[Federal Register Volume 85, Number 218 (Tuesday, November 10, 2020)]
[Rules and Regulations]
[Pages 71734-71770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21112]
[[Page 71733]]
Vol. 85
Tuesday,
No. 218
November 10, 2020
Part III
Department of the Treasury
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Internal Revenue Service
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26 CFR Part 1
Additional First Year Depreciation Deduction; Final Rule
Federal Register / Vol. 85 , No. 218 / Tuesday, November 10, 2020 /
Rules and Regulations
[[Page 71734]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9916]
RIN 1545-BP32
Additional First Year Depreciation Deduction
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations that provide guidance
regarding the additional first year depreciation deduction under
section 168(k) of the Internal Revenue Code (Code). These final
regulations reflect and further clarify the increased deduction and the
expansion of qualified property, particularly to certain classes of
used property, authorized by the Tax Cuts and Jobs Act. These final
regulations generally affect taxpayers who depreciate qualified
property acquired and placed in service after September 27, 2017.
DATES: Effective date: These regulations are effective on January 11,
2021.
Applicability dates: For dates of applicability, see Sec. Sec.
1.168(b)-1(b)(2)(iv), 1.168(k)-2(h), and 1.1502-68(e). See
SUPPLEMENTARY INFORMATION for an in-depth discussion.
FOR FURTHER INFORMATION CONTACT: Concerning Sec. Sec. 1.168(b)-1 and
1.168(k)-2, Elizabeth R. Binder at (202) 317-4869 or Kathleen Reed at
(202) 317-4660 (not toll-free numbers); concerning Sec. 1.1502-68,
Samuel G. Trammell at (202) 317-6975 or Katherine H. Zhang at (202)
317-5363 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Applicability
A taxpayer may choose to apply Sec. Sec. 1.168(k)-2 and 1.1502-68
of these final regulations, in their entirety, to depreciable property
acquired and placed in service or certain plants planted or grafted, as
applicable, after September 27, 2017, by the taxpayer during a taxable
year ending on or after September 28, 2017, provided the taxpayer
consistently applies all rules in these final regulations. However,
once the taxpayer applies Sec. Sec. 1.168(k)-2 and 1.1502-68 of these
final regulations for a taxable year, the taxpayer must continue to
apply Sec. Sec. 1.168(k)-2 and 1.1502-68 of these final regulations
for subsequent taxable years. Alternatively, a taxpayer may rely on the
proposed regulations under section 168(k) in REG-106808-19 (84 FR
50152; 2019-41 I.R.B. 912), for depreciable property acquired and
placed in service or certain plants planted or grafted, as applicable,
after September 27, 2017, by the taxpayer during a taxable year ending
on or after September 28, 2017, and ending before the taxpayer's first
taxable year that begins on or after January 1, 2021, if the taxpayer
follows the proposed regulations in their entirety, except for Sec.
1.168(k)-2(b)(3)(iii)(B)(5), and in a consistent manner.
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under sections 168(k) and 1502.
Section 168(k) allows an additional first year depreciation
deduction for qualified property in the property's placed-in-service
year. On December 22, 2017, section 168(k) was amended by sections
12001(b)(13), 13201, and 13204 of Public Law 115-97 (131 Stat. 2054),
commonly referred to as the Tax Cuts and Jobs Act (TCJA).
Section 13201 of the TCJA made several significant amendments to
the additional first year depreciation deduction provisions in section
168(k) (additional first year depreciation deduction). First, the
additional first year depreciation deduction percentage was increased
from 50 to 100 percent. Second, the property eligible for the
additional first year depreciation deduction was expanded, for the
first time, to include certain used depreciable property and certain
film, television, or live theatrical productions. Third, the placed-in-
service date was extended from before January 1, 2020, to before
January 1, 2027 (and from before January 1, 2021, to before January 1,
2028, for longer production period property or certain aircraft
property described in section 168(k)(2)(B) or (C)). Fourth, the date on
which a specified plant may be planted or grafted by the taxpayer was
extended from before January 1, 2020, to before January 1, 2027. The
provisions of section 168(k), as amended by the TCJA, are explained in
greater detail in the preamble to the final regulations published by
the Department of the Treasury (Treasury Department) and the IRS as TD
9874 on September 24, 2019 (2019 Final Regulations) in the Federal
Register (84 FR 50108).
Section 13201(h) of the TCJA provides the effective dates of the
amendments to section 168(k) made by section 13201 of the TCJA. Except
as provided in section 13201(h)(2) of the TCJA, section 13201(h)(1) of
the TCJA provides that these amendments apply to property acquired and
placed in service after September 27, 2017. However, section 13201(h)
of the TCJA also provides that property is not treated as acquired
after the date on which a written binding contract is entered into for
such acquisition. Section 13201(h)(2) provides that the amendments
apply to specified plants planted or grafted after September 27, 2017.
Additionally, section 12001(b)(13) of the TCJA repealed section
168(k)(4), relating to the election to accelerate alternative minimum
tax credits in lieu of the additional first year depreciation
deduction, for taxable years beginning after December 31, 2017.
Further, section 13204(a)(4)(B)(ii) repealed section 168(k)(3), so that
qualified improvement property placed in service after December 31,
2017, was not eligible for the additional first year depreciation
deduction. However, section 2307 of the Coronavirus Aid, Relief, and
Economic Security Act, Public Law 116-136, 134 Stat. 281 (March 27,
2020) (CARES Act) amended section 168(e)(3)(E) to provide that
qualified improvement property is classified as 15-year property,
thereby providing a 15-year recovery period under section 168(c) and
making qualified improvement property again eligible for the additional
first year depreciation deduction, consistent with the original intent
of the TCJA. Section 2307 of the CARES Act is discussed in greater
detail in part II.B of the Summary of Comments and Explanation of
Revisions section in this preamble.
Unless otherwise indicated, all references to section 168(k)
hereinafter are references to section 168(k) as amended by the TCJA.
On August 8, 2018, the Treasury Department and the IRS published a
notice of proposed rulemaking (REG-104397-18) in the Federal Register
(83 FR 39292) containing proposed regulations under section 168(k)
(2018 Proposed Regulations). After full consideration of the comments
received on the 2018 Proposed Regulations and the testimony heard at
the public hearing on November 28, 2018, the Treasury Department and
the IRS published the 2019 Final Regulations adopting the 2018 Proposed
Regulations with modifications in response to such comments and
testimony.
Concurrently with the publication of the 2019 Final Regulations,
the Treasury Department and the IRS published an additional notice of
proposed rulemaking (REG-106808-19) in the Federal Register (84 FR
50152) withdrawing certain provisions of the 2018 Proposed Regulations
and proposing additional guidance under section 168(k) (2019 Proposed
[[Page 71735]]
Regulations). The Summary of Comments and Explanation of Revisions
section of this preamble summarizes the provisions of the 2019 Proposed
Regulations, which are explained in greater detail in the preamble to
the 2019 Proposed Regulations.
The Treasury Department and the IRS received written and electronic
comments responding to the 2019 Proposed Regulations and held a public
hearing on the 2019 Proposed Regulations on November 13, 2019. After
full consideration of the comments received on the 2019 Proposed
Regulations and the testimony heard at the public hearing, this
Treasury decision adopts the 2019 Proposed Regulations with
modifications in response to certain comments and testimony, as
described in the Summary of Comments and Explanation of Revisions
section.
Summary of Comments and Explanation of Revisions
The Treasury Department and the IRS received written comments from
five commenters in response to the 2019 Proposed Regulations. In
connection with these comments, some commenters also provided comments
on aspects of the 2019 Final Regulations. All comments were considered
and are available at https://www.regulations.gov or upon request. The
comments addressing the 2019 Proposed Regulations and 2019 Final
Regulations are summarized in this Summary of Comments and Explanation
of Revisions section.
Because of the amendments to section 168(k) by the TCJA, the 2019
Final Regulations updated existing regulations in Sec. 1.168(k)-1 by
providing a new section at Sec. 1.168(k)-2 for property acquired and
placed in service after September 27, 2017. The 2019 Final Regulations
also made conforming amendments to the existing regulations. The 2019
Final Regulations described and clarified the statutory requirements
that must be met for depreciable property to qualify for the additional
first year depreciation deduction provided by section 168(k), and they
provided guidance to taxpayers in determining the additional first year
depreciation deduction and the amount of depreciation otherwise
allowable for this property.
These final regulations provide taxpayers with guidance regarding
issues relating to the application of section 168(k) that are not
addressed in the 2019 Final Regulations, along with clarifying changes
to the 2019 Final Regulations. Specifically, these final regulations
provide (1) rules relevant to the definition of qualified property, (2)
rules for consolidated groups, (3) rules regarding components acquired
or self-constructed after September 27, 2017, for larger self-
constructed property for which manufacture, construction, or production
began before September 28, 2017, (4) rules regarding the application of
the mid-quarter convention, as determined under section 168(d), and (5)
changes to the definitions in the 2019 Final Regulations for the terms
qualified improvement property, predecessor, and class of property.
Also, the rules for consolidated groups have been moved from Sec.
1.168(k)-2(b)(3)(v) of the 2019 Proposed Regulations to new Sec.
1.1502-68 of these final regulations.
Part I of this Background section addresses operational rules. Part
II of this Background section addresses definitions.
I. Operational Rules
A. Property Described in Section 168(k)(9)(B)
Section 1.168(k)-2(b)(2)(ii)(G) of the 2019 Proposed Regulations
provides that, for purposes of section 168(k)(9)(B), floor plan
financing interest is not taken into account for the taxable year by a
trade or business that has had floor plan financing indebtedness if the
sum of the amounts calculated under section 163(j)(1)(A) and (B) for
the trade or business for the taxable year equals or exceeds the
business interest (which includes floor plan financing interest), as
defined in section 163(j)(5), of the trade or business for the taxable
year. If the business interest, which includes floor plan financing
interest, exceeds the sum of the amounts calculated under section
163(j)(1)(A) and (B) for the taxable year, the floor plan financing
interest is taken into account for the taxable year for purposes of
section 168(k)(9)(B). See Example 7 in Sec. 1.168(k)-2(b)(2)(iii)(G)
of the 2019 Proposed Regulations. Floor plan financing indebtedness is
defined in section 163(j)(9)(B) and Sec. 1.163(j)-1(b)(18) as
indebtedness that is (i) used to finance the acquisition of motor
vehicles held for sale or lease; and (ii) secured by the motor vehicles
so acquired. Floor plan financing interest expense is defined in
section 163(j)(9)(A) and Sec. 1.163(j)-1(b)(19) as interest paid or
accrued on floor plan financing indebtedness.
A commenter on the 2019 Proposed Regulations requested that these
final regulations allow a trade or business that has business interest
expense, including floor plan financing interest expense, that exceeds
the sum of the amounts calculated under section 163(j)(1)(A) and (B)
for the taxable year, to choose to limit its interest expense deduction
to the sum of the amounts under section 163(j)(1)(A) and (B), and not
be precluded by section 168(k)(9)(B) from claiming the additional first
year depreciation deduction. The Treasury Department and the IRS do not
interpret section 163(j)(1) as allowing such an option. Consistent with
the plain language of section 163(j)(1), Sec. 1.163(j)-2(b)(1)
provides that the amount allowed as a deduction for business interest
expense for the taxable year generally cannot exceed the sum of (1) the
taxpayer's business interest income for the taxable year, (2) 30
percent of the taxpayer's adjusted taxable income for the taxable year,
and (3) the taxpayer's floor plan financing interest expense for the
taxable year. Pursuant to section 2306(a) of the CARES Act, the
adjusted taxable income percentage is increased from 30 to 50 percent
for any taxable year beginning in 2019 or 2020, subject to certain
exceptions. Because neither section 163(j)(1) nor Sec. 1.163(j)-2(b)
provide an option for a trade or business with floor plan financing
indebtedness to include or exclude its floor plan financing interest
expense in determining the amount allowed as a deduction for business
interest expense for the taxable year, the Treasury Department and the
IRS decline to adopt this comment.
The commenter also requested that the Treasury Department and the
IRS provide transition relief for taxpayers that treated, on their 2018
Federal income tax returns, section 163(j)(1) as providing an option
for a trade or business with floor plan financing indebtedness to
include or exclude its floor plan financing interest expense in
determining the amount allowed as a deduction for business interest
expense for the taxable year. Further, the commenter requested
transition relief for taxpayers with a trade or business with floor
plan financing indebtedness that want to revoke their elections not to
claim the additional first year depreciation for property placed in
service during 2018 in order to rely on the 2019 Proposed Regulations.
The Treasury Department and the IRS intend to issue published guidance
that will address these requests.
B. Used Property
1. Depreciable Interest
a. Five-Year Safe Harbor
Section 1.168(k)-2(b)(3)(iii)(B)(1) of the 2019 Final Regulations
provides that property is treated as used by the taxpayer or a
predecessor at any time prior to acquisition by the taxpayer or
[[Page 71736]]
predecessor if the taxpayer or the predecessor had a depreciable
interest in the property at any time prior to such acquisition, whether
or not the taxpayer or the predecessor claimed depreciation deductions
for the property. To determine if the taxpayer or a predecessor had a
depreciable interest in the property at any time prior to acquisition,
the 2019 Final Regulations also provide that only the five calendar
years immediately prior to the taxpayer's current placed-in-service
year of the property are taken into account (Five-Year Safe Harbor). If
the taxpayer and a predecessor have not been in existence for this
entire five-year period, the 2019 Final Regulations provide that only
the number of calendar years the taxpayer and the predecessor have been
in existence are taken into account.
Commenters requested clarification that the Five-Year Safe Harbor
applies for purposes of the special rules for consolidated groups in
Sec. 1.168(k)-2(b)(3)(v) of the 2019 Proposed Regulations. A commenter
also requested clarification whether ``the partnership's current year''
in Sec. 1.168(k)-2(b)(3)(iii)(B)(5) of the 2019 Proposed Regulations
(Partnership Lookthrough Rule) is the taxable year or the calendar
year. These comments are addressed later in this Summary of Comments
and Explanation of Revisions section.
In connection with comments received on the Five-Year Safe Harbor
and the Partnership Lookthrough Rule, the Treasury Department and the
IRS reviewed the Five-Year Safe Harbor and determined that
clarification of this safe harbor would be beneficial. One commenter
requested clarification of the Five-Year Safe Harbor as to: (1) Whether
the ``placed-in-service year'' is the taxable year or the calendar
year; and (2) whether the portion of the calendar year covering the
period up to the placed-in-service date of the property is taken into
account. The commenter also requested clarification regarding the
application of the Five-Year Safe Harbor to situations where the
taxpayer or a predecessor was not in existence during the entire 5-year
lookback period. Specifically, the commenter pointed out that the safe
harbor in the 2019 Final Regulations could be read to apply only to
those periods in the 5-year lookback period that both the taxpayer and
a predecessor are in existence, and not to those periods in the 5-year
lookback period during which the taxpayer or a predecessor, or both,
were in existence and had a depreciable interest in the property later
acquired and placed in service by the taxpayer. The commenter suggested
that the Five-Year Safe Harbor be clarified to say that the taxpayer
and each predecessor is subject to a separate lookback period that
begins no earlier than the date such person came into existence.
The Treasury Department and the IRS intended the ``placed-in-
service year'' to be the current calendar year in which the property is
placed in service by the taxpayer. Also, the Treasury Department and
the IRS intended the portion of that calendar year covering the period
up to the placed-in-service date of the property to be considered in
determining whether the taxpayer or a predecessor previously had a
depreciable interest. This approach is consistent with an exception to
the de minimis use rule in Sec. 1.168(k)-2(b)(3)(iii)(B)(4) of the
2019 Proposed Regulations, which is discussed in greater detail in part
I.B.1.b of this Summary of Comments and Explanation of Revisions
section. Pursuant to that exception, when a taxpayer places in service
eligible property in Year 1, disposes of that property to an unrelated
party in Year 1 within 90 calendar days of that placed-in-service date,
and then reacquires the same property later in Year 1, the taxpayer is
treated as having a prior depreciable interest in the property upon the
taxpayer's reacquisition of the property in Year 1. This rule would be
superfluous if the Five-Year Safe Harbor did not consider the portion
of the calendar year covering the period up to the placed-in-service
date of the property.
Accordingly, Sec. 1.168(k)-2(b)(3)(iii)(B)(1) is amended to
clarify that the five calendar years immediately prior to the current
calendar year in which the property is placed in service by the
taxpayer, and the portion of such current calendar year before the
placed-in-service date of the property determined without taking into
account the applicable convention, are taken into account to determine
if the taxpayer or a predecessor had a depreciable interest in the
property at any time prior to acquisition (lookback period). Section
1.168(k)-2(b)(3)(iii)(B)(1) also is amended to adopt the suggestion of
the commenter that each of the taxpayer and the predecessor be subject
to a separate lookback period. These final regulations clarify that if
the taxpayer or a predecessor, or both, have not been in existence
during the entire lookback period, then only the portion of the
lookback period during which the taxpayer or a predecessor, or both,
have been in existence is taken into account to determine if the
taxpayer or the predecessor had a depreciable interest in the property.
More examples have been added to clarify the application of the Five-
Year Safe Harbor.
b. De Minimis Use
Section 1.168(k)-2(b)(3)(iii)(B)(4) of the 2019 Proposed
Regulations provides an exception to the prior depreciable interest
rule in the 2019 Final Regulations when the taxpayer disposes of
property to an unrelated party within 90 calendar days after the
taxpayer originally placed such property in service (De Minimis Use
Rule). The 2019 Proposed Regulations also provide that the De Minimis
Use Rule does not apply if the taxpayer reacquires and again places in
service the property during the same taxable year the taxpayer disposed
of the property. A commenter on the 2019 Proposed Regulations asked for
clarification regarding the application of the De Minimis Use Rule in
the following situations:
(1) The taxpayer places in service property in Year 1, disposes of
that property to an unrelated party in Year 1 within 90 calendar days
of that original placed-in-service date, and then reacquires and again
places in service the same property later in Year 1 and does not
dispose of the property again in Year 1;
(2) The taxpayer places in service property in Year 1, disposes of
that property to an unrelated party in Year 2 within 90 calendar days
of that original placed-in-service date, and then reacquires and again
places in service the same property in Year 2 or later; and
(3) The taxpayer places in service property in Year 1 and disposes
of that property to an unrelated party in Year 1 within 90 calendar
days of that original placed-in-service date, then the taxpayer
reacquires and again places in service the same property later in Year
1 and disposes of that property to an unrelated party in Year 2 within
90 calendar days of the subsequent placed-in-service date in Year 1,
and the taxpayer reacquires and again places in service the same
property in Year 4.
In situation 1, the additional first year depreciation deduction is
not allowable for the property when it was initially placed in service
in Year 1 by the taxpayer pursuant to Sec. 1.168(k)-2(g)(1)(i) of the
2019 Final Regulations. The additional first year depreciation
deduction also is not allowable when the same property is subsequently
placed in service in Year 1 by the same taxpayer under the De Minimis
Use Rule in the 2019 Proposed Regulations. The commenter asserted that
the additional first year depreciation deduction should be allowable
for the property when it is placed in service
[[Page 71737]]
again in Year 1 and is not disposed of again in Year 1, because the
additional first year depreciation deduction is not allowable for the
property when it initially was placed in service in Year 1 by the
taxpayer. The Treasury Department and the IRS agree with this comment
if the property is originally acquired by the taxpayer after September
27, 2017. The Treasury Department and the IRS decline to adopt this
comment with respect to property that was originally acquired by the
taxpayer before September 28, 2017, as the exception to the De Minimis
Use Rule was intended to prevent certain churning transactions
involving such property. The Treasury Department and the IRS believe
that property that is placed in service, disposed of, and reacquired in
the same taxable year is more likely to be part of a predetermined
churning plan.
In situation 2, the additional first year depreciation deduction is
allowable for the same property by the same taxpayer twice (in Year 1
when the property is initially placed in service, and in Year 2 when
the property is placed in service again). This result is consistent
with the De Minimis Use Rule in the 2019 Proposed Regulations, and this
result is not changed in these final regulations.
In situation 3, the De Minimis Use Rule provides only one 90-day
period that is disregarded in determining whether the taxpayer had a
depreciable interest in the property prior to its reacquisition. That
90-day period is measured from the original placed-in-service date of
the property by the taxpayer. As a result, the second 90-day period in
situation 3 (during which the taxpayer reacquired the property in Year
1, again placed it in service in Year 1, and then disposed of it in
Year 2) is taken into account in determining whether the taxpayer
previously used the property when the taxpayer again places in service
the property in Year 4.
The De Minimis Use Rule in these final regulations is clarified to
reflect these results. These final regulations also include additional
examples to illustrate the application of the De Minimis Use Rule in
these situations and conforming changes to Sec. 1.168(k)-2(g)(1)(i) of
the 2019 Final Regulations.
2. Application to Partnerships
The Treasury Department and the IRS received several comments
regarding the Partnership Lookthrough Rule in Sec. 1.168(k)-
2(b)(3)(iii)(B)(5) of the 2019 Proposed Regulations, which addresses
the extent to which a partner is deemed to have a depreciable interest
in property held by a partnership. The Partnership Lookthrough Rule
provides that a person is treated as having a depreciable interest in a
portion of property prior to the person's acquisition of the property
if the person was a partner in a partnership at any time the
partnership owned the property. The Partnership Lookthrough Rule
further provides that the portion of property in which a partner is
treated as having a depreciable interest is equal to the total share of
depreciation deductions with respect to the property allocated to the
partner as a percentage of the total depreciation deductions allocated
to all partners during the current calendar year and the five calendar
years immediately prior to the partnership's current year.
One commenter requested that the Treasury Department and the IRS
withdraw the Partnership Lookthrough Rule and replace it with a rule
that treats a taxpayer as having a depreciable interest in an item of
property only if the taxpayer was a controlling partner in a
partnership at any time the partnership owned the property during the
applicable lookback period. The Treasury Department and the IRS agree
with the commenter that the Partnership Lookthrough Rule should be
withdrawn. The Treasury Department and the IRS have determined that the
complexity of applying the Partnership Lookthrough Rule would place a
significant administrative burden on both taxpayers and the IRS. For
this reason, these final regulations do not retain the Partnership
Lookthrough Rule. Therefore, under these final regulations, a partner
will not be treated as having a depreciable interest in partnership
property solely by virtue of being a partner in the partnership. The
Treasury Department and the IRS have determined that a replacement rule
that applies only to controlling partners is not necessary because the
related party rule in section 179(d)(2)(A) applies to a direct purchase
of partnership property by a current majority partner, and the series
of related transactions rules in Sec. 1.168(k)-2(b)(3)(iii)(C)
prevents avoidance of the related party rule through the use of
intermediary parties.
The same commenter recommended a number of changes to the
Partnership Lookthrough Rule if it were to be retained. It is not
necessary to address these comments, because these final regulations do
not retain the Partnership Lookthrough Rule.
Additionally, one commenter recommended that the Treasury
Department and the IRS clarify the operation of the section 168(k)
regulations with respect to section 743(b) adjustments after transfers
of partnership interests in section 168(i)(7) transactions, as
described in the 2019 Final Regulations. The Treasury Department and
the IRS have determined that this comment is outside of the scope of
these final regulations.
3. Series of Related Transactions
Section 1.168(k)-2(b)(3)(iii)(C) of the 2019 Proposed Regulations
provides special rules for a series of related transactions (Proposed
Related Transactions Rule). The Proposed Related Transactions Rule
generally provides that the relationship between the parties under
section 179(d)(2)(A) or (B) in a series of related transactions is
tested immediately after each step in the series, and between the
original transferor and the ultimate transferee immediately after the
last transaction in the series. The Proposed Related Transactions Rule
also provides that the relationship between the parties in a series of
related transactions is not tested in certain situations. For example,
a party in the series that is neither the original transferor nor the
ultimate transferee is disregarded in applying the relatedness test if
the party placed in service and disposed of the property in the party's
same taxable year or did not place the property in service. The
relationship between the parties also is not tested if the step is a
transaction described in Sec. 1.168(k)-2(g)(1)(iii) (that is, a
transfer of property in a transaction described in section 168(i)(7) in
the same taxable year that the property is placed in service by the
transferor). Finally, the 2019 Proposed Regulations provide that the
Proposed Related Transactions Rule does not apply to syndication
transactions or when all transactions in the series are described in
Sec. 1.168(k)-2(g)(1)(iii).
A commenter stated that the Proposed Related Transactions Rule may
disregard significant relationships that existed before the series, or
that are formed as a result of the series. The commenter also stated
that the rule does not address how relatedness should be tested when
the relationship between the parties changes over the course of the
series or when a party ceases to exist.
The commenter recommended that the final regulations test
relatedness immediately before the first step in the series of related
transactions and immediately after the last step in the series, similar
to Sec. 1.197-2(h)(6)(ii)(B). The commenter also recommended
simplifying the Proposed Related Transactions Rule and alleviating
knowledge burdens imposed on transferees and the IRS as to whether a
transfer is pursuant to a series of related transactions, the date that
a transferee in
[[Page 71738]]
a series placed the asset in service, and whether a transferee is
related to a transferor.
The Treasury Department and the IRS have determined that the rule
in Sec. 1.197-2(h)(6)(ii)(B) is not appropriate for testing
relatedness for purposes of the additional first year depreciation
deduction. Section 1.197-2(h)(6)(ii)(B) provides that relatedness is
tested immediately before the first step in a series of related
transactions and immediately after the last step in the series. The
purpose of this rule is to prevent the churning of assets, and the
relationship that is of importance is that of the first and last
acquisition. In contrast, the purpose of the Proposed Related
Transactions Rule is to determine whether each transferee in the series
qualifies to claim the additional first year depreciation deduction for
the assets and, therefore, testing for relatedness is done immediately
after each step in the series. Testing for relatedness at no point in
time other than immediately before the first step and immediately after
the last step in the series would preclude all intermediaries in the
series from claiming the additional first year depreciation deduction.
Accordingly, the Treasury Department and the IRS do not adopt this
recommendation.
The commenter also recommended several alternative approaches to
testing relatedness: (1) Any transferee in a series of related
transactions tests its relatedness to every prior transferor in the
series; or (2) a transferee tests its relatedness only to its immediate
transferor if the transferee demonstrated that it did not know, or have
reason to know, that the transfer occurred pursuant to a series of
related transactions.
The Treasury Department and the IRS have determined that requiring
each transferee in a series of related transactions to test its
relatedness to every prior transferor in the series would impose a
significant administrative burden. Therefore, these final regulations
do not adopt the commenter's first alternative approach.
The Treasury Department and the IRS also have determined that,
because a series of related transactions generally is undertaken among
the relevant parties pursuant to a preconceived plan, the rule in the
commenter's second alternative approach would have limited application.
Because the application of this approach would depend upon the
taxpayer's demonstration that it did not know, and did not have reason
to know, that a transfer occurred pursuant to a series, this rule also
may be difficult for both taxpayers and the IRS to administer.
Furthermore, this approach fails to adequately address situations where
the parties other than the original transferor and the ultimate
transferee in a series may be related or may become related pursuant to
the series. Thus, these final regulations do not adopt the commenter's
second alternative approach.
However, the Treasury Department and the IRS agree that the
Proposed Related Transactions Rule should be simplified. The Treasury
Department and the IRS also agree that this rule should be modified to
take into account changes in the relationship between the parties,
including a party ceasing to exist, over the course of a series of
related transactions. For example, assume that, pursuant to a series of
related transactions, A transfers property to B, B transfers property
to C, and C transfers property to D. Under the Proposed Related
Transactions Rule, relatedness is tested after each step and between D
and A. Assume further that, at the beginning of the series, C was
related to A but, prior to acquiring the property, C ceases to be
related to A, or A ceases to exist. The Proposed Related Transactions
Rule does not address how to treat such changes.
Accordingly, these final regulations provide that each transferee
in a series of related transactions tests its relationship under
section 179(d)(2)(A) or (B) with the transferor from which the
transferee directly acquires the depreciable property (immediate
transferor) and with the original transferor of the depreciable
property in the series. The transferee is treated as related to the
immediate transferor or the original transferor if the relationship
exists either immediately before the first transfer of the depreciable
property in the series or when the transferee acquires the property.
Any transferor in a series of related transactions that ceases to exist
during the series is deemed to continue to exist for purposes of
testing relatedness.
These final regulations also provide a special rule that disregards
certain transitory relationships created pursuant to a series of
related transactions. More specifically, if a party acquires
depreciable property in a series of related transactions in which the
acquiring party acquires stock, meeting the requirements of section
1504(a)(2), of a corporation in a fully taxable transaction, followed
by a liquidation of the acquired corporation under section 331, any
relationship created as part of such series of transactions is
disregarded in determining whether any party is related to such
acquired corporation for purposes of testing relatedness. This rule is
similar to Sec. 1.197-2(h)(6)(iii) and properly reflects the change in
ownership of depreciable property in a series of related transactions
without taking into account certain transitory relationships the
purpose of which is unrelated to the additional first year depreciation
deduction.
Finally, these final regulations provide that, if a transferee in a
series of related transactions acquires depreciable property from a
transferor that was not in existence immediately prior to the first
transfer of the property in the series (new transferor), the transferee
tests its relationship with the party from which the new transferor
acquired the depreciable property. Examples illustrating these revised
rules are provided in these final regulations.
4. Application to Members of a Consolidated Group
a. The 2019 Proposed Regulations
The 2019 Proposed Regulations provide special rules addressing the
availability of the additional first year depreciation deduction upon
the acquisition of depreciable property by a member of a consolidated
group, as defined in Sec. 1.1502-1(b) and (h), respectively. Under the
2019 Proposed Regulations, if a member acquires property in which the
consolidated group had a depreciable interest at any time prior to the
member's acquisition of such property, then the member is treated as
previously having a depreciable interest in such property (Group Prior
Use Rule). This rule was first included in the 2018 Proposed
Regulations to address situations in which property is disposed of by
one member of a consolidated group and subsequently is acquired by
another member of the same consolidated group, because the Treasury
Department and the IRS had determined that allowing the additional
first year depreciation deduction in such situations would not clearly
reflect the income of the consolidated group. See 83 FR 39292, 39295
(Aug. 8, 2018). For purposes of the Group Prior Use Rule, a
consolidated group is treated as having a depreciable interest in
property during the time any current or former member of the group had
a depreciable interest while a member of the group. See Sec. 1.168(k)-
2(b)(3)(v)(A) of the 2019 Proposed Regulations.
Further, when members of a consolidated group acquire both
depreciable property and the stock of a corporation that previously had
a depreciable interest in such property
[[Page 71739]]
pursuant to the same series of related transactions, the 2019 Proposed
Regulations treat the member that acquires the property as previously
having a depreciable interest in such property (Stock and Asset
Acquisition Rule). See Sec. 1.168(k)-2(b)(3)(v)(B) of the 2019
Proposed Regulations. Like the Group Prior Use Rule, the Stock and
Asset Acquisition Rule initially was included in the 2018 Proposed
Regulations. As stated in the preamble to those regulations, the
Treasury Department and the IRS have determined that, in substance,
this series of related transactions is the same as a series of related
transactions in which a consolidated group acquired the selling
corporation, which subsequently reacquired the property in which it
previously had a depreciable interest and then transferred it to
another member of the consolidated group. In that situation, the
additional first year depreciation deduction would not be allowed. See
83 FR 39292, 39295 (Aug. 8, 2018). Both the Group Prior Use Rule and
the Stock and Asset Acquisition Rule are adopted in these final
regulations with certain modifications, as discussed further in part
I.B.4.b(2) of this Summary of Comments and Explanation of Revisions
section.
The 2019 Proposed Regulations also include rules addressing
transfers of depreciable property between members of the same
consolidated group. One such rule (Proposed Consolidated Asset
Acquisition Rule) applies if a member (transferee member) acquires
depreciable property from another member of the same consolidated group
in a taxable transaction and, as part of the same series of related
transactions, the transferee member then ceases to be a member of that
group within 90 calendar days of the date of the property acquisition.
Under the Proposed Consolidated Asset Acquisition Rule, the transferee
member is treated as (1) acquiring the property one day after the date
on which the transferee member ceases to be a member of the
consolidated group (Deconsolidation Date) for all Federal income tax
purposes, and (2) placing the property in service no earlier than one
day after the Deconsolidation Date for purposes of depreciation and the
investment credit allowed by section 38. See Sec. 1.168(k)-
2(b)(3)(v)(C) of the 2019 Proposed Regulations.
The Treasury Department and the IRS also determined that, in
general, deemed acquisitions of property pursuant to a section 338
election or a section 336(e) election should be subject to the same
treatment as actual acquisitions of property because such deemed
acquisitions generally are respected as actually occurring for Federal
income tax purposes. See Sec. Sec. 1.336-2(e) and 1.338-1(a)(2); see
also Sec. 1.336-1(a)(1) (generally providing that, except to the
extent inconsistent with section 336(e), the results of section 336(e)
should coincide with those of section 338(h)(10)). Accordingly, the
Treasury Department and the IRS proposed a rule analogous to the
Proposed Consolidated Asset Acquisition Rule for deemed acquisitions of
property pursuant to such an election (Proposed Consolidated Deemed
Acquisition Rule, and together with the Proposed Consolidated Asset
Acquisition Rule, the Proposed Consolidated Acquisition Rules).
Section 338 and section 336(e) both provide elections to treat
certain transfers of a target corporation's stock as transfers of the
target corporation's assets. If a section 338 election is made for a
``qualified stock purchase'' (QSP), then the target corporation
generally is treated as two separate corporations before and after the
acquisition date for Federal income tax purposes. As a result of the
election, ``old target'' is deemed to sell its assets to an unrelated
person at the close of the acquisition date at fair market value, and
``new target'' is deemed to acquire those assets from an unrelated
person at the beginning of the following day. See section 338(a). If
the election is a section 338(h)(10) election, then old target is
deemed to liquidate following the deemed sale of its assets. See Sec.
1.338-1(a)(1).
Generally, a similar sale and liquidation are deemed to occur if a
section 336(e) election is made for a ``qualified stock disposition''
(QSD) of target corporation stock. However, if a section 336(e)
election is made for a QSD described in section 355(d)(2) or (e)(2),
then a different transaction is deemed to occur. In that case, old
target is deemed to sell its assets to an unrelated party and then
reacquire those assets from an unrelated party, and old target is not
deemed to liquidate (sale-to-self model). See Sec. 1.336-2(b).
The Proposed Consolidated Deemed Acquisition Rule changes certain
aspects of the deemed acquisitions that result from a section 338
election or a section 336(e) election. This proposed rule applies if a
member (transferee member) acquires, in a QSP or QSD, stock of another
member (target) that holds depreciable property and, as part of the
same series of related transactions, the transferee member and target
cease to be members of the selling consolidated group within 90
calendar days of the QSP or QSD. Under this proposed rule, (1) the
acquisition date or disposition date, as applicable, is treated as the
day that is one day after the Deconsolidation Date for all Federal
income tax purposes, and (2) new target is treated as placing the
property in service no earlier than one day after the Deconsolidation
Date for purposes of depreciation and the investment credit allowed by
section 38. The Proposed Consolidated Deemed Acquisition Rule does not
apply to QSDs described in section 355(d)(2) or (e)(2). See Sec.
1.168(k)-2(b)(3)(v)(D) of the 2019 Proposed Regulations.
b. Comments on Consolidated Group Rules in the 2019 Proposed
Regulations
The Treasury Department and the IRS received comments regarding the
foregoing consolidated group rules in the 2019 Proposed Regulations.
(1) The Proposed Consolidated Acquisition Rules
(a) Issues Under the Proposed Consolidated Acquisition Rules
The Proposed Consolidated Acquisition Rules were intended to make
the additional first year depreciation deduction available to the buyer
of depreciable property in an intercompany transaction, as defined in
Sec. 1.1502-13(b)(1)(i), if the buyer member leaves the consolidated
group within 90 calendar days pursuant to the same series of related
transactions that includes the property acquisition. As discussed in
the preamble to the 2019 Proposed Regulations, the Treasury Department
and the IRS have determined that, in substance, such a transaction
should be treated the same as if the buyer member first left the
consolidated group and then purchased the depreciable property (in
which case the buyer member would be allowed to claim the additional
first year depreciation deduction). See 84 FR 50152, 50156 (Sep. 24,
2019). Treating the property acquisition as occurring after the buyer
member leaves the consolidated group reduces the likelihood that the
transfer fails to satisfy the ``purchase'' requirements in section
179(d)(2) and (3), helps ensure that the buyer member is not attributed
the seller member's prior use of the property, and precludes the
application of section 168(i)(7).
Commenters appreciated the Proposed Consolidated Acquisition Rules.
However, commenters also argued that, because these rules treat certain
actual or deemed asset acquisitions as occurring on a date that is
different than the date on which the
[[Page 71740]]
acquisitions occurred up to 90 calendar days after the date of such an
acquisition for all Federal income tax purposes, these rules create
some uncertainty and raise certain implementation issues.
Many of the questions raised by commenters regarding the Proposed
Consolidated Acquisition Rules concern the period beginning on the date
of the actual or deemed asset acquisition and ending on the
Deconsolidation Date (interim period). In particular, commenters noted
that tax items may arise during the interim period from both the
depreciable property acquired by the transferee member and the
consideration received by the transferor member. Commenters asked how
income, deductions, or other tax items from the transferred depreciable
property during the interim period should be reported, particularly if
the asset acquisition occurs in one taxable year and the
Deconsolidation Date occurs in the subsequent taxable year.
Additionally, commenters suggested that the consideration used to
acquire depreciable property from the transferor member may consist of
stock or debt instruments that produce dividends or interest during the
interim period. According to commenters, the Proposed Consolidated
Acquisition Rules do not address how such income should be reported.
Commenters also asked how changes in the depreciable property (or the
seller consideration) during the interim period--such as a change in
value, or a change in use that affects eligibility for the additional
first year depreciation deduction--should be taken into account, and
how tax items associated with the property should be reported if the
transferor member leaves the selling group during the interim period.
Commenters also raised questions about the interim period relating
specifically to the Proposed Consolidated Deemed Acquisition Rule.
Commenters noted that additional transaction steps, such as property
transfers by the transferee member to target, or the assumption of
additional liabilities of the transferee member by target, may occur
between the date of the QSP and the Deconsolidation Date. If these
transaction steps occur, commenters asked whether the aggregate deemed
sale price (ADSP) and adjusted grossed-up basis (AGUB) (see Sec. Sec.
1.338-4 and 1.338-5, respectively) are adjusted and, if so, how.
Additionally, commenters asked about the interaction of the
Proposed Consolidated Acquisition Rules with section 355. More
specifically, if the transferee member is relying on the acquired
assets to satisfy the ``active trade or business'' requirements of
section 355(b) in connection with the distribution of the transferee
member's stock, commenters asked whether the Proposed Consolidated
Acquisition Rules could prevent the distribution from qualifying under
section 355 because the asset acquisition would be treated as occurring
one day after the transferee member has left the selling group. See
section 355(b)(1)(A) (providing that the distributing corporation and
the controlled corporation must be ``engaged immediately after the
distribution in the active conduct of a trade or business'').
The Treasury Department and the IRS appreciate the comments
received with regard to the Proposed Consolidated Acquisition Rules.
The Treasury Department and the IRS agree that these proposed rules
could create uncertainty and raise implementation issues. As a result,
these final regulations adopt an alternative approach (Delayed Bonus
Approach) that would alleviate many of the concerns raised by
commenters. See the discussion in part I.B.4.b(1)(e) of this Summary of
Comments and Explanation of Revisions section.
(b) The 90-Day Requirement
The Proposed Consolidated Acquisition Rules apply only if, as part
of the same series of related transactions, the transferee member
leaves (or, in the case of a deemed asset purchase, the transferee
member and target leave) the transferor member's consolidated group
within 90 calendar days of the date of the property acquisition (90-day
requirement). See part I.B.4.a of this Summary of Comments and
Explanation of Revisions section. The 90-day requirement was based in
part on the rule for syndication transactions in section
168(k)(2)(E)(iii) and Sec. 1.168(k)-2(b)(3)(vi) and (b)(4)(iv). By
capping the period of time that could elapse between the property
transfer date and the Deconsolidation Date, the 90-day requirement was
intended to limit the scope of certain issues created by treating the
asset acquisition as occurring after the actual transfer date under the
Proposed Consolidated Acquisition Rules. See the discussion in part
I.B.4.b(1)(a) of this Summary of Comments and Explanation of Revisions
section.
The Treasury Department and the IRS received several comments
recommending the elimination of the 90-day requirement. The commenters
generally argued that, in many cases, the 90-day requirement will be
difficult for taxpayers to satisfy. In business transactions, an
intercompany asset transfer may be a preparatory step undertaken well
in advance of the Deconsolidation Date, particularly if the transaction
involves the transfer of legal title to assets. Additionally, delays in
regulatory approval for the transaction may preclude the transferee
member from leaving the consolidated group within 90 days. Moreover,
one commenter argued that the rationale for the 90-day requirement for
syndication transactions differs from the rationale for such a
requirement in the Proposed Consolidated Acquisition Rules. The
commenter noted that the syndication exception in section
168(k)(2)(E)(iii) specifies a period of time that ownership of an asset
(rather than the relationship between the transferor and transferee, as
in the Proposed Consolidated Acquisition Rules) should be disregarded,
and the commenter suggested that the primary authority for disregarding
periods of transitory ownership is the step transaction doctrine rather
than section 168(k). Commenters also suggested that the 90-day
requirement does not further the policy goals of section 168(k). In
other words, so long as there is a series of related transactions,
whether the asset acquisition and the deconsolidation occur within 90
days should not be determinative. Based on the foregoing, the
commenters recommended removing the 90-day requirement and simply
retaining the ``series of related transactions'' requirement.
The Treasury Department and the IRS agree with commenters that the
90-day requirement would be difficult for taxpayers to satisfy in many
ordinary-course business transactions. The Treasury Department and the
IRS also have determined that the Delayed Bonus Approach would
eliminate many of the aforementioned issues with the Proposed
Consolidated Acquisition Rules by respecting the date on which each
transaction in the series actually occurs. Consequently, the Delayed
Bonus Approach does not include a 90-day requirement. See the
discussion in part I.B.4.b(1)(e) of this Summary of Comments and
Explanation of Revisions section.
(c) Assets to Which the Proposed Consolidated Acquisition Rules Apply
Under the 2019 Proposed Regulations, the Proposed Consolidated
Acquisition Rules apply to actual or deemed acquisitions of
``depreciable property,'' regardless of whether such property is of a
type that is eligible for the additional first year depreciation
deduction (eligible property) or of a type that is ineligible for the
additional first year depreciation deduction (ineligible
[[Page 71741]]
property). For example, under a literal reading of the Proposed
Consolidated Asset Acquisition Rule, a member's acquisition of several
parcels of depreciable real estate that is not eligible property from
another member would be subject to this rule (assuming that all other
requirements for application of this rule are satisfied), even though
none of the transferred property is eligible property. Similarly, a
member's acquisition of the stock of a target corporation whose assets
largely consist of depreciable real estate that is not eligible
property would be subject to the Proposed Consolidated Deemed
Acquisition Rule (again, assuming that all other requirements for
application of this rule are satisfied), even though most of the target
corporation's assets are not eligible property.
One commenter recommended that the final regulations limit the
application of the Proposed Consolidated Acquisition Rules to actual or
deemed acquisitions of eligible property. The commenter explained that
application of the Proposed Consolidated Acquisition Rules to
ineligible property would not further the purposes of section 168(k)
and might lack statutory authority. The commenter also asserted that
such an application might create a trap for unwary taxpayers who do not
consult the regulations under section 168(k) when planning transfers of
ineligible property.
The Treasury Department and the IRS agree that the Proposed
Consolidated Acquisition Rules should apply only to eligible property.
Thus, the Delayed Bonus Approach applies solely to depreciable
property, as defined in Sec. 1.168(b)-1(a)(1), that meets the
requirements in Sec. 1.168(k)-2(b)(2), determined without regard to
Sec. 1.168(k)-2(b)(2)(ii)(C) (election not to claim the additional
first year depreciation for a class of property) except on the day
after the Deconsolidation Date. See the discussion in part
I.B.4.b(1)(e) of this Summary of Comments and Explanation of Revisions
section.
(d) Application of the Proposed Consolidated Deemed Acquisition Rule to
Qualified Stock Dispositions Described in Section 355(d)(2) or (e)(2)
The Proposed Consolidated Deemed Acquisition Rule does not apply to
QSDs described in section 355(d)(2) or (e)(2). As explained in part
2(D)(iv) of the Explanation of Provisions section in the 2019 Proposed
Regulations and part II(C)(2)(c) of the Summary of Comments and
Explanation of Revisions section in the 2019 Final Regulations, the
Treasury Department and the IRS determined that this limitation would
be appropriate because the rules applicable to such QSDs do not treat a
new target corporation as acquiring assets from an unrelated person.
See Sec. 1.336-2(b)(2).
One commenter argued that, although the sale-to-self model in Sec.
1.336-2(b)(2) could be construed as violating the ``no prior use''
requirement in section 168(k)(2)(E)(ii)(I) and Sec. 1.168(k)-
2(b)(3)(iii)(A)(1), this model should not control eligibility for the
additional first year depreciation deduction, for several reasons.
First, the commenter argued that there is no policy rationale under
section 168(k) for treating QSDs described in section 355(d)(2) or
(e)(2) differently than other transactions for which an election under
section 336(e) is made. Second, the commenter argued that the sale-to-
self model was not intended to be applied, and has not been applied,
for all Federal income tax purposes. See, for example, Sec. 1.336-
2(b)(2)(ii)(C) (for purposes of section 197(f)(9), section 1091, and
any other provision designated in the Internal Revenue Bulletin by the
Internal Revenue Service, old target in its capacity as the deemed
seller of assets is treated as separate and distinct from, and
unrelated to, old target in its capacity as the deemed acquirer of
assets). Third, the commenter suggested that taxpayers will structure
around the exclusion for these QSDs in order to avail themselves of the
Proposed Consolidated Deemed Acquisition Rule. Thus, the commenter
recommended expanding this rule to include all types of QSD for which
an election under section 336(e) is made.
The Treasury Department and the IRS do not agree with the
commenter's recommendation to expand the scope of the Proposed
Consolidated Deemed Acquisition Rule to include all types of QSD for
which an election under section 336(e) is made. In general, a section
336(e) election should not affect the tax consequences to which the
purchaser or the distributee would have been subject with respect to
the acquisition of target stock if a section 336(e) election had not
been made. See Sec. 1.336-2(c). As explained in the preamble to the
final section 336(e) regulations, the Treasury Department and the IRS
believe that ``the predominant feature of the section 336(e) election
with respect to a section 355(d)(2) or (e)(2) transaction is the
section 355 transaction.'' 78 FR 28347, 28469 (May 15, 2013). Following
such a transaction, the controlled corporation (that is, old target)
generally remains in existence, and it retains its earnings and profits
and other tax attributes. Because old target remains in existence under
this construct, such attributes would include old target's prior use of
its depreciable property. Accordingly, the Treasury Department and the
IRS decline to expand the scope of the Proposed Consolidated Deemed
Acquisition Rule.
(e) Alternative Approaches
Commenters recommended several alternative approaches to alleviate
the uncertainties and implementation issues raised by the Proposed
Consolidated Acquisition Rules. This part I.B.4.b(1)(e) of this Summary
of Comments and Explanation of Revisions section discusses each
alternative approach.
(i) Delayed Bonus Approach
The first alternative approach recommended by commenters (Delayed
Bonus Approach) would treat the asset acquisition as occurring on the
date such acquisition actually occurred for all Federal income tax
purposes and, thus, as generally being subject to all Federal income
tax rules that ordinarily would apply (with the exception of the series
of related transactions rules in Sec. 1.168(k)-2(b)(3)(iii)(C)). For
example, during the interim period, the transferee member would
recognize depreciation on all depreciable transferred assets (including
the eligible property), and the transferor member would recognize gain
or loss in accordance with section 168(i)(7) and Sec. 1.1502-13(c)(2).
Absent additional rules, the transferee member would not be able to
claim the additional first year depreciation deduction (see sections
179(d)(2)(A) and (B) and the Group Prior Use Rule). To enable the
transferee member to claim this deduction, the Delayed Bonus Approach
treats the transferee member as (1) selling the eligible property to an
unrelated third party one day after the Deconsolidation Date for an
amount equal to the member's basis in the eligible property at such
time, and then (2) acquiring identical, but different, eligible
property from another unrelated third party for the same amount (deemed
sale and purchase of eligible property). For this purpose, the
transferee member's basis in the eligible property on the day after the
Deconsolidation Date is the value of the consideration paid by the
transferee member for the property less any depreciation deductions
taken by the member with respect to such property during the interim
period.
The Treasury Department and the IRS have determined that the
Delayed Bonus Approach would achieve the objectives of the Proposed
Consolidated Acquisition Rules (that is, permitting
[[Page 71742]]
additional first year depreciation to the transferee member after the
member leaves the selling group pursuant to a series of related
transactions) while creating fewer collateral consequences. Moreover,
because the Delayed Bonus Approach would respect the asset acquisition
as occurring on the actual acquisition date for all Federal income tax
purposes, this approach would provide taxpayers with greater certainty
regarding the tax consequences of the acquisition and the treatment of
tax items arising during the interim period.
Thus, these final regulations adopt the Delayed Bonus Approach for
actual and deemed acquisitions of eligible property that satisfy
certain requirements. As noted in part I.B.4.b(1)(b) of this Summary of
Comments and Explanation of Revisions section, the Delayed Bonus
Approach does not include a 90-day requirement because this approach
would not raise the same issues as the Proposed Consolidated
Acquisition Rules. Furthermore, as noted in part I.B.4.b(1)(c) of this
Summary of Comments and Explanation of Revisions section, the
transferee member's (or target's) deemed sale and purchase of assets
the day after the Deconsolidation Date under the Delayed Bonus Approach
applies solely to eligible property (rather than to all depreciable
assets).
Under the Delayed Bonus Approach in these final regulations, the
transferee member (or target) is treated as selling and then purchasing
eligible property for cash. Accordingly, the deemed sale and purchase
of eligible property cannot be characterized as an exchange of property
that is eligible for nonrecognition treatment under section 1031.
Moreover, in the deemed sale and purchase of eligible property, the
transferee member (or target) is treated as acquiring used property
(deemed replacement property). Accordingly, the original use of such
property does not commence with the transferee member (or target). As a
result, the deemed sale and purchase of eligible property does not
allow the deemed replacement property to be eligible for federal income
tax credits or deductions that require new property. For example, such
property does not satisfy the original use requirement in section
48(a)(3)(B)(ii) for the energy credit.
Because the cost of the deemed replacement property (and,
consequently, the adjusted basis in such property) is identical to the
transferee member's (or target's) adjusted basis in the eligible
property, a question has arisen as to whether section 179(d)(3) and
Sec. 1.168(k)-2(b)(3)(iii)(A)(3) potentially could apply to prevent
the transferee member (or target) from claiming the additional first
year depreciation deduction for such property. To avoid any potential
uncertainty in this regard, these final regulations expressly provide
that the acquisition of the deemed replacement property does not result
in the basis in such property being determined, in whole or in part, by
reference to the basis of other property held at any time by the
transferee member or target.
The Treasury Department and the IRS note that, under the Delayed
Bonus Approach in these final regulations, the deemed sale and purchase
of eligible property are treated as occurring for all Federal income
tax purposes. Treating the deemed sale and purchase of eligible
property as applicable solely for purposes of sections 168 and 179 (and
not for all Federal income tax purposes) could lead to complications
and inconsistencies. Under such an approach, taxpayers would be
required to treat each piece of eligible property as two separate
assets: (1) An asset that exists for purposes of sections 168 and 179;
and (2) an asset that exists for all other Federal income tax purposes.
Therefore, this approach could present difficulties in determining, for
instance, (1) how any depreciation claimed with respect to the asset
that exists for purposes of sections 168 and 179 affects the taxpayer's
adjusted basis in the asset that exists for all other Federal income
tax purposes, and (2) how to calculate the gain or loss recognized on a
future disposition of the eligible property.
The Delayed Bonus Approach does not apply to property unless such
property is eligible property as of the time of its acquisition by the
transferee member, the Deconsolidation Date, and the day after the
Deconsolidation Date. For this purpose, the status of acquired property
as ``eligible property'' is generally determined without regard to
Sec. 1.168(k)-2(b)(2)(ii)(C) (property subject to an election not to
claim the additional first year depreciation deduction for a class of
property). As a result, a series of related transactions may be subject
to the Delayed Bonus Approach even if the common parent of the selling
consolidated group makes an election under section 168(k)(7) not to
claim the additional first year depreciation deduction for a class of
property placed in service by the transferee member for the short
taxable year ending on the Deconsolidation Date. However, to avoid
creating a trap for the unwary, the definition of ``eligible property''
takes into account any such election made for the taxable year that
includes the day after the Deconsolidation Date. Accordingly, one
component in the definition of eligible property effectively provides
that for such taxable year, the transferee member cannot have made an
election under section 168(k)(7) not to claim the additional first year
depreciation deduction for the class of property to which the acquired
property belongs. By extension, the Delayed Bonus Approach does not
apply to acquired property belonging to a class of property with
respect to which the transferee makes an election under section
168(k)(7), for property placed in service in the taxable year that
includes the day after the Deconsolidation Date.
Additionally, these final regulations allow taxpayers to elect out
of the application of the Delayed Bonus Approach with respect to all
eligible property that otherwise would be subject to the Delayed Bonus
Approach. If a taxpayer makes this election for a transaction, the
taxpayer also is deemed to have made such an election for all other
transactions in the same series of related transactions that otherwise
would be subject to the Delayed Bonus Approach and that involve the
same (or a related) transferee member or target. To provide clarity and
uniformity with the other elections in Sec. 1.168(k)-2, these final
regulations provide that the election may be revoked only by filing a
request for a private letter ruling and obtaining the Commissioner of
Internal Revenue's written consent to revoke the election.
A commenter requested confirmation that the deemed sale and
purchase of eligible property under the Delayed Bonus Approach would
not prevent the transferee member's deconsolidation in a stock
distribution from qualifying under section 355. In other words, if such
eligible property comprises the transferee member's entire trade or
business, the deemed sale and purchase might be viewed as precluding
the distribution from satisfying the ``active trade or business''
requirement in section 355(b). See section 355(b)(2)(C) (a corporation
is treated as engaged in the active conduct of a trade or business only
if, among other things, such trade or business was not acquired in a
recognition transaction during the five-year period ending on the date
of the distribution). The Treasury Department and the IRS are
considering this issue and request comments for purposes of potential
future guidance.
(ii) Other Alternative Approaches
The second alternative approach recommended by commenters (Modified
Consolidated Acquisition Approach) would be identical to the Proposed
Consolidated Acquisition Rules, except
[[Page 71743]]
that the asset acquisition would not be treated as occurring on the day
after the Deconsolidation Date for all Federal income tax purposes.
Instead, the asset acquisition would be treated as occurring on the day
after the Deconsolidation Date solely for purposes of determining (1)
whether the requirements of section 168(k) are satisfied and, if so,
(2) the amount, location, and timing of the transferee member's (or new
target's) additional first year depreciation deduction with respect to
the depreciable property. For all other Federal income tax purposes,
the asset acquisition would be treated as occurring on the date such
acquisition actually occurred.
The third alternative approach recommended by commenters (Frozen
Depreciation Approach) is the same as the Delayed Bonus Approach,
except that the transferee member would not be permitted to claim
depreciation deductions during the interim period for the acquired
assets (and the transferor member would not be required to take into
account gain or loss from the asset acquisition under Sec. 1.1502-
13(c)).
The Treasury Department and the IRS have determined that, although
the Modified Consolidated Acquisition Approach would address certain
issues and uncertainties created by the Proposed Consolidated
Acquisition Rules, this approach would create other issues and
uncertainties by delaying the asset acquisition date for purposes of
section 168(k) but not for other Federal income tax purposes. For
instance, if the Modified Consolidated Acquisition Approach were
applied to a deemed asset acquisition pursuant to a section 338(h)(10)
election, the acquisition date would be delayed until one day after the
Deconsolidation Date for purposes of section 168(k), but old target
would be deemed to sell its assets and liquidate pursuant to Sec.
1.338(h)(10)-1(d)(4)(i) on the actual acquisition date for all other
Federal income tax purposes. This duality could complicate the
calculation and allocation of the ADSP and AGUB among the target's
assets by creating two separate acquisition dates, and thus two
different dates on which such calculation and allocation must be
determined. Therefore, these final regulations do not adopt the
Modified Consolidated Acquisition Approach.
Similarly, with respect to the Frozen Depreciation Approach, the
Treasury Department and the IRS have determined that holding the
transferee member's depreciation deductions (and the transferor
member's gain or loss on the asset acquisition) in abeyance could
create some of the same issues as those identified by commenters with
regard to the Proposed Consolidated Acquisition Rules. Such issues
include the proper manner for reporting transactions that are part of a
series of related transactions spanning multiple taxable years, and the
appropriate way to account for changes in the depreciable property
during the interim period. Accordingly, if the Frozen Depreciation
Approach were to be adopted, the 90-day requirement might be required
to limit the scope of such issues. Thus, these final regulations also
do not adopt this approach.
(2) Application of the Five-Year Safe Harbor
As discussed in part I.B.1.a of this Summary of Comments and
Explanation of Revisions section, the Five-Year Safe Harbor in Sec.
1.168(k)-2(b)(3)(iii)(B)(1) of these final regulations provides that,
in determining if the taxpayer or a predecessor previously had a
depreciable interest in property, ``only the five calendar years
immediately prior to the current calendar year in which the property is
placed in service by the taxpayer, and the portion of such current
calendar year before the placed-in-service date of the property without
taking into account the applicable convention, are taken into
account.'' Commenters requested confirmation that the Five-Year Safe
Harbor applies for purposes of the Group Prior Use Rule and the Stock
and Asset Acquisition Rule.
The Treasury Department and the IRS did not intend to require a
different (and longer) ``look back'' period for consolidated group
members than for other taxpayers. Accordingly, these final regulations
clarify the Group Prior Use Rule to provide that a member of a
consolidated group is treated as having a depreciable interest in
property only if the group had a depreciable interest within the
``lookback period.'' This period, which is defined in these final
regulations in accordance with the Five-Year Safe Harbor, includes both
the five calendar years immediately prior to the current calendar year
in which the property is placed in service by the member and the
portion of such current calendar year before the placed-in-service date
of the property, without taking into account the applicable convention.
Similarly, these final regulations clarify that the Stock and Asset
Acquisition Rule applies only if the corporation that joins the
consolidated group had a depreciable interest in the property within
the lookback period. These final regulations have modified Examples 26,
27, and 30 in Sec. 1.168(k)-2(b)(3)(vii) of the 2019 Proposed
Regulations (Examples 1, 2, and 3 in Sec. 1.1502-68(d) of these final
regulations) accordingly.
(3) Request for Additional Examples
One commenter requested several additional examples to clarify the
application of the aforementioned special rules for consolidated
groups. One such example would illustrate that the Group Prior Use Rule
does not apply to situations in which an asset is acquired by a former
group member (other than the member that directly held the asset)
following the termination of the group. Another such example would
address the consequences of an asset acquisition by one member of a
consolidated group if, in an unrelated transaction, a corporation that
previously had a depreciable interest in the property becomes a member
of the same consolidated group.
The Treasury Department and the IRS agree that such examples would
be helpful and have included them in these final regulations.
(4) Movement of Consolidated Rules to Regulations Under Section 1502
The Treasury Department and the IRS have determined that moving the
section 168(k) rules for consolidated groups to the regulations under
section 1502 would facilitate the identification and application of
these rules by practitioners. Thus, these rules have been moved from
Sec. 1.168(k)-2(b)(3)(v) of the 2019 Proposed Regulations to new Sec.
1.1502-68.
C. Acquisition of Property
1. Acquisition of a Trade or Business or an Entity
Section 1.168(k)-2(b)(5)(iii)(G) of the 2019 Proposed Regulations
provides that a contract to acquire all or substantially all of the
assets of a trade or business or to acquire an entity is binding if it
is enforceable under State law against the parties to the contract and
that certain conditions do not prevent the contract from being a
binding contract. This proposed rule also provides that it applies to a
contract for the sale of stock of a corporation that is treated as an
asset sale as a result of an election under section 338.
The Treasury Department and the IRS are aware of potential
questions regarding whether Sec. 1.168(k)-2(b)(5)(iii)(G) of the 2019
Proposed Regulations also applies to a contract for the sale of stock
of a corporation that is treated as an asset sale as a result of an
election under section 336(e). The Federal income tax consequences of a
section 336(e) election made with respect to a qualified stock
disposition
[[Page 71744]]
not described, in whole or in part, in section 355(d)(2) or (e)(2) are
similar to the Federal income tax consequences of a section 338
election. See Sec. Sec. 1.336-1(a)(1) and 1.336-2(b)(1). Accordingly,
these final regulations clarify that Sec. 1.168(k)-2(b)(5)(iii)(G)
applies to a contract for the sale of stock of a corporation that is
treated as an asset sale as a result of an election under section
336(e) made for a disposition described in Sec. 1.336-2(b)(1).
2. Property Not Acquired Pursuant to a Written Binding Contract
Section 1.168(k)-2(b)(5)(v) of the 2019 Proposed Regulations
provides that, in general, the acquisition date of property that the
taxpayer acquires pursuant to a contract that does not meet the
definition of a written binding contract in Sec. 1.168(k)-2(b)(5)(iii)
of the 2019 Final Regulations is the date on which the taxpayer paid or
incurred more than 10 percent of the total cost of the property,
excluding the cost of any land and preliminary activities. A commenter
on the 2019 Proposed Regulations requested the bifurcation of a
particular type of contract that the taxpayer has determined does not
meet the definition of a written binding contract in Sec. 1.168(k)-
2(b)(5)(iii) of the 2019 Final Regulations. The contract at issue is
cancelable at any time by the taxpayer/customer without penalty and
requires the taxpayer to reimburse the contractor only for the costs
the contractor has incurred, plus the contractor's profit margin, prior
to the date the contractor receives a notice of cancellation by the
taxpayer. For such a contract, the commenter requested that the final
regulations allow the contract to be bifurcated into a binding contract
for the period prior to the effective date of section 13201 of the TCJA
and a separate non-binding contract for the period after the effective
date of section 13201 of the TCJA. If the final regulations allow such
a bifurcation, the commenter asserted that, if more than 10 percent of
the costs of the project are paid or incurred by the taxpayer before
the effective date of section 13201 of the TCJA, none of such costs are
eligible for the 100-percent additional first year depreciation
deduction, but all costs paid or incurred by the taxpayer after the
effective date of section 13201 of the TCJA would meet the acquisition
date requirements for the 100-percent additional first year
depreciation deduction.
The Treasury Department and the IRS have determined that the change
made in these final regulations to the component election (see part
I.C.3 of this Summary of Comments and Explanation of Revisions section)
generally addresses this comment. Therefore, the Treasury Department
and the IRS decline to provide a special rule for this particular type
of contract.
3. Component Election
Section 1.168(k)-2(c) of the 2019 Proposed Regulations allows a
taxpayer to elect to treat one or more components acquired or self-
constructed after September 27, 2017, of certain larger self-
constructed property as being eligible for the additional first year
depreciation deduction (Component Election). The larger self-
constructed property must be qualified property under section
168(k)(2), as in effect before the enactment of the TCJA, for which the
manufacture, construction, or production began before September 28,
2017. However, the election is not available for components of larger
self-constructed property when such components are not otherwise
eligible for the additional first year depreciation deduction.
a. Eligible Larger Self-Constructed Property
Pursuant to Sec. 1.168(k)-2(c)(2)(ii) of the 2019 Proposed
Regulations, larger self-constructed property that is placed in service
by the taxpayer after December 31, 2019, or larger self-constructed
property described in section 168(k)(2)(B) or (C), as in effect on the
day before enactment of the TCJA, that is placed in service after
December 31, 2020, is not eligible larger self-constructed property.
Accordingly, any components of such property that are acquired or self-
constructed after September 27, 2017, do not qualify for the Component
Election. A commenter on the 2019 Proposed Regulations requested that
the final regulations remove this cut-off date for when the larger
self-constructed property must be placed in service because it does not
reflect the intent of section 13201 of the TCJA of promoting capital
investment, modernization, and growth. If a taxpayer constructs a
building, the Treasury Department and the IRS are aware that taxpayers
have questioned whether the larger self-constructed property is the
building or the tangible personal property constructed as part of the
building.
After considering these comments and the comment for property not
acquired pursuant to a written binding contract (see part I.C.2 of this
Summary of Comments and Explanation of Revisions section), the Treasury
Department and the IRS have determined to expand the larger self-
constructed property that is eligible for the Component Election. These
final regulations provide that eligible larger self-constructed
property also includes property that is manufactured, constructed, or
produced for the taxpayer by another person under a written contract
that does not meet the definition of a binding contract under Sec.
1.168(k)-2(b)(5)(iii) of the 2019 Final Regulations (written non-
binding contract) and that is entered into prior to the manufacture,
construction, or production of the property for use by the taxpayer in
its trade or business or for its production of income. Further, these
final regulations remove the requirement that the larger self-
constructed property be qualified property under section 168(k)(2), as
in effect on the day before the enactment of the TCJA, and instead
provide that the larger self-constructed property must be (i) MACRS
property with a recovery period of 20 years or less, computer software,
water utility property, or qualified improvement property under section
168(k)(3) as in effect on the day before the enactment date of the
TCJA, and (ii) qualified property under Sec. 1.168(k)-2(b) of the 2019
Final Regulations and these final regulations, determined without
regard to the acquisition date requirement in Sec. 1.168(k)-2(b)(5),
for which the taxpayer begins the manufacture, construction, or
production before September 28, 2017. As a result of this change, the
cut-off dates for when the larger self-constructed property must be
placed in service by the taxpayer now align with the placed-in-service
dates under section 168(k)(6) and Sec. 1.168(k)-2(b)(4)(i). Because
the Component Election is an exception to the acquisition date
requirements in Sec. 1.168(k)-2(b)(5)(iv) of the 2019 Final
Regulations and Sec. 1.168(k)-2(b)(5)(v) of these final regulations,
and such rules do not apply to qualified film, television, and live
theatrical productions, the Treasury Department and the IRS have
determined to retain the rule in Sec. 1.168(k)-2(c) of the 2019
Proposed Regulations to exclude these productions from being eligible
for the Component Election.
With regard to the taxpayers' question of whether the larger self-
constructed property is the building constructed by the taxpayer or the
tangible personal property constructed as part of the building, all
tangible personal property constructed as part of that building
generally is MACRS property with a recovery period of 20 years or less.
As a result, the Treasury Department and the IRS have determined that
such tangible personal property is the larger self-constructed property
for purposes
[[Page 71745]]
of the Component Election if the construction of all tangible personal
property of the building began before September 28, 2017, and any
eligible component of such tangible personal property is eligible for
the Component Election. Accordingly, these final regulations clarify
that all property that is constructed as part of residential rental
property, nonresidential real property, or an improvement to such
property, and that is MACRS property with a recovery period of 20 years
or less, computer software, water utility property, or qualified
improvement property under section 168(k)(3) as in effect on the day
before the enactment date of the TCJA, is the larger self-constructed
property for purposes of the Component Election.
b. Eligible Components
To be eligible for the Component Election, Sec. 1.168(k)-2(c)(3)
of the 2019 Proposed Regulations provides that a component of the
larger self-constructed property must be qualified property under Sec.
1.168(k)-2(b) of the 2019 Final Regulations and these final regulations
that is acquired or self-constructed by the taxpayer after September
27, 2017. These final regulations retain this rule. In addition, these
final regulations clarify that the acquisition date of a component
acquired pursuant to a written binding contract is determined under
Sec. 1.168(k)-2(b)(5)(ii)(B) of the 2019 Final Regulations. If a
component is acquired or self-constructed pursuant to a written non-
binding contract, these final regulations provide that the rules under
Sec. 1.168(k)-2(b)(5)(v) of these final regulations determine the
acquisition date of such component or when manufacture, construction,
or production of such component begins. These final regulations also
include a conforming change to Sec. 1.168(k)-2(b)(5)(v) clarifying
that these rules apply to property that is self-constructed pursuant to
a written non-binding contract, and amend Sec. 1.168(k)-2(d)(3) to
provide a rule similar to the rule in Sec. 1.168(k)-2(b)(5)(v) for
property that is described in section 168(k)(2)(B) or (C) and is not
acquired pursuant to a written binding contract.
D. Property Described in Section 168(k)(2)(B)
Section 1.168(k)-2(e)(1)(iii) of the 2019 Proposed Regulations
provides that rules similar to the rules in section 4.02(1)(b) of
Notice 2007-36 (2007-17 I.R.B. 1000) apply for determining the amounts
of unadjusted depreciable basis attributable to the manufacture,
construction, or production of property described in section
168(k)(2)(B) before January 1, 2027. These final regulations clarify
that such rules apply regardless of whether the manufacture,
construction, or production of such property is pursuant to a written
binding contract or a written non-binding contract.
II. Definitions
A. Depreciable Property
Section 1.168(b)-1(a)(1) defines the term ``depreciable property''
for purposes of section 168. See also Sec. 1.168(k)-2(b)(1). In
connection with its comments on the special rules for consolidated
groups in Sec. 1.168(k)-2(b)(3)(v) of the 2019 Proposed Regulations, a
commenter requested the final regulations provide either an explicit
definition of that term or an alternate term that is expressly limited
to property the nature of which is eligible for the additional first
year depreciation deduction.
The definition of ``depreciable property'' in Sec. 1.168(b)-
1(a)(1) is the same definition of that term in Sec. 1.168(k)-
1(a)(2)(i) for purposes of section 168(k) as in effect before the
enactment of the TCJA. The Treasury Department and the IRS are not
aware of problems with applying the definition under either Sec.
1.168(b)-1(a)(1) or Sec. 1.168(k)-1(a)(2)(i). Moreover, the Treasury
Department and the IRS have determined that such definition clearly
describes which property is depreciable property. Accordingly, the
Treasury Department and the IRS decline to adopt this comment. However,
the rules in Sec. 1.1502-68 for consolidated groups use the term
``eligible property'' to identify the types of depreciable property
eligible for the additional first year depreciation deduction.
B. Qualified Improvement Property
Section 1.168(b)-1(a)(5) of the 2019 Final Regulations defines the
term ``qualified improvement property'' for purposes of section 168.
Section 168(e)(6), as amended by section 13204 of the TCJA, and Sec.
1.168(b)-1(a)(5)(i)(A) and (a)(5)(ii) provide the definition of that
term for improvements placed in service after December 31, 2017.
Section 2307 of the CARES Act amended section 168(e)(3)(E), (e)(6), and
(g)(3)(B). Section 2307(a)(1)(A) of the CARES Act added a new clause
(vii) to the end of section 168(e)(3)(E) to provide that qualified
improvement property is classified as 15-year property. Section
2307(a)(1)(B) of the CARES Act amended the definition of qualified
improvement property in section 168(e)(6) by providing that the
improvement must be ``made by the taxpayer.'' In addition, section
2307(a)(2) of the CARES Act amended the table in section 168(g)(3)(B)
to provide a recovery period of 20 years for qualified improvement
property for purposes of the alternative depreciation system under
section 168(g). These amendments to section 168(e) and (g) are
effective as if included in section 13204 of the TCJA and, therefore,
apply to property placed in service after December 31, 2017.
As a result of these changes by section 2307 of the CARES Act,
these final regulations amend Sec. 1.168(b)-1(a)(5)(i)(A) to provide
that the improvement must be made by the taxpayer. The Treasury
Department and the IRS are aware of questions regarding the meaning of
``made by the taxpayer'' with respect to third-party construction of
the improvement and the acquisition of a building in a transaction
described in section 168(i)(7)(B) (pertaining to treatment of
transferees in certain nonrecognition transactions) that includes an
improvement previously made by, and placed in service by, the
transferor or distributor of the building. In this regard, the Treasury
Department and the IRS believe that an improvement is made by the
taxpayer if the taxpayer makes, manufactures, constructs, or produces
the improvement for itself or if the improvement is made, manufactured,
constructed, or produced for the taxpayer by another person under a
written contract. In contrast, if a taxpayer acquires nonresidential
real property in a taxable transaction and such nonresidential real
property includes an improvement previously placed in service by the
seller of such nonresidential real property, the improvement is not
made by the taxpayer.
Consistent with section 168(i)(7) (pertaining to treatment of
transferees in certain nonrecognition transactions), the Treasury
Department and the IRS also believe that if a transferee taxpayer
acquires nonresidential real property in a transaction described in
section 168(i)(7)(B) (for example, section 351 or 721), any improvement
that was previously made by, and placed in service by, the transferor
or distributor of such nonresidential real property and that is
qualified improvement property in the hands of the transferor or
distributor is treated as being made by the transferee taxpayer, and
thus is qualified improvement property in the hands of the transferee
taxpayer, but only for the portion of its basis in such property that
does not exceed the transferor's or distributor's adjusted depreciable
basis of this property.
[[Page 71746]]
However, because the basis is determined by reference to the
transferor's or distributor's adjusted basis in the improvement, the
transferee taxpayer's acquisition does not satisfy section 179(d)(2)(C)
and Sec. 1.179-4(c)(1)(iv) and thus, does not satisfy the used
property acquisition requirements of Sec. 1.168(k)-2(b)(3)(iii).
Accordingly, the qualified improvement property is not eligible for the
additional first year depreciation deduction in the hands of the
transferee taxpayer, except as provided in Sec. 1.168(k)-2(g)(1)(iii).
An example has been added to Sec. 1.168(k)-2(b)(2)(iii) to
illustrate the eligibility of qualified improvement property for the
additional first year depreciation deduction.
C. Predecessor and Class of Property
Section 1.168(k)-2(a)(2)(iv)(B) of the 2019 Final Regulations
defines a predecessor as including a transferor of an asset to a
transferee in a transaction in which the transferee's basis in the
asset is determined, in whole or in part, by reference to the basis of
the asset in the hands of the transferor. A commenter requested
clarification of whether this definition was intended to apply only
with respect to the specific property transferred or more broadly. The
Treasury Department and the IRS intended the definition of a
``predecessor'' in Sec. 1.168(k)-2(a)(2)(iv)(B) of the 2019 Final
Regulations to be property-specific. Similarly, the Treasury Department
and the IRS intended the definition of a ``class of property'' in Sec.
1.168(k)-2(f)(1)(ii)(G) of the 2019 Final Regulations (regarding basis
adjustments in partnership assets under section 743(b)) to be partner-
specific. Accordingly, these final regulations amend Sec. 1.168(k)-
2(a)(2)(iv)(B) of the 2019 Final Regulations to substitute ``the'' for
``an'', and these final regulations amend Sec. 1.168(k)-2(f)(1)(ii)(G)
of the 2019 Final Regulations to substitute ``Each'' for ``A''.
Pursuant to Sec. 1.168(k)-2(a)(2)(iv)(E) of the 2019 Final
Regulations, a transferor of an asset to a trust is a predecessor with
respect to the trust. The Treasury Department and the IRS intended that
this provision apply only to transfers involving carryover basis.
Because Sec. 1.168(k)-2(a)(2)(iv)(B) of the 2019 Final Regulations
applies to such transfers, these final regulations remove Sec.
1.168(k)-2(a)(2)(iv)(E) of the 2019 Final Regulations.
Statement of Availability of IRS Documents
The IRS Revenue Procedures and Revenue Rulings cited in this
document are published in the Internal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Superintendent of Documents, U.S.
Government Publishing Office, Washington, DC 20402, or by visiting the
IRS website at http://www.irs.gov.
Applicability Date
The definition of qualified improvement property in Sec. 1.168(b)-
1(a)(5)(i)(A) of these final regulations applies to depreciable
property placed in service by the taxpayer after December 31, 2017.
Sections 1.168(k)-2 and 1.1502-68 of these final regulations apply to
depreciable property, including certain components, acquired after
September 27, 2017, and placed in service, or certain plants planted or
grafted, as applicable, by the taxpayer during or after the taxpayer's
taxable year that begins on or after January 1, 2021. However, a
taxpayer may choose to apply Sec. Sec. 1.168(k)-2 and 1.1502-68 of
these final regulations to depreciable property, including certain
components, acquired and placed in service after September 27, 2017, or
certain plants planted or grafted after September 27, 2017, as
applicable, by the taxpayer during a taxable year ending on or after
September 28, 2017, provided the taxpayer applies all rules in
Sec. Sec. 1.168(k)-2 and 1.1502-68 (to the extent relevant) in their
entirety and in a consistent manner. See section 7805(b)(7).
In the case of property described in Sec. 1.1502-68(e)(2)(i) of
these final regulations that is acquired in a transaction that
satisfies the requirements of Sec. 1.1502-68(c)(1)(ii) or (c)(2)(ii)
of these final regulations, the taxpayer may apply Sec. Sec. 1.168(k)-
2 and 1.1502-68 of these final regulations for such property only if
the rules are applied, in their entirety and in a consistent manner, by
all parties to the transaction, including the transferor member, the
transferee member, and the target, as applicable, and the consolidated
groups of which they are members, for the taxable year(s) in which the
transaction occurs and the taxable year(s) that includes the day after
the deconsolidation date, as defined in Sec. 1.1502-68(a)(2)(iii) of
these final regulations.
Additionally, once a taxpayer applies Sec. Sec. 1.168(k)-2 and
1.1502-68 of these final regulations, in their entirety, for a taxable
year, the taxpayer must continue to apply Sec. Sec. 1.168(k)-2 and
1.1502-68 of these final regulations, in their entirety, for the
taxpayer's subsequent taxable years.
Alternatively, a taxpayer may rely on the proposed regulations
under section 168(k) in regulation project REG-106808-19 (84 FR 50152;
2019-41 I.R.B. 912), with respect to depreciable property, including
certain components, acquired and placed in service after September 27,
2017, or certain plants planted or grafted after September 27, 2017, as
applicable, by the taxpayer during a taxable year ending on or after
September 28, 2017, and before the taxpayer's first taxable year that
begins on or after January 1, 2021, if (1) the taxpayer follows the
proposed regulations in their entirety, except for the Partnership
Lookthrough Rule in proposed Sec. 1.168(k)-2(b)(3)(iii)(B)(5), and in
a consistent manner, and (2) all members of a consolidated group
consistently rely on the same set of rules. Further, if such property
is acquired in a transaction described in proposed Sec. 1.168(k)-
2(b)(3)(v)(C) or (D), the taxpayer may rely on the proposed regulations
under section 168(k) for such property only if the rules are followed,
in their entirety and in a consistent manner, by all parties to the
transaction, including the transferor member, the transferee member,
and the target, as applicable, and the consolidated groups of which
they are members, for the taxable year(s) in which the transaction
occurs and the taxable year(s) that includes the day after the
Deconsolidation Date. For this purpose, the terms transferor member,
transferee member, and target have the meaning provided in proposed
Sec. 1.168(k)-2(b)(3)(v)(C) and (D), and the term Deconsolidation Date
has the meaning provided in proposed Sec. 1.168(k)-2(b)(3)(v)(C)(1).
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Executive Orders 12866, 13563, and 13771 direct agencies to assess
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including (i) potential economic, environmental, and
public health and safety effects, (ii) potential distributive impacts,
and (iii) equity). Executive Order 13563 emphasizes the importance of
quantifying both costs and benefits, reducing costs, harmonizing rules,
and promoting flexibility.
These final regulations have been designated as subject to review
under Executive Order 12866 pursuant to the Memorandum of Agreement
(April 11,
[[Page 71747]]
2018) (MOA) between the Treasury Department and the Office of
Management and Budget (OMB) regarding review of tax regulations. The
Office of Information and Regulatory Affairs has designated these
regulations as economically significant under section 1(c) of the MOA.
Accordingly, the OMB has reviewed these regulations.
A. Background
i. Bonus Depreciation
In general, section 168(k) allows taxpayers to immediately deduct
some portion of investment in certain types of capital assets referred
to as the ``bonus percentage.'' This provision is colloquially referred
to as ``bonus depreciation.'' Public Law 115-97, commonly referred to
as the Tax Cuts and Jobs Act (TCJA), increased the bonus percentage
from 50 percent to 100 percent for qualified property acquired after
September 27, 2017, which accelerates depreciation deductions relative
to previous law. The TCJA also removed the ``original use''
requirement, meaning that taxpayers could claim bonus depreciation on
certain ``used'' property. The TCJA made several other modest changes
to the operation of section 168(k). First, it excluded from the
definition of qualified property any property used by rate-regulated
utilities and certain firms (primarily automobile dealerships) with
``floor plan financing indebtedness'' as defined under section 163(j).
Furthermore, section 168(k)(2)(a)(ii)(IV) and (V) allowed qualified
film, television, and live theatrical productions (as defined under
Section 181) to qualify for bonus depreciation.
The Treasury Department and the IRS promulgated regulations under
Sec. 1.168(k)-2 to generally provide structure and clarity for the
implementation of section 168(k). Such regulations were proposed as
REG-104397-18 (2018 Proposed Regulations) and finalized as TD 9874
(2019 Final Regulations). However, the Treasury Department and the IRS
determined that there remained several outstanding issues requiring
clarification that should be subject to notice and comment. In
response, the Treasury Department and the IRS issued an additional
notice of proposed rulemaking as REG 106808-19 (2019 Proposed
Regulations). These final regulations finalize the 2019 Proposed
Regulations with only minor changes.
These final regulations (these regulations) address ambiguities
related to the operation of section 168(k)(9), which describes property
that is ineligible for bonus depreciation. Second, these regulations
create a de minimis rule which provides that a taxpayer will be deemed
not to have had a prior depreciable interest in a property--and thus
that property will be eligible for bonus depreciation in that
taxpayer's hands (assuming it otherwise qualifies)--if the taxpayer
previously disposed of that property within 90 days of the date on
which that property was originally placed in service. Third, these
regulations provide for the treatment of an asset acquisition as part
of a sale of a member of a consolidated group from one group to
another. Fourth, these regulations clarify the treatment of a series of
related transactions. Finally, these regulations provide an election to
treat certain components of larger self-constructed property as
eligible for the increased bonus percentage even if the construction of
such larger self-constructed property began before September 28, 2017.
B. Economic Analysis
1. No-Action Baseline
In this analysis, the Treasury Department and the IRS assess the
benefits and costs of these regulations relative to a no-action
baseline reflecting anticipated Federal income tax-related behavior in
the absence of these regulations.
2. Summary of Economic Effects
These regulations provide certainty and consistency in the
application of section 168(k) by providing definitions and
clarifications regarding the statute's terms and rules. In the absence
of the guidance provided in these regulations, the chance that
different taxpayers might interpret the statute differently is
exacerbated. For example, two similarly situated taxpayers might
interpret the statutory provisions pertaining to the definition of
property eligible for bonus depreciation differently, with one taxpayer
pursuing a project that another comparable taxpayer might decline
because of a different interpretation of whether property is eligible
for bonus depreciation under 168(k). If this second taxpayer's activity
is more profitable, an economic loss arises. Similar situations may
arise under each of the provisions addressed by these regulations.
Certainty and clarity over tax treatment generally also reduce
compliance costs for taxpayers and increase overall economic
performance.
An economic loss might also arise if all taxpayers have similar
interpretations under the baseline of the tax treatment of particular
deductible items but those interpretations differ slightly from the
interpretation Congress intended for deductions of these items. For
example, these regulations may specify a tax treatment that few or no
taxpayers would adopt in the absence of specific guidance but that
nonetheless advances Congressional intent. In these cases, guidance
provides value by bringing economic decisions closer in line with the
intent and purpose of the statute.
While no guidance can curtail all differential or inaccurate
interpretations of the statute, these regulations significantly
mitigate the chance for differential or inaccurate interpretations and
thereby increase economic efficiency.
Because these regulations clarify the tax treatment of bonus
depreciation for certain taxpayers, there is the possibility that
business decisions may change as a result of these regulations relative
to the no-action baseline. Averaged across taxpayers in the economy,
these regulations will tend to expand the pool of property that is
eligible for bonus depreciation, thus reducing effective tax rates for
affected taxpayers, relative to the no-action baseline. This reduction
in effective tax rates, viewed in isolation, is generally projected to
increase economic activity by these taxpayers relative to the no-action
baseline.
3. Economic Analysis of Specific Provisions
i. Property Excluded From Bonus by Section 168(k)(9)
Section 168(k)(9) provides that property used by certain businesses
is not eligible for bonus depreciation. These businesses include
certain rate-regulated utilities and certain firms (primarily motor
vehicle dealerships) with floor plan financing indebtedness and total
interest expense that exceeds certain thresholds.
These regulations clarify that those taxpayers that lease property
to such businesses described by section 168(k)(9) may claim bonus
depreciation, so long as other requirements of section 168(k) are met.
This approach broadly follows existing normalization rules (which pre-
date TCJA and which provide generally for the reconciliation of tax
income and book income for regulatory purposes for utilities), which
provide that lessors to public utilities are not bound by such rules so
long as they themselves are not a public utility. The Treasury
Department and the IRS expect that this guidance will be easy for
taxpayers to interpret and comply with. To the extent that lessors can
claim bonus depreciation, it is plausible that the market-clearing
lease price for
[[Page 71748]]
such assets will fall, potentially enabling some expansions of output
and contributing to economic growth.
These regulations next clarify which businesses fall under the
umbrella of section 168(k)(9)(A) (utilities) and section 168(k)(9)(B)
(firms with floor plan financing indebtedness). In regards to section
168(k)(9)(A), which applies to property that is ``primarily used'' in
certain utilities businesses, these regulations provide that the
``primary use'' of property is consistent with how primary use is
determined in existing regulations under section 167. This application
should be familiar to taxpayers, and thus relatively easy to comply
with.
The statutory language of section 168(k)(9)(B) is somewhat
ambiguous, requiring more substantive clarifications. First, section
168(k)(9)(B) provides that firms with floor plan financing indebtedness
are ineligible for bonus depreciation ``if the floor plan financing
interest [from such indebtedness] was taken into account under [section
163(j)(1)(C)].'' These regulations clarify that such interest is in
fact ``taken into account'' only if the firm in fact received a benefit
from section 163(j)(1)(C)--i.e., if total business interest expense
(including floor plan financing interest) exceeds business interest
income plus 30 percent (50 percent for taxable years beginning during
2019 and 2020) of adjusted taxable income. This decision allows more
firms to claim bonus depreciation than if the Treasury Department and
the IRS had made the opposite interpretation (deeming all firms with
floor plan financing interest to be ineligible for bonus depreciation,
regardless of whether the firm received a benefit from section
163(j)(1)(C)). However, the Treasury Department and the IRS expect that
most taxpayers would have interpreted the phrase ``taken into account''
in the same manner as these regulations in the absence of these
regulations, implying that the economic effects of this provision are
modest.
An additional ambiguity in section 168(k)(9)(B) pertains to the
length of time that the section applies to a given firm. The section
refers to a ``trade or business that has had floor plan financing
indebtedness . . . if the floor plan financing interest related to such
indebtedness was taken into account under [section 163(j)(1)(C)]''
(emphasis added). Consider a firm (Example A) that received a benefit
from section 163(j)(C)(1) in the 2021 tax year (meaning that its
interest deduction would have been smaller if not for section
163(j)(C)(1)) but not in the 2022 tax year or any other later year. The
Treasury Department and the IRS considered two options to address the
length of time to which this designation would apply: (i) In
perpetuity, such that such businesses would be forever ineligible for
bonus depreciation; or (ii) annually; that is, section 168(k)(9)(B) is
determined on an annual basis. Under this option, the firm in Example A
would not be eligible for bonus depreciation in 2021, but so long as
the other requirements were met, it would be eligible for bonus
depreciation in 2022.
These regulations adopt the second option. This interpretation
enables more firms to be eligible for bonus depreciation in more years,
relative to the alternative regulatory approach, and would thus
potentially increase investment by such firms. The Treasury Department
and the IRS expect that a substantial proportion of taxpayers would
have come to a different conclusion regarding the interpretation of
this timing in the absence of these regulations. Therefore, this
provision could be expected to affect economic activity by these
taxpayers relative to the no-action baseline.
The Treasury Department and the IRS engaged in an analysis of these
effects based on historical tax data, parameter values from the
economic literature for the effect of bonus depreciation on investment,
and assumptions regarding taxpayer interpretations in the absence of
these regulations. This analysis projects that this provision will
cause investment to increase in this industry by no greater than $55
million in any year, and approximately $25 million per year on average
over the period from 2019-2028, relative to the no-action baseline.
Additionally, this analysis projects that some share of this increased
investment will reduce investment in other industries through crowd-out
effects.
ii. Prior Depreciable Interest
In general, to be statutorily eligible for bonus depreciation, a
given property may not have been owned and depreciated by the same firm
in the past. This requirement has the effect of penalizing any tax-
driven ``churning'' of assets, whereby a firm could sell and soon
thereafter repurchase the same asset in order to claim the 100 percent
deduction. The 2019 Final Regulations defined ``ownership'' for this
purpose as having a prior depreciable interest. These regulations
create an exception that provides that a taxpayer does not have a prior
depreciable interest in a given property if the taxpayer disposed of
the property within 90 days of the initial date when the property was
placed in service (additional requirements apply to the extent the
original acquisition occurred prior to September 28, 2017). The
Treasury Department and the IRS instituted this rule to address
situations where temporary ownership of property is necessary to
facilitate certain lease arrangements so that the property subsequently
purchased off-lease is not ineligible for bonus depreciation and to
coordinate with the syndication transaction rules of section
168(k)(2)(E)(iii).
The Treasury Department and the IRS do not anticipate substantial
economic effects of this provision. Nevertheless, it will generally
have the effect of causing more property to be eligible for bonus
depreciation (increasing incentives to invest) relative to the no-
action baseline. This provision is not expected to meaningfully
increase tax-driven or economically wasteful churning of assets
relative to the no-action baseline.
iii. Group Prior Use Rule
These regulations clarify several aspects of the ``Group Prior Use
Rule'' as introduced in the 2018 Proposed Regulations. Under that rule,
all members of a consolidated group are treated as having had a
depreciable interest in a property if any member of the consolidated
group had such a depreciable interest. First, these final regulations
clarify that the rule ceases to be in effect once the consolidated
group terminates as a result of joining another consolidated group.
Second, these regulations clarify that the Group Prior Use Rule does
not apply to a corporation after it deconsolidates from the
consolidated group, so long as that corporation did not in fact
previously own that property. As is the case with the prior use rules
generally, the Treasury Department and the IRS do not anticipate large
economic effects as a result of this section of these regulations
relative to the no-action baseline.
iv. Purchases of Assets as Part of Acquisition of Entire Business
These regulations clarify the procedure for certain purchases of
assets by a given corporation from a related party that are a part of
an integrated plan involving the selling of that corporation from one
group to another. Specifically, these regulations provide that the
deduction for bonus depreciation is allowed in such circumstances and
should be claimed by the acquiring group. These regulations provide for
a similar treatment in the case of deemed acquisitions in the case of
an election under section 338(h)(10)
[[Page 71749]]
or section 336(e). These rules cause the tax treatment to reflect the
economic reality, in which the acquiring group is bearing the economic
outlay of the asset purchase, and that acquiring group had no economic
prior depreciable interest. By aligning the tax consequences with the
economic allocations, this treatment minimizes potential distortions
caused by the anti-churning rules relative to the no-action baseline.
v. Component Rule Election
In 2010, Congress increased the bonus percentage from 50 percent to
100 percent for property placed in service between September 9, 2010
and December 31, 2011. In 2011, the IRS issued Revenue Procedure 2011-
26 to allow taxpayers to elect to have the 100 percent bonus rate apply
to components of larger self-constructed property whose construction
began before September 9, 2010, so long as (1) the components were
acquired (or self-constructed) after that date and (2) the larger self-
constructed property itself otherwise qualifies for bonus depreciation
generally. These regulations provide an analogous rule, replacing
September 9, 2010 with September 28, 2017. This provision will allow
more property to qualify for 100 percent bonus depreciation relative to
the no-action baseline. Furthermore, this provision provides neutrality
between taxpayers who acquire distinct, smaller pieces of depreciable
property and those taxpayers that invest a similar amount in fewer,
larger pieces of depreciable property whose construction takes place
over a longer period of time. By treating similar taxpayers (and
similar choices) similarly, this rule enhances economic efficiency by
minimizing tax-related distortions. However, the Treasury Department
and the IRS project these rules to have only a modest effect on future
economic decisions relative to the no-action baseline. These rules
affect only taxpayers (1) that acquire (or self-construct) components
after September 27, 2017 and (2) that began construction of the larger
self-constructed property prior to September 28, 2017 (approximately 32
months ago). The Treasury Department and the IRS expect relatively few
taxpayers to be affected by this provision going forward.
vi. Series of Related Transactions
The 2018 Proposed Regulations provided that, in a series of related
transactions, the relationship between the transferor and transferee of
an asset was determined only after the final transaction in the series
(Series of Related Transactions Rule). Commenters had expressed
confusion regarding whether this rule applies to testing whether
parties are related under section 179(d)(2), or whether it applies more
broadly (e.g., in determining whether the taxpayer had a prior
depreciable interest). These regulations clarify that this Series of
Related Transactions Rule is intended only to test the relatedness of
the parties involved in the series of related transactions.
These regulations further revise the Series of Related Transactions
Rule to address its application in various situations. Under these
regulations, relatedness is tested after each step of the series of
related transactions and between the original transferor in the series
and the direct transferor, with a substantial exception that any
intermediary (i.e., a taxpayer other than the original transferor or
ultimate transferee) is disregarded so long as that intermediary (1)
never places the property in service or (2) disposes of the property in
the same taxable year in which it was placed in service. Testing
relatedness after each step in the transaction allows certain
intermediaries in the series to claim bonus depreciation if they
maintained use of the property for a non-trivial length of time. The
Treasury Department and the IRS do not predict substantial economic
effects of this provision relative to the no-action baseline.
vii. Miscellaneous
These regulations put forward rules to the extent existing
regulations apply in slightly new contexts. In particular, these
regulations clarify when a binding contract is in force to acquire all
or substantially all the assets of a trade or business. Additionally,
consistent with the rules of Sec. 1.168(d)-1(b)(4), these regulations
provide that, for the purpose of determining whether the mid-quarter
convention applies, depreciable basis is not reduced by the amount of
bonus depreciation.
The Treasury Department and the IRS do not anticipate large
economic effects of these clarifications relative to the no-action
baseline, though the additional clarity provided by these regulations
will likely reduce compliance burdens.
4. Number of Affected Taxpayers
The most substantial components of these regulations affect the
ability of dealers of motor vehicles to claim bonus depreciation. Based
on data from tax year 2017, the Treasury Department and the IRS
estimate that there are approximately 94,000 taxpayers in that industry
who may be affected by these regulations based on the taxpayer's
voluntarily reported NAICS code. Of this 94,000, 14,000 are filers of
Form 1120, 42,000 are filers of Form 1120S, 12,000 are filers of Form
1065, and 26,000 are filers of Form 1040. Additionally, other
components of these regulations may have a very slight effect on all
taxpayers that claim bonus depreciation. Including such taxpayers,
these regulations may affect approximately 2.85 million taxpayers,
including 160,000 filers of Form 1120, 560,000 filers of Form 1120S,
400,000 filers of Form 1065, and 1.75 million filers of Form 1040.
II. Paperwork Reduction Act
The collections of information in these final regulations are in
Sec. Sec. 1.168(k)-2(c) and 1.1502-68(c)(4). The collection of
information in Sec. 1.168(k)-2(c) is an election that a taxpayer may
make to treat one or more components acquired or self-constructed after
September 27, 2017, of certain larger self-constructed property as
being eligible for the 100-percent additional first year depreciation
deduction under section 168(k). The larger self-constructed property
must be MACRS property with a recovery period of 20 years or less,
computer software, water utility property, or qualified improvement
property placed in service by the taxpayer after September 27, 2017,
and before January 1, 2018, that is qualified property under section
168(k)(2) for which the manufacture, construction, or production began
before September 28, 2017. The election is made by attaching a
statement to a Federal income tax return indicating that the taxpayer
is making the election under Sec. 1.168(k)-2(c) and whether the
taxpayer is making the election for all or some of the components
described in Sec. 1.168(k)-2(c).
The collection of information in Sec. 1.1502-68(c)(4) is an
election that a taxpayer may make to not claim the additional first
year depreciation deduction for qualified property, and which Sec.
1.1502-68(c)(1) or (2) would otherwise require the taxpayer to claim
such deduction when a member of a consolidated group acquires from
another member property eligible for the additional first year
depreciation deduction (or stock of a third member holding such
property), and the acquirer member (and acquired member, if applicable)
then leaves the consolidated group. To make the election, the
corporation must attach a statement to its timely filed federal income
tax return (including extensions) for the taxable year that begins
after the date on which it leaves the consolidated group. The
[[Page 71750]]
statement must describe the transaction(s) to which Sec. 1.1502-
68(c)(1) or (2) would apply and state that the corporation elects not
to claim the additional first year depreciation deduction for any
property transferred in such transaction(s).
For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) (PRA), the reporting burden associated with Sec. 1.168(k)-
2(c) will be reflected in the PRA submission associated with income tax
returns in the Form 1120 series, Form 1040 series, Form 1041 series,
and Form 1065 series (for OMB control numbers, see chart at the end of
this part II of this Special Analysis section). The estimate for the
number of impacted filers with respect to the collection of information
described in this part is 0 to 41,775 respondents. Partial data was
available to directly estimate the upper bound for the number of
impacted filers. The upper bound estimate is based on the change in
volume of federal income tax return filers that amended a 2017 or 2018
filing a nonzero entry on Form 4562 Line 14 (additional first year
depreciation deduction).
For purposes of the PRA, the reporting burden associated with Sec.
1.1502-68(c)(4) will be reflected in the PRA submission associated with
income tax returns in the Form 1120 series (for OMB control number, see
chart at the end of this part II of this Special Analysis section). The
estimate for the number of impacted filers with respect to the
collection of information described in this part is 0 to 500
respondents. Partial data was available to estimate the upper bound for
the number of impacted filers. The upper bound estimate is based on the
observed volume of federal income tax return filers that are a
subsidiary corporation of a parent, have a history of reporting
depreciation on a Form 4562, and based on the parent's consolidated
federal tax return filing in 2017 and 2018, the subsidiary
deconsolidated from the consolidated group.
The IRS estimates the number of affected filers to be the
following:
Tax Forms Impacted
------------------------------------------------------------------------
Number of Forms to which the
Collection of information respondents information may be
(estimated) attached
------------------------------------------------------------------------
Section 1.168(k)-2(c) Election for 0-41,775 Form 1120 series,
components of larger self- Form 1040 series,
constructed property for which Form 1041 series,
the manufacture, construction, or and Form 1065
production begins before series.
September 28, 2017.
Section 1.1502-68(c)(4) Election 0-500 Form 1120 series.
to not claim the additional first
year depreciation deduction under
Sec. 1.1502-68(c)(1) or (2) for
property owned by a subsidiary
corporation of a consolidated
group that is qualified property
after the subsidiary corporation
leaves the consolidated group.
------------------------------------------------------------------------
Source: IRS:RAAS:KDA (CDW 5-16-20 for Sec. 1.168(k)-2(c) election and
CDW 5-15-20 for Sec. 1.1502-68(c)(4)(i) election).
The current status of the PRA submissions related to the tax forms
that will be revised as a result of the information collections in the
section 168(k) regulations and the section 1502 regulations is provided
in the accompanying table. As described earlier, the reporting burdens
associated with the information collections in the regulations are
included in the aggregated burden estimates for OMB control numbers
1545-0123 (which represents a total estimated burden time for all forms
and schedules for corporations of 3.344 billion hours and total
estimated monetized costs of $61.558 billion ($2019)), 1545-0074 (which
represents a total estimated burden time, including all other related
forms and schedules for individuals, of 1.721 billion hours and total
estimated monetized costs of $33.267 billion ($2019)), and 1545-0092
(which represents a total estimated burden time, including all other
related forms and schedules for trusts and estates, of 307,844,800
hours and total estimated monetized costs of $9.950 billion ($2016)).
The IRS is currently in the process of revising the methodology it uses
to estimate burden and costs for OMB control number 1545-0092. It is
expected that future estimates under this OMB control number will
include dollar estimates of annual burden costs to taxpayers calculated
using this revised methodology. The overall burden estimates provided
for the OMB control numbers below are aggregate amounts that relate to
the entire package of forms associated with the applicable OMB control
number and will in the future include, but not isolate, the estimated
burden of the tax forms that will be created or revised as a result of
the information collections in the regulations. These numbers are
therefore unrelated to the future calculations needed to assess the
burden imposed by the regulations. These burdens have been reported for
other regulations that rely on the same OMB control numbers to conduct
information collections under the PRA, and the Treasury Department and
the IRS urge readers to recognize that these numbers are duplicates and
to guard against over counting the burden that the regulations that
cite these OMB control numbers imposed prior to the TCJA. No burden
estimates specific to the forms affected by the regulations are
currently available. The Treasury Department and the IRS have not
estimated the burden, including that of any new information
collections, related to the requirements under the regulations. For the
OMB control numbers discussed earlier, the Treasury Department and the
IRS estimate PRA burdens on a taxpayer-type basis rather than a
provision-specific basis. Those estimates would capture changes made by
the TCJA and those that arise out of discretionary authority exercised
in these final regulations and other regulations that affect the
compliance burden for those forms.
The Treasury Department and the IRS request comments on all aspects
of information collection burdens related to these final regulations,
including estimates for how much time it would take to comply with the
paperwork burdens described earlier for each relevant form and ways for
the IRS to minimize the paperwork burden. In addition, when available,
drafts of IRS forms are posted for comment at https://apps.irs.gov/app/picklist/list/draftTaxForms.htm. IRS forms are available at https://www.irs.gov/forms-instructions. Forms will not be finalized until after
they have been approved by OMB under the PRA.
[[Page 71751]]
----------------------------------------------------------------------------------------------------------------
Form Type of filer OMB No(s). Status
----------------------------------------------------------------------------------------------------------------
Form 1040............................... Individual (NEW Model).... 1545-0074 Approved by OIRA through 1/
31/2021.
-----------------------------------------------------------------------
Link: https://www.federalregister.gov/documents/2019/09/30/2019-21066/proposed-collection-comment-request-for-form-1040-form-1040nr-form-1040nr-ez-form-1040x-1040-sr-and
----------------------------------------------------------------------------------------------------------------
Form 1041............................... Trusts and estates........ 1545-0092 Approved by OIRA through 5/
3/2022.
-----------------------------------------------------------------------
Link: https://www.federalregister.gov/documents/2018/04/04/2018-06892/proposed-collection-comment-request-for-form-1041
----------------------------------------------------------------------------------------------------------------
Forms 1065 and 1120..................... Business (NEW Model)...... 1545-0123 Approved by OIRA through 1/
31/2021.
-----------------------------------------------------------------------
Link: https://www.federalregister.gov/documents/2019/09/30/2019-21068/proposed-collection-comment-request-for-forms-1065-1066-1120-1120-c-1120-f-1120-h-1120-nd-1120-s
----------------------------------------------------------------------------------------------------------------
III. Regulatory Flexibility Act
It is hereby certified that these final regulations will not have a
significant economic impact on a substantial number of small entities
within the meaning of section 601(6) of the Regulatory Flexibility Act
(5 U.S.C. chapter 6).
Section 168(k) generally affects taxpayers that own and use
depreciable property in their trades or businesses or for their
production of income. The reporting burden in Sec. 1.168(k)-2(c)
generally affects taxpayers that elect to have the 100-percent
additional first year depreciation deduction apply to components that
are acquired or self-constructed after September 27, 2017, of
depreciable property for which the manufacture, construction, or
production began before September 28, 2017. The election is made by
attaching a statement to a Federal income tax return indicating that
the taxpayer is making the election under Sec. 1.168(k)-2(c) and
whether the taxpayer is making this election for all or some of the
components described in Sec. 1.168(k)-2(c).
The reporting burden in Sec. 1.1502-68(c)(4) generally affects
taxpayers that elect to not claim the additional first year
depreciation deduction for qualified property, and which Sec. 1.1502-
68(c)(1) or (2) would otherwise require the taxpayer to claim such
deduction when a member of a consolidated group acquires from another
member property eligible for the additional first year depreciation
deduction (or stock of a third member holding such property), and the
acquirer member (and acquired member, if applicable) then leaves the
consolidated group. To make the election, the corporation must attach a
statement to its timely filed federal income tax return (including
extensions) for the taxable year that begins after the date on which it
leaves the consolidated group. The statement must describe the
transaction(s) to which Sec. 1.1502-68(c)(1) or (2) would apply and
state that the corporation elects not to claim the additional first
year depreciation deduction for any property transferred in such
transaction(s).
For purposes of the PRA, the Treasury Department and the IRS
estimate that there are 0 to 41,775 respondents of all sizes that are
likely to be impacted by the collection of information in Sec.
1.168(k)-2(c). Most of these filers are likely to be small entities
(business entities with gross receipts of $25 million or less pursuant
to section 448(c)(1)). The Treasury Department and the IRS estimate the
number of filers affected by Sec. 1.168(k)-2(c) to be the following:
------------------------------------------------------------------------
Gross receipts of
Form $25 million or Gross receipts
less over $25 million
------------------------------------------------------------------------
Form 1040....................... 0-7,000 0-25 Respondents
Respondents (estimated).
(estimated).
Form 1065....................... 0-12,000 0-500 Respondents
Respondents (estimated).
(estimated).
Form 1120....................... 0-1,500 0-750 Respondents
Respondents (estimated).
(estimated).
Form 1120S...................... 0-19,000 0-1,000
Respondents Respondents
(estimated). (estimated).
---------------------------------------
Total....................... 0-39,500 0-2,275
Respondents Respondents
(estimated). (estimated).
------------------------------------------------------------------------
Source: IRS:RAAS:KDA (CDW 5-6-20).
For purposes of the PRA, the Treasury Department and the IRS
estimate that there are 0 to 500 respondents of all sizes that are
likely to be impacted by the collection of information in Sec. 1.1502-
68(c)(4). Only a small number of these filers are likely to be small
entities, business entities with gross receipts of $25 million or less
pursuant to section 448(c)(1). The Treasury Department and the IRS
estimate the number of filers affected by Sec. 1.1502-68(c)(4)(i) to
be the following:
------------------------------------------------------------------------
Gross receipts of
Form $25 million or Gross receipts
less over $25 million
------------------------------------------------------------------------
Form 1120....................... 0-67 Respondents 0-433 Respondents
(estimated). (estimated).
------------------------------------------------------------------------
Source: IRS:RAAS:KDA (CDW 5-15-2020).
Regardless of the number of small entities potentially affected by
these final regulations, the Treasury Department and the IRS have
concluded that Sec. Sec. 1.168(k)-2(c) and 1.1502-68(c)(4) will not
have a significant economic impact on a substantial number of small
entities. As a result of all changes in these final regulations, the
Treasury Department and the IRS estimate that individual taxpayers who
have gross receipts of $25 million or less
[[Page 71752]]
and experience an increase in burden will incur an average increase of
0 to 3 hours, and business taxpayers that have gross receipts of $25
million or less and experience an increase in burden will incur an
average increase of 0 to 2 hours (Source: IRS:RAAS (8-28-2019)).
Because the elections in Sec. Sec. 1.168(k)-2(c) and 1.1502-68(c)(4)
are one of several changes in these final regulations, the Treasury
Department and the IRS expect the average increase in burden to be less
for the collections of information in Sec. Sec. 1.168(k)-2(c) and
1.1502-68(c)(4) than the average increase in burden in the preceding
sentence. The Treasury Department and the IRS also note that many
taxpayers with gross receipts of $25 million or less may experience a
reduction in burden as a result of all changes in these final
regulations.
Additionally: (1) Many small businesses are not required to
capitalize under section 263(a) the amount paid or incurred for the
acquisition of depreciable tangible property that costs $5,000 or less
if the business has an applicable financial statement or costs $500 or
less if the business does not have an applicable financial statement,
pursuant to Sec. 1.263(a)-1(f)(1); (2) many small businesses are no
longer required to capitalize under section 263A the costs to
construct, build, manufacture, install, improve, raise, or grow
depreciable property if their average annual gross receipts are
$26,000,000 or less (2020 inflation adjusted amount); and (3) a small
business that capitalizes costs of depreciable tangible property may
deduct under section 179 up to $1,040,000 (2020 inflation adjusted
amount) of the cost of such property placed in service during the
taxable year if the total cost of depreciable tangible property placed
in service during the taxable year does not exceed $2,590,000 (2020
inflation adjusted amount). Therefore, the Treasury Department and the
IRS have determined that a substantial number of small entities will
not be subject to these final regulations. Further, Sec. Sec.
1.168(k)-2(c) and 1.1502-68(c)(4) apply only if the taxpayer chooses to
make an election. Finally, no comments regarding the economic impact of
these regulations on small entities were received. Accordingly, the
Secretary of the Treasury's delegate certifies that these final
regulations will not have a significant economic impact on a
substantial number of small entities.
Pursuant to section 7805(f) of the Code, the proposed rule
preceding this final rule was submitted to the Chief Counsel for the
Office of Advocacy of the Small Business Administration for comment on
its impact on small business, and no comments were received from the
Chief Counsel for the Office of Advocacy of the Small Business
Administration.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a state,
local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. In 2019, that threshold is approximately $154 million. These
final regulations do not include any Federal mandate that may result in
expenditures by state, local, or tribal governments, or by the private
sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These final regulations do not have
federalism implications and do not impose substantial direct compliance
costs on state and local governments or preempt state law within the
meaning of the Executive order.
VI. Congressional Review Act
The Administrator of the Office of Information and Regulatory
Affairs of the OMB has determined that this Treasury decision is a
major rule for purposes of the Congressional Review Act (5 U.S.C. 801
et seq.) (CRA). Under section 801(3) of the CRA, a major rule takes
effect 60 days after the rule is published in the Federal Register.
Accordingly, the Treasury Department and IRS are adopting these final
regulations with the delayed effective date generally prescribed under
the Congressional Review Act.
Drafting Information
The principal authors of these final regulations are Kathleen Reed
and Elizabeth R. Binder of the Office of Associate Chief Counsel
(Income Tax and Accounting). However, other personnel from the Treasury
Department and the IRS 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 citation for part 1 is amended by adding
an entry for Sec. 1.1502-68 in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.1502-68 also issued under 26 U.S.C. 1502.
* * * * *
0
Par. 2. Section 1.168(b)-1 is amended by:
0
1. Revising paragraph (a)(5)(i)(A);
0
2. In paragraph (b)(2)(i), removing ``paragraphs (b)(2)(ii) and (iii)''
and adding ``paragraphs (b)(2)(ii) through (iv)'' in its place; and
0
3. Adding paragraph (b)(2)(iv).
The addition and revision read as follows:
Sec. 1.168(b)-1 Definitions.
(a) * * *
(5) * * *
(i) * * *
(A) For purposes of section 168(e)(6), the improvement is made by
the taxpayer and is placed in service by the taxpayer after December
31, 2017;
* * * * *
(b) * * *
(2) * * *
(iv) Addition of language in paragraph (a)(5)(i)(A) of this
section. The language ``is made by the taxpayer and'' in paragraph
(a)(5)(i)(A) of this section applies to property placed in service by
the taxpayer after December 31, 2017.
0
Par. 3. Section 1.168(k)-0 is amended under Sec. 1.168(k)-2 by:
0
1. Adding entries for (b)(3)(iii)(C), (b)(3)(v), (b)(5)(iii)(G),
(b)(5)(v), (c), (c)(1) and (2), (c)(2)(i) through (iv), (c)(3),
(c)(3)(i) through (iii), (c)(4), (c)(4)(i) and (ii), (c)(5), (c)(5)(i)
and (ii), (c)(6), (c)(6)(i) and (ii), (c)(7), (c)(7)(i) and (ii), and
(c)(8) and (c)(9);
0
2. Revising the entry for (d)(3)(iv);
0
3. Adding entries for (d)(4), (f)(7), and (g)(11);
0
4. Revising the entries for (h)(2) and (3); and
0
5. Adding entries for (h)(3)(i) through (iii).
The additions and revisions read as follows:
Sec. 1.168(k)-0 Table of contents.
* * * * *
[[Page 71753]]
Sec. 1.168(k)-2 Additional first year depreciation deduction for
property acquired and placed in service after September 27, 2017.
* * * * *
(b) * * *
(3) * * *
(iii) * * *
(C) Special rules for a series of related transactions.
* * * * *
(v) Application to members of a consolidated group.
* * * * *
(5) * * *
(iii) * * *
(G) Acquisition of a trade or business or an entity.
* * * * *
(v) Determination of acquisition date for property not acquired
pursuant to a written binding contract.
* * * * *
(c) Election for components of larger self-constructed property
for which the manufacture, construction, or production begins before
September 28, 2017.
(1) In general.
(2) Eligible larger self-constructed property.
(i) In general.
(ii) Residential rental property or nonresidential real
property.
(iii) Beginning of manufacture, construction, or production.
(iv) Exception.
(3) Eligible components.
(i) In general.
(ii) Acquired components.
(iii) Self-constructed components.
(4) Special rules.
(i) Installation costs.
(ii) Property described in section 168(k)(2)(B).
(5) Computation of additional first year depreciation deduction.
(i) Election is made.
(ii) Election is not made.
(6) Time and manner for making election.
(i) Time for making election.
(ii) Manner of making election.
(7) Revocation of election.
(i) In general.
(ii) Automatic 6-month extension.
(8) Additional procedural guidance.
(9) Examples.
(d) * * *
(3) * * *
(iv) Determination of acquisition date for property not acquired
pursuant to a written binding contract.
(4) Examples.
* * * * *
(f) * * *
(7) Additional procedural guidance.
(g) * * *
(11) Mid-quarter convention.
(h) * * *
(2) Applicability of this section for prior taxable years.
(3) Early application of this section and Sec. 1.1502-68.
(i) In general.
(ii) Early application to certain transactions.
(iii) Bound by early application.
0
Par. 4. Section 1.168(k)-2 is amended by:
0
1. At the end of paragraph (a)(1), removing the period and adding ``,
except as provided in paragraph (c) of this section.'' in its place;
0
2. In paragraph (a)(2)(iv)(B), removing ``an asset'' and adding ``the
asset'' in its place;
0
3. After the semicolon at the end of paragraph (a)(2)(iv)(C), adding
the word ``or'';
0
4. In paragraph (a)(2)(iv)(D), removing ``; or'' and adding a period in
its place;
0
5. Removing paragraph (a)(2)(iv)(E);
0
6. Revising paragraphs (b)(2)(ii)(F) and (G);
0
7. Adding paragraphs (b)(2)(iii)(F) through (I);
0
8. Revising the second and third sentences in paragraph
(b)(3)(iii)(B)(1);
0
9. Adding paragraphs (b)(3)(iii)(B)(4), (b)(3)(iii)(C), (b)(3)(v), and
(b)(3)(vii)(Y) through (OO);
0
10. Revising the last sentence in paragraph (b)(5)(ii)(A);
0
11. In the first sentence in paragraph (b)(5)(iii)(A), removing the
word ``A'' at the beginning of the sentence and adding ``Except as
provided in paragraph (b)(5)(iii)(G) of this section, a'' in its place;
0
12. In the first sentence in paragraph (b)(5)(iii)(B), removing the
word ``A'' at the beginning of the sentence and adding ``Except as
provided in paragraph (b)(5)(iii)(G) of this section, a'' in its place;
0
13. Adding paragraph (b)(5)(iii)(G);
0
14. In the fourth sentence in paragraph (b)(5)(iv)(C)(1), removing the
period at the end of the sentence and adding ``, except as provided in
paragraph (c) of this section.'' in its place;
0
15. In the fourth sentence in paragraph (b)(5)(iv)(C)(2), removing the
period at the end of the sentence and adding ``, except as provided in
paragraph (c) of this section.'' in its place;
0
16. Adding paragraph (b)(5)(v);
0
17. Revising the second sentence in paragraph (b)(5)(viii) introductory
text;
0
18. Adding paragraph (c);
0
19. Redesignating paragraph (d)(3)(iv) as paragraph (d)(4) and adding
new paragraph (d)(3)(iv);
0
20. Adding three sentences at the end of paragraph (e)(1)(iii);
0
21. In paragraph (f)(1)(ii)(D), removing ``(a)(5)(ii),'' and adding
``(a)(5)(ii) (acquired by the taxpayer after September 27, 2017, and
placed in service by the taxpayer after September 27, 2017, and before
January 1, 2018),'' in its place;
0
22. In paragraph (f)(1)(ii)(G), removing the word ``A'' at the
beginning of the sentence and adding the word ``Each'' in its place;
0
23. Adding paragraph (f)(7);
0
24. In paragraph (g)(1)(i):
0
i. In the first sentence, after ``paragraphs (g)(1)(ii) and (iii) of
this section'' adding ``and by the application of paragraph
(b)(3)(iii)(B)(4) of this section''; and
0
ii. In the last sentence, removing the period at the end of the
sentence and adding ``, except as otherwise provided by the application
of paragraph (b)(3)(iii)(B) of this section.'' in its place;
0
25. Adding paragraph (g)(11); and
0
26. Revising paragraphs (h)(1), (2), and (3).
The additions and revisions read as follows:
Sec. 1.168(k)-2 Additional first year depreciation deduction for
property acquired and placed in service after September 27, 2017.
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(F) Primarily used in a trade or business described in section
163(j)(7)(A)(iv) and Sec. Sec. 1.163(j)-1(b)(15)(i) and 1.163(j)-
10(c)(3)(iii)(C)(3), and placed in service by the taxpayer in any
taxable year beginning after December 31, 2017. For purposes of section
168(k)(9)(A) and this paragraph (b)(2)(ii)(F), the term primarily used
has the same meaning as that term is used in Sec. 1.167(a)-
11(b)(4)(iii)(b) and (e)(3)(iii) for classifying property. This
paragraph (b)(2)(ii)(F) does not apply to property that is leased to a
lessee's trade or business described in section 163(j)(7)(A)(iv) and
Sec. Sec. 1.163(j)-1(b)(15)(i) and 1.163(j)-10(c)(3)(iii)(C)(3), by a
lessor's trade or business that is not described in section
163(j)(7)(A)(iv) and Sec. Sec. 1.163(j)-1(b)(15)(i) and 1.163(j)-
10(c)(3)(iii)(C)(3) for the taxable year; or
(G) Used in a trade or business that has had floor plan financing
indebtedness, as defined in section 163(j)(9)(B) and Sec. 1.163(j)-
1(b)(18), if the floor plan financing interest expense, as defined in
section 163(j)(9)(A) and Sec. 1.163(j)-1(b)(19), related to such
indebtedness is taken into account under section 163(j)(1)(C) for the
taxable year. Such property also must be placed in service by the
taxpayer in any taxable year beginning after December 31, 2017. Solely
for purposes of section 168(k)(9)(B) and this paragraph (b)(2)(ii)(G),
floor plan financing interest expense is taken into account for the
taxable year by a trade or business that has had floor plan financing
[[Page 71754]]
indebtedness only if the business interest expense, as defined in
section 163(j)(5) and Sec. 1.163(j)-1(b)(3), of the trade or business
for the taxable year (which includes floor plan financing interest
expense) exceeds the sum of the amounts calculated under section
163(j)(1)(A) and (B) for the trade or business for the taxable year. If
the trade or business has taken floor plan financing interest expense
into account pursuant to this paragraph (b)(2)(ii)(G) for a taxable
year, this paragraph (b)(2)(ii)(G) applies to any property placed in
service by that trade or business in that taxable year. This paragraph
(b)(2)(ii)(G) does not apply to property that is leased to a lessee's
trade or business that has had floor plan financing indebtedness, by a
lessor's trade or business that has not had floor plan financing
indebtedness during the taxable year or that has had floor plan
financing indebtedness but did not take into account floor plan
financing interest expense for the taxable year pursuant to this
paragraph (b)(2)(ii)(G).
(iii) * * *
(F) Example 6. In 2019, a financial institution buys new equipment
for $1 million and then leases this equipment to a lessee that
primarily uses the equipment in a trade or business described in
section 163(j)(7)(A)(iv) and Sec. Sec. 1.163(j)-1(b)(15)(i) and
1.163(j)-10(c)(3)(iii)(C)(3). The financial institution is not
described in section 163(j)(7)(A)(iv) and Sec. Sec. 1.163(j)-
1(b)(15)(i) and Sec. 1.163(j)-10(c)(3)(iii)(C)(3). As a result,
paragraph (b)(2)(ii)(F) of this section does not apply to this new
equipment. Assuming all other requirements are met, the financial
institution's purchase price of $1 million for the new equipment
qualifies for the additional first year depreciation deduction under
this section.
(G) Example 7. During its taxable year beginning in 2020, F, a
corporation that is an automobile dealer, buys new computers for
$50,000 for use in its trade or business of selling automobiles. For
purposes of section 163(j), F has the following for 2020: $700 of
adjusted taxable income, $40 of business interest income, $400 of
business interest expense (which includes $100 of floor plan financing
interest expense). The sum of the amounts calculated under section
163(j)(1)(A) and (B) for F for 2020 is $390 ($40 + ($700 x 50
percent)). F's business interest expense, which includes floor plan
financing interest expense, for 2020 is $400. As a result, F's floor
plan financing interest expense is taken into account by F for 2020
pursuant to paragraph (b)(2)(ii)(G) of this section. Accordingly, F's
purchase price of $50,000 for the computers does not qualify for the
additional first year depreciation deduction under this section.
(H) Example 8. The facts are the same as in Example 7 in paragraph
(b)(2)(iii)(G) of this section, except F buys new computers for $30,000
for use in its trade or business of selling automobiles and, for
purposes of section 163(j), F has $1,300 of adjusted taxable income.
The sum of the amounts calculated under section 163(j)(1)(A) and (B)
for F for 2020 is $690 ($40 + ($1,300 x 50 percent)). F's business
interest expense, which includes floor plan financing interest expense,
for 2020 is $400. As a result, F's floor plan financing interest
expense is not taken into account by F for 2020 pursuant to paragraph
(b)(2)(ii)(G) of this section. Assuming all other requirements are met,
F's purchase price of $30,000 for the computers qualifies for the
additional first year depreciation deduction under this section.
(I) Example 9. (1) G, a calendar-year taxpayer, owns an office
building for use in its trade or business and G placed in service such
building in 2000. In November 2018, G made and placed in service an
improvement to the inside of such building at a cost of $100,000. In
January 2019, G entered into a written contract with H for H to
construct an improvement to the inside of the building. In March 2019,
H completed construction of the improvement at a cost of $750,000 and G
placed in service such improvement. Both improvements to the building
are section 1250 property and are not described in Sec. 1.168(b)-
1(a)(5)(ii).
(2) Both the improvement to the office building made by G in
November 2018 and the improvement to the office building that was
constructed by H for G in 2019 are improvements made by G under Sec.
1.168(b)-1(a)(5)(i)(A). Further, each improvement is made to the inside
of the office building, is section 1250 property, and is not described
in Sec. 1.168(b)-1(a)(5)(ii). As a result, each improvement meets the
definition of qualified improvement property in section 168(e)(6) and
Sec. 1.168(b)-1(a)(5)(i)(A) and (a)(5)(ii). Accordingly, each
improvement is 15-year property under section 168(e)(3) and is
described in Sec. 1.168(k)-2(b)(2)(i)(A). Assuming all other
requirements of this section are met, each improvement made by G
qualifies for the additional first year depreciation deduction for G
under this section.
(3) * * *
(iii) * * *
(B) * * *
(1) * * * To determine if the taxpayer or a predecessor had a
depreciable interest in the property at any time prior to the
acquisition, only the five calendar years immediately prior to the
current calendar year in which the property is placed in service by the
taxpayer, and the portion of such current calendar year before the
placed-in-service date of the property without taking into account the
applicable convention, are taken into account (lookback period). If
either the taxpayer or a predecessor, or both, have not been in
existence for the entire lookback period, only the portion of the
lookback period during which the taxpayer or a predecessor, or both, as
applicable, have been in existence is taken into account to determine
if the taxpayer or a predecessor had a depreciable interest in the
property at any time prior to the acquisition. * * *
(4) De minimis use of property. If a taxpayer acquires and places
in service property, the taxpayer or a predecessor did not previously
have a depreciable interest in the property, the taxpayer disposes of
the property to an unrelated party within 90 calendar days after the
date the property was originally placed in service by the taxpayer,
without taking into account the applicable convention, and the taxpayer
reacquires and again places in service the property, then the
taxpayer's depreciable interest in the property during that 90-day
period is not taken into account for determining whether the property
was used by the taxpayer or a predecessor at any time prior to its
reacquisition by the taxpayer under paragraphs (b)(3)(iii)(A)(1) and
(b)(3)(iii)(B)(1) of this section. If the taxpayer originally acquired
the property before September 28, 2017, as determined under Sec.
1.168(k)-1(b)(4), and the taxpayer reacquires and again places in
service the property during the same taxable year the taxpayer disposed
of the property to the unrelated party, then this paragraph
(b)(3)(iii)(B)(4) does not apply. For purposes of this paragraph
(b)(3)(iii)(B)(4), an unrelated party is a person not described in
section 179(d)(2)(A) or (B), and Sec. 1.179-4(c)(1)(ii) or (iii) or
(c)(2).
(C) Special rules for a series of related transactions--(1) In
general. Solely for purposes of paragraph (b)(3)(iii) of this section,
each transferee in a series of related transactions tests its
relationship under section 179(d)(2)(A) or (B) with the transferor from
which the transferee directly acquires the depreciable property
(immediate transferor) and with the original transferor of the
depreciable property in the series. The transferee is treated as
related to the immediate transferor or the original
[[Page 71755]]
transferor if the relationship exists either when the transferee
acquires, or immediately before the first transfer of, the depreciable
property in the series. A series of related transactions may include,
for example, a transfer of partnership assets followed by a transfer of
an interest in the partnership that owned the assets; or a disposition
of property and a disposition, directly or indirectly, of the
transferor or transferee of the property. For special rules that may
apply when the transferor and transferee of the property are members of
a consolidated group, as defined in Sec. 1.1502-1(h), see Sec.
1.1502-68.
(2) Special rules--(i) Property placed in service and disposed of
in same taxable year or property not placed in service. Any party in a
series of related transactions that is neither the original transferor
nor the ultimate transferee is disregarded (disregarded party) for
purposes of testing the relationships under paragraph (b)(3)(iii)(C)(1)
of this section if the party places in service and disposes of the
depreciable property subject to the series, other than in a transaction
described in paragraph (g)(1)(iii) of this section, during the party's
same taxable year, or if the party does not place in service the
depreciable property subject to the series for use in the party's trade
or business or production of income. In either case, the party to which
the disregarded party disposed of the depreciable property tests its
relationship with the party from which the disregarded party acquired
the depreciable property and with the original transferor of the
depreciable property in the series. If the series has consecutive
disregarded parties, the party to which the last disregarded party
disposed of the depreciable property tests its relationship with the
party from which the first disregarded party acquired the depreciable
property and with the original transferor of the depreciable property
in the series. The rules for testing the relationships in paragraph
(b)(3)(iii)(C)(1) of this section continue to apply for the other
transactions in the series.
(ii) All section 168(i)(7) transactions. This paragraph
(b)(3)(iii)(C) does not apply if all transactions in a series of
related transactions are described in paragraph (g)(1)(iii) of this
section (section 168(i)(7) transactions in which property is
transferred in the same taxable year that the property is placed in
service by the transferor).
(iii) One or more section 168(i)(7) transactions. Any step in a
series of related transactions that is neither the original step nor
the ultimate step is disregarded (disregarded step) for purposes of
testing the relationships under paragraph (b)(3)(iii)(C)(1) of this
section if the step is a transaction described in paragraph (g)(1)(iii)
of this section. In this case, the relationship is not tested between
the transferor and transferee of that transaction. Instead, the
relationship is tested between the transferor in the disregarded step
and the party to which the transferee in the disregarded step disposed
of the depreciable property, the transferee in the disregarded step and
the party to which the transferee in the disregarded step disposed of
the depreciable property, and the original transferor of the
depreciable property in the series and the party to which the
transferee in the disregarded step disposed of the depreciable
property. If the series has consecutive disregarded steps, the
relationship is tested between the transferor in the first disregarded
step and the party to which the transferee in the last disregarded step
disposed of the depreciable property, the transferee in the last
disregarded step and the party to which the transferee in the last
disregarded step disposed of the depreciable property, and the original
transferor of the depreciable property in the series and the party to
which the transferee in the last disregarded step disposed of the
depreciable property. The rules for testing the relationships in
paragraph (b)(3)(iii)(C)(1) of this section continue to apply for the
other transactions in the series.
(iv) Syndication transaction. This paragraph (b)(3)(iii)(C) does
not apply to a syndication transaction described in paragraph
(b)(3)(vi) of this section.
(v) Certain relationships disregarded. If a party acquires
depreciable property in a series of related transactions in which the
party acquires stock, meeting the requirements of section 1504(a)(2),
of a corporation in a fully taxable transaction followed by a
liquidation of the acquired corporation under section 331, any
relationship created as part of such series of related transactions is
disregarded in determining whether any party is related to such
acquired corporation for purposes of testing the relationships under
paragraph (b)(3)(iii)(C)(1) of this section.
(vi) Transferors that cease to exist for Federal tax purposes. Any
transferor in a series of related transactions that ceases to exist for
Federal tax purposes during the series is deemed, for purposes of
testing the relationships under paragraph (b)(3)(iii)(C)(1) of this
section, to be in existence at the time of any transfer in the series.
(vii) Newly created party. If a transferee in a series of related
transactions acquires depreciable property from a transferor that was
not in existence immediately prior to the first transfer of such
property in such series (new transferor), the transferee tests its
relationship with the party from which the new transferor acquired such
property and with the original transferor of the depreciable property
in the series for purposes of paragraph (b)(3)(iii)(C)(1) of this
section. If the series has consecutive new transferors, the party to
which the last new transferor disposed of the depreciable property
tests its relationship with the party from which the first new
transferor acquired the depreciable property and with the original
transferor of the depreciable property in the series. The rules for
testing the relationships in paragraph (b)(3)(iii)(C)(1) of this
section continue to apply for the other transactions in the series.
(viii) Application of paragraph (g)(1) of this section. Paragraph
(g)(1) of this section applies to each step in a series of related
transactions.
* * * * *
(v) Application to members of a consolidated group. For rules
applicable to the acquisition of depreciable property by a member of a
consolidated group, see Sec. 1.1502-68.
* * * * *
(vii) * * *
(Y) Example 25. (1) JL is a fiscal year taxpayer with a taxable
year ending June 30. On April 22, 2020, JL acquires and places in
service a new machine for use in its trade or business. On May 1, 2022,
JL sells this machine to JM, an unrelated party, for use in JM's trade
or business. JM is a fiscal year taxpayer with a taxable year ending
March 31. On February 1, 2023, JL buys the machine from JM and places
the machine in service. JL uses the machine in its trade or business
for the remainder of its taxable year ending June 30, 2023.
(2) JL's acquisition of the machine on April 22, 2020, satisfies
the original use requirement in paragraph (b)(3)(ii) of this section.
Assuming all other requirements are met, JL's purchase price of the
machine qualifies for the additional first year depreciation deduction
for JL for the taxable year ending June 30, 2020, under this section.
(3) JM placed in service the machine on May 1, 2022, and disposed
of it on February 1, 2023. As a result, JM placed in service and
disposed of the machine during the same taxable year (JM's taxable year
beginning April 1, 2022, and ending March 31, 2023). Accordingly, JM's
acquisition of the machine on May 1, 2022, does not qualify for the
additional first year
[[Page 71756]]
depreciation deduction pursuant to paragraph (g)(1)(i) of this section.
(4) Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the
lookback period is calendar years 2018 through 2022 and January 1,
2023, through January 31, 2023, to determine if JL had a depreciable
interest in the machine when JL reacquired it on February 1, 2023. As a
result, JL's depreciable interest in the machine during the period
April 22, 2020, to April 30, 2022, is taken into account for
determining whether the machine was used by JL or a predecessor at any
time prior to its reacquisition by JL on February 1, 2023. Accordingly,
the reacquisition of the machine by JL on February 1, 2023, does not
qualify for the additional first year depreciation deduction.
(Z) Example 26. (1) EF has owned and had a depreciable interest in
Property since 2012. On January 1, 2016, EF contributes assets (not
including Property) to existing Partnership T in a transaction
described in section 721, in exchange for a partnership interest in
Partnership T, and Partnership T placed in service these assets for use
in its trade or business. On July 1, 2016, EF sells Property to EG, a
party unrelated to either EF or Partnership T. On April 1, 2018,
Partnership T buys Property from EG and places it in service for use in
its trade or business.
(2) EF is not Partnership T's predecessor with respect to Property
within the meaning of paragraph (a)(2)(iv)(B) of this section. Pursuant
to paragraph (b)(3)(iii)(B)(1) of this section, the lookback period is
2013-2017, plus January through March 2018, to determine if Partnership
T had a depreciable interest in Property that Partnership T acquired on
April 1, 2018. EF need not be examined in the lookback period to see if
EF had a depreciable interest in Property, because EF is not
Partnership T's predecessor. Because Partnership T did not have a
depreciable interest in Property in the lookback period prior to its
acquisition of Property on April 1, 2018, Partnership T's acquisition
of Property on April 1, 2018, satisfies the used property acquisition
requirement of paragraph (b)(3)(iii)(B)(1) of this section. Assuming
all other requirements of this section are satisfied, Partnership T's
purchase price of Property qualifies for the additional first year
depreciation deduction under this section.
(AA) Example 27. (1) The facts are the same as in Example 26 of
paragraph (b)(3)(vii)(Z)(1) of this section, except that on January 1,
2016, EF's contribution of assets to Partnership T includes Property.
On July 1, 2016, Partnership T sells Property to EG.
(2) Partnership T's acquisition of Property on January 1, 2016,
does not satisfy the original use requirement of Sec. 1.168(k)-1(b)(3)
and is not eligible for the additional first year depreciation
deduction under section 168(k) as in effect prior to the enactment of
the Act.
(3) With respect to Partnership T's acquisition of Property on
April 1, 2018, EF is Partnership T's predecessor with respect to
Property within the meaning of paragraph (a)(2)(iv)(B) of this section.
Pursuant to paragraph (b)(3)(iii)(B)(1) of this section, the lookback
period is 2013-2017, plus January through March 2018, to determine if
EF or Partnership T had a depreciable interest in Property that
Partnership T acquired on April 1, 2018. Because EF had a depreciable
interest in Property from 2013 to 2015 and Partnership T had a
depreciable interest in Property from January through June 2016,
Partnership T's acquisition of Property on April 1, 2018, does not
satisfy the used property acquisition requirement of paragraph
(b)(3)(iii)(B)(1) of this section and is not eligible for the
additional first year depreciation deduction.
(BB) Example 28. (1) X Corporation has owned and had a depreciable
interest in Property since 2012. On January 1, 2015, X Corporation sold
Property to Q, an unrelated party. Y Corporation is formed July 1,
2015. On January 1, 2016, Y Corporation merges into X Corporation in a
transaction described in section 368(a)(1)(A). On April 1, 2018, X
Corporation buys Property from Q and places it in service for use in
its trade or business.
(2) Pursuant to paragraph (a)(2)(iv)(A) of this section, Y
Corporation is X Corporation's predecessor. Pursuant to paragraph
(b)(3)(iii)(B)(1) of this section, the lookback period is 2013-2017,
plus January through March 2018, to determine if Y Corporation or X
Corporation had a depreciable interest in Property that X Corporation
acquired on April 1, 2018. Y Corporation did not have a depreciable
interest in Property at any time during the lookback period. Because X
Corporation had a depreciable interest in Property from 2013 through
2014, X Corporation's acquisition of Property on April 1, 2018, does
not satisfy the used property acquisition requirement of paragraph
(b)(3)(iii)(B)(1) of this section and is not eligible for the
additional first year depreciation deduction.
(CC) Example 29. (1) Y Corporation has owned and had a depreciable
interest in Property since 2012. On January 1, 2015, Y Corporation
sells Property to Q, an unrelated party. X Corporation is formed on
July 1, 2015. On January 1, 2016, Y Corporation merges into X
Corporation in a transaction described in section 368(a)(1)(A). On
April 1, 2018, X Corporation buys Property from Q and places it in
service for use in its trade or business.
(2) Pursuant to paragraph (a)(2)(iv)(A) of this section, Y
Corporation is X Corporation's predecessor. Pursuant to paragraph
(b)(3)(iii)(B)(1) of this section, the lookback period is 2013-2017,
plus January through March 2018, to determine if X Corporation or Y
Corporation had a depreciable interest in Property that X Corporation
acquired on April 1, 2018. Because Y Corporation had a depreciable
interest in Property from 2013 through 2014, X Corporation's
acquisition of Property on April 1, 2018, does not satisfy the used
property acquisition requirement of paragraph (b)(3)(iii)(B)(1) of this
section and is not eligible for the additional first year depreciation
deduction.
(DD) Example 30. (1) On September 5, 2017, Y, a calendar-year
taxpayer, acquires and places in service a new machine (Machine #1),
and begins using Machine #1 in its manufacturing trade or business. On
November 1, 2017, Y sells Machine #1 to Z, then Z leases Machine #1
back to Y for 4 years, and Y continues to use Machine #1 in its
manufacturing trade or business. The lease agreement contains a
purchase option provision allowing Y to buy Machine #1 at the end of
the lease term. On November 1, 2021, Y exercises the purchase option in
the lease agreement and buys Machine #1 from Z. The lease between Y and
Z for Machine #1 is a true lease for Federal tax purposes.
(2) Because Y, a calendar-year taxpayer, placed in service and
disposed of Machine #1 during 2017, Machine #1 is not eligible for the
additional first year depreciation deduction for Y pursuant to Sec.
1.168(k)-1(f)(1)(i).
(3) The use of Machine #1 by Y prevents Z from satisfying the
original use requirement of paragraph (b)(3)(ii) of this section.
However, Z's acquisition of Machine #1 satisfies the used property
acquisition requirements of paragraph (b)(3)(iii) of this section.
Assuming all other requirements are met, Z's purchase price of Machine
#1 qualifies for the additional first year depreciation deduction for Z
under this section.
(4) During 2017, Y sold Machine #1 within 90 calendar days of
placing Machine #1 in service originally on September 5, 2017. Pursuant
to paragraph (b)(3)(iii)(B)(4) of this section, Y's depreciable
interest in Machine #1 during that 90-day period is not taken
[[Page 71757]]
into account for determining whether Machine #1 was used by Y or a
predecessor at any time prior to its reacquisition by Y on November 1,
2021. Accordingly, assuming all other requirements are met, Y's
purchase price of Machine #1 on November 1, 2021, qualifies for the
additional first year depreciation deduction for Y under this section.
(EE) Example 31. (1) On October 15, 2019, FA, a calendar-year
taxpayer, buys and places in service a new machine for use in its trade
or business. On January 10, 2020, FA sells this machine to FB for use
in FB's trade or business. FB is a calendar-year taxpayer and is not
related to FA. On March 30, 2020, FA buys the machine from FB and
places the machine in service. FA uses the machine in its trade or
business for the remainder of 2020.
(2) FA's acquisition of the machine on October 15, 2019, satisfies
the original use requirement in paragraph (b)(3)(ii) of this section.
Assuming all other requirements are met, FA's purchase price of the
machine qualifies for the additional first year depreciation deduction
for FA for the 2019 taxable year under this section.
(3) Because FB placed in service the machine on January 10, 2020,
and disposed of it on March 30, 2020, FB's acquisition of the machine
on January 10, 2020, does not qualify for the additional first year
depreciation deduction pursuant to Sec. 1.168(k)-2(g)(1)(i).
(4) FA sold the machine to FB in 2020 and within 90 calendar days
of placing the machine in service originally on October 15, 2019.
Pursuant to paragraph (b)(3)(iii)(B)(4) of this section, FA's
depreciable interest in the machine during that 90-day period is not
taken into account for determining whether the machine was used by FA
or a predecessor at any time prior to its reacquisition by FA on March
30, 2020. Accordingly, assuming all other requirements are met, FA's
purchase price of the machine on March 30, 2020, qualifies for the
additional first year depreciation deduction for FA for the 2020
taxable year under this section.
(FF) Example 32. (1) The facts are the same as in Example 31 of
paragraph (b)(3)(vii)(EE)(1) of this section, except that on November
1, 2020, FB buys the machine from FA and places the machine in service.
FB uses the machine in its trade or business for the remainder of 2020.
(2) Because FA placed in service the machine on March 30, 2020, and
disposed of it on November 1, 2020, FA's reacquisition of the machine
on March 30, 2020, does not qualify for the additional first year
depreciation deduction pursuant to paragraph (g)(1)(i) of this section.
(3) During 2020, FB sold the machine to FA within 90 calendar days
of placing the machine in service originally on January 10, 2020. After
FB reacquired the machine on November 1, 2020, FB did not dispose of
the property during the remainder of 2020. Pursuant to paragraph
(b)(3)(iii)(B)(4) of this section, FB's depreciable interest in the
machine during that 90-day period is not taken into account for
determining whether the machine was used by FB or a predecessor at any
time prior to its reacquisition by FB on November 1, 2020. Accordingly,
assuming all other requirements are met, FB's purchase price of the
machine on November 1, 2020, qualifies for the additional first year
depreciation deduction for FB under this section.
(GG) Example 33. (1) The facts are the same as in Example 32 of
paragraph (b)(3)(vii)(FF)(1) of this section, except FB sells the
machine to FC, an unrelated party, on December 31, 2020.
(2) Because FB placed in service the machine on November 1, 2020,
and disposed of it on December 31, 2020, FB's reacquisition of the
machine on November 1, 2020, does not qualify for the additional first
year depreciation deduction pursuant to paragraph (g)(1)(i) of this
section.
(3) FC's acquisition of the machine on December 31, 2020, satisfies
the used property acquisition requirement of paragraph
(b)(3)(iii)(A)(2) of this section. Accordingly, assuming all other
requirements of this section are satisfied, FC's purchase price of the
machine qualifies for the additional first year depreciation deduction
under this section.
(HH) Example 34. (1) In August 2017, FD, a calendar-year taxpayer,
entered into a written binding contract with X for X to manufacture a
machine for FD for use in its trade or business. Before September 28,
2017, FD incurred more than 10 percent of the total cost of the
machine. On February 8, 2020, X delivered the machine to FD and FD
placed in service the machine. The machine is property described in
section 168(k)(2)(B) as in effect on the day before the date of the
enactment of the Act. FD's entire unadjusted depreciable basis of the
machine is attributable to the machine's manufacture before January 1,
2020. FD uses the safe harbor test in Sec. 1.168(k)-1(b)(4)(iii)(B)(2)
to determine when manufacturing of the machine began. On March 26,
2020, FD sells the machine to FE for use in FE's trade or business. FE
is a calendar-year taxpayer and is not related to FD. On November 7,
2020, FD buys the machine from FE and places in service the machine. FD
uses the machine in its trade or business for the remainder of 2020.
(2) Because FD incurred more than 10 percent of the cost of the
machine before September 28, 2017, and FD uses the safe harbor test in
Sec. 1.168(k)-1(b)(4)(iii)(B)(2) to determine when the manufacturing
of the machine began, FD acquired the machine before September 28,
2017. If FD had not disposed of the machine on March 26, 2020, the cost
of the machine would have qualified for the 30-percent additional first
year depreciation deduction pursuant to section 168(k)(8), assuming all
requirements are met under section 168(k)(2) as in effect on the day
before the date of the enactment of the Act. However, because FD placed
in service the machine on February 8, 2020, and disposed of it on March
26, 2020, FD's acquisition of the machine on February 8, 2020, does not
qualify for the additional first year depreciation deduction pursuant
to Sec. 1.168(k)-1(f)(1)(i).
(3) Because FE placed in service the machine on March 26, 2020, and
disposed of it on November 7, 2020, FE's acquisition of the machine on
March 26, 2020, does not qualify for the additional first year
depreciation deduction pursuant to paragraph (g)(1)(i) of this section.
(4) During 2020, FD sold the machine to FE within 90 calendar days
of placing the machine in service originally on February 8, 2020. After
FD reacquired the machine on November 7, 2020, FD did not dispose of
the machine during the remainder of 2020. FD originally acquired this
machine before September 28, 2017. As a result, paragraph
(b)(3)(iii)(B)(4) of this section does not apply. Pursuant to paragraph
(b)(3)(iii)(B)(1) of this section, the lookback period is 2015 through
2019 and January 1, 2020, through November 6, 2020, to determine if FD
had a depreciable interest in the machine when FD reacquired it on
November 7, 2020. As a result, FD's depreciable interest in the machine
during the period February 8, 2020, to March 26, 2020, is taken into
account for determining whether the machine was used by FD or a
predecessor at any time prior to its reacquisition by FD on November 7,
2020. Accordingly, the reacquisition of the machine by FD on November
7, 2020, does not qualify for the additional first year depreciation
deduction.
(II) Example 35. (1) In a series of related transactions, a father
sells a machine to an unrelated individual on
[[Page 71758]]
December 15, 2019, who sells the machine to the father's daughter on
January 2, 2020, for use in the daughter's trade or business. Pursuant
to paragraph (b)(3)(iii)(C)(1) of this section, a transferee tests its
relationship with the transferor from which the transferee directly
acquires the depreciable property, and with the original transferor of
the depreciable property in the series. The relationship is tested when
the transferee acquires, and immediately before the first transfer of,
the depreciable property in the series. As a result, the following
relationships are tested under section 179(d)(2)(A): The unrelated
individual tests its relationship to the father as of December 15,
2019; and the daughter tests her relationship to the unrelated
individual as of January 2, 2020, and December 15, 2019, and to the
father as of January 2, 2020, and December 15, 2019.
(2) Because the individual is not related to the father within the
meaning of section 179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii) as of
December 15, 2019, the individual's acquisition of the machine
satisfies the used property acquisition requirement of paragraph
(b)(3)(iii)(A)(2) of this section. Accordingly, assuming the unrelated
individual placed the machine in service for use in its trade or
business in 2019 and all other requirements of this section are
satisfied, the unrelated individual's purchase price of the machine
qualifies for the additional first year depreciation deduction under
this section.
(3) The individual and the daughter are not related parties within
the meaning of section 179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii) as of
January 2, 2020, or December 15, 2019. However, the father and his
daughter are related parties within the meaning of section 179(d)(2)(A)
and Sec. 1.179-4(c)(1)(ii) as of January 2, 2020, or December 15,
2019. Accordingly, the daughter's acquisition of the machine does not
satisfy the used property acquisition requirements of paragraph
(b)(3)(iii) of this section and is not eligible for the additional
first year depreciation deduction.
(JJ) Example 36. (1) The facts are the same as in Example 35 of
paragraph (b)(3)(vii)(II)(1) of this section, except that instead of
selling to an unrelated individual, the father sells the machine to his
son on December 15, 2019, who sells the machine to his sister (the
father's daughter) on January 2, 2020. Pursuant to paragraph
(b)(3)(iii)(C)(1) of this section, a transferee tests its relationship
with the transferor from which the transferee directly acquires the
depreciable property, and with the original transferor of the
depreciable property in the series. The relationship is tested when the
transferee acquires, and immediately before the first transfer of, the
depreciable property in the series. As a result, the following
relationships are tested under section 179(d)(2)(A): The son tests his
relationship to the father as of December 15, 2019; and the daughter
tests her relationship to her brother as of January 2, 2020, and
December 15, 2019, and to the father as of January 2, 2020, and
December 15, 2019.
(2) Because the father and his son are related parties within the
meaning of section 179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii) as of
December 15, 2019, the son's acquisition of the machine does not
satisfy the used property acquisition requirements of paragraph
(b)(3)(iii) of this section. Accordingly, the son's acquisition of the
machine is not eligible for the additional first year depreciation
deduction.
(3) The son and his sister are not related parties within the
meaning of section 179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii) as of
January 2, 2020, or December 15, 2019. However, the father and his
daughter are related parties within the meaning of section 179(d)(2)(A)
and Sec. 1.179-4(c)(1)(ii) as of January 2, 2020, or December 15,
2019. Accordingly, the daughter's acquisition of the machine does not
satisfy the used property acquisition requirements of paragraph
(b)(3)(iii) of this section and is not eligible for the additional
first year depreciation deduction.
(KK) Example 37. (1) In June 2018, BA, an individual, bought and
placed in service a new machine from an unrelated party for use in its
trade or business. In a series of related transactions, BA sells the
machine to BB and BB places it in service on October 1, 2019, BB sells
the machine to BC and BC places it in service on December 1, 2019, and
BC sells the machine to BD and BD places it in service on January 2,
2020. BA and BB are related parties within the meaning of section
179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii). BB and BC are related parties
within the meaning of section 179(d)(2)(B) and Sec. 1.179-
4(c)(1)(iii). BC and BD are not related parties within the meaning of
section 179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii), or section
179(d)(2)(B) and Sec. 1.179-4(c)(1)(iii). BA is not related to BC or
to BD within the meaning of section 179(d)(2)(A) and Sec. 1.179-
4(c)(1)(ii). All parties are calendar-year taxpayers.
(2) BA's purchase of the machine in June 2018 satisfies the
original use requirement of paragraph (b)(3)(ii) of this section and,
assuming all other requirements of this section are met, BA's purchase
price of the machine qualifies for the additional first year
depreciation deduction under this section.
(3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a
transferee tests its relationship with the transferor from which the
transferee directly acquires the depreciable property, and with the
original transferor of the depreciable property in the series. The
relationship is tested when the transferee acquires, and immediately
before the first transfer of, the depreciable property in the series.
However, because BB placed in service and disposed of the machine in
the same taxable year, BB is disregarded pursuant to paragraph
(b)(3)(iii)(C)(2)(i) of this section. As a result, the following
relationships are tested under section 179(d)(2)(A) and (B): BC tests
its relationship to BA as of December 1, 2019, and October 1, 2019; and
BD tests its relationship to BC as of January 2, 2020, and October 1,
2019, and to BA as of January 2, 2020, and October 1, 2020.
(4) Because BA is not related to BC within the meaning of section
179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii) as of December 1, 2019, or
October 1, 2019, BC's acquisition of the machine satisfies the used
property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this
section. Accordingly, assuming all other requirements of this section
are satisfied, BC's purchase price of the machine qualifies for the
additional first year depreciation deduction under this section.
(5) Because BC is not related to BD and BA is not related to BD
within the meaning of section 179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii),
or section 179(d)(2)(B) and Sec. 1.179-4(c)(1)(iii) as of January 2,
2020, or October 1, 2019, BD's acquisition of the machine satisfies the
used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of
this section. Accordingly, assuming all other requirements of this
section are satisfied, BD's purchase price of the machine qualifies for
the additional first year depreciation deduction under this section.
(LL) Example 38. (1) In June 2018, CA, an individual, bought and
placed in service a new machine from an unrelated party for use in his
trade or business. In a series of related transactions, CA sells the
machine to CB and CB places it in service on September 1, 2019, CB
transfers the machine to CC in a transaction described in paragraph
(g)(1)(iii) of this section and CC places it in service on November 1,
2019, and CC sells the
[[Page 71759]]
machine to CD and CD places it in service on January 2, 2020. CA and CB
are not related parties within the meaning of section 179(d)(2)(A) and
Sec. 1.179-4(c)(1)(ii). CB and CC are related parties within the
meaning of section 179(d)(2)(B) and Sec. 1.179-4(c)(1)(iii). CB and CD
are related parties within the meaning of section 179(d)(2)(A) and
Sec. 1.179-4(c)(1)(ii), or section 179(d)(2)(B) and Sec. 1.179-
4(c)(1)(iii). CC and CD are not related parties within the meaning of
section 179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii), or section
179(d)(2)(B) and Sec. 1.179-4(c)(1)(iii). CA is not related to CC or
to CD within the meaning of section 179(d)(2)(A) and Sec. 1.179-
4(c)(1)(ii). All parties are calendar-year taxpayers.
(2) CA's purchase of the machine in June 2018 satisfies the
original use requirement of paragraph (b)(3)(ii) of this section and,
assuming all other requirements of this section are met, CA's purchase
price of the machine qualifies for the additional first year
depreciation deduction under this section.
(3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a
transferee tests its relationship with the transferor from which the
transferee directly acquires the depreciable property, and with the
original transferor of the depreciable property in the series. The
relationship is tested when the transferee acquires, and immediately
before the first transfer of, the depreciable property in the series.
However, because CB placed in service and transferred the machine in
the same taxable year in a transaction described in paragraph
(g)(1)(iii) of this section, the section 168(i)(7) transaction between
CB and CC is disregarded pursuant to paragraph (b)(3)(iii)(C)(2)(iii)
of this section. As a result, the following relationships are tested
under section 179(d)(2)(A) and (B): CB tests its relationship to CA as
of September 1, 2019; and CD tests its relationship to CB, CC, and CA
as of January 2, 2020, and September 1, 2019.
(4) Because CA is not related to CB within the meaning of section
179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii) as of September 1, 2019, CB's
acquisition of the machine satisfies the used property acquisition
requirement of paragraph (b)(3)(iii)(A)(2) of this section.
Accordingly, assuming all other requirements of this section are
satisfied, CB's purchase price of the machine qualifies for the
additional first year depreciation deduction under this section.
Pursuant to paragraph (g)(1)(iii) of this section, CB is allocated 2/12
of its 100-percent additional first year depreciation deduction for the
machine, and CC is allocated the remaining portion of CB's 100-percent
additional first year depreciation deduction for the machine.
(5) CC is not related to CD and CA is not related to CD within the
meaning of section 179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii), or section
179(d)(2)(B) and Sec. 1.179-4(c)(1)(iii) as of January 2, 2020, or
September 1, 2019. However, CB and CD are related parties within the
meaning of section 179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii), or section
179(d)(2)(B) and Sec. 1.179-4(c)(1)(iii) as of January 2, 2020, or
September 1, 2019. Accordingly, CD's acquisition of the machine does
not satisfy the used property acquisition requirements of paragraph
(b)(3)(iii) of this section and is not eligible for the additional
first year depreciation deduction.
(MM) Example 39. (1) In a series of related transactions, on
January 2, 2018, DA, a corporation, bought and placed in service a new
machine from an unrelated party for use in its trade or business. As
part of the same series, DB purchases 100 percent of the stock of DA on
January 2, 2019, and such stock acquisition meets the requirements of
section 1504(a)(2). DB and DA were not related prior to the acquisition
within the meaning of section 179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii)
or section 179(d)(2)(B) and Sec. 1.179-4(c)(1)(iii). Immediately after
acquiring the DA stock, and DB liquidates DA under section 331. In the
liquidating distribution, DB receives the machine that was acquired by
DA on January 2, 2018. As part of the same series, on March 1, 2020, DB
sells the machine to DC and DC places it in service. Throughout the
series, DC is not related to DB or DA within the meaning of section
179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii) or section 179(d)(2)(B) and
Sec. 1.179-4(c)(1)(iii).
(2) DA's purchase of the machine on January 2, 2018, satisfies the
original use requirement of paragraph (b)(3)(ii) of this section and,
assuming all other requirements of this section are met, DA's purchase
price of the machine qualifies for the additional first year
depreciation deduction under this section.
(3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a
transferee tests its relationship with the transferor from which the
transferee directly acquires the depreciable property, and with the
original transferor of the depreciable property in the series. The
relationship is tested when the transferee acquires, and immediately
before the first transfer of, the depreciable property in the series.
Although DA is no longer in existence as of the date DC acquires the
machine, pursuant to paragraph (b)(3)(iii)(C)(2)(vi) of this section,
DA is deemed to be in existence at the time of each transfer for
purposes of testing relationships under paragraph (b)(3)(iii)(C)(1). As
a result, the following relationships are tested under section
179(d)(2)(A) and (B): DB tests its relationship to DA as of January 2,
2019, and January 2, 2018; and DC tests its relationship to DB and DA
as of March 1, 2020, and January 2, 2018.
(4) Because DB acquired the machine in a series of related
transactions in which DB acquired stock, meeting the requirements of
section 1504(a)(2), of DA followed by a liquidation of DA under section
331, the relationship of DB and DA created thereof is disregarded for
purposes of testing the relationship pursuant to paragraph
(b)(3)(iii)(C)(2)(v) of this section. Therefore, DA is not related to
DB within the meaning of section 179(d)(2)(A) and Sec. 1.179-
4(c)(1)(ii) or section 179(d)(2)(B) and Sec. 1.179-4(c)(1)(iii) as of
January 2, 2019, or January 2, 2018, and DB's acquisition of the
machine satisfies the used property acquisition requirement of
paragraph (b)(3)(iii)(A)(2) of this section. Accordingly, assuming all
other requirements of this section are satisfied, DB's depreciable
basis of the machine as a result of the liquidation of DA qualifies for
the additional first year depreciation deduction under this section.
(5) Because DC is not related to DB or DA within the meaning of
section 179(d)(2)(A) and Sec. 1.179-4(c)(1)(ii) or section
179(d)(2)(B) and Sec. 1.179-4(c)(1)(iii) as of March 1, 2020, or
January 2, 2018, DC 's acquisition of the machine satisfies the used
property acquisition requirements of paragraph (b)(3)(iii)(A)(2) of
this section. Accordingly, assuming all other requirements of this
section are satisfied, DC 's purchase price of the machine qualifies
for the additional first year depreciation deduction.
(NN) Example 40. (1) Pursuant to a series of related transactions,
on January 2, 2018, EA bought and placed in service a new machine from
an unrelated party for use in its trade or business. As part of the
same series, EA sells the machine to EB and EB places it in service on
January 2, 2019. As part of the same series, EB sells the machine to EC
and EC places it in service on January 2, 2020. Throughout the series,
EA is not related to EB or EC within the meaning of section
179(d)(2)(B) and Sec. 1.179-4(c)(1)(iii). EB and EC were related
parties within the meaning of section 179(d)(2)(B) and Sec. 1.179-
4(c)(1)(iii) until July 1, 2019, at which time, they ceased to be
related.
[[Page 71760]]
(2) EA's purchase of the machine on January 2, 2018, satisfies the
original use requirement of paragraph (b)(3)(ii) of this section and,
assuming all other requirements of this section are met, EA's purchase
price of the machines qualifies for the additional first year
depreciation deduction under this section.
(3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a
transferee tests its relationship with the transferor from which the
transferee directly acquires the depreciable property, and with the
original transferor of the depreciable property in the series. The
relationship is tested when the transferee acquires, and immediately
before the first transfer of, the depreciable property in the series.
As a result, the following relationships are tested under section
179(d)(2)(A) and (B): EB tests its relationship to EA as of January 2,
2019, and January 2, 2018; and EC tests its relationship to EA and EB
as of January 2, 2020, and January 2, 2018.
(4) Because EA is not related to EB within the meaning of section
179(d)(2)(B) and Sec. 1.179-4(c)(1)(iii) as of January 2, 2019, or
January 2, 2018, EB's acquisition of the machine satisfies the used
property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this
section. Accordingly, assuming all other requirements of this section
are satisfied, EB's purchase price of the machine qualifies for the
additional first year depreciation deduction under this section.
(5) EC and EA are not related parties within the meaning of section
179(d)(2)(B) and Sec. 1.179-4(c)(1)(iii) as of January 2, 2020, or
January 2, 2018. Within the meaning of section 179(d)(2)(B) and Sec.
1.179-4(c)(1)(iii), EC is not related to EB as of January 2, 2020;
however, EC is related to EB as of January 2, 2018. Accordingly, EC 's
acquisition of the machine does not satisfy the used property
acquisition requirement of paragraph (b)(3)(iii) of this section and is
not eligible for the additional first year depreciation deduction.
(OO) Example 41. (1) The facts are the same as in Example 40 of
paragraph (b)(3)(vii)(NN)(1) of this section, except that instead of
selling to EC, EB sells the machine to EE, and EE places in service on
January 2, 2020, and EE sells the machine to EC and EC places in
service on January 2, 2021. EE was not in existence until July 2019 and
is not related to EA or EB.
(2) EA's purchase of the machine on January 2, 2018, satisfies the
original use requirement of paragraph (b)(3)(ii) of this section and,
assuming all other requirements of this section are met, EA's purchase
price of the machine qualifies for the additional first year
depreciation deduction under this section.
(3) Pursuant to paragraph (b)(3)(iii)(C)(1) of this section, a
transferee tests its relationship with the transferor from which the
transferee directly acquires the depreciable property, and with the
original transferor of the depreciable property in the series. The
relationship is tested when the transferee acquires, and immediately
before the first transfer of, the depreciable property in the series.
However, because EE was not in existence immediately prior to the first
transfer of the depreciable property in the series, EC tests its
relationship with EB and EA pursuant to paragraph
(b)(3)(iii)(C)(2)(vii) of this section. As a result, the following
relationships are tested under section 179(d)(2)(A) and (B): EB tests
its relationship to EA as of January 2, 2019, and January 2, 2018; EE
tests its relationship to EA and EB as of January 2, 2020, and January
2, 2018; and EC tests its relationship to EA and EB as of January 2,
2021, and January 2, 2018.
(4) Because EA is not related to EB within the meaning of section
179(d)(2)(B) and Sec. 1.179-4(c)(1)(iii) as of January 2, 2019, or
January 2, 2018, EB's acquisition of the machine satisfies the used
property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of this
section. Accordingly, assuming all other requirements of this section
are satisfied, EB's purchase price of the machine qualifies for the
additional first year depreciation deduction under this section.
(5) Because EE is not related to EA or EB within the meaning of
section 179(d)(2)(B) and Sec. 1.179-4(c)(1)(iii) as of January 2,
2020, or January 2, 2018, EE's acquisition of the machine satisfies the
used property acquisition requirement of paragraph (b)(3)(iii)(A)(2) of
this section. Accordingly, assuming all other requirements of this
section are satisfied, EE 's purchase price of the machine qualifies
for the additional first year depreciation deduction under this
section.
(6) Within the meaning of section 179(d)(2)(B) and Sec. 1.179-
4(c)(1)(iii), EC is not related to EA as of January 2, 2021, or January
2, 2018; however, EC is related to EB as of January 2, 2018.
Accordingly, EC 's acquisition of the machine does not satisfy the used
property acquisition requirement of paragraph (b)(3)(iii) of this
section and is not eligible for the additional first year depreciation
deduction.
* * * * *
(5) * * *
(ii) * * *
(A) * * * For determination of acquisition date, see paragraph
(b)(5)(ii)(B) of this section for property acquired pursuant to a
written binding contract, paragraph (b)(5)(iv) of this section for
self-constructed property, and paragraph (b)(5)(v) of this section for
property not acquired pursuant to a written binding contract.
* * * * *
(iii) * * *
(G) Acquisition of a trade or business or an entity. A contract to
acquire all or substantially all of the assets of a trade or business
or to acquire an entity (for example, a corporation, a partnership, or
a limited liability company) is binding if it is enforceable under
State law against the parties to the contract. The presence of a
condition outside the control of the parties, including, for example,
regulatory agency approval, will not prevent the contract from being a
binding contract. Further, the fact that insubstantial terms remain to
be negotiated by the parties to the contract, or that customary
conditions remain to be satisfied, does not prevent the contract from
being a binding contract. This paragraph (b)(5)(iii)(G) also applies to
a contract for the sale of the stock of a corporation that is treated
as an asset sale as a result of an election under section 338 or under
section 336(e) made for a disposition described in Sec. 1.336-2(b)(1).
* * * * *
(v) Determination of acquisition date for property not acquired
pursuant to a written binding contract. Except as provided in
paragraphs (b)(5)(iv), (vi), and (vii) of this section, the acquisition
date of property that the taxpayer acquires pursuant to a contract that
does not meet the definition of a written binding contract in paragraph
(b)(5)(iii) of this section, is the date on which the taxpayer paid, in
the case of a cash basis taxpayer, or incurred, in the case of an
accrual 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 and designing, securing financing, exploring, or
researching. The preceding sentence also applies to property that is
manufactured, constructed, or produced for the taxpayer by another
person under a written contract that does not meet the definition of a
binding contract in paragraph (b)(5)(iii) of this section, and that is
entered into prior to the manufacture, construction, or
[[Page 71761]]
production of the property for use by the taxpayer in its trade or
business or for its production of income. This paragraph (b)(5)(v) does
not apply to an acquisition described in paragraph (b)(5)(iii)(G) of
this section.
* * * * *
(viii) * * * Unless the facts specifically indicate otherwise,
assume that the parties are not related within the meaning of section
179(d)(2)(A) or (B) and Sec. 1.179-4(c), paragraph (c) of this section
does not apply, and the parties do not have predecessors:
* * * * *
(c) Election for components of larger self-constructed property for
which the manufacture, construction, or production begins before
September 28, 2017--(1) In general. A taxpayer may elect to treat any
acquired or self-constructed component, as described in paragraph
(c)(3) of this section, of the larger self-constructed property, as
described in paragraph (c)(2) of this section, as being eligible for
the additional first year depreciation deduction under this section,
assuming all requirements of section 168(k) and this section are met.
The taxpayer may make this election for one or more such components.
(2) Eligible larger self-constructed property--(i) In general.
Solely for purposes of this paragraph (c), a larger self-constructed
property is property that is manufactured, constructed, or produced by
the taxpayer for its own use in its trade or business or production of
income. Solely for purposes of this paragraph (c), property that is
manufactured, constructed, or produced for the taxpayer by another
person under a written binding contract, as defined in paragraph
(b)(5)(iii) of this section, or under a written contract that does not
meet the definition of a binding contract in paragraph (b)(5)(iii) of
this section, that is entered into prior to the manufacture,
construction, or production of the property for use by the taxpayer in
its trade or business or production of income is considered to be
manufactured, constructed, or produced by the taxpayer. Except as
provided in paragraph (c)(2)(iv) of this section, such larger self-
constructed property must be property--
(A) That is described in paragraph (b)(2)(i)(A), (B), (C), or (D)
of this section. Solely for purposes of the preceding sentence, the
requirement that property has to be acquired after September 27, 2017,
is disregarded;
(B) That meets the requirements under paragraph (b) of this
section, determined without regard to the acquisition date requirement
in paragraph (b)(5) of this section; and
(C) For which the taxpayer begins the manufacture, construction, or
production before September 28, 2017.
(ii) Residential rental property or nonresidential real property.
If the taxpayer constructs, manufactures, or produces residential
rental property or nonresidential real property, as defined in section
168(e)(2), or an improvement to such property, for use in its trade or
business or production of income, all property that is constructed,
manufactured, or produced as part of such residential rental property,
nonresidential real property, or improvement, as applicable, and that
is described in paragraph (c)(2)(i)(A) of this section is the larger
self-constructed property for purposes of applying the rules in this
paragraph (c).
(iii) Beginning of manufacturing, construction, or production.
Solely for purposes of paragraph (c)(2)(i)(C) of this section, the
determination of when manufacture, construction, or production of the
larger self-constructed property begins is made in accordance with the
rules in paragraph (b)(5)(iv)(B) of this section if the larger self-
constructed property is manufactured, constructed, or produced by the
taxpayer for its own use in its trade or business or production of
income, or is manufactured, constructed, or produced for the taxpayer
by another person under a written binding contract, as defined in
paragraph (b)(5)(iii) of this section, that is entered into prior to
the manufacture, construction, or production of the property for use by
the taxpayer in its trade or business or production of income. If the
larger self-constructed property is manufactured, constructed, or
produced for the taxpayer by another person under a written contract
that does not meet the definition of a binding contract in paragraph
(b)(5)(iii) of this section, that is entered into prior to the
manufacture, construction, or production of the property for use by the
taxpayer in its trade or business or production of income, the
determination of when manufacture, construction, or production of the
larger self-constructed property begins is made in accordance with the
rules in paragraph (b)(5)(v) of this section. If the taxpayer enters
into a written binding contract, as defined in paragraph (b)(5)(iii) of
this section, before September 28, 2017, with another person to
manufacture, construct, or produce the larger self-constructed property
and the manufacture, construction, or production of this property
begins after September 27, 2017, as determined under paragraph
(b)(5)(iv)(B) of this section, this paragraph (c) does not apply. If
the taxpayer enters into a written contract that does not meet the
definition of a binding contract in paragraph (b)(5)(iii) of this
section before September 28, 2017, with another person to manufacture,
construct, or produce the larger self-constructed property and the
manufacture, construction, or production of this property begins after
September 27, 2017, as determined under paragraph (b)(5)(v) of this
section, this paragraph (c) does not apply.
(iv) Exception. This paragraph (c) does not apply to any larger
self-constructed property that is included in a class of property for
which the taxpayer made an election under section 168(k)(7) (formerly
section 168(k)(2)(D)(iii)) not to deduct the additional first year
depreciation deduction.
(3) Eligible components--(i) In general. Solely for purposes of
this paragraph (c), a component of the larger self-constructed
property, as described in paragraph (c)(2) of this section, must be
qualified property under section 168(k)(2) and paragraph (b) of this
section. Solely for purposes of the preceding sentence, a component
will satisfy the acquisition date requirement in paragraph (b)(5) of
this section if it satisfies the requirements in paragraph (c)(3)(ii)
or (iii) of this section, as applicable.
(ii) Acquired components. If a component of the larger self-
constructed property is acquired pursuant to a written binding
contract, as defined in paragraph (b)(5)(iii) of this section, the
component must be acquired by the taxpayer after September 27, 2017, as
determined under the rules in paragraph (b)(5)(ii)(B) of this section.
If a component of the larger self-constructed property is acquired
pursuant to a written contract that does not meet the definition of a
binding contract in paragraph (b)(5)(iii) of this section, the
component must be acquired by the taxpayer after September 27, 2017, as
determined under the rules in paragraph (b)(5)(v) of this section.
(iii) Self-constructed components. The manufacture, construction,
or production of a component of a larger self-constructed property must
begin after September 27, 2017. The determination of when manufacture,
construction, or production of the component begins is made in
accordance with the rules in--
(A) Paragraph (b)(5)(iv)(B) of this section if the component is
manufactured, constructed, or produced by the taxpayer for its own use
in its trade or business or for its production of
[[Page 71762]]
income, or is manufactured, constructed, or produced for the taxpayer
by another person under a written binding contract, as defined in
paragraph (b)(5)(iii) of this section, that is entered into prior to
the manufacture, construction, or production of the component for use
by the taxpayer in its trade or business or for its production of
income; or
(B) Paragraph (b)(5)(v) of this section if the component is
manufactured, constructed, or produced for the taxpayer by another
person under a written contract that does not meet the definition of a
binding contract in paragraph (b)(5)(iii) of this section, that is
entered into prior to the manufacture, construction, or production of
the component for use by the taxpayer in its trade or business or for
its production of income.
(4) Special rules--(i) Installation costs. If the taxpayer pays, in
the case of a cash basis taxpayer, or incurs, in the case of an accrual
basis taxpayer, costs, including labor costs, to install a component of
the larger self-constructed property, as described in paragraph (c)(2)
of this section, such costs are eligible for the additional first year
depreciation under this section, assuming all requirements are met,
only if the component being installed meets the requirements in
paragraph (c)(3) of this section.
(ii) Property described in section 168(k)(2)(B). The rules in
paragraph (e)(1)(iii) of this section apply for determining the
unadjusted depreciable basis, as defined in Sec. 1.168(b)-1(a)(3), of
larger self-constructed property described in paragraph (c)(2) of this
section and in section 168(k)(2)(B).
(5) Computation of additional first year depreciation deduction--
(i) Election is made. Before determining the allowable additional first
year depreciation deduction for the larger self-constructed property,
as described in paragraph (c)(2) of this section, for which the
taxpayer makes the election specified in this paragraph (c) for one or
more components of such property, the taxpayer must determine the
portion of the unadjusted depreciable basis, as defined in Sec.
1.168(b)-1(a)(3), of the larger self-constructed property, including
all components, attributable to the component that meets the
requirements of paragraphs (c)(3) and (c)(4)(i) of this section
(component basis). The additional first year depreciation deduction for
the component basis is determined by multiplying such component basis
by the applicable percentage for the placed-in-service year of the
larger self-constructed property. The additional first year
depreciation deduction, if any, for the remaining unadjusted
depreciable basis of the larger self-constructed property, as described
in paragraph (c)(2) of this section, is determined under section
168(k), as in effect on the day before the date of the enactment of the
Act, and section 168(k)(8). For purposes of this paragraph (c), the
remaining unadjusted depreciable basis of the larger self-constructed
property is equal to the unadjusted depreciable basis, as defined in
Sec. 1.168(b)-1(a)(3), of the larger self-constructed property,
including all components, reduced by the sum of the component basis of
the components for which the taxpayer makes the election specified in
this paragraph (c).
(ii) Election is not made. If the taxpayer does not make the
election specified in this paragraph (c), the additional first year
depreciation deduction, if any, for the larger self-constructed
property, including all components, is determined under section 168(k),
as in effect on the day before the date of the enactment of the Act,
and section 168(k)(8).
(6) Time and manner for making election--(i) Time for making
election. The election specified in this paragraph (c) must be made by
the due date, including extensions, of the Federal tax return for the
taxable year in which the taxpayer placed in service the larger self-
constructed property.
(ii) Manner of making election. The election specified in this
paragraph (c) must be made by attaching a statement to such return
indicating that the taxpayer is making the election provided in this
paragraph (c) and whether the taxpayer is making the election for all
or some of the components described in paragraph (c)(3) of this
section. The election is made separately by each person owning
qualified property (for example, for each member of a consolidated
group by the agent for the group (within the meaning of Sec. 1.1502-
77(a) and (c)), by the partnership (including a lower-tier
partnership), or by the S corporation).
(7) Revocation of election--(i) In general. Except as provided in
paragraph (c)(7)(ii) of this section, the election specified in this
paragraph (c), once made, may be revoked only by filing a request for a
private letter ruling and obtaining the Commissioner of Internal
Revenue's written consent to revoke the election. The Commissioner may
grant a request to revoke the election if the taxpayer acted reasonably
and in good faith, and the revocation will not prejudice the interests
of the Government. See generally Sec. 301.9100-3 of this chapter. The
election specified in this paragraph (c) may not be revoked through a
request under section 446(e) to change the taxpayer's method of
accounting.
(ii) Automatic 6-month extension. If a taxpayer made the election
specified in this paragraph (c), 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 larger self-
constructed property is granted to revoke that election, provided the
taxpayer timely filed the taxpayer's Federal tax return for that
placed-in-service year and, within this 6-month extension period, the
taxpayer, and all taxpayers whose tax liability would be affected by
the election, file an amended Federal tax return for the placed-in-
service year in a manner that is consistent with the revocation of the
election.
(8) Additional procedural guidance. The IRS may publish procedural
guidance in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii)(b) of this chapter) that provides alternative
procedures for complying with paragraph (c)(6) or (c)(7)(i) of this
section.
(9) Examples. The application of this paragraph (c) is illustrated
by the following examples. Unless the facts specifically indicate
otherwise, assume that the larger self-constructed property is
described in paragraph (c)(2) of this section, the components that are
acquired or self-constructed after September 27, 2017, are described in
paragraph (c)(3) of this section, the taxpayer is an accrual basis
taxpayer, and none of the costs paid or incurred after September 27,
2017, are for the installation of components that do not meet the
requirements of paragraph (c)(3) of this section.
(i) Example 1. (A) BC, a calendar year taxpayer, is engaged in a
trade or business described in section 163(j)(7)(A)(iv) and Sec. Sec.
1.163(j)-1(b)(15)(i) and 1.163(j)-10(c)(3)(iii)(C)(3). In December
2015, BC decided to construct an electric generation power plant for
its own use. This plant is property described in section 168(k)(2)(B)
as in effect on the day before the date of the enactment of the Act.
However, the turbine for the plant had to be manufactured by another
person for BC. In January 2016, BC entered into a written binding
contract with CD to acquire the turbine. BC received the completed
turbine in August 2017 at which time BC incurred the cost of the
turbine. The cost of the turbine is 11 percent of the total cost of the
electric generation power plant to be constructed by BC. BC began
[[Page 71763]]
constructing the electric generation power plant in October 2017 and
placed in service this new power plant, including all component parts,
in 2020.
(B) The larger self-constructed property is the electric generation
power plant to be constructed by BC. For determining if the
construction of this power plant begins before September 28, 2017,
paragraph (b)(5)(iv)(B) of this section provides that manufacture,
construction, or production of property begins when physical work of a
significant nature begins. BC uses the safe harbor test in paragraph
(b)(5)(iv)(B)(2) of this section to determine when physical work of a
significant nature begins for the electric generation power plant.
Because the turbine that was manufactured by CD for BC is more than 10
percent of the total cost of the electric generation power plant,
physical work of a significant nature for this plant began before
September 28, 2017.
(C) The power plant is described in section 168(k)(9)(A) and
paragraph (b)(2)(ii)(F) of this section and, therefore, is not larger
self-constructed property eligible for the election pursuant to
paragraph (c)(2)(i)(B) of this section. Accordingly, none of BC's
expenditures for components of the power plant that are acquired or
self-constructed after September 27, 2017, are eligible for the
election specified in this paragraph (c). Assuming all requirements are
met under section 168(k)(2) as in effect on the day before the date of
the enactment of the Act, the unadjusted depreciable basis of the power
plant, including all components, attributable to its construction
before January 1, 2020, is eligible for the 30-percent additional first
year depreciation deduction pursuant to section 168(k)(8).
(ii) Example 2. (A) In August 2017, BD, a calendar-year taxpayer,
entered into a written binding contract with CE for CE to manufacture a
locomotive for BD for use in its trade or business. Before September
28, 2017, BD acquired or self-constructed components of the locomotive.
These components cost $500,000, which is more than 10 percent of the
total cost of the locomotive, and BD incurred such costs before
September 28, 2017. After September 27, 2017, BD acquired or self-
constructed components of the locomotive and these components cost
$4,000,000. In February 2019, CE delivered the locomotive to BD and BD
placed in service the locomotive. The total cost of the locomotive is
$4,500,000. The locomotive is property described in section
168(k)(2)(B) as in effect on the day before the date of the enactment
of the Act. On its timely filed Federal income tax return for 2019, BD
made the election specified in this paragraph (c).
(B) The larger self-constructed property is the locomotive being
manufactured by CE for BD. For determining if the manufacturing of this
locomotive begins before September 28, 2017, paragraph (b)(5)(iv)(B) of
this section provides that manufacture, construction, or production of
property begins when physical work of a significant nature begins. BD
uses the safe harbor test in paragraph (b)(5)(iv)(B)(2) of this section
to determine when physical work of a significant nature begins for the
locomotive. Because BD had incurred more than 10 percent of the total
cost of the locomotive before September 28, 2017, physical work of a
significant nature for this locomotive began before September 28, 2017.
(C) Because BD made the election specified in this paragraph (c),
the cost of $4,000,000 for the locomotive's components acquired or
self-constructed after September 27, 2017, qualifies for the 100-
percent additional first year depreciation deduction under this
section, assuming all other requirements are met. The remaining cost of
the locomotive is $500,000 and such amount qualifies for the 40-percent
additional first year depreciation deduction pursuant to section
168(k)(8), assuming all other requirements in section 168(k) as in
effect on the day before the date of the enactment of the Act are met.
(iii) Example 3. (A) In February 2016, BF, a calendar-year
taxpayer, entered into a written binding contract with CG for CG to
manufacture a vessel for BF for use in its trade or business. Before
September 28, 2017, BF acquired or self-constructed components for the
vessel. These components cost $30,000,000, which is more than 10
percent of the total cost of the vessel, and BF incurred such costs
before September 28, 2017. After September 27, 2017, BF acquired or
self-constructed components for the vessel and these components cost
$15,000,000. In February 2021, CG delivered the vessel to BF and BF
placed in service the vessel. The vessel is property described in
section 168(k)(2)(B) as in effect on the day before the date of the
enactment of the Act. The total cost of the vessel is $45,000,000. On
its timely filed Federal income tax return for 2021, BF made the
election specified in this paragraph (c).
(B) The larger self-constructed property is the vessel being
manufactured by CG for BF. For determining if the manufacturing of this
vessel begins before September 28, 2017, paragraph (b)(5)(iv)(B) of
this section provides that manufacture, construction, or production of
property begins when physical work of a significant nature begins. BF
uses the safe harbor test in paragraph (b)(5)(iv)(B)(2) of this section
to determine when physical work of a significant nature begins for the
vessel. Because BF had incurred more than 10 percent of the total cost
of the vessel before September 28, 2017, physical work of a significant
nature for this vessel began before September 28, 2017.
(C) Because BF made the election specified in this paragraph (c),
the cost of $15,000,000 for the vessel's components acquired or self-
constructed after September 27, 2017, qualifies for the 100-percent
additional first year depreciation deduction under this section,
assuming all other requirements are met. Pursuant to section 168(k)(8)
and because BF placed in service the vessel after 2020, none of the
remaining cost of the vessel is eligible for any additional first year
depreciation deduction under section 168(k) and this section nor under
section 168(k) as in effect on the day before the date of the enactment
of the Act.
(iv) Example 4. (A) In March 2017, BG, a calendar year taxpayer,
entered into a written contract with CH for CH to construct a building
for BG to use in its retail business. This written contract does not
meet the definition of a binding contract in paragraph (b)(5)(iii) of
this section. In September 2019, the construction of the building was
completed and placed in service by BG. The total cost is $10,000,000.
Of this amount, $3,000,000 is the total cost for all section 1245
properties constructed as part of the building, and $7,000,000 is for
the building. Under section 168(e), section 1245 properties in the
total amount of $2,400,000 are 5-year property and in the total amount
of $600,000 are 7-year property. The building is nonresidential real
property under section 168(e). Before September 28, 2017, BG acquired
or self-constructed certain components and the total cost of these
components is $500,000 for the section 1245 properties and $3,000,000
for the building. BG incurred these costs before September 28, 2017.
After September 27, 2017, BG acquired or self-constructed the remaining
components of the section 1245 properties and these components cost
$2,500,000. BG incurred these costs of $2,500,000 after September 27,
2017. On its timely filed Federal income tax return for 2019, BG made
the election specified in this paragraph (c).
[[Page 71764]]
(B) All section 1245 properties are constructed as part of the
construction of the building and are described in paragraph
(b)(2)(i)(A) of this section. The building is not described in
paragraph (b)(2)(i)(A), (B), (C), or (D) of this section. As a result,
under paragraph (c)(2)(ii) of this section, the larger self-constructed
property is all section 1245 properties with a total cost of
$3,000,000. For determining if the construction of these section 1245
properties begins before September 28, 2017, paragraph (b)(5)(v) of
this section provides that manufacture, construction, or production of
property begins when the taxpayer incurs more than 10 percent of the
total cost of the property. Because BG incurred more than 10 percent of
the total cost of the section 1245 properties before September 28,
2017, construction of the section 1245 properties began before
September 28, 2017.
(C) Because BG made the election specified in this paragraph (c),
the cost of $2,500,000 for the section 1245 components acquired or
self-constructed by BG after September 27, 2017, qualifies for the 100-
percent additional first year depreciation deduction under this
section, assuming all other requirements are met. The remaining cost of
the section 1245 components is $500,000 and such amount qualifies for
the 30-percent additional first year depreciation deduction pursuant to
section 168(k)(8), assuming all other requirements in section 168(k),
as in effect on the day before the date of the enactment of the Act,
are met. Because the building is not qualified property under section
168(k), as in effect on the day before the date of the enactment of the
Act, none of the cost of $7,000,000 for the building is eligible for
any additional first year depreciation deduction under section 168(k)
and this section or under section 168(k), as in effect on the day
before the date of the enactment of the Act.
(d) * * *
(3) * * *
(iv) Determination of acquisition date for property not acquired
pursuant to a written binding contract. For purposes of the acquisition
rules in paragraph (d)(1) of this section, the following property is
acquired by the taxpayer before January 1, 2027, if the taxpayer paid,
in the case of a cash basis taxpayer, or incurred, in the case of an
accrual basis taxpayer, more than 10 percent of the total cost of the
property before January 1, 2027, excluding the cost of any land and
preliminary activities such as planning and designing, securing
financing, exploring, or researching:
(A) Property that the taxpayer acquires pursuant to a contract that
does not meet the definition of a written binding contract in paragraph
(b)(5)(iii) of this section; or
(B) Property that is manufactured, constructed, or produced for the
taxpayer by another person under a written contract that does not meet
the definition of a binding contract in paragraph (b)(5)(iii) of this
section, and that is entered into prior to the manufacture,
construction, or production of the property for use by the taxpayer in
its trade or business or production of income.
* * * * *
(e) * * *
(1) * * *
(iii) * * * The amounts of unadjusted depreciable basis
attributable to the property's manufacture, construction, or production
before January 1, 2027, are referred to as ``progress expenditures.''
Rules similar to the rules in section 4.02(1)(b) of Notice 2007-36
(2007-17 I.R.B. 1000) (see Sec. 601.601(d)(2)(ii)(b) of this chapter)
apply for determining progress expenditures, regardless of whether the
property is manufactured, constructed, or produced for the taxpayer by
another person under a written binding contract, as defined in
paragraph (b)(5)(iii) of this section, or under a written contract that
does not meet the definition of a binding contract in paragraph
(b)(5)(iii) of this section. The IRS may publish procedural guidance in
the Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this
chapter) that provides alternative procedures for complying with this
paragraph (e)(1)(iii).
* * * * *
(f) * * *
(7) Additional procedural guidance. The IRS may publish procedural
guidance in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii)(b) of this chapter) that provides alternative
procedures for complying with paragraph (f)(1)(iii), (f)(1)(iv),
(f)(2)(ii), (f)(2)(iii), (f)(3)(ii), (f)(3)(iii), or (f)(5)(i) of this
section.
(g) * * *
(11) Mid-quarter convention. In determining whether the mid-quarter
convention applies for a taxable year under section 168(d)(3) and Sec.
1.168(d)-1, the depreciable basis, as defined in Sec. 1.168(d)-
1(b)(4), for the taxable year the qualified property is placed in
service by the taxpayer is not reduced by the allowed or allowable
additional first year depreciation deduction for that taxable year. See
Sec. 1.168(d)-1(b)(4).
(h) * * *
(1) In general. Except as provided in paragraphs (h)(2) and (3) of
this section, this section applies to--
(i) Depreciable property acquired after September 27, 2017, by the
taxpayer and placed in service by the taxpayer during or after the
taxpayer's taxable year that begins on or after January 1, 2021;
(ii) A specified plant for which the taxpayer properly made an
election to apply section 168(k)(5) and that is planted, or grafted to
a plant that was previously planted, by the taxpayer during or after
the taxpayer's taxable year that begins on or after January 1, 2021;
and
(iii) Components acquired or self-constructed after September 27,
2017, of larger self-constructed property described in paragraph (c)(2)
of this section and placed in service by the taxpayer during or after
the taxpayer's taxable year that begins on or after January 1, 2021.
(2) Applicability of this section for prior taxable years. For
taxable years beginning before January 1, 2021, see Sec. 1.168(k)-2 as
contained in 26 CFR part 1, revised as of April 1, 2020.
(3) Early application of this section and Sec. 1.1502-68--(i) In
general. Subject to paragraphs (h)(3)(ii) and (iii) of this section,
and provided that all members of a consolidated group consistently
apply the same set of rules, a taxpayer may choose to apply both the
rules of this section and the rules of Sec. 1.1502-68 (to the extent
relevant), in their entirety and in a consistent manner, to--
(A) Depreciable property acquired after September 27, 2017, by the
taxpayer and placed in service by the taxpayer during a taxable year
ending on or after September 28, 2017;
(B) A specified plant for which the taxpayer properly made an
election to apply section 168(k)(5) and that is planted, or grafted to
a plant that was previously planted, after September 27, 2017, by the
taxpayer during a taxable year ending on or after September 28, 2017;
and
(C) Components acquired or self-constructed after September 27,
2017, of larger self-constructed property described in paragraph (c)(2)
of this section and placed in service by the taxpayer during a taxable
year ending on or after September 28, 2017.
(ii) Early application to certain transactions. In the case of
property described in Sec. 1.1502-68(e)(2)(i) that is acquired in a
transaction that satisfies the requirements of Sec. 1.1502-
68(c)(1)(ii) or (c)(2)(ii), the taxpayer may apply the rules of this
section and the rules of Sec. 1.1502-68 (to the extent relevant), in
their entirety and in a consistent manner, to such property only if
those
[[Page 71765]]
rules are applied, in their entirety and in a consistent manner, by all
parties to the transaction, including the transferor member, the
transferee member, and the target, as applicable, and the consolidated
groups of which they are members, for the taxable year(s) in which the
transaction occurs and the taxable year(s) that includes the day after
the deconsolidation date, as defined in Sec. 1.1502-68(a)(2)(iii).
(iii) Bound by early application. Once a taxpayer applies the rules
of this section and the rules of Sec. 1.1502-68 (to the extent
relevant), in their entirety, for a taxable year, the taxpayer must
continue to apply the rules of this section and the rules of Sec.
1.1502-68 (to the extent relevant), in their entirety, for the
taxpayer's subsequent taxable years.
0
Par. 5. Section 1.1502-68 is added immediately following Sec. 1.1502-
59A to read as follows:
Sec. 1.1502-68 Additional first year depreciation deduction for
property acquired and placed in service after September 27, 2017.
(a) In general--(1) Overview. This section provides rules governing
the availability of the additional first year depreciation deduction
allowable under section 168(k) for qualified property that is acquired
and placed in service after September 27, 2017, by a member of a
consolidated group. Except as otherwise provided in paragraph (c) of
this section, the rules in Sec. 1.168(k)-2 apply to members of a
consolidated group in addition to the rules in this section. Paragraph
(a)(2) of this section provides definitions of terms used in this
section. Paragraph (b) of this section provides rules addressing the
application of Sec. 1.168(k)-2(b)(3)(iii)(A)(1) (requiring that a
taxpayer claiming the additional first year depreciation deduction for
used property not previously have used the property) to members of a
consolidated group. Paragraph (c) of this section provides rules
addressing certain transfers of eligible property (as defined in
paragraph (a)(2)(vii) of this section) between members of a
consolidated group if the transferee member (as defined in paragraph
(a)(2)(xii) of this section) leaves the group pursuant to the same
series of related transactions. Paragraph (d) of this section provides
examples illustrating the application of the rules of this section.
Paragraph (e) of this section provides the applicability dates.
(2) Definitions. The following definitions apply for purposes of
this section.
(i) Consolidated Asset Acquisition Rule. The term Consolidated
Asset Acquisition Rule refers to the rule set forth in paragraph
(c)(1)(i) of this section addressing certain intercompany transfers of
eligible property.
(ii) Consolidated Deemed Acquisition Rule. The term Consolidated
Deemed Acquisition Rule refers to the rule set forth in paragraph
(c)(2)(i) of this section addressing certain intercompany transfers of
the stock of target (as defined in paragraph (a)(2)(xi) of this
section).
(iii) Deconsolidation date. The term deconsolidation date means the
date on which a transferee member ceases to be a member of a
consolidated group.
(iv) Designated transaction. The term designated transaction has
the meaning provided in paragraph (c)(4)(i) of this section.
(v) Deemed replacement property. The term deemed replacement
property means used property that is identical to (but is separate and
distinct from) the eligible property that the transferee member or
target is deemed to sell to an unrelated party under the Consolidated
Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule. For
all Federal income tax purposes, the deemed purchase of deemed
replacement property by the transferee member or target under paragraph
(c)(1)(i)(B) or (c)(2)(i)(B) of this section, respectively, does not
result in the basis in such property being determined, in whole or in
part, by reference to the basis of other property held at any time by
the transferee member or target. See section 179(d)(3) and Sec.
1.168(k)-2(b)(3)(iii)(A)(3).
(vi) Deemed sale amount. The term deemed sale amount means an
amount equal to the transferee member's or the target's adjusted basis
in the eligible property immediately before the transferee member or
target is deemed to sell the property to an unrelated party under the
Consolidated Asset Acquisition Rule or the Consolidated Deemed
Acquisition Rule.
(vii) Eligible property. The term eligible property means
depreciable property (as defined in Sec. 1.168(b)-1(a)(1)) that meets
the requirements in Sec. 1.168(k)-2(b)(2), determined without regard
to Sec. 1.168(k)-2(b)(2)(ii)(C) (property subject to an election not
to claim the additional first year depreciation for a class of
property) except on the day after the deconsolidation date.
(viii) Group Prior Use Rule. The term Group Prior Use Rule refers
to the rule set forth in paragraph (b)(1) of this section addressing
when a member of a consolidated group is attributed another member's
depreciable interest in property.
(ix) Lookback Period. The term lookback period means, with respect
to a member of a consolidated group, the period that includes the five
calendar years immediately prior to the current calendar year in which
the property is placed in service by such member, as well as the
portion of such current calendar year before the date on which the
member placed the property in service (without taking into account the
applicable convention).
(x) Stock and Asset Acquisition Rule. The term Stock and Asset
Acquisition Rule refers to the rule set forth in paragraph (b)(2) of
this section addressing when a member of a consolidated group is
attributed a new member's depreciable interest in property.
(xi) Target. The term target means the member whose stock is
transferred in a transaction that is subject to the Consolidated Deemed
Acquisition Rule.
(xii) Transferee member. The term transferee member means the
member that acquires eligible property or target stock, respectively,
in a transaction that is subject to the Consolidated Asset Acquisition
Rule or the Consolidated Deemed Acquisition Rule.
(xiii) Transferor member. The term transferor member means the
member that transfers eligible property or target stock, respectively,
in a transaction that is subject to the Consolidated Asset Acquisition
Rule or the Consolidated Deemed Acquisition Rule.
(b) Acquisitions of depreciable property by a member of a
consolidated group--(1) General rule (Group Prior Use Rule). Solely for
purposes of applying Sec. 1.168(k)-2(b)(3)(iii)(A)(1), if a member of
a consolidated group acquires depreciable property in which the group
had a depreciable interest at any time within the lookback period, the
member is treated as having a depreciable interest in the property
prior to the acquisition. For purposes of this paragraph (b)(1), a
consolidated group is treated as having a depreciable interest in
property during the time any current or previous member of the group
had a depreciable interest in the property while a member of the group.
For special rules that apply when a member of a consolidated group
acquires depreciable property in an intercompany transaction (as
defined in Sec. 1.1502-13(b)(1)(i)) and then leaves the group pursuant
to the same series of related transactions, see paragraph (c) of this
section.
(2) Certain acquisitions pursuant to a series of related
transactions (Stock and Asset Acquisition Rule). Solely for purposes of
applying Sec. 1.168(k)-2(b)(3)(iii)(A)(1), if a series of related
[[Page 71766]]
transactions includes one or more transactions in which property is
acquired by a member of a consolidated group, and one or more
transactions in which a corporation that had a depreciable interest in
the property (determined without regard to the application of the Group
Prior Use Rule) within the lookback period becomes a member of the
group, then the member that acquires the property is treated as having
a depreciable interest in the property prior to the acquisition.
(c) Certain intercompany transfers of eligible property followed by
deconsolidation--(1) Acquisition of eligible property by a member that
leaves the group--(i) General rule (Consolidated Asset Acquisition
Rule). This paragraph (c)(1) applies to certain transactions pursuant
to which one member of a consolidated group (transferee member)
acquires from another member of the same consolidated group (transferor
member) eligible property. Except as otherwise provided in paragraph
(c)(3) or (4) of this section, if a transaction satisfies the
requirements of paragraph (c)(1)(ii) of this section, then Sec.
1.168(k)-2(b)(3)(iii)(C) (providing special rules when depreciable
property is acquired as part of a series of related transactions) does
not apply to the transaction, and for all Federal income tax purposes--
(A) The transferee member is treated as selling the eligible
property to an unrelated person on the day after the deconsolidation
date in exchange for an amount of cash equal to the deemed sale amount;
and
(B) Immediately after the deemed sale in paragraph (c)(1)(i)(A) of
this section, the transferee member is treated as purchasing deemed
replacement property from an unrelated person for an amount of cash
equal to the deemed sale amount.
(ii) Requirements. A transaction satisfies the requirements of this
paragraph (c)(1)(ii) if--
(A) The transferee member's acquisition of the eligible property
meets the requirements of Sec. 1.168(k)-2(b)(3)(iii)(A) without regard
to section 179(d)(2)(A) or (B) and Sec. 1.179-4(c)(1)(ii) or (iii) or
the Group Prior Use Rule;
(B) As part of the same series of related transactions that
includes the acquisition, the transferee member ceases to be a member
of the consolidated group and ceases to be related, within the meaning
of section 179(d)(2)(A) or (B) and Sec. 1.179-4(c)(1)(ii) or (iii), to
the transferor member; and
(C) The acquired eligible property continues to be eligible
property on the deconsolidation date and the day after the
deconsolidation date.
(2) Deemed acquisition of eligible property pursuant to an election
under section 338 or 336(e) by a member that leaves the group--(i)
General rule (Consolidated Deemed Acquisition Rule). This paragraph
(c)(2) applies to certain transactions pursuant to which a transferee
member acquires from a transferor member the stock of another member of
the same consolidated group that holds eligible property (target) in
either a qualified stock purchase for which a section 338 election is
made or a qualified stock disposition described in Sec. 1.336-2(b)(1)
for which a section 336(e) election is made. Except as otherwise
provided in paragraph (c)(3) or (4) of this section, if a transaction
satisfies the requirements of paragraph (c)(2)(ii) of this section,
then Sec. 1.168(k)-2(b)(3)(iii)(C) does not apply to the transaction,
and for all Federal income tax purposes--
(A) The target is treated as selling the eligible property to an
unrelated person on the day after the deconsolidation date in exchange
for an amount of cash equal to the deemed sale amount; and
(B) Immediately after the deemed sale in paragraph (c)(2)(i)(A) of
this section, the target is treated as purchasing deemed replacement
property from an unrelated person for an amount of cash equal to the
deemed sale amount.
(ii) Requirements. A transaction satisfies the requirements of this
paragraph (c)(2)(ii) if:
(A) The target's acquisition of the eligible property meets the
requirements of Sec. 1.168(k)-2(b)(3)(iii)(A) without regard to the
Group Prior Use Rule;
(B) As part of the same series of related transactions that
includes the qualified stock purchase or qualified stock disposition,
the transferee member and the target cease to be members of the
transferor member's consolidated group and cease to be related, within
the meaning of section 179(d)(2)(A) or (B) and Sec. 1.179-4(c)(1)(ii)
or (iii), to the transferor member; and
(C) The target's eligible property on the acquisition date (within
the meaning of Sec. 1.338-2(c)(1)) or the disposition date (within the
meaning of Sec. 1.336-1(b)(8)) continues to be eligible property on
the deconsolidation date and the day after the deconsolidation date.
(3) Disposition of depreciable property pursuant to the same series
of related transactions. Paragraph (c)(1) of this section does not
apply if, following the acquisition of eligible property, the
transferee member disposes of such property pursuant to the same series
of related transactions that includes the property acquisition.
Paragraph (c)(2) of this section does not apply if, following the
deemed acquisition of eligible property, the target disposes of such
property pursuant to the same series of related transactions that
includes the qualified stock purchase or qualified stock disposition.
See Sec. 1.168(k)-2(b)(3)(iii)(C) for rules regarding the transfer of
property in a series of related transactions. See also Sec. 1.168(k)-
2(g)(1) for rules regarding property placed in service and disposed of
in the same taxable year. For purposes of this paragraph (c)(3), the
deemed sale of eligible property by the transferee member or the target
pursuant to paragraph (c)(1)(i)(A) or (c)(2)(i)(A) of this section is
not treated as a ``disposition'' of such property.
(4) Election to not apply paragraph (c)(1)(i) or (c)(2)(i) of this
section--(i) In general. If a transaction satisfies the requirements of
the Consolidated Asset Acquisition Rule or the Consolidated Deemed
Acquisition Rule in paragraph (c)(1)(ii) or (c)(2)(ii) of this section,
respectively, the transferee member or the target nonetheless may elect
not to apply the Consolidated Asset Acquisition Rule or the
Consolidated Deemed Acquisition Rule, respectively, to all eligible
property that is acquired or deemed acquired in such transaction. If a
transferee member or target makes an election under this paragraph
(c)(4) with respect to any transaction (designated transaction), then--
(A) The transferee member or target is deemed to have made such an
election for all other transactions--
(1) That satisfy the requirements of the Consolidated Asset
Acquisition Rule or the Consolidated Deemed Acquisition Rule;
(2) That are part of the same series of related transactions as the
designated transaction; and
(3) In which the transferee member or target either is the same
transferee member or target as in the designated transaction or is
related, within the meaning of section 179(d)(2)(A) or (B) and Sec.
1.179-4(c)(1)(ii) or (iii), to the transferee member or target in the
designated transaction immediately after the end of the series of
related transactions; and
(B) Any eligible property acquired or deemed acquired in the
designated transaction and in any transactions described in paragraph
(c)(4)(i)(A) of this section does not satisfy either the original use
requirement or the used property acquisition requirements in Sec.
1.168(k)-2(b)(3) and, thus, is not ``qualified property'' within the
meaning of Sec. 1.168(k)-2(b)(1).
(ii) Time and manner for making election--(A) Time to make
election. An
[[Page 71767]]
election under this paragraph (c)(4) must be made by the due date,
including extensions, for the Federal tax return for the taxable year
of the transferee member or target that begins on the day after the
deconsolidation date.
(B) Manner of making election. A transferee member or target, as
applicable, makes the election under this paragraph (c)(4) by attaching
a statement to its return for the taxable year that begins on the day
after the deconsolidation date. The statement must describe the
transaction(s) to which the Consolidated Asset Acquisition Rule or
Consolidated Deemed Acquisition Rule otherwise would apply and state
that the transferee member or the target, as applicable, is not
claiming the additional first year depreciation deduction for any
eligible property transferred in such transaction(s). If, at the time
the election is made, the transferee member or the target is a member
of a consolidated group, the statement is made by the agent for the
group (within the meaning of Sec. 1.1502-77(a) and (c)) on behalf of
the transferee member or the target and is attached to the consolidated
return of the group for the taxable year of the group that includes the
taxable year of the transferee member or target that begins on the day
after the deconsolidation date.
(C) Additional procedural guidance. The IRS may publish procedural
guidance in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii)(b) of this chapter) that provides alternative
procedures for complying with paragraph (c)(4)(ii)(A) or (B) of this
section.
(iii) Revocation of election. An election specified in this
paragraph (c)(4), once made, may be revoked only by filing a request
for a private letter ruling and obtaining the Commissioner of Internal
Revenue's written consent to revoke the election. The Commissioner may
grant a request to revoke the election if the taxpayer acted reasonably
and in good faith, and the revocation will not prejudice the interests
of the Government. See generally Sec. 301.9100-3 of this chapter. An
election specified in this paragraph (c)(4) may not be revoked through
a request under section 446(e) to change the taxpayer's method of
accounting.
(d) Examples. For purposes of the examples in this section, unless
otherwise stated: Parent, S, B, Controlled, and T are members of a
consolidated group of which Parent is the common parent (Parent group);
Parent owns all of the only class of stock of each of S, B, Controlled,
and T; X is the common parent of the X consolidated group (X group); no
member of the X group is related, within the meaning of section
179(d)(2)(A) or (B) and Sec. 1.179-4(c)(1)(ii) or (iii) (Related), to
any member of the Parent group; G and U are corporations that are not
Related to each other or to any member of the Parent group or the X
group; the Equipment in each example is eligible property; no member of
the Parent group or the X group has had a depreciable interest in the
Equipment within the lookback period; Sec. 1.168(k)-2(b)(3)(iii)(A)(1)
is referred to as the No Prior Use Requirement; and Sec. 1.168(k)-
2(b)(3)(iii)(A)(2) is referred to as the Unrelated Party Requirement.
The rules of this section are illustrated by the following examples.
(1) Example 1: Intercompany sale of eligible property--(i) Facts. S
has a depreciable interest in Equipment #1. In 2018, S sells Equipment
#1 to B, and B places Equipment #1 in service in the same year.
(ii) Analysis. B's acquisition of Equipment #1 does not satisfy
either the No Prior Use Requirement or the Unrelated Party Requirement.
Under the Group Prior Use Rule, B is treated as previously having a
depreciable interest in Equipment #1 because B (a member of the Parent
group) acquired Equipment #1 and S, while a member of the Parent group,
had a depreciable interest in Equipment #1 within the lookback period.
In addition, B acquires Equipment #1 from S, and B and S are Related at
the time of the acquisition. Accordingly, B is not eligible to claim
the additional first year depreciation deduction for Equipment #1 in
2018.
(2) Example 2: Sale outside of the consolidated group followed by a
reacquisition within the lookback period--(i) Facts. S has a
depreciable interest in Equipment #2. In 2018, S sells Equipment #2 to
G. In 2019, in an unrelated transaction, B acquires Equipment #2 from G
and places it in service in the same year.
(ii) Analysis. B's acquisition of Equipment #2 does not satisfy the
No Prior Use Requirement as a result of the Group Prior Use Rule.
Pursuant to the Group Prior Use Rule, B is treated as previously having
a depreciable interest in Equipment #2 because B is a member of the
Parent group and S, while a member of the Parent group, had a
depreciable interest in Equipment #2 within the lookback period. Thus,
B is not eligible to claim the additional first year depreciation
deduction for Equipment #2 in 2019. The result would be the same if,
after selling Equipment #2 to G, S had ceased to be a member of the
Parent group prior to B's acquisition of Equipment #2.
(iii) Sale outside of the consolidated group followed by a
reacquisition beyond the lookback period. The facts are the same as in
paragraph (d)(2)(i) of this section, except that B acquires Equipment
#2 and places it in service in 2024 instead of 2019. B's acquisition of
Equipment #2 satisfies the No Prior Use Requirement. B would not be
treated as previously having a depreciable interest in Equipment #2
under the Group Prior Use Rule because the Parent group did not have a
depreciable interest in Equipment #2 within the lookback period.
Further, B itself did not have a prior depreciable interest in
Equipment #2 within the lookback period. Assuming all other
requirements in Sec. 1.168(k)-2 are satisfied, B is eligible to claim
the additional first year depreciation deduction for Equipment #2 in
2024. The result would be the same if S, rather than B, acquired and
placed in service Equipment #2 in 2024.
(3) Example 3: Acquisition of eligible property by the consolidated
group followed by a corporation with a prior depreciable interest
joining the group as part of the same series of related transactions--
(i) Facts. G has a depreciable interest in Equipment #3. During 2018, G
sells Equipment #3 to U. In a series of related transactions that does
not include the 2018 sale, Parent acquires all of the stock of G in
2019. Later in 2019, B purchases Equipment #3 from U and places it in
service immediately thereafter.
(ii) Analysis. B's acquisition of Equipment #3 does not satisfy the
No Prior Use Requirement as a result of the Stock and Asset Acquisition
Rule. In a series of related transactions, G became a member of the
Parent group and B acquired Equipment #3. Because G had a depreciable
interest in Equipment #3 within the lookback period, B is treated as
having a depreciable interest in Equipment #3 under the Stock and Asset
Acquisition Rule. Thus, B is not eligible to claim the additional first
year depreciation deduction for Equipment #3 in 2019.
(iii) B purchases Equipment #3 in 2024. The facts are the same as
in paragraph (d)(3)(i) of this section, except that B acquires and
places in service Equipment #3 in 2024 instead of 2019. B is not
treated under the Stock and Asset Acquisition Rule as having a prior
depreciable interest in Equipment #3 because G (which sold Equipment #3
to U in 2018) did not have a depreciable interest in Equipment #3
within the lookback period. In addition, B is not treated under the
Group Prior Use Rule as having a prior depreciable interest in
[[Page 71768]]
Equipment #3 at the time of the purchase because neither G nor any
other member of the Parent group had a depreciable interest in
Equipment #3 while a member of the Parent group within the lookback
period. Further, B itself did not have a depreciable interest in
Equipment #3 within the lookback period. Accordingly, B's acquisition
of Equipment #3 satisfies the No Prior Use Requirement. Assuming all
other requirements in Sec. 1.168(k)-2 are satisfied, B is eligible to
claim the additional first year depreciation deduction for Equipment #3
in 2024.
(iv) No series of related transactions. The facts are the same as
in paragraph (d)(3)(i) of this section, except that Parent's
acquisition of the G stock and B's purchase of Equipment #3 are not
part of the same series of related transactions. Because B's purchase
of Equipment #3 and Parent's acquisition of the G stock did not occur
pursuant to the same series of related transactions, the Stock and
Asset Acquisition Rule does not apply. In addition, B is not treated
under the Group Prior Use Rule as having a prior depreciable interest
in Equipment #3 at the time of the purchase because neither G nor any
other member of the Parent group had a depreciable interest in
Equipment #3 while a member of the Parent group within the lookback
period. Further, B itself did not have a depreciable interest in
Equipment #3 within the lookback period. Accordingly, B's acquisition
of Equipment #3 satisfies the No Prior Use Requirement. Assuming all
other requirements in Sec. 1.168(k)-2 are satisfied, B is eligible to
claim the additional first year depreciation deduction for Equipment #3
in 2019.
(4) Example 4: Termination of the consolidated group--(i) Facts. S
owns Equipment #4. In 2018, S sells Equipment #4 to U. In 2019, X
acquires all of the stock of Parent in a transaction that causes the
Parent group to terminate and Parent, B, and S to become members of the
X group. In 2020, in a transaction that is not part of a series of
related transactions, B purchases Equipment #4 from U and places it in
service in the same year.
(ii) Analysis. B's acquisition of Equipment #4 satisfies the No
Prior Use Requirement. The Group Prior Use Rule does not apply to treat
B as having a prior depreciable interest in Equipment #4 because B is a
member of the X group and no member of the X group had a depreciable
interest in Equipment #4 while a member of the X group within the
lookback period. Further, B itself did not have a prior depreciable
interest in Equipment #4 within the lookback period. Assuming all other
requirements in Sec. 1.168(k)-2 are satisfied, B is eligible to claim
the additional first year depreciation deduction for Equipment #4 in
2020.
(iii) S purchases Equipment #4 in 2020. The facts are the same as
in paragraph (d)(4)(i) of this section, except that S rather than B
purchases and places in service Equipment #4 in 2020. S's purchase of
Equipment #4 does not satisfy the No Prior Use Requirement because S
had a depreciable interest in Equipment #4 within the lookback period.
Thus, S is not eligible to claim the additional first year depreciation
deduction for Equipment #4 in 2020.
(iv) Acquisitions are part of the same series of related
transactions. The facts are the same as in paragraph (d)(4)(i) of this
section, except that X's acquisition of the Parent stock and B's
purchase of Equipment #4 are part of the same series of related
transactions. Thus, pursuant to the same series of related
transactions, S became a member of the X group and B (another member of
the X group) acquired Equipment #4. Because S had a depreciable
interest in Equipment #4 within the lookback period, B is treated as
having a depreciable interest in Equipment #4 under the Stock and Asset
Acquisition Rule. As a result, B's acquisition of Equipment #4 does not
satisfy the No Prior Use Requirement, and B is not eligible to claim
the additional first year depreciation deduction for Equipment #4 in
2020.
(5) Example 5: Intercompany sale of eligible property followed by
sale of B stock as part of the same series of related transactions--(i)
Facts. S has a depreciable interest in Equipment #5. On January 1,
2019, B purchases Equipment #5 from S and places it in service. On June
1, 2019, as part of the same series of related transactions that
includes B's purchase of Equipment #5, Parent sells all of the stock of
B to X. Thus, B leaves the Parent group at the end of the day on June
1, 2019, and B is a member of the X group starting June 2, 2019. See
Sec. 1.1502-76(b). As of June 1, 2019, Equipment #5 remains eligible
property.
(ii) Analysis--(A) Application of the Consolidated Asset
Acquisition Rule. B was a member of the Parent group when it acquired
Equipment #5. Because S, another member of the Parent group, had a
depreciable interest in Equipment #5 while a member of the group within
the lookback period, B would be treated as having a prior depreciable
interest in Equipment #5 under the Group Prior Use Rule and B's
acquisition of Equipment #5 would not satisfy the No Prior Use
Requirement. However, B's acquisition of Equipment #5 satisfies the
requirements of the Consolidated Asset Acquisition Rule in paragraph
(c)(1)(ii) of this section. First, B's acquisition of Equipment #5
meets the requirements of Sec. 1.168(k)-2(b)(3)(iii)(A) without regard
to the related-party tests under section 179(d)(2)(A) or (B) and Sec.
1.179-4(c)(1)(ii) or (iii) or the Group Prior Use Rule. Second, as part
of the same series of related transactions that includes B's
acquisition of Equipment #5, B ceases to be a member of the Parent
group and ceases to be Related to S. Third, Equipment #5 continues to
be eligible property on the deconsolidation date (June 1, 2019).
(B) Consequences of the Consolidated Asset Acquisition Rule. Under
the Consolidated Asset Acquisition Rule, B is treated for all Federal
income tax purposes as transferring Equipment #5 to an unrelated person
on June 2, 2019, in exchange for an amount of cash equal to the deemed
sale amount and, immediately thereafter, acquiring deemed replacement
property (New Equipment #5) from an unrelated person for an amount of
cash equal to the deemed sale amount. Accordingly, assuming all other
requirements in Sec. 1.168(k)-2 are satisfied, B is eligible to claim
the additional first year depreciation for an amount equal to the
deemed sale amount for the taxable year in which it places New
Equipment #5 in service.
(iii) Distribution of B. The facts are the same as in paragraph
(d)(5)(i) of this section, except that, on June 1, 2019, Parent
distributes the stock of B to its shareholders (which are not Related
to S) in a distribution that qualifies for nonrecognition under section
355(a). Accordingly, the Consolidated Asset Acquisition Rule applies.
As in paragraph (d)(5)(ii)(B) of this section, assuming all other
requirements in Sec. 1.168(k)-2 are satisfied, B is eligible to claim
the additional first year depreciation deduction for an amount equal to
the deemed sale amount for the taxable year in which it places New
Equipment #5 in service.
(iv) Equipment #5 ceases to be eligible property. The facts are the
same as in paragraph (d)(5)(i) of this section, except that, on June 1,
2019, Equipment #5 is no longer eligible property. The Consolidated
Asset Acquisition Rule does not apply because B's acquisition of
Equipment #5 fails to satisfy the requirement in paragraph
(c)(1)(ii)(C) of this section that the acquired eligible property
continue to be eligible property on the deconsolidation date.
Therefore, B's acquisition of Equipment #5 on January 1, 2019, fails to
satisfy the No Prior Use Requirement. Under the Group Prior Use Rule, B
is treated as
[[Page 71769]]
having a prior depreciable interest in Equipment #5 because B is a
member of the Parent group and S, while a member of the Parent group,
had a depreciable interest in Equipment #5 within the lookback period.
Accordingly, B is not eligible to claim the additional first year
depreciation deduction with respect to Equipment #5 in 2019.
(6) Example 6: Intercompany sale of member stock for which a
section 338(h)(10) election is made followed by sale of B stock as part
of a series of related transactions--(i) Facts. S owns all of the stock
of T, which has a depreciable interest in Equipment #6. On January 1,
2019, B purchases all of the T stock from S in a qualified stock
purchase for which a section 338(h)(10) election is made. On June 1,
2019, as part of the same series of related transactions that includes
B's purchase of the T stock, Parent sells all of the stock of B to X.
Thus, B and T leave the Parent group at the end of the day on June 1,
2019, and B and T are members of the X group starting June 2, 2019. See
Sec. 1.1502-76(b). As of June 1, 2019, Equipment #6 remains eligible
property.
(ii) Analysis--(A) Section 338(h)(10) election. Pursuant to the
section 338(h)(10) election, Old T is treated as transferring all of
its assets, including Equipment #6, to an unrelated person in a single
transaction in exchange for consideration at the close of the
acquisition date (January 1, 2019), and New T is treated as acquiring
all of its assets, including Equipment #6, from an unrelated person in
exchange for consideration. Old T is deemed to liquidate following the
deemed asset sale. See Sec. 1.338-1(a)(1).
(B) Application of the Consolidated Deemed Acquisition Rule. New T
was a member of the Parent group when New T acquired Equipment #6 from
an unrelated person. Because Old T, another member of the Parent group,
had a depreciable interest in Equipment #6 while a member of the group
within the lookback period, New T would be treated as having a prior
depreciable interest in Equipment #6 under the Group Prior Use Rule and
New T's acquisition of Equipment #6 would not satisfy the No Prior Use
Requirement. However, New T's acquisition of Equipment #6 satisfies the
requirements of the Consolidated Deemed Acquisition Rule in paragraph
(c)(2)(ii) of this section. First, New T's acquisition of Equipment #6
meets the requirements of Sec. 1.168(k)-2(b)(3)(iii)(A) without regard
to the Group Prior Use Rule. Second, as part of the same series of
related transactions that includes B's qualified stock purchase of the
T stock, B and New T cease to be members of the Parent group and cease
to be Related to S. Third, Equipment #6 continues to be eligible
property on the deconsolidation date (June 1, 2019).
(C) Consequences of the Consolidated Deemed Acquisition Rule. Under
the Consolidated Deemed Acquisition Rule, New T is treated for all
Federal income tax purposes as transferring Equipment #6 to an
unrelated person on June 2, 2019, in exchange for an amount of cash
equal to the deemed sale amount and, immediately thereafter, acquiring
deemed replacement property (New Equipment #6) from an unrelated person
for an amount of cash equal to the deemed sale amount. Accordingly,
assuming all other requirements in Sec. 1.168(k)-2 are satisfied, New
T is eligible to claim the additional first year depreciation deduction
for an amount equal to the deemed sale amount for the taxable year in
which it places New Equipment #6 in service.
(iii) T owns multiple assets. The facts are the same as in
paragraph (d)(6)(i) of this section, except that, in addition to
Equipment #6, T also owns Asset A (depreciable real estate that is not
eligible property). With respect to Equipment #6, the results are the
same as in paragraph (d)(6)(ii) of this section. However, the
Consolidated Deemed Acquisition Rule does not apply to Asset A because
it is not eligible property. Accordingly, New T is not treated as
transferring Asset A to an unrelated person on June 2, 2019 and then,
immediately thereafter, acquiring deemed replacement property for Asset
A. If Equipment #6 had ceased to be eligible property as of June 1,
2019, the Consolidated Deemed Acquisition Rule also would not apply to
Equipment #6.
(7) Example 7: Section 355 transaction following a section
338(h)(10) transaction pursuant to the same series of related
transactions--(i) Facts. T has a depreciable interest in Equipment #7.
On January 1, 2019, Parent contributes all of the stock of T to B in
exchange for common and non-voting preferred stock of B and sells the
non-voting preferred stock of B to U pursuant to a binding commitment
entered into prior to the contribution (T Exchange). The non-voting
preferred stock is not treated as ``stock'' for purposes of section
1504(a). See section 1504(a)(4). Parent and B jointly make an election
under section 338(h)(10) with respect to the T Exchange. On June 1,
2019, as part of the same series of related transactions that includes
the T Exchange, Parent contributes the stock of B and assets comprising
an active trade or business (within the meaning of section 355(b)) to
Controlled in exchange for Controlled common stock and then distributes
the Controlled common stock to Parent's shareholders in a distribution
qualifying under section 355(a) (Controlled Distribution). In the
Controlled Distribution, T and B cease to be Related to Parent.
Equipment #7 remains eligible property on June 1, 2019.
(ii) Section 338(h)(10) election. Immediately after the Controlled
Distribution, Parent and B are not related as determined under section
338(h)(3)(A)(iii). Further, B's basis in the T stock is not determined,
in whole or in part, by reference to the adjusted basis of the T stock
in the hands of Parent, and the stock is not acquired in an exchange to
which section 351, 354, 355, or 356 applies. Accordingly, the T
Exchange qualifies as a ``purchase'' within the meaning of section
338(h)(3). Pursuant to the section 338(h)(10) election, Old T is
treated as transferring all of its assets, including Equipment #7, to
an unrelated person in a single transaction in exchange for
consideration at the close of the acquisition date (January 1, 2019),
and New T is treated as acquiring all of its assets, including
Equipment #7, from an unrelated person in exchange for consideration.
Old T is deemed to liquidate following the deemed asset sale. See Sec.
1.338-1(a)(1).
(iii) Application of the Consolidated Deemed Acquisition Rule. New
T was a member of the Parent group when New T acquired Equipment #7
from an unrelated person. Because Old T, another member of the Parent
group, had a depreciable interest in Equipment #7 while a member of the
group within the lookback period, New T would be treated as having a
prior depreciable interest in Equipment #7 under the Group Prior Use
Rule and New T's acquisition of Equipment #7 would not satisfy the No
Prior Use Requirement. However, New T's acquisition of Equipment #7
satisfies the requirements of the Consolidated Deemed Acquisition Rule
in paragraph (c)(2)(ii) of this section. Thus, New T is treated for all
Federal income tax purposes as transferring Equipment #7 to an
unrelated person on June 2, 2019, in exchange for an amount of cash
equal to the deemed sale amount and, immediately thereafter, acquiring
deemed replacement property (New Equipment #7) from an unrelated person
for an amount of cash equal to the deemed sale amount. Accordingly,
assuming all other requirements in Sec. 1.168(k)-2 are satisfied, New
T is eligible to claim the additional first year depreciation deduction
for an amount equal to the deemed sale amount for the
[[Page 71770]]
taxable year in which it places New Equipment #7 in service.
(e) Applicability dates--(1) In general. Except as provided in
paragraph (e)(2) of this section, this section applies to--
(i) Depreciable property acquired after September 27, 2017, by the
taxpayer and placed in service by the taxpayer during or after the
taxpayer's taxable year that begins on or after January 1, 2021;
(ii) A specified plant for which the taxpayer properly made an
election to apply section 168(k)(5) and that is planted, or grafted to
a plant that was previously planted, by the taxpayer during or after
the taxpayer's taxable year that begins on or after January 1, 2021;
and
(iii) Components acquired or self-constructed after September 27,
2017, of larger self-constructed property described in Sec. 1.168(k)-
2(c)(2) and placed in service by the taxpayer during or after the
taxpayer's taxable year that begins on or after January 1, 2021.
(2) Early application of this section and Sec. 1.168(k)-2--(i) In
general. Subject to paragraphs (e)(2)(ii) and (iii) of this section,
and provided that all members of a consolidated group consistently
apply the same set of rules, a taxpayer may choose to apply both the
rules of this section and the rules of Sec. 1.168(k)-2, in their
entirety and in a consistent manner, to--
(A) Depreciable property acquired after September 27, 2017, by the
taxpayer and placed in service by the taxpayer during a taxable year
ending on or after September 28, 2017;
(B) A specified plant for which the taxpayer properly made an
election to apply section 168(k)(5) and that is planted, or grafted to
a plant that was previously planted, after September 27, 2017, by the
taxpayer during a taxable year ending on or after September 28, 2017;
and
(C) Components acquired or self-constructed after September 27,
2017, of larger self-constructed property described in Sec. 1.168(k)-
2(c)(2) and placed in service by the taxpayer during a taxable year
ending on or after September 28, 2017.
(ii) Early application to certain transactions. In the case of
property described in paragraph (e)(2)(i) of this section that is
acquired in a transaction that satisfies the requirements of paragraph
(c)(1)(ii) or (c)(2)(ii) of this section, the taxpayer may apply the
rules of this section and the rules of Sec. 1.168(k)-2, in their
entirety and in a consistent manner, to such property only if those
rules are applied, in their entirety and in a consistent manner, by all
parties to the transaction (including the transferor member, the
transferee member, and the target, as applicable) and the consolidated
groups of which they are members, for the taxable year(s) in which the
transaction occurs and the taxable year(s) that includes the day after
the deconsolidation date.
(iii) Bound by early application. Once a taxpayer applies the rules
of this section and the rules of Sec. 1.168(k)-2, in their entirety,
for a taxable year, the taxpayer must continue to apply the rules of
this section and the rules of Sec. 1.168(k)-2, in their entirety, for
the taxpayer's subsequent taxable years.
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
Approved: September 16, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-21112 Filed 11-5-20; 4:15 pm]
BILLING CODE 4830-01-P