Property Placed in Service and Disposed
of in the Same Taxable Year
With respect to qualified property, 50percent bonus depreciation property, or
Liberty Zone property placed in service
and disposed of in the same taxable
year, the final regulations retain the
rules contained in the temporary
regulations. In general, the regulations
provide that the additional first year
depreciation deduction is not allowed.
If qualified property or 50-percent
bonus depreciation property is placed in
service and disposed of by a taxpayer in
the same taxable year and then, in a
subsequent taxable year, is reacquired
and again placed in service by the
taxpayer, a commentator inquired
whether the additional first year
depreciation deduction is allowable in
the subsequent taxable year. Because the
property is used property in the
subsequent taxable year, the additional
first year depreciation deduction is not

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51733

allowable for the property in the
subsequent taxable year. Accordingly, in
this situation, the final regulations
clarify that the additional first year
depreciation deduction is not allowable
for the property in the subsequent
taxable year.
The temporary regulations provide
two exceptions to the general rule. First,
the additional first year depreciation
deduction is allowable for qualified
property, 50-percent bonus depreciation
property, or Liberty Zone property
placed in service by a terminated
partnership in the same taxable year in
which a technical termination of the
partnership occurs. In this case, the new
partnership, and not the terminated
partnership, claims the additional first
year depreciation deduction. Second,
the additional first year depreciation
deduction is allowable for qualified
property, 50-percent bonus depreciation
property, or Liberty Zone property
placed in service by a transferor in the
same taxable year in which the property
is transferred in a transaction described
in section 168(i)(7). In this case, the
additional first year depreciation
deduction for the transferor’s taxable
year in which the property is placed in
service is allocated between the
transferor and the transferee on a
monthly basis. The allocation shall be
made in accordance with the rules in
§ 1.168(d)–1(b)(7)(ii) for allocating the
depreciation deduction between the
transferor and the transferee. If the
transferee has a different taxable year
than the transferor, a commentator
questioned whether the allocation of the
additional first year depreciation
deduction would be made between the
transferor and the transferee in
accordance with the above rules.
Because the allocation rules in
§ 1.168(d)–1(b)(7)(ii) cover this
situation, the IRS and Treasury
Department did not modify the rule in
the final regulations.
Redetermination of Basis
The final regulations also retain the
rules contained in the temporary
regulations with respect to a
redetermination of basis of qualified
property, 50-percent bonus depreciation
property, or Liberty Zone property (for
example, due to a contingent purchase
price or a discharge of indebtedness).
These rules apply to a redetermination
of the unadjusted depreciable basis of
the property occurring before January 1,
2005 (January 1, 2006, for the extended
placed-in-service date property) for
qualified property or 50-percent bonus
depreciation property, or before January
1, 2007 (January 1, 2010, in the case of
nonresidential real property and

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Federal Register / Vol. 71, No. 169 / Thursday, August 31, 2006 / Rules and Regulations

residential rental property) for Liberty
Zone property. A commentator
suggested that the rules should be
expanded to include redeterminations
of basis occurring on or after these
dates. The commentator pointed out
that the rule results in additional first
year depreciation not being allowable
for additional purchase price paid on or
after January 1, 2005, with respect to
qualified property or 50-percent bonus
depreciation property acquired before
2005. The final regulations do not adopt
this suggestion. While the current rule
may be unfavorable when, for example,
a redetermination of basis results in an
increase of basis on or after January 1,
2005, for qualified property or 50percent bonus depreciation property
acquired before 2005, the current rule
may be favorable when, for example, a
redetermination of basis results in a
decrease of basis on or after January 1,
2005, with respect to qualified property
or 50-percent bonus depreciation
property acquired before 2005. Further,
the IRS and Treasury Department
limited the rules to redeterminations
occurring before the dates mentioned
above to be consistent with the dates on
which property must be placed in
service to be eligible for the additional
first year depreciation deduction. For
this reason, the IRS and Treasury
Department determined not to change
the rule in the final regulations.
In the case of a redetermination of
basis that results in a decrease in basis,
a commentator noted that the operative
rule provides that the taxpayer includes
in the taxpayer’s income the excess
additional first year depreciation
deduction previously claimed for the
qualified property, the 50-percent bonus
depreciation property, or the Liberty
Zone property but the example
illustrating the application of this rule
allows the taxpayer to reduce current
year depreciation deductions by the
amount of the excess additional first
year depreciation deduction previously
claimed for the qualified property, the
50-percent bonus depreciation property,
or Liberty Zone property. Because the
IRS and Treasury Department recognize
that the lump-sum inclusion in income
approach provided in the operative rule
of the temporary regulation may
adversely affect real estate investment
trusts and similar entities, the final
regulations provide that the excess
additional first year depreciation
deduction offsets the amount otherwise
allowable for depreciation for the
taxable year. Even if the amount of the
offset exceeds the amount otherwise
allowable for depreciation for the
taxable year, the taxpayer takes into

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account a negative depreciation
deduction in computing taxable income.
The final regulations retain the rule
contained in the temporary regulations
providing that, for purposes of the
redetermination of basis rules: (1) an
increase in basis occurs in the taxable
year an amount is taken into account
under section 461; and (2) a decrease in
basis occurs in the taxable year an
amount is taken into account under
section 451. A commentator questioned
whether because the event in question
is giving rise to a basis adjustment,
rather than to an item of income or
deduction, it is appropriate for the rule
to tie the timing of the adjustment to
accounting method rules concerning the
timing of income and deductions. The
commentator also noted that one
apparent effect of applying the
accounting method rules is to override
the basis reduction rule of section
1017(a) as illustrated in Example 2 of
§ 1.168(k)–1T(f)(2)(iv). The IRS and
Treasury Department did not intend to
change the section 1017(a) rules. While
the IRS and Treasury Department
continue to believe that the current rule
is appropriate, the final regulations have
been modified for cases in which the
Code, the regulations under the Code, or
other published guidance expressly
provides an exception to such rule (for
example, section 1017(a)). Therefore,
Example 2 of § 1.168(k)–1(f)(2)(iv) in the
final regulations reflects the basis
adjustment rules of section 1017(a).
Like-Kind Exchanges and Involuntary
Conversions
With respect to MACRS property or
computer software acquired in a likekind exchange under section 1031 or as
a result of an involuntary conversion
under section 1033, the final regulations
change the rules contained in the
temporary regulations (TD 9091 as
amended by TD 9115) in several
respects. First, the final regulations
modify the scope of this provision to
include property described in section
168(k)(2)(C) (certain aircraft), which was
added to section 168(k) by section 336
of the AJCA, and to include property to
which Announcement 2006–29 (2006–
19 IRB 879) applies if the time of
replacement is after September 10, 2001,
and before January 1, 2007. As
previously noted, Announcement 2006–
29 applies to property described in
section 168(k)(2)(B) or (C) that is either
placed in service by the taxpayer or
manufactured by a person in the Gulf
Opportunity (GO) Zone, the Rita GO
Zone, or the Wilma GO Zone, provided
the taxpayer was unable to meet the
December 31, 2005, placed-in-service
date deadline for such property as a

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result of Hurricane Katrina, Hurricane
Rita, or Hurricane Wilma. Similar
changes also are made to the paragraph
relating to the computation of the
additional first year depreciation
deduction for MACRS property or
computer software acquired in a likekind exchange or as a result of an
involuntary conversion.
A commentator inquired whether the
rules should be expanded to include
exchanged or involuntarily converted
property that is subject to former section
168 (the accelerated cost recovery
system or ACRS) or that is pre-1981
depreciation property. The current rules
apply only to exchanged or
involuntarily converted property that is
MACRS property in order to conform
with § 1.168(i)–6T (relating to
depreciation of property acquired in
like-kind exchanges or as a result of
involuntary conversions). Accordingly,
the IRS and Treasury Department
believe that this issue is outside the
scope of these regulations and should be
addressed when the temporary
regulations under § 1.168(i)–6T are
finalized.
Second, the temporary regulations
define the time of replacement as the
later of when the acquired MACRS
property or acquired computer software
is placed in service, or the time of
disposition of the exchanged or
involuntarily converted property. A
commentator expressed concern that in
the case of an involuntary conversion
under section 1033, the final regulations
may confer an unintended benefit in the
case of taxpayers who acquired property
prior to September 11, 2001, in order to
replace property that was ultimately
requisitioned or condemned after
September 10, 2001, but as to which the
threat or imminence of condemnation
existed prior to that date. The IRS and
Treasury Department acknowledge that
the rule confers a benefit under such
circumstances, but continue to believe
that the rule is appropriate.
Additionally, the IRS and Treasury
Department decided to provide rules in
the final regulations to address how the
additional first year depreciation
deduction is treated when § 1.168(i)–
6T(d)(4) applies. Section 1.168(i)–
6T(d)(4) applies when, in an
involuntary conversion, a taxpayer
acquires and places in service acquired
MACRS property before the time of
disposition of the involuntarily
converted MACRS property. If the time
of disposition of the involuntarily
converted MACRS property is after
December 31, 2004, or, in the case of
property described in section
168(k)(2)(B) or (C), after December 31,
2005 (or after December 31, 2006, in the

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Federal Register / Vol. 71, No. 169 / Thursday, August 31, 2006 / Rules and Regulations
case of property described in section
168(k)(2)(B) or (C) to which
Announcement 2006–29 applies), the
final regulations provide that the time of
replacement is when the acquired
MACRS property is placed in service,
provided the threat or imminence of
requisition or condemnation of the
converted property existed prior to
January 1, 2005, or, in the case of
property described in section
168(k)(2)(B) or (C), existed before
January 1, 2006 (or existed before
January 1, 2007, in the case of property
described in section 168(k)(2)(B) or (C)
to which Announcement 2006–29
applies). In this case, the final
regulations also modify the income
inclusion rule in § 1.168(i)–6T(d)(4) to
allow the additional first year
depreciation deduction on the
remaining carryover basis of the
acquired MACRS property that is
qualified property, 50-percent bonus
depreciation property, or Liberty Zone
property.
Third, the final regulations clarify the
rules contained in the temporary
regulations relating to the computation
of the additional first year depreciation
deduction for property described in
section 168(k)(2)(B) (longer production
period property) and for alternative
minimum tax purposes. In both cases,
the temporary regulations provide a
cross-reference to § 1.168(k)–1T(d)
(computation of depreciation deduction
for qualified property or 50-percent
bonus depreciation property). A
commentator suggested that the purpose
of the reference to § 1.168(k)–1T(d)
should be clarified. The final
regulations adopt this suggestion by
deleting the cross-reference and
providing rules for computing the
additional first year depreciation
deduction for property described in
section 168(k)(2)(B) (longer production
period property) and for alternative
minimum tax purposes.
Also, a commentator questioned
whether the rule that the additional first
year depreciation is calculated
separately with respect to the carryover
basis and the excess basis is
appropriate, and suggested that the rule
should be simplified by eliminating the
requirement of separate calculations.
The IRS and Treasury Department
believe that the rule is appropriate
because it conforms with § 1.168(i)–6T,
which requires separate calculations of
depreciation for the carryover basis and
the excess basis.
Fourth, the final regulations clarify
the rules contained in the temporary
regulations relating to exchanged or
involuntarily converted MACRS
property or exchanged or involuntarily

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converted computer software that is
placed in service and disposed of in an
exchange or involuntary conversion in
the same taxable year. In this case, the
temporary regulations provide that the
additional first year depreciation
deduction is not allowable for the
exchanged or involuntarily converted
MACRS property or the exchanged or
involuntarily converted computer
software if the MACRS property or
computer software is placed in service
and disposed of in an exchange or
involuntary conversion in the same
taxable year. A commentator suggested
that the final regulations clarify that the
reference in the above rule to the
MACRS property or computer software
that is placed in service and disposed of
in the same taxable year is the
exchanged or involuntarily converted
MACRS property or exchanged or
involuntarily converted computer
software. The final regulations adopt
this suggestion.
Finally, a new example is added and
the facts in several of the examples are
clarified to reflect that the acquired
property must be new property in order
to meet the original use requirement
and, therefore, qualify for the additional
first year depreciation deduction.
Change in Use
The final regulations retain the rules
contained in the temporary regulations
providing when the use of qualified
property, 50-percent bonus depreciation
property, or Liberty Zone property
changes in the hands of the same
taxpayer during the placed-in-service
year or a subsequent taxable year. One
of these rules provide that if property is
acquired by a taxpayer for personal use
and, during a subsequent taxable year,
is converted by the taxpayer from
personal use to business or incomeproducing use, the additional first year
depreciation deduction is allowable for
the property in the taxable year the
property is converted to business or
income-producing use (assuming all the
requirements for the additional first year
depreciation deduction are met).
Another rule provides that if
depreciable property is not qualified
property, 50-percent bonus depreciation
property, or Liberty Zone property in
the placed-in-service year, the
additional first year depreciation
deduction is not allowable for the
property even if a change in the use of
the property subsequent to the placedin-service year results in the property
being qualified property, 50-percent
bonus depreciation property, or Liberty
Zone property in the taxable year of the
change in use. A commentator
questioned whether these two rules are

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51735

inconsistent. The commentator further
noted that under § 1.167(a)–11(e)(1)(i),
property that is ready for use in a
personal activity is considered to be
placed in service. The IRS and Treasury
Department do not believe that the two
rules are inconsistent. Property is
eligible for the additional first year
depreciation deduction if in the first
year in which the property is subject to
depreciation, the property meets all the
requirements to qualify for the
additional first year depreciation
deduction. In the case of property that
changes from personal use to a business
or income-producing use, the first year
such property is subject to depreciation
is the year of conversion to business or
income-producing use. But in the case
of property that changes from a
depreciable use not eligible for the
additional first year depreciation
deduction to a depreciable use that is
eligible for the additional first year
depreciation deduction, such property
did not meet the requirements to qualify
for the additional first year depreciation
deduction in the first year in which the
property is subject to depreciation.
Earnings and Profits
The final regulations retain the rule
contained in the temporary regulations
providing that the additional first year
depreciation deduction is not allowable
for purposes of computing earnings and
profits. A commentator suggested that
because this provision interprets section
312(k), the regulations under section
312 should include a cross-reference to
the regulations under section 168(k).
The IRS and Treasury Department agree
and, accordingly, the final regulations
adopt this suggestion.
280F(a)(1) Limitation
The final regulations also retain the
rules contained in the temporary
regulations providing the increase in the
limitation under section 280F(a)(1) of
the amount of depreciation for certain
passenger automobiles that are qualified
property or 50-percent bonus
depreciation property. A commentator
had three inquiries about this increase
in the limitation under section
280F(a)(1). First, the commentator asked
whether the increase in the limitation
can be taken as a section 179 expense.
The increase in the limitation under
section 280F(a)(1) that is provided in
the final regulations may be taken as a
section 179 expense. Second, the
commentator asked whether the
increase in the limitation of amount of
depreciation for certain passenger
automobiles needs to be prorated in a
short taxable year. Because the
additional first year depreciation

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deduction is not prorated for a short
taxable year, the increase in the
limitation under section 280F(a)(1) that
is provided in the final regulations also
is not prorated. Third, when calculating
depreciation for an asset with less than
100 percent business use, the
commentator asked whether the
business use percentage is applied to
the increase in the limitation of amount
of depreciation for certain passenger
automobiles. If a taxpayer’s business use
of the automobile is less than 100
percent, the business use percentage is
applied to the automobile’s depreciation
deduction, including the additional first
year depreciation deduction, for the
taxable year. The IRS and Treasury
Department believe that these issues are
outside the scope of these regulations
and, accordingly, the final regulations
do not address these issues.
Section 754 Election
Finally, the final regulations retain
the rules contained in the temporary
regulations relating to any increase in
basis of qualified property, 50-percent
bonus depreciation property, or Liberty
Zone property due to a section 754
election. Under these rules, such
increase in basis generally is not eligible
for the additional first year depreciation
deduction. However, if qualified
property, 50-percent bonus depreciation
property, or Liberty Zone property is
placed in service by a partnership in the
taxable year the partnership terminates
under section 708(b)(1)(B), any increase
of basis of the qualified property, 50percent bonus depreciation property, or
Liberty Zone property due to a section
754 election is eligible for the additional
first year depreciation deduction. A
commentator requested that we expand
this terminating partnership rule to any
increase in basis due to a section 754
election that arises before or during the
placed-in-service year of the property.
The IRS and Treasury Department
decided not to do so. The rule for a
termination of a partnership under
section 708(b)(1)(B) was made to be
consistent with the special rule allowing
the new partnership, instead of the
terminated partnership, to claim the
additional first year depreciation
deduction for property placed in service
during the taxable year of termination
and contributed by the terminated
partnership to a new partnership. The
IRS and Treasury Department believe
that these rules should not be expanded
to cover any other situations.
A commentator also suggested that we
clarify the regulation to provide that any
increase in basis due to a section 754
election that arises before or during the
year in which the qualified property, 50-

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Jkt 208001

percent bonus depreciation property, or
Liberty Zone property is placed in
service will be taken into account for
the additional first year depreciation
deduction. The IRS and Treasury
Department did not adopt this
suggestion in the final regulations. The
additional first year depreciation
deduction rules provide for the
accelerated recovery of a taxpayer’s cost
of qualified property, 50-percent bonus
depreciation property, or Liberty Zone
property. Many basis increases resulting
from a section 754 election bear no
relation whatsoever to the cost of
qualified property, 50-percent bonus
depreciation property, or Liberty Zone
property. For example, if a partnership
with a section 754 election in effect
made a liquidating distribution of highbasis property to a partner with low
basis in his partnership interest, the
basis of the partnership’s undistributed
property would be increased under
section 734(b) by an amount equal to the
decrease in basis to the distributed
property under section 732(b). The
amount of the section 734(b) basis
increase allocable to qualified property
under section 755 would have no
correlation to the taxpayer’s cost of the
property. The IRS and Treasury
Department believe that the rules
regarding any basis increase due to a
section 754 election should remain
limited to those provided in the
temporary regulations.
Rehabilitation Credit
Several commentators asked whether
property that is qualified property, 50percent bonus depreciation property, or
Liberty Zone property qualifies for the
rehabilitation credit under section 47.
Section 47 allows a rehabilitation credit
for qualified rehabilitation expenditures
for certain buildings. Section 47(c)(2)
defines the term qualified rehabilitation
expenditure as meaning, in general, any
amount properly chargeable to capital
account for property for which
depreciation is allowable under section
168 and that is nonresidential real
property, residential rental property,
real property that has a class life of more
than 12.5 years, or an addition or
improvement thereof. However, a
qualified rehabilitation expenditure
does not include any expenditure with
respect to which the taxpayer does not
use the straight line method over a
recovery period determined under
section 168(c) or (g). Because the
additional first year depreciation
deduction is not a straight line method,
the IRS and Treasury Department have
decided to provide in the final
regulations that if qualified
rehabilitation expenditures (as defined

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in section 47(c)(2) and § 1.48–12(c)) are
qualified property, 50-percent bonus
depreciation property, or Liberty Zone
property, the taxpayer may claim the
additional first year depreciation
deduction for the unadjusted
depreciable basis of the qualified
rehabilitation expenditures and may
claim the rehabilitation credit (provided
the requirements of section 47 are met)
for the remaining basis of the qualified
rehabilitation expenditures (unadjusted
depreciable basis less the additional
first year depreciation deduction
allowed or allowable, whichever is
greater) provided the taxpayer
depreciates the remaining adjusted
depreciable basis of such expenditures
using the straight line method over a
recovery period determined under
section 168(c) or (g). The taxpayer may
also claim the rehabilitation credit for
the portion of the basis of the qualified
rehabilitated building that is attributable
to the qualified rehabilitation
expenditures if the taxpayer elects not
to deduct the additional first year
depreciation for the class of property
that includes the qualified rehabilitated
expenditures.
Depreciation Under Section 514(a)(3)
Finally, a few commentators
questioned whether a tax-exempt
partner in a partnership that has debtfinanced property may take advantage of
the additional first year depreciation
deduction. In computing under section
512 the unrelated business taxable
income for any taxable year, section 514
provides the rules for determining the
amount of unrelated business taxable
income related to debt-financed
property. Under section 514(a)(3), the
deductions allowable with respect to
each debt-financed property is the sum
of the deductions under chapter 1 of the
Code that are directly connected with
the debt-financed property or the
income therefrom, except that if the
debt-financed property is depreciable
property, the allowance must be
computed only by use of the straightline method. The final regulations
provide that the additional first year
depreciation deduction is not allowable
for purposes of section 514(a)(3).
Changes in Method of Accounting
The IRS and Treasury Department
intend to issue administrative guidance
providing procedures for automatic
consent for taxpayers that wish to seek
a change in method of accounting to
comply with these final regulations.
Effective Date
In general, the final regulations apply
to qualified property or Liberty Zone

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Federal Register / Vol. 71, No. 169 / Thursday, August 31, 2006 / Rules and Regulations
property acquired by a taxpayer after
September 10, 2001, and for 50-percent
bonus depreciation property acquired
by a taxpayer after May 5, 2003.
Modifications to § 1.168(k)–
1(b)(3)(iii)(B) and (5)(ii)(B) relating to
syndication and other lease transactions
that provide a special rule for multiple
units of property subject to the same
lease apply to property sold after June
4, 2004.
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 and, because these
regulations do not impose on small
entities a collection of information
requirement, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to
section 7805(f) of the Code, the notice
of proposed rulemaking was previously
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
Drafting Information
The principal author of these
regulations is Douglas H. Kim, Office of
Associate Chief Counsel (Passthroughs
and Special Industries). However, other
personnel from the IRS and Treasury
Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:

■

PART 1—INCOME TAXES
Paragraph 1. The authority for part 1
continues to read, in part, as follows:

■

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.48–12 is amended by
adding a new sentence at the end of
paragraph (a)(2)(i) and adding a new
sentence at the end of paragraph (c)(8)(i)
to read as follows:
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■

§ 1.48–12 Qualified rehabilitated building;
expenditures incurred after December 31,
1981.

(a) * * *
(2) * * *

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(i) * * * The last sentence of
paragraph (c)(8)(i) of this section applies
to qualified rehabilitation expenditures
that are qualified property under section
168(k)(2) or qualified New York Liberty
Zone property under section 1400L(b)
acquired by a taxpayer after September
10, 2001, and to qualified rehabilitation
expenditures that are 50 percent bonus
depreciation property under section
168(k)(4) acquired by a taxpayer after
May 5, 2003.
*
*
*
*
*
(c) * * *
(8) * * *
(i) * * * However, see § 1.168(k)–
1(f)(10) if the qualified rehabilitation
expenditures are qualified property or
50-percent bonus depreciation property
under section 168(k) and see
§ 1.1400L(b)–1(f)(9) if the qualified
rehabilitation expenditures are qualified
New York Liberty Zone property under
section 1400L(b).
*
*
*
*
*
■ Par. 3. Section 1.167(a)–14 is
amended by revising paragraphs (b)(1),
(e)(2), and (e)(3) to read as follows:
§ 1.167(a)–14 Treatment of certain
intangible property excluded from section
197.

*

*
*
*
*
(b) * * * (1) In general. The amount
of the deduction for computer software
described in section 167(f)(1) and
§ 1.197–2(c)(4) is determined by
amortizing the cost or other basis of the
computer software using the straight
line method described in § 1.167(b)–1
(except that its salvage value is treated
as zero) and an amortization period of
36 months beginning on the first day of
the month that the computer software is
placed in service. Before determining
the amortization deduction allowable
under this paragraph (b), the cost or
other basis of computer software that is
section 179 property, as defined in
section 179(d)(1)(A)(ii), must be reduced
for any portion of the basis the taxpayer
properly elects to treat as an expense
under section 179. In addition, the cost
or other basis of computer software that
is qualified property under section
168(k)(2) or § 1.168(k)–1, 50-percent
bonus depreciation property under
section 168(k)(4) or § 1.168(k)–1, or
qualified New York Liberty Zone
property under section 1400L(b) or
§ 1.1400L(b)–1, must be reduced by the
amount of the additional first year
depreciation deduction allowed or
allowable, whichever is greater, under
section 168(k) or section 1400L(b) for
the computer software. If costs for
developing computer software that the
taxpayer properly elects to defer under

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51737

section 174(b) result in the development
of property subject to the allowance for
depreciation under section 167, the
rules of this paragraph (b) will apply to
the unrecovered costs. In addition, this
paragraph (b) applies to the cost of
separately acquired computer software
if the cost to acquire the software is
separately stated and the cost is
required to be capitalized under section
263(a).
*
*
*
*
*
(e) * * *
(2) Change in method of accounting.
See § 1.197–2(l)(4) for rules relating to
changes in method of accounting for
property to which § 1.167(a)–14 applies.
However, see § 1.168(k)–1(g)(4) or
1.1400L(b)–1(g)(4) for rules relating to
changes in method of accounting for
computer software to which the third
sentence in § 1.167(a)–14(b)(1) applies.
(3) Qualified property, 50-percent
bonus depreciation property, qualified
New York Liberty Zone property, or
section 179 property. This section also
applies to computer software that is
qualified property under section
168(k)(2) or qualified New York Liberty
Zone property under section 1400L(b)
acquired by a taxpayer after September
10, 2001, and to computer software that
is 50-percent bonus depreciation
property under section 168(k)(4)
acquired by a taxpayer after May 5,
2003. This section also applies to
computer software that is section 179
property placed in service by a taxpayer
in a taxable year beginning after 2002
and before 2010.
§ 1.167(a)–14T

[Removed]

■ Par. 4. Section 1.167(a)–14T is
removed.
■ Par. 5. Section 1.168(d)–1 is amended
by revising paragraph (d)(2) to read as
follows:

§ 1.168(d)–1 Applicable conventions—halfyear and mid-quarter convention.

*

*
*
*
*
(d) * * *
(2) Qualified property, 50-percent
bonus depreciation property, or
qualified New York Liberty Zone
property. This section also applies to
qualified property under section
168(k)(2) or qualified New York Liberty
Zone property under section 1400L(b)
acquired by a taxpayer after September
10, 2001, and to 50-percent bonus
depreciation property under section
168(k)(4) acquired by a taxpayer after
May 5, 2003.
*
*
*
*
*
■ Par. 6. In § 1.168(d)–1T, paragraphs
(b)(3)(ii) and (d)(2) are amended as
follows:

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Federal Register / Vol. 71, No. 169 / Thursday, August 31, 2006 / Rules and Regulations

1. The last sentence in paragraph
(b)(3)(ii) is amended by removing the
language ‘‘§ 1.168(k)–1T(f)(1)’’ and
adding ‘‘§ 1.168(k)–1(f)(1)’’ in its place.
■ 2. The last sentence in paragraph
(b)(3)(ii) is amended by removing the
language ‘‘§ 1.1400L(b)–1T(f)(1)’’ and
adding ‘‘§ 1.1400L(b)–1(f)(1)’’ in its
place.
■ 3. Paragraph (d)(2) is revised.
The revision reads as follows:
■

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

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*

*

*

*

*

*

*

*

(B) Syndication transaction and certain
other transactions.
(C) Sale-leaseback transaction followed by
a syndication transaction and certain other
transactions.

*

*
*
*
*
(d) * * *
(4) * * * However, see § 1.168(k)–
1(f)(5)(v) for replacement MACRS
property that is qualified property or 50percent bonus depreciation property
and § 1.1400L(b)–1(f)(5) for replacement
MACRS property that is qualified New
York Liberty Zone property.
*
*
*
*
*
■ Par. 8. Section 1.168(k)–0T is
redesignated as § 1.168(k)–0 and newly
designated § 1.168(k)–0 is amended as
follows:
■ 1. The word ‘‘temporary’’ is removed
from the section heading.
■ 2. The introductory text and the table
of contents heading are revised.
■ 3. The entries for § 1.168(k)–
1(b)(3)(ii)(A) and (B) are added.
■ 4. The entries for § 1.168(k)–
1(b)(3)(iii), (iii)(B), and (iii)(C) are
revised.
■ 5. The entry for § 1.168(k)–
1(b)(4)(iii)(B) is revised.
■ 6. The entries for § 1.168(k)–
1(b)(4)(iii)(B)(1) and (2) are added.
■ 7. The entries for § 1.168(k)–1(b)(5)(ii),
(ii)(B), and (ii)(C) are revised.
■ 8. The entry for § 1.168(k)–1(b)(5)(v) is
added.
■ 9. The entries for § 1.168(k)–1(e)(6),
(7), (7)(i), and (7)(ii) are added.
■ 10. The entries for § 1.168(k)–
1(f)(5)(iii)(C) and (D) are added.
■ 11. The entry for § 1.168(k)–1(f)(5)(v)
is redesignated as § 1.168(k)–1(f)(5)(vi).
■ 12. The entries for § 1.168(k)–
1(f)(5)(v), (v)(A), and (v)(B) are added.

Jkt 208001

§ 1.168(k)–1 Additional first year
depreciation deduction.

*

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

15:29 Aug 30, 2006

Table of contents.

This section lists the headings that
appear in § 1.168(k)–1.

(b) * * *
(3) * * *
(ii) * * *
(A) Personal use to business or incomeproducing use.
(B) Inventory to business or incomeproducing use.
(iii) Sale-leaseback, syndication, and
certain other transactions.

*
*
*
*
(d) * * *
(2) Qualified property, 50-percent
bonus depreciation property, or
qualified New York Liberty Zone
property. For further guidance, see
§ 1.168(d)–1(d)(2).
*
*
*
*
*
■ Par. 7. Section 1.168(i)–6T is
amended by adding a new sentence at
the end of paragraph (d)(4) to read as
follows:

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§ 1.168(k)–0

*

*

*

■ 13. The entries for § 1.168(k)–1(f)(10)
and (11) are added.
■ 14. The entries for § 1.168(k)–1(g)(5)
and (6) are added.
The additions and revisions read as
follows:

*

*

*

*

(4) * * *
(iii) * * *
(B) When does manufacture, construction,
or production begin.
(1) In general.
(2) Safe harbor.

*

*

*

*

*

(5) * * *
(ii) Sale-leaseback, syndication, and certain
other transactions. * * *
(B) Syndication transaction and certain
other transactions.
(C) Sale-leaseback transaction followed by
a syndication transaction and certain other
transactions.

*

*

*

*

*

*

*

(v) Example.

*

*

*

(e) * * *
(6) Alternative minimum tax.
(7) Revocation.
(i) In general.
(ii) Automatic 6-month extension.

*

*

*

*

*

(f) * * *
(5) * * *
(iii) * * *
(C) Property having a longer production
period.
(D) Alternative minimum tax.

*

*

*

*

*

(v) Acquired MACRS property or acquired
computer software that is acquired and
placed in service before disposition of
involuntarily converted MACRS property or
involuntarily converted computer software.
(A) Time of replacement.
(B) Depreciation of acquired MACRS
property or acquired computer software.

*

*

*

*

*

(10) Coordination with section 47.
(11) Coordination with section 514(a)(3).
(g) * * *

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(5) Revisions to paragraphs (b)(3)(ii)(B) and
(b)(5)(ii)(B).
(6) Rehabilitation credit.
■ Par. 9. Section 1.168(k)–1T is
redesignated as § 1.168(k)–1 and newly
designated § 1.168(k)–1 is amended as
follows:
■ 1. The word ‘‘temporary’’ is removed
from the section heading.
■ 2. Paragraph (a)(2)(iii) is revised.
■ 3. Paragraph (a)(2)(iv) is amended by
removing the language ‘‘§ 1.168(k)–
1T(a)(2)(iii)’’ and adding ‘‘§ 1.168(k)–
1(a)(2)(iii)’’ in its place.
■ 4. Paragraph (b)(1) is revised.
■ 5. Paragraph (b)(2)(i)(A) is amended
by removing the language ‘‘§ 1.168(k)–
1T(a)(2)(ii)’’ and adding ‘‘§ 1.168(k)–
1(a)(2)(ii)’’ in its place.
■ 6. Paragraphs (b)(2)(ii)(A)(2), (b)(3)(i),
and (b)(3)(ii) are revised.
■ 7. The heading of paragraph (b)(3)(iii)
is revised.
■ 8. Paragraphs (b)(3)(iii)(B) and (C) are
revised.
■ 9. The first and second sentences of
paragraph (b)(3)(iv) are revised.
■ 10. Paragraph (b)(3)(v) is amended by
revising the fourth sentence in Example
4 and by adding new Example 5.
■ 11. Paragraph (b)(4)(i)(B) is revised.
■ 12. The last sentences of paragraphs
(b)(4)(ii)(A), (B), and (D) are revised.
■ 13. Paragraph (b)(4)(iii)(A) is amended
by adding a new sentence at the end.
■ 14. Paragraphs (b)(4)(iii)(B) and
(b)(4)(iv)(A) are revised.
■ 15. Paragraph (b)(4)(v) is amended by
revising the third sentence in Example
10, by adding a sentence at the end of
Example 11, and by adding Examples
12, 13, and 14.
■ 16. Paragraph (b)(5)(i) is revised.
■ 17. The heading of paragraph (b)(5)(ii)
is revised.
■ 18. Paragraphs (b)(5)(ii)(B) and (C) are
revised.
■ 19. Paragraph (b)(5)(v) is added.
■ 20. Paragraph (d)(1)(i) is revised.
■ 21. Paragraph (d)(1)(ii) is amended by
removing the language ‘‘§ 1.168(k)–
1T(a)(2)(iii)’’ and adding ‘‘§ 1.168(k)–
1(a)(2)(iii)’’ in its place.
■ 22. Paragraphs (d)(1)(iii) and
(e)(1)(ii)(B) are revised.
■ 23. Paragraphs (e)(6) and (e)(7) are
added.
■ 24. Paragraph (f)(1)(i) is amended by
adding a new sentence at the end.
■ 25. The introductory text of paragraph
(f)(2) is revised.
■ 26. Paragraph (f)(2)(ii) and the
introductory text of paragraph (f)(2)(iii)
are revised.
■ 27. Paragraph (f)(2)(iv) is amended by
revising Example 2.
■ 28. Paragraph (f)(5)(i) is revised.
■ 29. Paragraphs (f)(5)(ii)(F) and
(f)(5)(ii)(J)(2) are revised.

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Federal Register / Vol. 71, No. 169 / Thursday, August 31, 2006 / Rules and Regulations
30. Paragraphs (f)(5)(ii)(K) and (L) are
added.
■ 31. Paragraph (f)(5)(iii)(A) is revised.
■ 32. The last sentence of paragraph
(f)(5)(iii)(B) is revised.
■ 33. Paragraphs (f)(5)(iii)(C) and (D) are
added.
■ 34. Paragraph (f)(5)(v) is redesignated
as paragraph (f)(5)(vi) and newly
designated paragraph (f)(5)(vi) is
amended by revising paragraph (i) in
Examples 1, 3, 4, and 5, and by adding
new Example 6.
■ 35. New paragraph (f)(5)(v) is added.
■ 36. Paragraphs (f)(10) and (11) are
added.
■ 37. Paragraph (g)(1) is revised.
■ 38. The last sentence in paragraph
(g)(3)(ii) is removed.
■ 39. Paragraphs (g)(5) and (6) are
added.
The additions and revisions read as
follows:
■

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§ 1.168(k)–1 Additional first year
depreciation deduction.

(a) * * *
(2) * * *
(iii) Unadjusted depreciable basis is
the basis of property for purposes of
section 1011 without regard to any
adjustments described in section
1016(a)(2) and (3). This basis reflects the
reduction in basis for the percentage of
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), for any portion of the basis
the taxpayer properly elects to treat as
an expense under section 179 or section
179C, and for any adjustments to basis
provided by other provisions of the
Internal Revenue Code and the
regulations thereunder (other than
section 1016(a)(2) and (3)) (for example,
a reduction in basis by the amount of
the disabled access credit pursuant to
section 44(d)(7)). For property subject to
a lease, see section 167(c)(2).
*
*
*
*
*
(b) Qualified property or 50-percent
bonus depreciation property—(1) In
general. Qualified property or 50percent bonus depreciation property is
depreciable property that meets all the
following requirements in the first
taxable year in which the property is
subject to depreciation by the taxpayer
whether or not depreciation deductions
for the property are allowable:
(i) The requirements in § 1.168(k)–
1(b)(2) (description of property);
(ii) The requirements in § 1.168(k)–
1(b)(3) (original use);
(iii) The requirements in § 1.168(k)–
1(b)(4) (acquisition of property); and
(iv) The requirements in § 1.168(k)–
1(b)(5) (placed-in-service date).
(2) * * *

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(ii) * * *
(A) * * *
(2) Required to be depreciated under
the alternative depreciation system of
section 168(g) pursuant to section
168(g)(1)(A) through (D) or other
provisions of the Internal Revenue Code
(for example, property described in
section 263A(e)(2)(A) if the taxpayer (or
any related person as defined in section
263A(e)(2)(B)) has made an election
under section 263A(d)(3), or property
described in section 280F(b)(1)).
*
*
*
*
*
(3) * * *
(i) In general. For purposes of the 30percent additional first year
depreciation deduction, depreciable
property will meet the requirements of
this paragraph (b)(3) if the original use
of the property commences with the
taxpayer after September 10, 2001. For
purposes of the 50-percent additional
first year depreciation deduction,
depreciable property will meet the
requirements of this paragraph (b)(3) if
the original use of the property
commences with the taxpayer after May
5, 2003. Except as provided in
paragraphs (b)(3)(iii) and (iv) of this
section, original use means the first use
to which the property is put, whether or
not that use corresponds to the use of
the property by the taxpayer. Thus,
additional capital expenditures incurred
by a taxpayer to recondition or rebuild
property acquired or owned by the
taxpayer satisfies the original use
requirement. However, the cost of
reconditioned or rebuilt property does
not satisfy the original use requirement.
The question of whether property is
reconditioned or rebuilt property is a
question of fact. For purposes of this
paragraph (b)(3)(i), property that
contains used parts will not be treated
as reconditioned or rebuilt if the cost of
the used parts is not more than 20
percent of the total cost of the property,
whether acquired or self-constructed.
(ii) Conversion to business or incomeproducing use—(A) Personal use to
business or income-producing use. If a
taxpayer initially acquires new property
for personal use and subsequently uses
the property in the taxpayer’s trade or
business or for the taxpayer’s
production of income, the taxpayer is
considered the original user of the
property. If a person initially acquires
new property for personal use and a
taxpayer subsequently acquires the
property from the person for use in the
taxpayer’s trade or business or for the
taxpayer’s production of income, the
taxpayer is not considered the original
user of the property.
(B) Inventory to business or incomeproducing use. If a taxpayer initially

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51739

acquires new property and holds the
property primarily for sale to customers
in the ordinary course of the taxpayer’s
business and subsequently withdraws
the property from inventory and uses
the property primarily in the taxpayer’s
trade or business or primarily for the
taxpayer’s production of income, the
taxpayer is considered the original user
of the property. If a person initially
acquires new property and holds the
property primarily for sale to customers
in the ordinary course of the person’s
business and a taxpayer subsequently
acquires the property from the person
for use primarily in the taxpayer’s trade
or business or primarily for the
taxpayer’s production of income, the
taxpayer is considered the original user
of the property. For purposes of this
paragraph (b)(3)(ii)(B), the original use
of the property by the taxpayer
commences on the date on which the
taxpayer uses the property primarily in
the taxpayer’s trade or business or
primarily for the taxpayer’s production
of income.
(iii) Sale-leaseback, syndication, and
certain other transactions. * * *
(B) Syndication transaction and
certain other transactions. If new
property is originally placed in service
by a lessor (including by operation of
paragraph (b)(5)(ii)(A) of this section)
after September 10, 2001 (for qualified
property), or after May 5, 2003 (for 50percent bonus depreciation property),
and is sold by the lessor or any
subsequent purchaser within three
months after the date the property was
originally placed in service by the lessor
(or, in the case of multiple units of
property subject to the same lease,
within three months after the date the
final unit is placed in service, so long
as the period between the time the first
unit is placed in service and the time
the last unit is placed in service does
not exceed 12 months), and the user of
the property after the last sale during
the three-month period remains the
same as when the property was
originally placed in service by the
lessor, the purchaser of the property in
the last sale during the three-month
period is considered the original user of
the property.
(C) Sale-leaseback transaction
followed by a syndication transaction
and certain other transactions. If a saleleaseback transaction that satisfies the
requirements in paragraph (b)(3)(iii)(A)
of this section is followed by a
transaction that satisfies the
requirements in paragraph (b)(3)(iii)(B)
of this section, the original user of the
property is determined in accordance
with paragraph (b)(3)(iii)(B) of this
section.

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Federal Register / Vol. 71, No. 169 / Thursday, August 31, 2006 / Rules and Regulations

(iv) Fractional interests in property. If,
in the ordinary course of its business, a
taxpayer sells fractional interests in
property to third parties unrelated to the
taxpayer, each first fractional owner of
the property is considered as the
original user of its proportionate share
of the property. Furthermore, if the
taxpayer uses the property before all of
the fractional interests of the property
are sold but the property continues to be
held primarily for sale by the taxpayer,
the original use of any fractional interest
sold to a third party unrelated to the
taxpayer subsequent to the taxpayer’s
use of the property begins with the first
purchaser of that fractional interest.
* * *
(v) * * *

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Example 4. * * * On June 1, 2003, G sells
to I, an unrelated party to G, the remaining
unsold 3⁄8 fractional interests in the aircraft.
* * *
Example 5. On September 1, 2001, JJ, an
equipment dealer, buys new tractors that are
held by JJ primarily for sale to customers in
the ordinary course of its business. On
October 15, 2001, JJ withdraws the tractors
from inventory and begins to use the tractors
primarily for producing rental income. The
holding of the tractors by JJ as inventory does
not constitute a ‘‘use’’ for purposes of the
original use requirement and, therefore, the
original use of the tractors commences with
JJ on October 15, 2001, for purposes of
paragraph (b)(3) of this section. However, the
tractors are not eligible for the additional first
year depreciation deduction because JJ
acquired the tractors before September 11,
2001.

(4) * * *
(i) * * *
(B) 50-percent bonus depreciation
property. For purposes of the 50-percent
additional first year depreciation
deduction, depreciable property will
meet the requirements of this paragraph
(b)(4) if the property is—
(1) Acquired by the taxpayer after
May 5, 2003, and before January 1, 2005,
but only if no written binding contract
for the acquisition of the property was
in effect before May 6, 2003; or
(2) Acquired by the taxpayer pursuant
to a written binding contract that was
entered into after May 5, 2003, and
before January 1, 2005.
(ii) * * *
(A) * * * If the contract provided for
a full refund of the purchase price in
lieu of any damages allowable by law in
the event of breach or cancellation, the
contract is not considered binding.
(B) * * * A contract that imposes
significant obligations on the taxpayer
or a predecessor will be treated as
binding notwithstanding the fact that
certain terms remain to be negotiated by
the parties to the contract.
*
*
*
*
*

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(D) * * * For example, if the
provisions of a supply or similar
agreement state the design
specifications of the property to be
purchased, a purchase order under the
agreement for a specific number of
assets is treated as a binding contract.
*
*
*
*
*
(iii) * * *
(A) * * * If a taxpayer enters into a
written binding contract (as defined in
paragraph (b)(4)(ii) of this section) after
September 10, 2001, and before January
1, 2005, with another person to
manufacture, construct, or produce
property described in section
168(k)(2)(B) (longer production period
property) or section 168(k)(2)(C) (certain
aircraft) and the manufacture,
construction, or production of this
property begins after December 31,
2004, the acquisition rule in paragraph
(b)(4)(i)(A)(2) or (b)(4)(i)(B)(2) of this
section is met.
(B) When does manufacture,
construction, or production begin—(1)
In general. For purposes of paragraph
(b)(4)(iii) of this section, manufacture,
construction, or production of property
begins when physical work of a
significant nature begins. Physical work
does not include preliminary activities
such as planning or designing, securing
financing, exploring, or researching. The
determination of when physical work of
a significant nature begins depends on
the facts and circumstances. For
example, if a retail motor fuels outlet or
other facility is to be constructed onsite, construction begins when physical
work of a significant nature commences
at the site; that is, when work begins on
the excavation for footings, pouring the
pads for the outlet, or the driving of
foundation pilings into the ground.
Preliminary work, such as clearing a
site, test drilling to determine soil
condition, or excavation to change the
contour of the land (as distinguished
from excavation for footings) does not
constitute the beginning of construction.
However, if a retail motor fuels outlet or
other facility is to be assembled on-site
from modular units manufactured offsite and delivered to the site where the
outlet will be used, manufacturing
begins when physical work of a
significant nature commences at the offsite location.
(2) Safe harbor. For purposes of
paragraph (b)(4)(iii)(B)(1) of this section,
a taxpayer may choose to determine
when physical work of a significant
nature begins in accordance with this
paragraph (b)(4)(iii)(B)(2). Physical work
of a significant nature will not be
considered to begin before the taxpayer
incurs (in the case of an accrual basis

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taxpayer) or pays (in the case of a cash
basis taxpayer) more than 10 percent of
the total cost of the property (excluding
the cost of any land and preliminary
activities such as planning or designing,
securing financing, exploring, or
researching). When property is
manufactured, constructed, or produced
for the taxpayer by another person, this
safe harbor test must be satisfied by the
taxpayer. For example, if a retail motor
fuels outlet or other facility is to be
constructed for an accrual basis
taxpayer by another person for the total
cost of $200,000 (excluding the cost of
any land and preliminary activities such
as planning or designing, securing
financing, exploring, or researching),
construction is deemed to begin for
purposes of this paragraph
(b)(4)(iii)(B)(2) when the taxpayer has
incurred more than 10 percent (more
than $20,000) of the total cost of the
property. A taxpayer chooses to apply
this paragraph (b)(4)(iii)(B)(2) by filing
an income tax return for the placed-inservice year of the property that
determines when physical work of a
significant nature begins consistent with
this paragraph (b)(4)(iii)(B)(2).
*
*
*
*
*
(iv) Disqualified transactions—(A) In
general. Property does not satisfy the
requirements of this paragraph (b)(4) if
the user of the property as of the date
on which the property was originally
placed in service (including by
operation of paragraphs (b)(5)(ii), (iii),
and (iv) of this section), or a related
party to the user or to the taxpayer,
acquired, or had a written binding
contract (as defined in paragraph
(b)(4)(ii) of this section) in effect for the
acquisition of the property at any time
before September 11, 2001 (for qualified
property), or before May 6, 2003 (for 50percent bonus depreciation property). In
addition, property manufactured,
constructed, or produced for the use by
the user of the property or by a related
party to the user or to the taxpayer does
not satisfy the requirements of this
paragraph (b)(4) if the manufacture,
construction, or production of the
property for the user or the related party
began at any time before September 11,
2001 (for qualified property), or before
May 6, 2003 (for 50-percent bonus
depreciation property).
*
*
*
*
*
(v) * * *
Example 10. * * * Between May 6, 2003,
and June 30, 2003, S, a calendar-year
taxpayer, began construction, and incurred
another $1,200,000 to complete the
construction, of the power plant and, on
August 1, 2003, S placed the power plant in
service. * * *

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Federal Register / Vol. 71, No. 169 / Thursday, August 31, 2006 / Rules and Regulations
Example 11. * * * In addition, the saleleaseback rules in paragraphs (b)(3)(iii)(A)
and (b)(5)(ii)(A) of this section do not apply
because the equipment was originally placed
in service by T before September 11, 2001.
Example 12. On July 1, 2001, KK began
constructing property for its own use. KK
placed this property in service on September
15, 2001. On October 15, 2001, KK sells the
property to LL, an unrelated party, and leases
the property back from LL in a sale-leaseback
transaction. Pursuant to paragraph (b)(4)(iv)
of this section, the property does not qualify
for the additional first year depreciation
deduction because the property was
constructed for KK, the user of the property,
and that construction began prior to
September 11, 2001.
Example 13. On June 1, 2004, MM decided
to construct property described in section
168(k)(2)(B) for its own use. However, one of
the component parts of the property had to
be manufactured by another person for MM.
On August 15, 2004, MM entered into a
written binding contract with NN to acquire
this component part of the property for
$100,000. The manufacture of the component
part commenced on September 1, 2004, and
MM received the completed component part
on February 1, 2005. The cost of this
component part is 9 percent of the total cost
of the property to be constructed by MM. MM
began constructing the property described in
section 168(k)(2)(B) on January 15, 2005, and
placed this property (including all
component parts) in service on November 1,
2005. Pursuant to paragraph (b)(4)(iii)(C)(2)
of this section, the self-constructed
component part of $100,000 manufactured by
NN for MM is eligible for the additional first
year depreciation deduction (assuming all
other requirements are met) because the
manufacturing of the component part began
after September 10, 2001, and before January
1, 2005, and the property described in
section 168(k)(2)(B), the larger selfconstructed property, was placed in service
by MM before January 1, 2006. However,
pursuant to paragraph (b)(4)(iii)(A) of this
section, the cost of the property described in
section 168(k)(2)(B) (excluding the cost of the
self-constructed component part of $100,000
manufactured by NN for MM) is not eligible
for the additional first year depreciation
deduction because construction of the
property began after December 31, 2004.
Example 14. On December 1, 2004, OO
entered into a written binding contract (as
defined in paragraph (b)(4)(ii) of this section)
with PP to manufacture an aircraft described
in section 168(k)(2)(C) for use in OO’s trade
or business. PP begins to manufacture the
aircraft on February 1, 2005. OO places the
aircraft in service on August 1, 2005.
Pursuant to paragraph (b)(4)(iii)(A) of this
section, the aircraft meets the requirements of
paragraph (b)(4)(i)(B)(2) of this section
because the aircraft was acquired by OO
pursuant to a written binding contract
entered into after May 5, 2003, and before
January 1, 2005.

(5) Placed-in-service date—(i) In
general. Depreciable property will meet
the requirements of this paragraph (b)(5)
if the property is placed in service by

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the taxpayer for use in its trade or
business or for production of income
before January 1, 2005, or, in the case
of property described in section
168(k)(2)(B) or (C), is placed in service
by the taxpayer for use in its trade or
business or for production of income
before January 1, 2006 (or placed in
service by the taxpayer for use in its
trade or business or for production of
income before January 1, 2007, in the
case of property described in section
168(k)(2)(B) or (C) to which section 105
of the Gulf Opportunity Zone Act of
2005 (Pub. L. 109–135, 119 Stat. 2577)
applies (for further guidance, see
Announcement 2006–29 (2006–19 I.R.B.
879) and § 601.601(d)(2)(ii)(b) of this
chapter)).
(ii) Sale-leaseback, syndication, and
certain other transactions. * * *
(B) Syndication transaction and
certain other transactions. If qualified
property is originally placed in service
after September 10, 2001, or 50-percent
bonus depreciation property is
originally placed in service after May 5,
2003, by a lessor (including by
operation of paragraph (b)(5)(ii)(A) of
this section) and is sold by the lessor or
any subsequent purchaser within three
months after the date the property was
originally placed in service by the lessor
(or, in the case of multiple units of
property subject to the same lease,
within three months after the date the
final unit is placed in service, so long
as the period between the time the first
unit is placed in service and the time
the last unit is placed in service does
not exceed 12 months), and the user of
the property after the last sale during
this three-month period remains the
same as when the property was
originally placed in service by the
lessor, the property is treated as
originally placed in service by the
purchaser of the property in the last sale
during the three-month period but not
earlier than the date of the last sale.
(C) Sale-leaseback transaction
followed by a syndication transaction
and certain other transactions. If a saleleaseback transaction that satisfies the
requirements in paragraph (b)(5)(ii)(A)
of this section is followed by a
transaction that satisfies the
requirements in paragraph (b)(5)(ii)(B)
of this section, the placed-in-service
date of the property is determined in
accordance with paragraph (b)(5)(ii)(B)
of this section.
*
*
*
*
*
(v) Example. The application of this
paragraph (b)(5) is illustrated by the
following example:
Example. On September 15, 2004, QQ
acquired and placed in service new

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51741

equipment. This equipment is not described
in section 168(k)(2)(B) or (C). On December
1, 2004, QQ sells the equipment to RR and
leases the equipment back from RR in a saleleaseback transaction. On February 15, 2005,
RR sells the equipment to TT subject to the
lease with QQ. As of February 15, 2005, QQ
is still the user of the equipment. The saleleaseback transaction of December 1, 2004,
between QQ and RR satisfies the
requirements of paragraph (b)(5)(ii)(A) of this
section. The sale transaction of February 15,
2005, between RR and TT satisfies the
requirements of paragraph (b)(5)(ii)(B) of this
section. Consequently, pursuant to paragraph
(b)(5)(ii)(C) of this section, the equipment is
treated as originally placed in service by TT
on February 15, 2005. Further, pursuant to
paragraph (b)(3)(iii)(C) of this section, TT is
considered the original user of the
equipment. Accordingly, the equipment is
not eligible for the additional first year
depreciation deduction.

*

*
*
*
*
(d) * * *
(1) * * * (i) In general. Except as
provided in paragraph (f) of this section,
the additional first year depreciation
deduction is allowable in the first
taxable year in which the qualified
property or 50-percent bonus
depreciation property is placed in
service by the taxpayer for use in its
trade or business or for the production
of income. Except as provided in
paragraph (f)(5) of this section, the
allowable additional first year
depreciation deduction for qualified
property is determined by multiplying
the unadjusted depreciable basis (as
defined in § 1.168(k)–1(a)(2)(iii)) of the
qualified property by 30 percent. Except
as provided in paragraph (f)(5) of this
section, the allowable additional first
year depreciation deduction for 50percent bonus depreciation property is
determined by multiplying the
unadjusted depreciable basis (as defined
in § 1.168(k)–1(a)(2)(iii)) of the 50percent bonus depreciation property by
50 percent. Except as provided in
paragraph (f)(1) of this section, the 30percent or 50-percent additional first
year depreciation deduction is not
affected by a taxable year of less than 12
months. See paragraph (f)(1) of this
section for qualified property or 50percent bonus depreciation property
placed in service and disposed of in the
same taxable year. See paragraph (f)(5)
of this section for qualified property or
50-percent bonus depreciation property
acquired in a like-kind exchange or as
a result of an involuntary conversion.
*
*
*
*
*
(iii) Alternative minimum tax. The 30percent or 50-percent additional first
year depreciation deduction is allowed
for alternative minimum tax purposes
for the taxable year in which the
qualified property or the 50-percent

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bonus depreciation property is placed in
service by the taxpayer. In general, the
30-percent or 50-percent additional first
year depreciation deduction for
alternative minimum tax purposes is
based on the unadjusted depreciable
basis of the property for alternative
minimum tax purposes. However, see
paragraph (f)(5)(iii)(D) of this section for
qualified property or 50-percent bonus
depreciation property acquired in a likekind exchange or as a result of an
involuntary conversion.
*
*
*
*
*
(e) * * *
(1) * * *
(ii) * * *
(B) Not to deduct both the 30-percent
and the 50-percent additional first year
depreciation. If this election is made, no
additional first year depreciation
deduction is allowable for the class of
property.
*
*
*
*
*
(6) Alternative minimum tax. If a
taxpayer makes an election specified in
paragraph (e)(1) of this section for a
class of property, the depreciation
adjustments under section 56 and the
regulations under section 56 apply to
the property to which that election
applies for purposes of computing the
taxpayer’s alternative minimum taxable
income.
(7) Revocation of election—(i) In
general. Except as provided in
paragraph (e)(7)(ii) of this section, an
election specified in paragraph (e)(1) of
this section, once made, may be revoked
only with the written consent of the
Commissioner of Internal Revenue. To
seek the Commissioner’s consent, the
taxpayer must submit a request for a
letter ruling.
(ii) Automatic 6-month extension. If a
taxpayer made an election specified in
paragraph (e)(1) of this section for a
class of property, an automatic
extension of 6 months from the due date
of the taxpayer’s Federal tax return
(excluding extensions) for the placed-inservice year of the class of property is
granted to revoke that election, provided
the taxpayer timely filed the taxpayer’s
Federal tax return for the placed-inservice year of the class of property and,
within this 6-month extension period,
the taxpayer (and all taxpayers whose
tax liability would be affected by the
election) files an amended Federal tax
return for the placed-in-service year of
the class of property in a manner that
is consistent with the revocation of the
election.
(f) * * *
(1) * * *
(i) * * * Also if qualified property or
50-percent bonus depreciation property

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is placed in service and disposed of
during the same taxable year and then
reacquired and again placed in service
in a subsequent taxable year, the
additional first year depreciation
deduction is not allowable for the
property in the subsequent taxable year.
*
*
*
*
*
(2) Redetermination of basis. If the
unadjusted depreciable basis (as defined
in § 1.168(k)–1(a)(2)(iii)) of qualified
property or 50-percent bonus
depreciation property is redetermined
(for example, due to contingent
purchase price or discharge of
indebtedness) before January 1, 2005, or,
in the case of property described in
section 168(k)(2)(B) or (C), is
redetermined before January 1, 2006 (or
redetermined before January 1, 2007, in
the case of property described in section
168(k)(2)(B) or (C) to which section 105
of the Gulf Opportunity Zone Act of
2005 (Pub. L, 109–135, 119 Stat. 2577)
applies (for further guidance, see
Announcement 2006–29 (2006–19 I.R.B.
879) and § 601.601(d)(2)(ii)(b) of this
chapter)), the additional first year
depreciation deduction allowable for
the qualified property or the 50-percent
bonus depreciation property is
redetermined as follows:
*
*
*
*
*
(ii) Decrease in basis. For the taxable
year in which a decrease in basis of
qualified property or 50-percent bonus
depreciation property occurs, the
taxpayer shall reduce the total amount
otherwise allowable as a depreciation
deduction for all of the taxpayer’s
depreciable property by the excess
additional first year depreciation
deduction previously claimed for the
qualified property or the 50-percent
bonus depreciation property. If, for such
taxable year, the excess additional first
year depreciation deduction exceeds the
total amount otherwise allowable as a
depreciation deduction for all of the
taxpayer’s depreciable property, the
taxpayer shall take into account a
negative depreciation deduction in
computing taxable income. The excess
additional first year depreciation
deduction for qualified property is
determined by multiplying the amount
of the decrease in basis for this property
by 30 percent. The excess additional
first year depreciation deduction for 50percent bonus depreciation property is
determined by multiplying the amount
of the decrease in basis for this property
by 50 percent. For purposes of this
paragraph (f)(2)(ii), the 30-percent
additional first year depreciation
deduction applies to the decrease in
basis if the underlying property is
qualified property and the 50-percent

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additional first year depreciation
deduction applies to the decrease in
basis if the underlying property is 50percent bonus depreciation property.
Also, if the taxpayer establishes by
adequate records or other sufficient
evidence that the taxpayer claimed less
than the additional first year
depreciation deduction allowable for
the qualified property or the 50-percent
bonus depreciation property before the
decrease in basis or if the taxpayer
claimed more than the additional first
year depreciation deduction allowable
for the qualified property or the 50percent bonus depreciation property
before the decrease in basis, the excess
additional first year depreciation
deduction is determined by multiplying
the amount of the decrease in basis by
the additional first year depreciation
deduction percentage actually claimed
by the taxpayer for the qualified
property or the 50-percent bonus
depreciation property, as applicable,
before the decrease in basis. To
determine the amount to reduce the
total amount otherwise allowable as a
depreciation deduction for all of the
taxpayer’s depreciable property for the
excess depreciation previously claimed
(other than the additional first year
depreciation deduction) resulting from
the decrease in basis of the qualified
property or the 50-percent bonus
depreciation property, the amount of the
decrease in basis of the qualified
property or the 50-percent bonus
depreciation property must be adjusted
by the excess additional first year
depreciation deduction that reduced the
total amount otherwise allowable as a
depreciation deduction (as determined
under this paragraph) and the remaining
decrease in basis of—
(A) Qualified property or 50-percent
bonus depreciation property (except for
computer software described in
paragraph (b)(2)(i)(B) of this section)
reduces the amount otherwise allowable
as a depreciation deduction over the
recovery period of the qualified
property or the 50-percent bonus
depreciation property, as applicable,
remaining as of the beginning of the
taxable year in which the decrease in
basis occurs, and using the same
depreciation method and convention of
the qualified property or 50-percent
bonus depreciation property, as
applicable, that applies in the taxable
year in which the decrease in basis
occurs. If, for any taxable year, the
reduction to the amount otherwise
allowable as a depreciation deduction
(as determined under this paragraph
(f)(2)(ii)(A)) exceeds the total amount
otherwise allowable as a depreciation

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deduction for all of the taxpayer’s
depreciable property, the taxpayer shall
take into account a negative
depreciation deduction in computing
taxable income; and
(B) Computer software (as defined in
paragraph (b)(2)(i)(B) of this section)
that is qualified property or 50-percent
bonus depreciation property reduces the
amount otherwise allowable as a
depreciation deduction over the
remainder of the 36-month period (the
useful life under section 167(f)(1)) as of
the beginning of the first day of the
month in which the decrease in basis
occurs. If, for any taxable year, the
reduction to the amount otherwise
allowable as a depreciation deduction
(as determined under this paragraph
(f)(2)(ii)(B)) exceeds the total amount
otherwise allowable as a depreciation
deduction for all of the taxpayer’s
depreciable property, the taxpayer shall
take into account a negative
depreciation deduction in computing
taxable income.
(iii) Definition. Except as otherwise
expressly provided by the Internal
Revenue Code (for example, section
1017(a)), the regulations under the
Internal Revenue Code, or other
guidance published in the Internal
Revenue Bulletin (see
§ 601.601(d)(2)(ii)(b) of this chapter), for
purposes of this paragraph (f)(2):
*
*
*
*
*
(iv) * * *
Example 2. (i) On May 15, 2002, DD, a
calendar-year taxpayer, purchased and
placed in service qualified property that is 5year property at a cost of $400,000. To
purchase the property, DD borrowed
$250,000 from Bank2. On May 15, 2003,
Bank2 forgives $50,000 of the indebtedness.
DD makes the election provided in section
108(b)(5) to apply any portion of the
reduction under section 1017 to the basis of
the depreciable property of the taxpayer. DD
depreciates the 5-year property placed in
service in 2002 using the optional
depreciation table that corresponds with the
general depreciation system, the 200-percent
declining balance method, a 5-year recovery
period, and the half-year convention.
(ii) For 2002, DD is allowed a 30-percent
additional first year depreciation deduction
of $120,000 (the unadjusted depreciable basis
of $400,000 multiplied by .30). In addition,
DD’s depreciation deduction allowable for
2002 for the remaining adjusted depreciable
basis of $280,000 (the unadjusted depreciable
basis of $400,000 reduced by the additional
first year depreciation deduction of $120,000)
is $56,000 (the remaining adjusted
depreciable basis of $280,000 multiplied by
the annual depreciation rate of .20 for
recovery year 1).
(iii) For 2003, DD’s deduction for the
remaining adjusted depreciable basis of
$280,000 is $89,600 (the remaining adjusted
depreciable basis of $280,000 multiplied by

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the annual depreciation rate .32 for recovery
year 2). Although Bank2 forgave the
indebtedness in 2003, the basis of the
property is reduced on January 1, 2004,
pursuant to sections 108(b)(5) and 1017(a)
under which basis is reduced at the
beginning of the taxable year following the
taxable year in which the discharge of
indebtedness occurs.
(iv) For 2004, DD’s deduction for the
remaining adjusted depreciable basis of
$280,000 is $53,760 (the remaining adjusted
depreciable basis of $280,000 multiplied by
the annual depreciation rate .192 for recovery
year 3). However, pursuant to paragraph
(f)(2)(ii) of this section, DD must reduce the
amount otherwise allowable as a
depreciation deduction for 2004 by the
excess depreciation previously claimed for
the $50,000 decrease in basis of the qualified
property. Consequently, DD must reduce the
amount of depreciation otherwise allowable
for 2004 by the excess additional first year
depreciation of $15,000 (the decrease in basis
of $50,000 multiplied by .30). Also, DD must
reduce the amount of depreciation otherwise
allowable for 2004 by the excess depreciation
attributable to the remaining decrease in
basis of $35,000 (the decrease in basis of
$50,000 reduced by the excess additional
first year depreciation of $15,000). The
reduction in the amount of depreciation
otherwise allowable for 2004 for the
remaining decrease in basis of $35,000 is
$19,999 (the remaining decrease in basis of
$35,000 multiplied by .5714, which is equal
to 1/remaining recovery period of 3.5 years
at January 1, 2004, multiplied by 2).
Accordingly, assuming the qualified property
is the only depreciable property owned by
DD, for 2004, DD’s total depreciation
deduction allowable for the qualified
property is $18,761 ($53,760 minus $15,000
minus $19,999).

*

*
*
*
*
(5) * * * (i) Scope. The rules of this
paragraph (f)(5) apply to acquired
MACRS property or acquired computer
software that is qualified property or 50percent bonus depreciation property at
the time of replacement provided the
time of replacement is after September
10, 2001, and before January 1, 2005, or,
in the case of acquired MACRS property
or acquired computer software that is
qualified property, or 50-percent bonus
depreciation property, described in
section 168(k)(2)(B) or (C), the time of
replacement is after September 10, 2001,
and before January 1, 2006 (or the time
of replacement is after September 10,
2001, and before January 1, 2007, in the
case of property described in section
168(k)(2)(B) or (C) to which section 105
of the Gulf Opportunity Zone Act of
2005 (Pub. L. 109–135, 119 Stat. 2577)
applies (for further guidance, see
Announcement 2006–29 (2006–19 I.R.B.
879) and § 601.601(d)(2)(ii)(b) of this
chapter)).
(ii) * * *

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51743

(F) Except as provided in paragraph
(f)(5)(v) of this section, the time of
replacement is the later of—
(1) When the acquired MACRS
property or acquired computer software
is placed in service; or
(2) The time of disposition of the
exchanged or involuntarily converted
property.
*
*
*
*
*
(J) * * *
(2) Any portion of the basis the
taxpayer properly elects to treat as an
expense under section 179 or section
179C;
*
*
*
*
*
(K) Year of disposition is the taxable
year that includes the time of
disposition.
(L) Year of replacement is the taxable
year that includes the time of
replacement.
(iii) * * * (A) In general. Assuming
all other requirements of section 168(k)
and this section are met, the remaining
carryover basis for the year of
replacement and the remaining excess
basis, if any, for the year of replacement
for the acquired MACRS property or the
acquired computer software, as
applicable, are eligible for the additional
first year depreciation deduction. The
30-percent additional first year
depreciation deduction applies to the
remaining carryover basis and the
remaining excess basis, if any, of the
acquired MACRS property or the
acquired computer software if the time
of replacement is after September 10,
2001, and before May 6, 2003, or if the
taxpayer made the election provided in
paragraph (e)(1)(ii)(A) of this section.
The 50-percent additional first year
depreciation deduction applies to the
remaining carryover basis and the
remaining excess basis, if any, of the
acquired MACRS property or the
acquired computer software if the time
of replacement is after May 5, 2003, and
before January 1, 2005, or, in the case
of acquired MACRS property or
acquired computer software that is 50percent bonus depreciation property
described in section 168(k)(2)(B) or (C),
the time of replacement is after May 5,
2003, and before January 1, 2006 (or the
time of replacement is after May 5,
2003, and before January 1, 2007, in the
case of 50-percent bonus depreciation
property described in section
168(k)(2)(B) or (C) to which section 105
of the Gulf Opportunity Zone Act of
2005 (Pub. L. 109–135, 119 Stat. 2577)
applies (for further guidance, see
Announcement 2006–29 (2006–19 I.R.B.
879) and § 601.601(d)(2)(ii)(b) of this
chapter)). The additional first year
depreciation deduction is computed

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Federal Register / Vol. 71, No. 169 / Thursday, August 31, 2006 / Rules and Regulations

separately for the remaining carryover
basis and the remaining excess basis.
(B) * * * However, the additional
first year depreciation deduction is not
allowable for the exchanged or
involuntarily converted MACRS
property or the exchanged or
involuntarily converted computer
software if the exchanged or
involuntarily converted MACRS
property or the exchanged or
involuntarily converted computer
software, as applicable, is placed in
service and disposed of in an exchange
or involuntary conversion in the same
taxable year.
(C) Property having a longer
production period. For purposes of
paragraph (f)(5)(iii)(A) of this section,
the total of the remaining carryover
basis and the remaining excess basis, if
any, of the acquired MACRS property
that is qualified property or 50-percent
bonus depreciation property described
in section 168(k)(2)(B) is limited to the
total of the property’s remaining
carryover basis and remaining excess
basis, if any, attributable to the
property’s manufacture, construction, or
production after September 10, 2001 (for
qualified property), or May 5, 2003 (for
50-percent bonus depreciation
property), and before January 1, 2005.
(D) Alternative minimum tax. The 30percent or 50-percent additional first
year depreciation deduction is allowed
for alternative minimum tax purposes
for the year of replacement of acquired
MACRS property or acquired computer
software that is qualified property or 50percent bonus depreciation property.
The 30-percent or 50-percent additional
first year depreciation deduction for
alternative minimum tax purposes is
based on the remaining carryover basis
and the remaining excess basis, if any,
of the acquired MACRS property or the
acquired computer software for
alternative minimum tax purposes.
*
*
*
*
*
(v) Acquired MACRS property or
acquired computer software that is
acquired and placed in service before
disposition of involuntarily converted
MACRS property or involuntarily
converted computer software. If, in an
involuntary conversion, a taxpayer
acquires and places in service the
acquired MACRS property or the
acquired computer software before the
time of disposition of the involuntarily
converted MACRS property or the
involuntarily converted computer
software and the time of disposition of
the involuntarily converted MACRS
property or the involuntarily converted
computer software is after December 31,
2004, or, in the case of property

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described in section 168(k)(2)(B) or (C),
after December 31, 2005 (or after
December 31, 2006, in the case of
property described in section
168(k)(2)(B) or (C) to which section 105
of the Gulf Opportunity Zone Act of
2005 (Pub. L. 109–135, 119 Stat. 2577)
applies (for further guidance, see
Announcement 2006–29 (2006–19 I.R.B.
879) and § 601.601(d)(2)(ii)(b) of this
chapter)), then—
(A) Time of replacement. The time of
replacement for purposes of this
paragraph (f)(5) is when the acquired
MACRS property or acquired computer
software is placed in service by the
taxpayer, provided the threat or
imminence of requisition or
condemnation of the involuntarily
converted MACRS property or
involuntarily converted computer
software existed before January 1, 2005,
or, in the case of property described in
section 168(k)(2)(B) or (C), existed
before January 1, 2006 (or existed before
January 1, 2007, in the case of property
described in section 168(k)(2)(B) or (C)
to which section 105 of the Gulf
Opportunity Zone Act of 2005 (Pub. L.
109–135, 119 Stat. 2577) applies (for
further guidance, see Announcement
2006–29 (2006–19 I.R.B. 879) and
§ 601.601(d)(2)(ii)(b) of this chapter));
and
(B) Depreciation of acquired MACRS
property or acquired computer software.
The taxpayer depreciates the acquired
MACRS property or acquired computer
software in accordance with paragraph
(d) of this section. However, at the time
of disposition of the involuntarily
converted MACRS property, the
taxpayer determines the exchanged
basis (as defined in § 1.168(i)–6T(b)(7))
and the excess basis (as defined in
§ 1.168(i)–6T(b)(8)) of the acquired
MACRS property and begins to
depreciate the depreciable exchanged
basis (as defined in § 1.168(i)–6T(b)(9))
of the acquired MACRS property in
accordance with § 1.168(i)–6T(c). The
depreciable excess basis (as defined in
§ 1.168(i)–6T(b)(10)) of the acquired
MACRS property continues to be
depreciated by the taxpayer in
accordance with the first sentence of
this paragraph. Further, in the year of
disposition of the involuntarily
converted MACRS property, the
taxpayer must include in taxable
income the excess of the depreciation
deductions allowable, including the
additional first year depreciation
deduction allowable, on the unadjusted
depreciable basis of the acquired
MACRS property over the additional
first year depreciation deduction that
would have been allowable to the
taxpayer on the remaining carryover

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basis of the acquired MACRS property
at the time of replacement (as defined in
paragraph (f)(5)(v)(A) of this section)
plus the depreciation deductions that
would have been allowable, including
the additional first year depreciation
deduction allowable, to the taxpayer on
the depreciable excess basis of the
acquired MACRS property from the date
the acquired MACRS property was
placed in service by the taxpayer (taking
into account the applicable convention)
to the time of disposition of the
involuntarily converted MACRS
property. Similar rules apply to
acquired computer software.
(vi) 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 new 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 5year 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.

*

*

*

*

*

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 new
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.

*

*

*

*

*

Example 4. (i) In September 2002, GG, a
June 30 year-end corporation, acquired for

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Federal Register / Vol. 71, No. 169 / Thursday, August 31, 2006 / Rules and Regulations
$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 new
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.

*

*

*

*

*

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 new 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.

*

*

*

*

*

Example 6. (i) In April 2004, SS, a calendar
year-end corporation, acquired and placed in
service Equipment K89. Equipment K89 is
50-percent bonus depreciation property
under section 168(k)(4). In November 2004,
SS acquired and placed in service used
Equipment N78 by exchanging Equipment
K89 in a like-kind exchange.
(ii) Pursuant to paragraph (f)(5)(iii)(B) of
this section, no additional first year
deduction is allowable for Equipment K89
and, pursuant to § 1.168(d)–1T(b)(3)(ii), no
regular depreciation deduction is allowable
for Equipment K89, for the taxable year
ended December 31, 2004.
(iii) Equipment N78 is not qualified
property under section 168(k)(1) or 50percent bonus depreciation property under
section 168(k)(4) because the original use
requirement of paragraph (b)(3) of this
section is not met. Accordingly, no
additional first year depreciation deduction
is allowable for Equipment N78.

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*

*
*
*
*
(10) Coordination with section 47—(i)
In general. If qualified rehabilitation
expenditures (as defined in section
47(c)(2) and § 1.48–12(c)) incurred by a
taxpayer with respect to a qualified
rehabilitated building (as defined in
section 47(c)(1) and § 1.48–12(b)) are

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qualified property or 50-percent bonus
depreciation property, the taxpayer may
claim the rehabilitation credit provided
by section 47(a) (provided the
requirements of section 47 are met)—
(A) With respect to the portion of the
basis of the qualified rehabilitated
building that is attributable to the
qualified rehabilitation expenditures if
the taxpayer makes the applicable
election under paragraph (e)(1)(i) or
(e)(1)(ii)(B) of this section not to deduct
any additional first year depreciation for
the class of property that includes the
qualified rehabilitation expenditures; or
(B) With respect to the portion of the
remaining rehabilitated basis of the
qualified rehabilitated building that is
attributable to the qualified
rehabilitation expenditures if the
taxpayer claims the additional first year
depreciation deduction on the
unadjusted depreciable basis (as defined
in paragraph (a)(2)(iii) of this section but
before the reduction in basis for the
amount of the rehabilitation credit) of
the qualified rehabilitation expenditures
and the taxpayer depreciates the
remaining adjusted depreciable basis (as
defined in paragraph (d)(2)(i) of this
section) of such expenditures using
straight line cost recovery in accordance
with section 47(c)(2)(B)(i) and § 1.48–
12(c)(7)(i). For purposes of this
paragraph (f)(10)(i)(B), the remaining
rehabilitated basis is equal to the
unadjusted depreciable basis (as defined
in paragraph (a)(2)(iii) of this section but
before the reduction in basis for the
amount of the rehabilitation credit) of
the qualified rehabilitation expenditures
that are qualified property or 50-percent
bonus depreciation property reduced by
the additional first year depreciation
allowed or allowable, whichever is
greater.
(ii) Example. The application of this
paragraph (f)(10) is illustrated by the
following example.
Example. (i) Between February 8, 2004,
and June 4, 2004, UU, a calendar-year
taxpayer, incurred qualified rehabilitation
expenditures of $200,000 with respect to a
qualified rehabilitated building that is
nonresidential real property under section
168(e). These qualified rehabilitation
expenditures are 50-percent bonus
depreciation property and qualify for the 10percent rehabilitation credit under section
47(a)(1). UU’s basis in the qualified
rehabilitated building is zero before incurring
the qualified rehabilitation expenditures and
UU placed the qualified rehabilitated
building in service in July 2004. UU
depreciates its nonresidential real property
placed in service in 2004 under the general
depreciation system of section 168(a) by
using the straight line method of
depreciation, a 39-year recovery period, and
the mid-month convention. UU elected to use

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51745

the optional depreciation tables to compute
the depreciation allowance for its depreciable
property placed in service in 2004. Further,
for 2004, UU did not make any election
under paragraph (e) of this section.
(ii) Because UU did not make any election
under paragraph (e) of this section, UU is
allowed a 50-percent additional first year
depreciation deduction of $100,000 for the
qualified rehabilitation expenditures for 2004
(the unadjusted depreciable basis of $200,000
(before reduction in basis for the
rehabilitation credit) multiplied by .50). For
2004, UU also is allowed to claim a
rehabilitation credit of $10,000 for the
remaining rehabilitated basis of $100,000 (the
unadjusted depreciable basis (before
reduction in basis for the rehabilitation
credit) of $200,000 less the additional first
year depreciation deduction of $100,000).
Further, UU’s depreciation deduction for
2004 for the remaining adjusted depreciable
basis of $90,000 (the unadjusted depreciable
basis (before reduction in basis for the
rehabilitation credit) of $200,000 less the
additional first year depreciation deduction
of $100,000 less the rehabilitation credit of
$10,000) is $1,059.30 (the remaining adjusted
depreciable basis of $90,000 multiplied by
the depreciation rate of .01177 for recovery
year 1, placed in service in month 7).

(11) Coordination with section
514(a)(3). The additional first year
depreciation deduction is not allowable
for purposes of section 514(a)(3).
(g) * * *
(1) In general. Except as provided in
paragraphs (g)(2), (3), and (5) of this
section, this section applies to qualified
property under section 168(k)(2)
acquired by a taxpayer after September
10, 2001, and to 50-percent bonus
depreciation property under section
168(k)(4) acquired by a taxpayer after
May 5, 2003.
*
*
*
*
*
(5) Revision to paragraphs
(b)(3)(iii)(B) and (b)(5)(ii)(B) of this
section. The addition of ‘‘(or, in the case
of multiple units of property subject to
the same lease, within three months
after the date the final unit is placed in
service, so long as the period between
the time the first unit is placed in
service and the time the last unit is
placed in service does not exceed 12
months)’’ to paragraphs (b)(3)(iii)(B) and
(b)(5)(ii)(B) of this section applies to
property sold after June 4, 2004.
(6) Rehabilitation credit. If a taxpayer
did not claim on a Federal tax return for
any taxable year ending on or before
September 1, 2006, the rehabilitation
credit provided by section 47(a) with
respect to the portion of the basis of a
qualified rehabilitated building that is
attributable to qualified rehabilitation
expenditures and the qualified
rehabilitation expenditures are qualified
property or 50-percent bonus
depreciation property, and the taxpayer

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Federal Register / Vol. 71, No. 169 / Thursday, August 31, 2006 / Rules and Regulations

did not make the applicable election
specified in paragraph (e)(1)(i) or
(e)(1)(ii)(B) of this section for the class
of property that includes the qualified
rehabilitation expenditures, the
taxpayer may claim the rehabilitation
credit for the remaining rehabilitated
basis (as defined in paragraph
(f)(10)(i)(B) of this section) of the
qualified rehabilitated building that is
attributable to the qualified
rehabilitation expenditures (assuming
all the requirements of section 47 are
met) in accordance with paragraph
(f)(10)(i)(B) of this section by filing an
amended Federal tax return for the
taxable year for which the rehabilitation
credit is to be claimed. The amended
Federal tax return must include the
adjustment to the tax liability for the
rehabilitation credit and any collateral
adjustments to taxable income or to the
tax liability (for example, the amount of
depreciation allowed or allowable in
that taxable year for the qualified
rehabilitated building). Such
adjustments must also be made on
amended Federal tax returns for any
affected succeeding taxable years.
■ Par. 10. Section 1.169–3 is amended
by revising paragraphs (a), (b)(2), and (g)
to read as follows:

erjones on PROD1PC72 with RULES

§ 1.169–3

Amortizable basis.

(a) In general. The amortizable basis
of a certified pollution control facility
for the purpose of computing the
amortization deduction under section
169 is the adjusted basis of the facility
for purposes of determining gain (see
part II (section 1011 and following),
subchapter O, chapter 1 of the Internal
Revenue Code), in conjunction with
paragraphs (b), (c), and (d) of this
section. The adjusted basis for purposes
of determining gain (computed without
regard to paragraphs (b), (c), and (d) of
this section) of a facility that performs
a function in addition to pollution
control, or that is used in connection
with more than one plant or other
property, or both, is determined under
§ 1.169–2(a)(3). For rules as to additions
and improvements to such a facility, see
paragraph (f) of this section. Before
computing the amortization deduction
allowable under section 169, the
adjusted basis for purposes of
determining gain for a facility that is
placed in service by a taxpayer after
September 10, 2001, and that is
qualified property under section
168(k)(2) or § 1.168(k)–1, 50-percent
bonus depreciation property under
section 168(k)(4) or § 1.168(k)–1, or
qualified New York Liberty Zone
property under section 1400L(b) or
§ 1.1400L(b)–1 must be reduced by the
amount of the additional first year

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depreciation deduction allowed or
allowable, whichever is greater, under
section 168(k) or section 1400L(b), as
applicable, for the facility.
(b) * * *
(2) If the taxpayer elects to begin the
60-month amortization period with the
first month of the taxable year
succeeding the taxable year in which
the facility is completed or acquired and
a depreciation deduction is allowable
under section 167 (including an
additional first-year depreciation
allowance under former section 179; for
a facility that is acquired by the
taxpayer after September 10, 2001, and
that is qualified property under section
168(k)(2) or § 1.168(k)–1 or qualified
New York Liberty Zone property under
section 1400L(b) or § 1.1400L(b)–1, the
additional first year depreciation
deduction under section 168(k)(1) or
1400L(b), as applicable; and for a
facility that is acquired by the taxpayer
after May 5, 2003, and that is 50-percent
bonus depreciation property under
section 168(k)(4) or § 1.168(k)–1, the
additional first year depreciation
deduction under section 168(k)(4)) with
respect to the facility for the taxable
year in which it is completed or
acquired, the amount determined under
paragraph (b)(1) of this section shall be
reduced by an amount equal to the
amount of the depreciation deduction
allowed or allowable, whichever is
greater, multiplied by a fraction the
numerator of which is the amount
determined under paragraph (b)(1) of
this section, and the denominator of
which is the facility’s total cost. The
additional first-year allowance for
depreciation under former section 179
will be allowable only for the taxable
year in which the facility is completed
or acquired and only if the taxpayer
elects to begin the amortization
deduction under section 169 with the
taxable year succeeding the taxable year
in which such facility is completed or
acquired. For a facility that is acquired
by a taxpayer after September 10, 2001,
and that is qualified property under
section 168(k)(2) or § 1.168(k)–1 or
qualified New York Liberty Zone
property under section 1400L(b) or
§ 1.1400L(b)–1, see § 1.168(k)–1(f)(4) or
§ 1.1400L(b)–1(f)(4), as applicable, with
respect to when the additional first year
depreciation deduction under section
168(k)(1) or 1400L(b) is allowable. For a
facility that is acquired by a taxpayer
after May 5, 2003, and that is 50-percent
bonus depreciation property under
section 168(k)(4) or § 1.168(k)–1, see
§ 1.168(k)–1(f)(4) with respect to when
the additional first year depreciation

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deduction under section 168(k)(4) is
allowable.
*
*
*
*
*
(g) Effective date for qualified
property, 50-percent bonus depreciation
property, and qualified New York
Liberty Zone property. This section
applies to a certified pollution control
facility. This section also applies to a
certified pollution control facility that is
qualified property under section
168(k)(2) or qualified New York Liberty
Zone property under section 1400L(b)
acquired by a taxpayer after September
10, 2001, and to a certified pollution
control facility that is 50-percent bonus
depreciation property under section
168(k)(4) acquired by a taxpayer after
May 5, 2003.
§ 1.169–3T

[Removed]

Par. 11. Section 1.169–3T is removed.
■ Par. 12. Section 1.312–15 is amended
by adding a new sentence at the end of
paragraph (a)(1) to read as follows:
■

§ 1.312–15 Effect of depreciation on
earnings and profits.

(a) * * * (1) * * * See § 1.168(k)–
1(f)(7) with respect to the treatment of
the additional first year depreciation
deduction allowable under section
168(k) for qualified property or 50percent bonus depreciation property,
and § 1.1400L(b)–1(f)(7) with respect to
the treatment of the additional first year
depreciation deduction allowable under
section 1400L(b) for qualified New York
Liberty Zone property, for purposes of
computing the earnings and profits of a
corporation.
*
*
*
*
*
■ Par. 13. Section 1.1400L(b)–1T is
redesignated as § 1.1400L(b)–1 and
newly designated § 1.1400l(b)–1 is
amended as follows:
■ 1. The word ‘‘(temporary)’’ is removed
from the section heading.
■ 2. Paragraph (b) is amended by
removing the language ‘‘§ 1.168(k)–
1T(a)(2)’’ and adding ‘‘§ 1.168(k)–
1(a)(2)’’ in its place.
■ 3. Paragraph (b)(4) is revised.
■ 4. Paragraph (c)(1) is revised.
■ 5. Paragraph (c)(2)(i)(A) is amended
by removing the language ‘‘§ 1.168(k)–
1T(b)(2)(i)’’ and adding ‘‘§ 1.168(k)–
1(b)(2)(i)’’ in its place.
■ 6. Paragraph (c)(2)(ii) is revised.
■ 7. Paragraph (c)(4) is amended by
removing the language ‘‘§ 1.168(k)–
1T(b)(3)’’ and adding ‘‘§ 1.168(k)–
1(b)(3)’’ in its place.
■ 8. Paragraph (c)(5)(i) is amended by
removing the language ‘‘§ 1.168(k)–
1T(b)(4)(ii)’’ and adding ‘‘§ 1.168(k)–
1(b)(4)(ii) in its place, removing the
language ‘‘§ 1.168(k)–1T(b)(4)(iii)’’ and

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Federal Register / Vol. 71, No. 169 / Thursday, August 31, 2006 / Rules and Regulations
adding ‘‘§ 1.168(k)–1(b)(4)(iii) in its
place, and removing the language
‘‘§ 1.168(k)–1T(b)(4)(iv)’’ and adding
‘‘§ 1.168(k)–1(b)(4)(iv)’’ in its place.
■ 9. Paragraph (c)(5)(ii) is amended by
removing the language ‘‘§ 1.168(k)–
1T(f)(1)(ii)’’ and adding ‘‘§ 1.168(k)–
1(f)(1)(ii)’’ in its place, and removing the
language ‘‘§ 1.168(k)–1T(f)(1)(iii)’’ and
adding ‘‘§ 1.168(k)–1(f)(1)(iii)’’ in its
place.
■ 10. Paragraph (c)(6) is amended by
removing the language ‘‘§ 1.168(k)–
1T(b)(5)(ii)’’ and adding ‘‘§ 1.168(k)–
1(b)(5)(ii)’’ in its place, removing the
language ‘‘§ 1.168(k)–1T(b)(5)(iii)’’ and
adding ‘‘§ 1.168(k)–1(b)(5)(iii)’’ in its
place, and removing the language
‘‘§ 1.168(k)–1T(b)(5)(iv)’’ and adding
‘‘§ 1.168(k)–1(b)(5)(iv)’’ in its place.
■ 11. Paragraph (d) is amended by
removing the language ‘‘§ 1.168(k)–
1T(d)(1)(i)’’ and adding ‘‘§ 1.168(k)–
1(d)(1)(i)’’ in its place.
■ 12. Paragraphs (e)(6) and (e)(7) are
added.
■ 13. Paragraph (f)(1) is amended by
removing the language ‘‘§ 1.168(k)–
1T(f)(1)’’ and adding ‘‘§ 1.168(k)–1(f)(1)’’
in its place.
■ 14. Paragraph (f)(2) is amended by
removing the language ‘‘§ 1.168(k)–
1T(a)(2)(iii)’’ and adding ‘‘§ 1.168(k)–
1(a)(2)(iii)’’ in its place, and removing
the language ‘‘§ 1.168(k)–1T(f)(2)’’ and
adding ‘‘§ 1.168(k)–1(f)(2)’’ in its place.
■ 15. Paragraph (f)(3) is amended by
removing the language ‘‘§ 1.168(k)–
1T(f)(3)’’ and adding ‘‘§ 1.168(k)–1(f)(3)’’
in its place.
■ 16. Paragraph (f)(4) is amended by
removing the language ‘‘§ 1.168(k)–
1T(f)(4)’’ and adding ‘‘§ 1.168(k)–1(f)(4)’’
in its place.
■ 17. Paragraph (f)(5) is amended by
removing the language ‘‘§ 1.168(k)–
1T(f)(5)(ii)(A)’’ and adding ‘‘§ 1.168(k)–
1(f)(5)(ii)(A)’’ in its place, removing the
language ‘‘§ 1.168(k)–1T(f)(5)(ii)(C)’’ and
adding ‘‘§ 1.168(k)–1(f)(5)(ii)(C)’’ in its
place, and removing the language
‘‘§ 1.168(k)–1T(f)(5)’’ and adding
‘‘§ 1.168(k)–1(f)(5)’’ in its place.
■ 18. Paragraph (f)(6) is amended by
removing the language ‘‘§ 1.168(k)–
1T(f)(6)’’ and adding ‘‘§ 1.168(k)–1(f)(6)’’
in its place.
■ 19. Paragraph (f)(7) is amended by
removing the language ‘‘§ 1.168(k)–
1T(f)(7)’’ and adding ‘‘§ 1.168(k)–1(f)(7)’’
in its place.
■ 20. Paragraph (f)(8) is amended by
removing the language ‘‘§ 1.168(k)–
1T(f)(9)’’ and adding ‘‘§ 1.168(k)–1(f)(9)’’
in its place.
■ 21. Paragraphs (f)(9) and (10) are
added.
■ 22. Paragraph (g)(1) is revised.

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23. Paragraphs (g)(4)(iii), (g)(5), and
(g)(6) are added.
The additions and revisions read as
follows:

■

§ 1.1400L(b)–1 Additional first year
depreciation deduction for qualified New
York Liberty Zone property.

*

*
*
*
*
(b) * * *
(4) Real property is a building or its
structural components, or other tangible
real property.
(c) Qualified New York Liberty Zone
property—(1) In general. Qualified New
York Liberty Zone property is
depreciable property that meets all the
following requirements in the first
taxable year in which the property is
subject to depreciation by the taxpayer
whether or not depreciation deductions
for the property are allowable—
(i) The requirements in § 1.1400L(b)–
1(c)(2) (description of property);
(ii) The requirements in § 1.1400L(b)–
1(c)(3) (substantial use);
(iii) The requirements in
§ 1.1400L(b)–1(c)(4) (original use);
(iv) The requirements in § 1.1400L(b)–
1(c)(5) (acquisition of property by
purchase); and
(v) The requirements in § 1.1400L(b)–
1(c)(6) (placed-in-service date).
(2) * * *
(ii) Property not eligible for additional
first year depreciation deduction.
Depreciable property will not meet the
requirements of this paragraph (c)(2)
if—
(A) Section 168(k) or § 1.168(k)–1
applies to the property;
(B) The property is described in
section 168(f);
(C) The property is required to be
depreciated under the alternative
depreciation system of section 168(g)
pursuant to section 168(g)(1)(A) through
(D) or other provisions of the Internal
Revenue Code (for example, property
described in section 263A(e)(2)(A) if the
taxpayer (or any related person) has
made an election under section
263A(d)(3), or property described in
section 280F(b)(1));
(D) The property is included in any
class of property for which the taxpayer
elects not to deduct the additional first
year depreciation under paragraph (e) of
this section; or
(E) The property is qualified New
York Liberty Zone leasehold
improvement property as described in
section 1400L(c)(2).
*
*
*
*
*
(e) * * *
(6) Alternative minimum tax. If a
taxpayer makes an election under this
paragraph (e) for a class of property, the
depreciation adjustments under section

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51747

56 and the regulations under section 56
apply to the property to which the
election applies for purposes of
computing the taxpayer’s alternative
minimum taxable income.
(7) Revocation of election—(i) In
general. Except as provided in
paragraph (e)(7)(ii) of this section, an
election under this paragraph (e), once
made, may be revoked only with the
written consent of the Commissioner of
Internal Revenue. To seek the
Commissioner’s consent, the taxpayer
must submit a request for a letter ruling.
(ii) Automatic 6-month extension. If a
taxpayer made an election under this
paragraph (e) for a class of property, an
automatic extension of 6 months from
the due date of the taxpayer’s Federal
tax return (excluding extensions) for the
placed-in-service year of the class of
property is granted to revoke that
election, provided the taxpayer timely
filed the taxpayer’s Federal tax return
for the placed-in-service year of the
class of property and, within this 6month extension period, the taxpayer
(and all taxpayers whose tax liability
would be affected by the election) files
an amended Federal tax return for the
placed-in-service year of the class of
property in a manner that is consistent
with the revocation of the election.
*
*
*
*
*
(f) * * *
(9) Coordination with section 47.
Rules similar to those provided in
§ 1.168(k)–1(f)(10) apply for purposes of
this paragraph (f)(9).
(10) Coordination with section
514(a)(3). Rules similar to those
provided in § 1.168(k)–1(f)(11) apply for
purposes of this paragraph (f)(10).
(g) * * *
(1) In general. Except as provided in
paragraphs (g)(2), (3), and (5) of this
section, this section applies to qualified
New York Liberty Zone property
acquired by a taxpayer after September
10, 2001.
*
*
*
*
*
(4) * * *
(iii) Revisions made in paragraphs
(b)(4) and (c)(2)(ii) of this section. If a
taxpayer did not claim on a Federal tax
return for a taxable year ending on or
after September 11, 2001, and on or
before September 1, 2006, any
additional first year depreciation
deduction for qualified New York
Liberty Zone property because of the
application of § 1.1400L(b)–1T(b)(4) or
because the taxpayer made an election
under § 1.168(k)–1T(e)(1) for a class of
property that included such qualified
New York Liberty Zone property, the
taxpayer may claim the additional first
year depreciation deduction for such

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Federal Register / Vol. 71, No. 169 / Thursday, August 31, 2006 / Rules and Regulations

qualified New York Liberty Zone
property under this section in
accordance with the applicable
administrative procedures issued under
§ 1.446–1(e)(3)(ii) for obtaining the
Commissioner’s consent to a change in
method of accounting. Section 481(a)
applies to a request to claim the
additional first year depreciation
deduction for such qualified New York
Liberty Zone property under this
paragraph (g)(4)(iii).
(5) Revision to paragraphs (b)(4) and
(b)(6). The addition of ‘‘(or, in the case
of multiple units of property subject to
the same lease, within three months
after the date the final unit is placed in
service, so long as the period between
the time the first unit is placed in
service and the time the last unit is
placed in service does not exceed 12
months)’’ to § 1.168(k)–1(b)(3)(iii)(B)
and § 1.168(k)–1(b)(5)(ii)(B) applies to
property sold after June 4, 2004, for
purposes of paragraphs (b)(4) and (b)(6)
of this section.
(6) Rehabilitation credit. If a taxpayer
did not claim on a Federal tax return for
a taxable year ending on or before
September 1, 2006, the rehabilitation
credit provided by section 47(a) with
respect to the portion of the basis of a
qualified rehabilitated building that is
attributable to qualified rehabilitation
expenditures and the qualified
rehabilitation expenditures are qualified
New York Liberty Zone property, and
the taxpayer did not make the election
specified in paragraph (e)(1) of this
section for the class of property that
includes the qualified rehabilitation
expenditures, the taxpayer may claim
the rehabilitation credit for the
remaining rehabilitated basis (as defined
in § 1.168(k)–1(f)(10)(i)(B)) of the
qualified rehabilitated building that is
attributable to the qualified
rehabilitation expenditures (assuming
all the requirements of section 47 are
met) in accordance with paragraph (f)(9)
of this section by filing an amended
Federal tax return for the taxable year
for which the rehabilitation credit is to
be claimed. The amended Federal tax
return must include the adjustment to
the tax liability for the rehabilitation
credit and any collateral adjustments to
taxable income or to the tax liability (for
example, the amount of depreciation
allowed or allowable in that taxable year
for the qualified rehabilitated building).
Such adjustments must also be made on

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amended Federal tax returns for any
affected succeeding taxable years.
Steven T. Miller,
Acting Deputy Commissioner for Services and
Enforcement.
Approved: August 25, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the
Treasury (Tax Policy).
[FR Doc. 06–7333 Filed 8–28–06; 4:28 pm]
BILLING CODE 4830–01–P

DEPARTMENT OF JUSTICE
Bureau of Prisons
28 CFR Part 503
[BOP–1136–F]
RIN 1120–AB36

Bureau of Prisons Central Office,
Regional Offices, Institutions, and Staff
Training Centers: Removal of
Addresses From Rules
Bureau of Prisons, Justice.
Final rule.

AGENCY:
ACTION:

SUMMARY: In this document, the Bureau
of Prisons (Bureau) finalizes the removal
of rules listing the addresses of Bureau
facilities in each of its regions. We have
replaced these rules with a short
description of the Bureau’s structure,
the address of the Bureau’s Central
Office, and a reference to the Bureau’s
internet address containing current and
frequently updated contact information
on Bureau facilities and Regional
Offices. This change enables the Bureau
to more quickly and accurately provide
updated contact information to
members of the public, in light of
frequently changing circumstances.
DATES: This rule is effective October 2,
2006.
FOR FURTHER INFORMATION CONTACT:
Sarah Qureshi, Office of General
Counsel, Bureau of Prisons, phone (202)
307–2105.
SUPPLEMENTARY INFORMATION: In this
document, the Bureau of Prisons
(Bureau) finalizes the removal of rules
listing the addresses of Bureau facilities
in each of its regions. We have replaced
these rules with a short description of
the Bureau’s structure, the address of
the Bureau’s Central Office, and a
reference to the Bureau’s Web site
containing current and frequently
updated contact information on Bureau
facilities and Regional Offices.
This rule was published as an interim
final rule on November 4, 2005 (70 FR
67090). No comments were received

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during the comment period. We
therefore finalized the interim final rule
without change.
Administrative Procedure Act
The Administrative Procedure Act (5
U.S.C. 553(b)(3)(B)) allows exceptions to
notice-and-comment rulemaking ‘‘when
the agency for good cause finds * * *
that notice and public procedure
thereon are impracticable, unnecessary,
or contrary to the public interest.’’
Further, § 553(d) provides an exception
to the usual requirement of a delayed
effective date when an agency finds
‘‘good cause’’ that the rule be made
immediately effective.
This rulemaking is exempt from
normal notice-and-comment procedures
because advance notice and public
comment in this instance is
unnecessary. This is an administrative
rule insignificant in impact and
inconsequential to the public. The rule
merely eliminates a long list of noncurrent addresses and replaces them
with a reference to a publicly accessible
and more accurate source. This
rulemaking makes no change to any
rights or responsibilities of the agency
or any regulated entities. For the same
reasons, the Bureau finds that ‘‘good
cause’’ exists to make this rule effective
upon publication. Nevertheless, the
Bureau did invite public comment on
this interim rule, and no comments
were received.
Executive Order 12866
This rule falls within a category of
actions that the Office of Management
and Budget (OMB) has determined not
to constitute ‘‘significant regulatory
actions’’ under section 3(f) of Executive
Order 12866 and, accordingly, it was
not reviewed by OMB.
Executive Order 13132
This regulation will not have
substantial direct effects on the States,
on the relationship between the national
government and the States, or on
distribution of power and
responsibilities among the various
levels of government. Therefore, under
Executive Order 13132, we determine
that this rule does not have sufficient
federalism implications to warrant the
preparation of a Federalism Assessment.
Regulatory Flexibility Act
The Director of the Bureau of Prisons,
under the Regulatory Flexibility Act (5
U.S.C. 605(b)), reviewed this regulation
and by approving it certifies that it will
not have a significant economic impact
upon a substantial number of small
entities for the following reasons: This
rule pertains to the correctional

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