General Asset Accounts Under the Accelerated Cost Recovery System

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8566]

RIN 1545-AN82

General Asset Accounts Under the Accelerated Cost Recovery System

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations on the election to

maintain general asset accounts for depreciable assets to which section

168 of the Internal Revenue Code applies. These regulations reflect

changes to the law made by the Tax Reform Act of 1986. The regulations

will simplify certain depreciation calculations.

EFFECTIVE DATE: October 11, 1994.

For dates of applicability of these regulations, see Dates under

SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: Kathleen Reed at (202) 622-3110 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations

has been reviewed and approved by the Office of Management and Budget

in accordance with the requirements of the Paperwork Reduction Act (44

U.S.C 3504(h)) under control number 1545-1331. The estimated annual

burden per respondent or recordkeeper varies from .20 to .30 hours,

depending on individual circumstances, with an estimated average of .25

hours.

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be sent to the Internal

Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,

Washington, DC 20224, and to the Office of Management and Budget, Attn:

Desk Officer for the Department of the Treasury, Office of Information

and Regulatory Affairs, Washington, DC 20503.

Background

On August 31, 1992, the IRS published a notice of proposed

rulemaking in the Federal Register (57 FR 39374 [PS-55-89, 1992-2 C.B.

870]) proposing amendments to the Income Tax Regulations (26 CFR part

1) under section 168(i)(4). These amendments were proposed to reflect

the amendments made by section 201 of the Tax Reform Act of 1986. The

preamble to the notice contains an explanation of the proposed

regulations.

Written comments responding to the notice were received, and a

public hearing was held on November 4, 1992. After considering all

written and oral comments, the proposed regulations under section

168(i)(4) are adopted as revised by this Treasury decision.

Explanation of Provisions

In General

The final regulations would simplify the computation of

depreciation by allowing taxpayers an election to group assets into one

or more general asset accounts under section 168(i)(4). The assets in

any particular general asset account are depreciated as a single asset.

Unlike the rules under section 168 as in existence before enactment of

the Tax Reform Act of 1986, general asset account treatment is not

limited to ``mass assets.''

As required by section 168(i)(4), the final regulations provide

generally that the amount realized upon the disposition of an asset

from a general asset account is recognized as ordinary income. In

addition, special rules are provided for terminating general asset

account treatment upon certain dispositions. For transactions described

in section 168(i)(7)(B), the transferee generally is bound by the

transferor's general asset account election.

Changes to the Proposed Regulations

This Treasury decision generally adopts the rules in the proposed

regulations. Certain changes to the proposed regulations have been

made, however, in response to comments. These changes and the comments

that were not adopted in the final regulations are discussed below.

Assets Subject to Recapture. One commentator recommended that the

proposed regulations be amended to allow general asset account

treatment for assets qualifying for the credit under section 47 or 48.

After considering this comment, the IRS and Treasury Department have

concluded that it is appropriate to allow taxpayers greater flexibility

in determining what assets will be included in a general asset account.

Therefore, the proposed rule that prohibits general asset account

treatment for investment credit property has been deleted. Accordingly,

under the final regulations, a general asset account may include any

depreciable asset for which a credit or deduction is allowable.

A new rule, however, has been added in the final regulations to

account for any basis increase upon recapture. The final regulations

provide that upon recapture, the asset is removed from the general

asset account as of the first day of the taxable year in which the

recapture event occurs. In addition, corresponding adjustments to the

unadjusted depreciable basis and depreciation reserve of the account

must be made. This rule was formulated in view of the limited types of

property currently eligible for the investment credit. The IRS,

however, may consider other alternatives to take into account the basis

increase upon recapture if the scope of property that qualifies for the

investment credit is expanded.

Assets Used in a Personal Activity. The final regulations retain

the rule of the proposed regulations that a general asset account may

not include an asset if a taxpayer uses the asset both in a trade or

business (or for the production of income) and in a personal activity

at any time during the taxable year in which the asset is first placed

in service by the taxpayer. Consistent with the retention of this rule

in the final regulations, a new rule has been added providing that an

asset in a general asset account becomes ineligible for general asset

account treatment if a taxpayer uses the asset in a personal activity

in a taxable year after the taxable year the asset is placed in

service. If this change in use occurs, the final regulations provide

that the taxpayer must use the method provided in Sec. 1.168(i)-

1(e)(3)(iii)(C) for adjusting a general asset account when an asset

becomes ineligible for general asset account treatment.

Assets that Generate Foreign Source Income. A commentator suggested

that the proposed regulations be amended to allow general asset account

treatment for assets generating foreign source income.

In response to this comment, the final regulations allow general

asset account treatment for assets generating foreign source income.

If, however, the inclusion of these assets in a general asset account

results in a substantial distortion of income, the Commissioner may

disregard the general asset account election and make reallocations of

income or expense as necessary to clearly reflect income.

The final regulations provide a rule coordinating the general asset

account rules with the rules in Sec. 1.8611-9T(g)(3) relating to

allocation and apportionment of interest expense under the asset

method. A general asset account will be treated as a single asset for

purposes of applying the rules in Sec. 1.861-9T(g)(3). If the general

asset account generates income in more than one separate grouping

(statutory and residual), then the account is a multiple category

asset, as defined in Sec. 1.861-9T(g)(3)(ii), and the income yield from

the general asset account must be computed as if the account were a

single multiple category asset.

The final regulations also provide rules for determining the source

of income from a disposition of an asset in a general asset account. If

the general asset account includes assets generating both United States

and foreign source income, any amount of ordinary income, gain, or loss

recognized on the disposition must be apportioned between United States

and foreign sources based on the allocation and apportionment of

depreciation allowed for the general asset account or for the disposed

asset, as applicable. If the general asset account includes assets that

generate foreign source income in more than one separate category under

section 904(d)(1) or another section of the Internal Revenue Code, or

under a United States income tax treaty that requires the foreign tax

credit limitation to be determined separately for specified types of

income, then the amount of ordinary income, gain, or loss recognized on

the disposition that is treated as foreign source income must be

allocated and apportioned to the applicable separate category or

categories.

Disposition of All Assets or the Last Asset. One commentator

questioned whether the rule under the proposed regulations that

provided that a general asset account terminates on the disposition of

all of the assets in the account or the last asset in the account was

mandatory. In response to this comment, the final regulations clarify

that this rule is an optional rule for taxpayers that maintain records

showing the disposition of assets in a general asset account. The final

regulations also provide that a taxpayer adopts the rule by reporting

the gain or loss on the taxpayer's income tax return for the taxable

year in which the disposition of all of the assets, or the last asset,

in the general asset account occurs.

Qualifying Dispositions. Under the proposed regulations, a

qualifying disposition of an asset in a general asset account occurs

when the asset is disposed of as a direct result of a cessation,

termination, curtailment, or disposition of a business, manufacturing

or other income producing process, operation, facility, plant, or other

unit (other than by transfer to a supplies, scrap, or similar account).

One commentator recommended that the final regulations should provide

an example showing that the sale of an undivided interest in mineral

property, along with the related operating equipment, is a curtailment

of a taxpayer's business and, thus, constitutes a qualifying

disposition. A curtailment was intended to be limited to a genuine

business contraction and not to include transactions involving the sale

of an undivided interest, other than the taxpayer's entire interest in

assets. To avoid any further misinterpretation, the final regulations

delete the term ``curtailment.'' The final regulations also clarify

that a taxpayer adopts the rule to terminate general asset account

treatment for an asset in a qualifying disposition by reporting the

gain, loss, or other deduction on the taxpayer's income tax return for

the taxable year in which the qualifying disposition occurs.

Anti-abuse rule. The final regulations add examples of transactions

subject to the anti-abuse rule.

Election. Some commentators noted that the proposed regulations do

not address whether the election is made by the common parent

corporation or each member of an affiliated group, by a partnership or

its partners, or by an S corporation or the S corporation shareholders.

The final regulations clarify that the election is made by each member

of an affiliated group, by the partnership, or by the S corporation,

respectively.

The proposed regulations provide that the election to apply the

regulations generally is binding on the taxpayer for computing taxable

income as well as computing alternative minimum taxable income. A

commentator suggested that the final regulations should allow taxpayers

the option to make the election for either the regular income tax, the

alternative minimum tax, or both. This rule was not adopted because of

the separate and parallel nature of the regular tax and alternative

minimum tax systems. Except as otherwise provided by statute or

regulations, all Code provisions that apply in determining the regular

taxable income of a taxpayer also apply in determining the alternative

minimum taxable income of the taxpayer. The final regulations have not

been expanded to include any exceptions. Consequently, an election to

apply section 168(i)(4) for determining regular taxable income also

applies for determining alternative minimum taxable income. Therefore,

the language ``as well as alternative minimum taxable income'' in the

proposed rule is redundant and has been deleted from the final

regulations.

Effective Date. For assets placed in service after December 31,

1986, in taxable years ending before the effective date of the final

regulations, one commentator recommended that the final regulations

should provide a retroactive election or, alternatively, a prospective

election. Another commentator also requested a provision allowing a

prospective election. The final regulations retain the rule of the

proposed regulations that, for prior periods, a taxpayer may use any

reasonable method that is consistently applied to the taxpayer's

general asset accounts.

Dates

The final regulations are effective for property placed in service

in taxable years ending on or after October 11, 1994. For property

placed in service after December 31, 1986, in taxable years ending

before October 11, 1994, the IRS will allow any reasonable method that

is consistently applied to the taxpayer's general asset accounts.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to

these regulations, and, therefore, a Regulatory Flexibility Analysis is

not required. Pursuant to section 7805(f) of the Internal Revenue Code,

the notice of proposed rulemaking preceding these regulations was

submitted to the Small Business Administration for comment on its

impact on small business.

Drafting Information

The principal author of these regulations is Kathleen Reed, Office

of Assistant Chief Counsel (Passthroughs and Special Industries), IRS.

However, other personnel from the IRS and Treasury Department

participated in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding

an entry in numerical order to read as follows:

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

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

Par. 2. Section 1.56(g)-1 is amended by adding a sentence at the

end of paragraph (b), introductory text, to read as follows:

Sec. 1.56(g)-1 Adjusted current earnings.

* * * * *

(b) * * * See Sec. 1.168(i)-1(k) for an election to use general

asset accounts.

* * * * *

Par. 3. Sections 1.168(i)-0 and 1.168(i)-1 are added to read as

follows:

Sec. 1.168(i)-0 Table of contents for the general asset account rules.

This section lists the major paragraphs contained in Sec. 1.168(i)-

1.

Sec. 1.168(i)-1 General asset accounts.

(a) Scope.

(b) Definitions.

(1) Unadjusted depreciable basis.

(2) Unadjusted depreciable basis of the general asset account.

(3) Adjusted depreciable basis of the general asset account.

(4) Expensed cost.

(c) Establishment of general asset accounts.

(1) Assets eligible for general asset accounts.

(i) General rules.

(ii) Special rules for assets generating foreign source income.

(2) Grouping assets in general asset accounts.

(i) General rules.

(ii) Special rules.

(d) Determination of depreciation allowance.

(1) In general.

(2) Special rule for passenger automobiles.

(e) Disposition of an asset from a general asset account.

(1) Scope.

(2) General rules for a disposition.

(i) No immediate recovery of basis.

(ii) Treatment of amount realized.

(iii) Effect of disposition on a general asset account.

(iv) Coordination with nonrecognition provisions.

(v) Examples.

(3) Special rules.

(i) In general.

(ii) Disposition of all assets remaining in a general asset

account.

(iii) Disposition of an asset in a qualifying disposition.

(iv) Transactions subject to section 168(i)(7).

(v) Anti-abuse rule.

(f) Assets generating foreign source income.

(1) In general.

(2) Source of ordinary income, gain, or loss.

(i) Source determined by allocation and apportionment of

depreciation allowed.

(ii) Formula for determining foreign source income, gain, or loss.

(3) Section 904(d) separate categories.

(g) Assets subject to recapture.

(h) Changes in use.

(1) Conversion to personal use.

(2) Other changes in use.

(i) Identification of disposed or converted asset.

(j) Effect of adjustments on prior dispositions.

(k) Election.

(1) Irrevocable election.

(2) Time for making election.

(3) Manner of making election.

(l) Effective date.

Sec. 1.168(i)-1 General asset accounts.

(a) Scope. This section provides rules for general asset accounts

under section 168(i)(4). The provisions of this section apply only to

assets for which an election has been made under paragraph (k) of this

section.

(b) Definitions. For purposes of this section, the following

definitions apply:

(1) Unadjusted depreciable basis is the basis of an asset for

purposes of section 1011 without regard to any adjustments described in

sections 1016(a)(2) and (3).

(2) Unadjusted depreciable basis of the general asset account is

the sum of the unadjusted depreciable bases of all assets included in

the general asset account.

(3) Adjusted depreciable basis of the general asset account is the

unadjusted depreciable basis of the general asset account less the

adjustments to basis described in sections 1016(a)(2) and (3).

(4) Expensed cost is the amount of any allowable credit or

deduction treated as a deduction allowable for depreciation or

amortization for purposes of section 1245 (for example, a credit

allowable under section 30 or a deduction allowable under section 179,

179A, or 190).

(c) Establishment of general asset accounts--(1) Assets eligible

for general asset accounts--(i) General rules. Assets that are subject

to either the general depreciation system of section 168(a) or the

alternative depreciation system of section 168(g) may be accounted for

in one or more general asset accounts. An asset may be included in a

general asset account only to the extent of the asset's unadjusted

depreciable basis (for example, if, in 1995, a taxpayer places in

service an asset that costs $20,000 and elects under section 179 to

expense $17,500 of that asset's cost, the unadjusted depreciable basis

of the asset is $2,500 and, therefore, only $2,500 of the asset's cost

may be included in a general asset account). However, an asset is not

to be included in a general asset account if the asset is used both in

a trade or business (or for the production of income) and in a personal

activity at any time during the taxable year in which the asset is

first placed in service by the taxpayer.

(ii) Special rules for assets generating foreign source income--(A)

Assets that generate foreign source income, both United States and

foreign source income, or combined gross income of a FSC (as defined in

section 922), DISC (as defined in section 992(a)), or possessions

corporation (as defined in section 936) and its related supplier, may

be included in a general asset account if the requirements of paragraph

(c)(2)(i) of this section are satisfied. If, however, the inclusion of

these assets in a general asset account results in a substantial

distortion of income, the Commissioner may disregard the general asset

account election and make any reallocations of income or expense

necessary to clearly reflect income.

(B) A general asset account shall be treated as a single asset for

purposes of applying the rules in Sec. 1.861- 9T(g)(3) (relating to

allocation and apportionment of interest expense under the asset

method). A general asset account that generates income in more than one

grouping of income (statutory and residual) is a multiple category

asset (as defined in Sec. 1.861-9T(g)(3)(ii)), and the income yield

from the general asset account must be determined by applying the rules

for multiple category assets as if the general asset account were a

single asset.

(2) Grouping assets in general asset accounts--(i) General rules.

If a taxpayer makes the election under paragraph (k) of this section,

assets that are subject to the election are grouped into one or more

general asset accounts. Assets that are eligible to be grouped into a

single general asset account may be divided into more than one general

asset account. Each general asset account must include only assets

that--

(A) Have the same asset class (for further guidance, see Rev. Proc.

87-56, 1987-2 C.B. 674, and Sec. 601.601(d)(2)(ii)(b) of this chapter);

(B) Have the same applicable depreciation method;

(C) Have the same applicable recovery period;

(D) Have the same applicable convention; and

(E) Are placed in service by the taxpayer in the same taxable year.

(ii) Special rules. In addition to the general rules in paragraph

(c)(2)(i) of this section, the following rules apply when establishing

general asset accounts--

(A) Assets without an asset class, but with the same

characteristics described in paragraphs (c)(2)(i)(B), (C), (D), and (E)

of this section, may be grouped into a general asset account;

(B) Assets subject to the mid-quarter convention may only be

grouped into a general asset account with assets that are placed in

service in the same quarter of the taxable year;

(C) Assets subject to the mid-month convention may only be grouped

into a general asset account with assets that are placed in service in

the same month of the taxable year; and

(D) Passenger automobiles for which the depreciation allowance is

limited under section 280F(a) must be grouped into a separate general

asset account.

(d) Determination of depreciation allowance--(1) In general.

Depreciation allowances are determined for each general asset account

by using the applicable depreciation method, recovery period, and

convention for the assets in the account. The depreciation allowances

are recorded in a depreciation reserve account for each general asset

account. The allowance for depreciation under this section constitutes

the amount of depreciation allowable under section 167(a).

(2) Special rule for passenger automobiles. For purposes of

applying section 280F(a), the depreciation allowance for a general

asset account established for passenger automobiles is limited for each

taxable year to the amount prescribed in section 280F(a) multiplied by

the excess of the number of automobiles originally included in the

account over the number of automobiles disposed of during the taxable

year or in any prior taxable year in a transaction described in

paragraph (e)(3)(iii) (disposition of an asset in a qualifying

disposition), (e)(3)(iv) (transactions subject to section 168(i)(7)),

(e)(3)(v) (anti-abuse rule), (g) (assets subject to recapture), or

(h)(1) (conversion to personal use) of this section.

(e) Disposition of an asset from a general asset account--(1)

Scope. This paragraph (e) provides rules applicable to dispositions of

assets included in a general asset account. For purposes of this

paragraph (e), an asset in a general asset account is disposed of when

ownership of the asset is transferred or when the asset is permanently

withdrawn from use either in the taxpayer's trade or business or in the

production of income. A disposition includes the sale, exchange,

retirement, physical abandonment, or destruction of an asset. A

disposition also occurs when an asset is transferred to a supplies,

scrap, or similar account. A disposition does not include, however, the

retirement of a structural component of real property.

(2) General rules for a disposition--(i) No immediate recovery of

basis. Immediately before a disposition of any asset in a general asset

account, the asset is treated as having an adjusted basis of zero for

purposes of section 1011. Therefore, no loss is realized upon the

disposition of an asset from the general asset account. Similarly,

where an asset is disposed of by transfer to a supplies, scrap, or

similar account, the basis of the asset in the supplies, scrap, or

similar account will be zero.

(ii) Treatment of amount realized. Any amount realized on a

disposition is recognized as ordinary income (notwithstanding any other

provision of subtitle A of the Internal Revenue Code (Code)) to the

extent the sum of the unadjusted depreciable basis of the general asset

account and any expensed cost (as defined in paragraph (b)(4) of this

section) for assets in the account exceeds any amounts previously

recognized as ordinary income upon the disposition of other assets in

the account. The recognition and character of any excess amount

realized are determined under other applicable provisions of the Code

(other than sections 1245 and 1250 or provisions of the Code that treat

gain on a disposition as subject to section 1245 or 1250).

(iii) Effect of disposition on a general asset account. The

unadjusted depreciable basis and the depreciation reserve of the

general asset account are not affected as a result of a disposition of

an asset from the general asset account.

(iv) Coordination with nonrecognition provisions. For purposes of

determining the basis of an asset acquired in a transaction described

in paragraph (e)(3)(iii)(B)(4) of this section (relating to certain

nonrecognition provisions), the amount of ordinary income recognized

under this paragraph (e)(2) is treated as the amount of gain recognized

on the disposition.

(v) Examples. The following examples illustrate the application of

this paragraph (e)(2).

Example 1. (i) R, a calendar-year corporation, maintains one

general asset account for ten machines. The machines cost a total of

$10,000 and were placed in service in June 1995. Of the ten

machines, one machine costs $8,200 and nine machines cost a total of

$1,800. Assume this general asset account has a depreciation method

of 200 percent declining balance, a recovery period of 5 years, and

a half-year convention. R does not make a section 179 election for

any of the machines. As of January 1, 1996, the depreciation reserve

of the account is $2,000 [(($10,000-$0) x 40%)/2].

(ii) On February 8, 1996, R sells the machine that cost $8,200

to an unrelated party for $9,000. Under paragraph (e)(2)(i) of this

section, this machine has an adjusted basis of zero.

(iii) On its 1996 tax return, R recognizes the amount realized

of $9,000 as ordinary income because such amount does not exceed the

unadjusted depreciable basis of the general asset account ($10,000),

plus any expensed cost for assets in the account ($0), less amounts

previously recognized as ordinary income ($0). Moreover, the

unadjusted depreciable basis and depreciation reserve of the account

are not affected by the disposition of the machine. Thus, the

depreciation allowance for the account in 1996 is $3,200

(($10,000-$2,000) x 40%).

Example 2. (i) The facts are the same as in Example 1. In

addition, on June 4, 1997, R sells seven machines to an unrelated

party for a total of $1,100. In accordance with paragraph (e)(2)(i)

of this section, these machines have an adjusted basis of zero.

(ii) On its 1997 tax return, R recognizes $1,000 as ordinary

income (the unadjusted depreciable basis of $10,000, plus the

expensed cost of $0, less the amount of $9,000 previously recognized

as ordinary income). The recognition and character of the excess

amount realized of $100 ($1,100-$1,000) are determined under

applicable provisions of the Code other than section 1245 (such as

section 1231). Moreover, the unadjusted depreciable basis and

depreciation reserve of the account are not affected by the

disposition of the machines. Thus, the depreciation allowance for

the account in 1997 is $1,920 (($10,000-$5,200) x 40%).

(3) Special rules--(i) In general. This paragraph (e)(3) provides

the rules for terminating general asset account treatment upon certain

dispositions. While the rules under paragraphs (e)(3)(ii) and (iii) of

this section are optional rules, the rules under paragraphs (e)(3)(iv)

and (v) of this section are mandatory rules. A taxpayer applies

paragraph (e)(3)(ii) or (iii) of this section by reporting the gain,

loss, or other deduction on the taxpayer's timely filed (including

extensions) income tax return for the taxable year in which the

disposition occurs. For purposes of applying paragraph (e)(3)(iii)

through (v) of this section, see paragraph (i) of this section for

identifying the unadjusted depreciable basis of a disposed asset.

(ii) Disposition of all assets remaining in a general asset

account--(A) Optional termination of a general asset account. Upon the

disposition of all of the assets, or the last asset, in a general asset

account, a taxpayer may apply this paragraph (e)(3)(ii) to recover the

adjusted depreciable basis of the general asset account (rather than

having paragraph (e)(2) of this section apply). Under this paragraph

(e)(3)(ii), the general asset account terminates and the amount of gain

or loss for the general asset account is determined under section

1001(a) by taking into account the adjusted depreciable basis of the

general asset account at the time of the disposition. The recognition

and character of the gain or loss are determined under other applicable

provisions of the Code, except that the amount of gain subject to

section 1245 (or section 1250) is limited to the excess of the

depreciation allowed or allowable for the general asset account,

including any expensed cost (or the excess of the additional

depreciation allowed or allowable for the general asset account), over

any amounts previously recognized as ordinary income under paragraph

(e)(2) of this section.

(B) Example. The following example illustrates the application of

this paragraph (e)(3)(ii).

Example. (i) T, a calendar-year corporation, maintains a general

asset account for 1,000 calculators. The calculators cost a total of

$60,000 and were placed in service in 1995. Assume this general

asset account has a depreciation method of 200 percent declining

balance, a recovery period of 5 years, and a half-year convention. T

does not make a section 179 election for any of the calculators. In

1996, T sells 200 of the calculators to an unrelated party for a

total of $10,000 and recognizes the $10,000 as ordinary income in

accordance with paragraph (e)(2) of this section.

(ii) On March 26, 1997, T sells the remaining calculators in the

general asset account to an unrelated party for $35,000. T chooses

to apply paragraph (e)(3)(ii) of this section. As a result, the

account terminates and gain or loss is determined for the account.

(iii) On the date of disposition, the adjusted depreciable basis

of the account is $23,040 (unadjusted depreciable basis of $60,000

less the depreciation allowed or allowable of $36,960). Thus, in

1997, T recognizes gain of $11,960 (amount realized of $35,000 less

the adjusted depreciable basis of $23,040). The gain of $11,960 is

subject to section 1245 to the extent of the depreciation allowed or

allowable for the account (plus the expensed cost for assets in the

account) less the amounts previously recognized as ordinary income

($36,960 + $0 - $10,000 = $26,960). As a result, the entire gain of

$11,960 is subject to section 1245.

(iii) Disposition of an asset in a qualifying disposition--(A)

Optional determination of the amount of gain, loss, or other deduction.

In the case of a qualifying disposition of an asset (described in

paragraph (e)(3)(iii)(B) of this section), a taxpayer may apply this

paragraph (e)(3)(iii) (rather than having paragraph (e)(2) of this

section apply). Under this paragraph (e)(3)(iii), general asset account

treatment for the asset terminates as of the first day of the taxable

year in which the qualifying disposition occurs, and the amount of

gain, loss, or other deduction for the asset is determined by taking

into account the asset's adjusted basis. The adjusted basis of the

asset at the time of the disposition equals the unadjusted depreciable

basis of the asset less the depreciation allowed or allowable for the

asset, computed by using the depreciation method, recovery period, and

convention applicable to the general asset account in which the asset

was included. The recognition and character of the gain, loss, or other

deduction are determined under other applicable provisions of the Code,

except that the amount of gain subject to section 1245 (or section

1250) is limited to the lesser of--

(1) The depreciation allowed or allowable for the asset, including

any expensed cost (or the additional depreciation allowed or allowable

for the asset); or

(2) The excess of--

(i) The original unadjusted depreciable basis of the general asset

account plus, in the case of section 1245 property originally included

in the general asset account, any expensed cost; over

(ii) The cumulative amounts of gain previously recognized as

ordinary income under either paragraph (e)(2) of this section or

section 1245 (or section 1250).

(B) Qualifying dispositions. A qualifying disposition is a

disposition that does not involve all the assets, or the last asset,

remaining in a general asset account and that is--

(1) A direct result of a fire, storm, shipwreck, or other casualty,

or from theft;

(2) A charitable contribution for which a deduction is allowable

under section 170;

(3) A direct result of a cessation, termination, or disposition of

a business, manufacturing or other income producing process, operation,

facility, plant, or other unit (other than by transfer to a supplies,

scrap, or similar account); or

(4) A transaction, other than a transaction described in paragraph

(e)(3)(iv) of this section (pertaining to transactions subject to

section 168(i)(7)), to which a nonrecognition section of the Code

applies (determined without regard to this section), such as section

1031 or 1033.

(C) Effect of a qualifying disposition on a general asset account.

If the taxpayer applies this paragraph (e)(3)(iii) to a qualifying

disposition of an asset, then--

(1) The asset is removed from the general asset account as of the

first day of the taxable year in which the qualifying disposition

occurs;

(2) The unadjusted depreciable basis of the general asset account

is reduced by the unadjusted depreciable basis of the asset as of the

first day of the taxable year in which the disposition occurs;

(3) The depreciation reserve of the general asset account is

reduced by the depreciation allowed or allowable for the asset as of

the end of the taxable year immediately preceding the year of

disposition, computed by using the depreciation method, recovery

period, and convention applicable to the general asset account in which

the asset was included; and

(4) For purposes of determining the amount of gain realized on

subsequent dispositions that is subject to ordinary income treatment

under paragraph (e)(2)(ii) of this section, the amount of any expensed

cost with respect to the asset is disregarded.

(D) Example. The provisions of this paragraph (e)(3)(iii) are

illustrated by the following example.

Example. (i) Z, a calendar-year corporation, maintains one

general asset account for 12 machines. Each machine costs $15,000

and was placed in service in 1995. Of the 12 machines, nine machines

that cost a total of $135,000 are used in Z's Kentucky plant, and

three machines that cost a total of $45,000 are used in Z's Ohio

plant. Assume this general asset account has a depreciation method

of 200 percent declining balance, a recovery period of 5 years, and

a half-year convention. Z does not make a section 179 election for

any of the machines. As of January 1, 1997, the depreciation reserve

for the account is $93,600.

(ii) On May 27, 1997, Z sells its entire manufacturing plant in

Ohio to an unrelated party. The sales proceeds allocated to each of

the three machines at the Ohio plant is $5,000. Because this

transaction is a qualifying disposition under paragraph

(e)(3)(iii)(B)(3) of this section, Z chooses to apply paragraph

(e)(3)(iii) of this section.

(iii) For Z's 1997 return, the depreciation allowance for the

account is computed as follows. As of December 31, 1996, the

depreciation allowed or allowable for the three machines at the Ohio

plant is $23,400. Thus, as of January 1, 1997, the unadjusted

depreciable basis of the account is reduced from $180,000 to

$135,000 ($180,000 less the unadjusted depreciable basis of $45,000

for the three machines), and the depreciation reserve of the account

is decreased from $93,600 to $70,200 ($93,600 less the depreciation

allowed or allowable of $23,400 for the three machines as of

December 31, 1996). Consequently, the depreciation allowance for the

account in 1997 is $25,920 (($135,000 - $70,200) x 40%).

(iv) For Z's 1997 return, gain or loss for each of the three

machines at the Ohio plant is determined as follows. The

depreciation allowed or allowable in 1997 for each machine is $1,440

[(($15,000 - $7,800) x 40%) / 2]. Thus, the adjusted basis of each

machine under section 1011 is $5,760 (the adjusted depreciable basis

of $7,200 removed from the account less the depreciation allowed or

allowable of $1,440 in 1997). As a result, the loss recognized in

1997 for each machine is $760 ($5,000 - $5,760), which is subject to

section 1231.

(iv) Transactions subject to section 168(i)(7). If an asset in a

general asset account is transferred in a transaction described in

section 168(i)(7)(B) (pertaining to treatment of transferees in certain

nonrecognition transactions), the transferor must remove the

transferred asset from the general asset account as of the first day of

the taxable year in which the transaction occurs. In addition, the

adjustments to the general asset account described in paragraph

(e)(3)(iii)(C)(2) through (4) of this section must be made. The

transferee is bound by the transferor's election under paragraph (k) of

this section with respect to so much of the asset's basis in the hands

of the transferee as does not exceed the asset's adjusted basis in the

hands of the transferor. If all of the assets, or the last asset, in a

general asset account are transferred, the transferee's basis in the

assets or asset transferred is equal to the adjusted depreciable basis

of the general asset account as of the beginning of the transferor's

taxable year in which the transaction occurs, decreased by the amount

of depreciation allocable to the transferor for the year of the

transfer.

(v) Anti-abuse rule--(A) In general. If an asset in a general asset

account is disposed of by a taxpayer in a transaction described in

paragraph (e)(3)(v)(B) of this section, general asset account treatment

for the asset terminates as of the first day of the taxable year in

which the disposition occurs. Consequently, the taxpayer must determine

the amount of gain, loss, or other deduction attributable to the

disposition in the manner described in paragraph (e)(3)(iii)(A) of this

section (notwithstanding that paragraph (e)(3)(iii)(A) of this section

is an optional rule) and must make the adjustments to the general asset

account described in paragraph (e)(3)(iii)(C)(1) through (4) of this

section.

(B) Abusive transactions. A transaction is described in this

paragraph (e)(3)(v)(B) if the transaction is not described in paragraph

(e)(3)(iv) of this section and the transaction is entered into, or

made, with a principal purpose of achieving a tax benefit or result

that would not be available absent an election under this section.

Examples of these types of transactions include--

(1) A transaction entered into with a principal purpose of shifting

income or deductions among taxpayers in a manner that would not be

possible absent an election under this section in order to take

advantage of differing effective tax rates among the taxpayers; or

(2) An election made under this section with a principal purpose of

disposing of an asset from a general asset account in order to utilize

an expiring net operating loss or credit. The fact that a taxpayer with

a net operating loss carryover or a credit carryover transfers an asset

to a related person or transfers an asset pursuant to an arrangement

where the asset continues to be used (or is available for use) by the

taxpayer pursuant to a lease (or otherwise) indicates, absent strong

evidence to the contrary, that the transaction is described in this

paragraph (e)(3)(v)(B).

(f) Assets generating foreign source income--(1) In general. This

paragraph (f) provides the rules for determining the source of any

income, gain, or loss recognized, and the appropriate section 904(d)

separate limitation category or categories for any foreign source

income, gain, or loss recognized, on a disposition (within the meaning

of paragraph (e)(1) of this section) of an asset in a general asset

account that consists of assets generating both United States and

foreign source income. These rules apply only to a disposition to which

paragraph (e)(2) (general disposition rules), (e)(3)(ii) (disposition

of all assets remaining in a general asset account), (e)(3)(iii)

(disposition of an asset in a qualifying disposition), or (e)(3)(v)

(anti-abuse rule) of this section applies.

(2) Source of ordinary income, gain, or loss--(i) Source determined

by allocation and apportionment of depreciation allowed. The amount of

any ordinary income, gain, or loss that is recognized on the

disposition of an asset in a general asset account must be apportioned

between United States and foreign sources based on the allocation and

apportionment of the--

(A) Depreciation allowed for the general asset account as of the

end of the taxable year in which the disposition occurs if paragraph

(e)(2) of this section applies to the disposition;

(B) Depreciation allowed for the general asset account as of the

time of the disposition if the taxpayer applies paragraph (e)(3)(ii) of

this section to the disposition of all of the assets, or the last

asset, in the general asset account; or

(C) Depreciation allowed for the disposed asset for only the

taxable year in which the disposition occurs if the taxpayer applies

paragraph (e)(3)(iii) to the disposition of the asset in a qualifying

disposition or if the asset is disposed in a transaction described in

paragraph (e)(3)(v) (anti-abuse rule) of this section.

(ii) Formula for determining foreign source income, gain, or loss.

The amount of ordinary income, gain, or loss recognized on the

disposition that shall be treated as foreign source income, gain, or

loss must be determined under the formula in this paragraph (f)(2)(ii).

For purposes of this formula, the allowed depreciation deductions are

determined for the applicable time period provided in paragraph

(f)(2)(i) of this section. The formula is:

Allowed Depreciation Deductions

Allocated and Apportioned to

Foreign Source Income, Gain, or Total Ordinary Income, Gain, or Foreign Source Income Total

Loss from the Disposition of an = Loss from Disposition of an Asset x Allowed Depreciation Deductions

Asset for the General Asset Account or

for the Disposed Asset (as

applicable)

(3) Section 904(d) separate categories. If the assets in the

general asset account generate foreign source income in more than one

separate category under section 904(d)(1) or another section of the

Code (for example, income treated as foreign source income under

section 904(g)(10)), or under a United States income tax treaty that

requires the foreign tax credit limitation to be determined separately

for specified types of income, the amount of ``foreign source income,

gain, or loss from the disposition of an asset'' (as determined under

the formula in paragraph (f)(2)(ii) of this section) must be allocated

and apportioned to the applicable separate category or categories under

the formula in this paragraph (f)(3). For purposes of this formula, the

allowed depreciation deductions are determined for the applicable time

period provided in paragraph (f)(2)(i) of this section. The formula is:

Allowed Depreciation Deductions

Allocated and Apportioned to a

Foreign Source Income, Gain, or = Forign Source Income, Gain, or x Separate Category Total Allowed

Loss In a Separate Category Loss from the Disposition of an Depreciation Deductions and

Asset Apportioned to Foreign Source

Income

(g) Assets subject to recapture. If the basis of an asset in a

general asset account is increased as a result of the recapture of any

allowable credit or deduction (for example, the basis adjustment for

the recapture amount under section 30(d)(2), 50(c)(2), 179(d)(10), or

179A(e)(4)), general asset account treatment for the asset terminates

as of the first day of the taxable year in which the recapture event

occurs. Consequently, the taxpayer must remove the asset from the

general asset account as of that day and must make the adjustments to

the general asset account described in paragraph (e)(3)(iii)(C)(2)

through (4) of this section.

(h) Changes in use--(1) Conversion to personal use. An asset in a

general asset account becomes ineligible for general asset account

treatment if a taxpayer uses the asset in a personal activity during a

taxable year. Upon a conversion to personal use, the taxpayer must

remove the asset from the general asset account as of the first day of

the taxable year in which the change in use occurs and must make the

adjustments to the general asset account described in paragraph

(e)(3)(iii)(C)(2) through (4) of this section.

(2) Other changes in use. [Reserved].

(i) Identification of disposed or converted asset. A taxpayer may

use any reasonable method that is consistently applied to the

taxpayer's general asset accounts for purposes of determining the

unadjusted depreciable basis of a disposed or converted asset in a

transaction described in paragraph (e)(3)(iii) (disposition of an asset

in a qualifying disposition), (e)(3)(iv) (transactions subject to

section 168(i)(7)), (e)(3)(v) (anti-abuse rule), (g) (assets subject to

recapture), or (h)(1) (conversion to personal use) of this section.

(j) Effect of adjustments on prior dispositions. The adjustments to

a general asset account under paragraph (e)(3)(iii), (e)(3)(iv),

(e)(3)(v), (g), or (h)(1) of this section have no effect on the

recognition and character of prior dispositions subject to paragraph

(e)(2) of this section.

(k) Election--(1) Irrevocable election. If a taxpayer makes an

election under this paragraph (k), the taxpayer consents to, and agrees

to apply, all of the provisions of this section to the assets included

in a general asset account. Except as provided in paragraph

(c)(1)(ii)(A), (e)(3), (g), or (h)(1) of this section, an election made

under this section is irrevocable and will be binding on the taxpayer

for computing taxable income for the taxable year for which the

election is made and for all subsequent taxable years. An election

under this paragraph (k) is made separately by each person owning an

asset to which this section applies (for example, by each member of a

consolidated group, at the partnership level (and not by the partner

separately), or at the S corporation level (and not by the shareholder

separately)).

(2) Time for making election. The election to apply this section

shall be made on the taxpayer's timely filed (including extensions)

income tax return for the taxable year in which the assets included in

the general asset account are placed in service by the taxpayer.

(3) Manner of making election. In the year of election, a taxpayer

makes the election under this section by typing or legibly printing at

the top of the Form 4562, ``GENERAL ASSET ACCOUNT ELECTION MADE UNDER

SECTION 168(i)(4),'' or in the manner provided for on Form 4562 and its

instructions. The taxpayer shall maintain records (for example,

``General Asset Account #1 - all 1995 additions in asset class 00.11

for Salt Lake City, Utah facility'') that identify the assets included

in each general asset account, that establish the unadjusted

depreciable basis and depreciation reserve of the general asset

account, and that reflect the amount realized during the taxable year

upon dispositions from each general asset account. (But see section

179(c) and Sec. 1.179-5 for the recordkeeping requirements for section

179 property.) The taxpayer's recordkeeping practices should be

consistently applied to the general asset accounts. If Form 4562 is

revised or renumbered, any reference in this section to that form shall

be treated as a reference to the revised or renumbered form.

(l) Effective date. This section applies to depreciable assets

placed in service in taxable years ending on or after October 11, 1994.

For depreciable assets placed in service after December 31, 1986, in

taxable years ending before October 11, 1994, the Internal Revenue

Service will allow any reasonable method that is consistently applied

to the taxpayer's general asset accounts.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part 602 continues to read as

follows:

Authority: 26 U.S.C. 7805.

Sec. 602.101(c) [Amended]

Par. 5. Section 602.101(c) is amended by adding the entry

``1.168(i)-1....1545-1331'' in numerical order to the table.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: September 9, 1994

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 94-24949 Filed 10-7-94; 8:45 am]

BILLING CODE 4830-01-U