Definition of Qualified Electric Vehicle, and Recapture Rules for Qualified Electric Vehicles, Qualified Clean-Fuel Vehicle Property, and Qualified Clean-Fuel Vehicle Refueling Property

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[PS-72-92]

RIN 1545-AR23

Definition of Qualified Electric Vehicle, and Recapture Rules for

Qualified Electric Vehicles, Qualified Clean-Fuel Vehicle Property, and

Qualified Clean-Fuel Vehicle Refueling Property

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations on the definition

of a qualified electric vehicle, the recapture of any credit allowable

for a qualified electric vehicle, and the recapture of any deduction

allowable for qualified clean-fuel vehicle property or qualified clean-

fuel vehicle refueling property. The proposed regulations reflect

changes to the law made by the Energy Policy Act of 1992 and affect

taxpayers who are owners of qualified electric vehicles, clean-fuel

vehicles, and clean-fuel vehicle refueling property. This document also

provides notice of a public hearing on these proposed regulations.

DATES: Written comments and outlines of oral comments to be presented

at the public hearing scheduled for January 19, 1995, at 10 a.m., must

be received by December 16, 1994.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS-72-92), room 5228,

Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,

DC 20044. In the alternative, submissions may be hand delivered between

the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (PS-72-92),

Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW,

Washington, DC.

The public hearing will be held in the auditorium at 1111

Constitution Ave. NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Joanne E.

Johnson at (202) 622-3110; concerning submissions and the hearing,

Carol Savage, (202) 622-8452 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed regulations under sections 30 and

179A. These provisions were added to the Internal Revenue Code by

section 1913 of the Energy Policy Act of 1992 (1992 Act) and apply to

property placed in service after June 30, 1993.

The proposed regulations provide the definition of a qualified

electric vehicle under section 30(c) and also provide rules for the

recapture of the section 30 credit and section 179A deduction under

sections 30(d)(2) and 179A(e)(4), respectively. The regulations follow

the legislative history to the 1992 Act, which provides guidance on

when recapture occurs, how to determine the recapture amount, and how

to adjust the basis of the property upon recapture.

On June 9, 1993, the IRS published Notice 93-34 in the Federal

Register inviting comments from the public on any issues under sections

30 and 179A that should be addressed in proposed regulations. The IRS

is reviewing these comments and will issue additional proposed

regulations addressing certain issues raised in the comments.

Explanation of Provisions

Definition of Qualified Electric Vehicle

A qualified electric vehicle is a motor vehicle that meets the

requirements of section 30(c). Section 30(c) provides that the original

use of the motor vehicle qualifying for the section 30 credit must

commence with the taxpayer. Thus, under the proposed regulations, a

qualified electric vehicle does not include any motor vehicle that has

ever been used (for either personal or business use) as a non-electric

vehicle.

Recapture of Section 30 Credit

The proposed regulations incorporate rules under section 30(d) and

the legislative history to provide that recapture occurs if, at any

time within 3 years after the date the property is placed in service,

the motor vehicle is modified so that it may no longer be primarily

powered by electricity or is used in a manner described under section

50(b) (for example, used predominantly outside the United States).

Generally, no recapture occurs upon a sale or other disposition

(including a disposition by reason of an accident or other casualty) of

a qualified electric vehicle.

The proposed regulations provide that recapture occurs if, within 3

years from the date the vehicle is placed in service, the taxpayer

sells or disposes of the vehicle and the taxpayer knows or has reason

to know that the vehicle will be modified so that it may no longer be

primarily powered by electricity or will be used in a manner described

under section 50(b). This is necessary to prevent avoidance of

recapture by taxpayers who transfer property to be used in a manner

that would have triggered recapture if the taxpayers had so used the

property themselves.

The proposed regulations provide that the recapture amount equals

the benefit of the section 30 credit that reduced tax liability in

years prior to the taxable year of recapture multiplied by the

recapture percentage. For this purpose, the benefit of the section 30

credit includes the amount of any other credits, such as under sections

53 (minimum tax credit) and 469 (passive activity credit), attributable

to section 30 and allowed in years prior to the taxable year of

recapture. Also, any credit carryover amounts attributable to section

30 must be reduced by an amount equal to that credit carryover amount

multiplied by the recapture percentage for the taxable year of

recapture.

Consistent with the legislative history, the proposed regulations

provide that the recapture percentage is 100 percent if the recapture

date is within the first full year from the date the qualified electric

vehicle is placed in service, 66\2/3\ percent if the recapture date is

in the second full year, or 33\1/3\ percent if the recapture date is in

the third full year.

The recapture amount is added to the amount of tax due for the

taxable year in which a recapture event occurs. For this purpose, the

recapture amount is not treated as an income tax imposed on the

taxpayer by chapter 1 for purposes of computing alternative minimum tax

or determining the amount of any other allowable credits for the

taxable year of recapture.

The basis of the qualified electric vehicle must be increased by

the recapture amount and any amount that reduced other carryover

credits attributable to section 30 as of the first day of the taxable

year in which the recapture event occurs. For a vehicle that is

eligible for depreciation, any additional basis resulting from

recapture is recoverable over its remaining recovery period beginning

as of the first day of the taxable year of recapture.

Moreover, the rules of section 1245 are to apply upon a sale or

other disposition of a depreciable qualified electric vehicle. Thus,

the proposed regulations provide that section 1245 will apply to any

gain recognized upon a sale or other disposition of a depreciable

vehicle to the extent the basis of the vehicle was reduced, net of any

basis increase resulting from any recapture previously taken into

account.

Recapture of Section 179A Deduction

The proposed regulations provide that recapture for qualified

clean-fuel vehicle property occurs if, at any time within 3 years from

the date the property is placed in service, the vehicle containing the

qualified clean-fuel vehicle property (1) is modified so that it may no

longer be propelled by a clean-burning fuel, (2) is used in a manner

described in section 50(b) (for example, used predominantly outside the

United States), or (3) otherwise ceases to qualify as property defined

in section 179A(c). These rules are consistent with section 179A(e) and

the specific recapture rules set forth in the legislative history to

the 1992 Act.

Similarly, the proposed regulations provide that recapture for the

qualified clean-fuel vehicle refueling property occurs if, at any time

before the end of the recovery period, the property (1) is no longer

used predominantly in a trade or business, (2) ceases to qualify as

property described in section 179A(d), or (3) is used in a manner

described in section 50(b) (for example, used predominantly outside the

United States).

Generally, no recapture occurs upon a sale or other disposition

(including a disposition by reason of an accident or other casualty) of

a vehicle containing qualified clean-fuel vehicle property or of

qualified clean-fuel vehicle refueling property.

The proposed regulations provide that recapture occurs if the

taxpayer sells or disposes of the clean-fuel vehicle within 3 years

from the date the property is placed in service and the taxpayer knows

or has reason to know that the vehicle will be converted to non-clean-

fuel use, will be used in a manner described in section 50(b), or will

otherwise cease to qualify as property defined in section 179A(c). This

is necessary to prevent avoidance of recapture by taxpayers who

transfer property to be used in a manner that would have triggered

recapture if the taxpayers had so used the property themselves.

Similarly, the proposed regulations require recapture if the

taxpayer sells or disposes of its qualified clean-fuel vehicle

refueling property before the end of its recovery period, and the

taxpayer knows or has reason to know that the property will cease to

qualify as property described in section 179A(d), will not be used

predominantly in a trade or business, or will be used in a manner

described in section 50(b).

Consistent with the legislative history, the proposed regulations

provide that the recapture amount for qualified clean-fuel vehicle

property equals 100 percent of the benefit of the section 179A

deduction allowable if the recapture date is within the first full year

from the date the property is placed in service, 66\2/3\ percent if the

recapture date is in the second full year, or 33\1/3\ percent if the

recapture date is in the third full year.

However, for qualified clean-fuel vehicle refueling property, the

legislative history states that the amount of the deduction for the

property is to vest ratably over the recovery period for the property.

Thus, the proposed regulations provide that the recapture amount is

equal to the portion of the section 179A deduction attributable to the

remaining recovery period including the taxable year of recapture.

The legislative history indicates that the section 179A deduction

is allowed as an adjustment to gross income. Consequently, the proposed

regulations provide that the recapture amount for qualified clean-fuel

vehicle property and refueling property is includable in the gross

income for the taxable year in which the recapture event occurs.

The basis of the vehicle containing qualified clean-fuel vehicle

property or the basis of qualified clean-fuel vehicle refueling

property is increased by the recapture amount as of the first day of

the taxable year in which the recapture event occurs. For a depreciable

vehicle or refueling property, any additional basis resulting from

recapture is recoverable over the remaining recovery period for the

vehicle or refueling property, beginning as of the first day of the

taxable year of recapture.

Moreover, under section 179A(e)(6)(B), the rules of section 1245

are to apply upon a sale or other disposition of depreciable section

179A property. Thus, the proposed regulations provide that section 1245

will apply to any gain recognized upon a sale or other disposition to

the extent the basis was reduced, net of any basis increase resulting

from any recapture previously taken into account.

Proposed Effective Dates

The regulations are proposed to be effective on the date of

publication in the Federal Register. If the recapture date is before

the effective date of these regulations, a taxpayer may use any

reasonable method to recapture the benefit of any section 30 credit

allowable or section 179A deduction allowable consistent with sections

30 and 179A and their legislative history.

Special Analyses

It has been determined that this notice of proposed rulemaking 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, this notice of proposed rulemaking will be

submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original

and eight (8) copies) that are submitted timely to the IRS. All

comments will be available for public inspection and copying.

A public hearing has been scheduled for Thursday, January 19, 1995,

at 10 a.m. in the auditorium. Because of access restrictions, visitors

will not be admitted beyond the Internal Revenue Building lobby more

than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written comments and outlines of the topics to be discussed and

the time to be devoted to each topic (signed original and eight (8)

copies) by December 16, 1994.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

Drafting Information

The principal author of these regulations is Joanne E. Johnson,

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 in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

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

entries in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.30-1 also issued under

26 U.S.C. 30(d)(2) * * * Section 1.179A-1 also issued under 26

U.S.C. 179A(e)(4) * * *

Par. 2. Section 1.30-1 is added under the heading ``Credits

allowable'' to read as follows:

Sec. 1.30-1 Definition of qualified electric vehicle and recapture of

credit for qualified electric vehicle.

(a) Definition of qualified electric vehicle. A qualified electric

vehicle is a motor vehicle that meets the requirements of section

30(c). Accordingly, a qualified electric vehicle does not include any

motor vehicle that has ever been used (for either personal or business

use) as a non-electric vehicle.

(b) Recapture of credit for qualified electric vehicle--(1) In

general--(i) Addition to tax. If a recapture event occurs with respect

to a taxpayer's qualified electric vehicle, the taxpayer must add the

recapture amount to the amount of tax due in the taxable year in which

the recapture event occurs. The recapture amount is not treated as

income tax imposed on the taxpayer by chapter 1 for purposes of

computing the alternative minimum tax or determining the amount of any

other allowable credits for the taxable year in which the recapture

event occurs.

(ii) Reduction of carryover. If a recapture event occurs with

respect to a taxpayer's qualified electric vehicle, and if a portion of

the section 30 credit for the cost of that vehicle was disallowed under

section 30(b)(3)(B) and consequently added to the taxpayer's minimum

tax credit pursuant to section 53(d)(1)(B)(iii), the taxpayer must

reduce its minimum tax credit carryover by an amount equal to the

portion of any minimum tax credit carryover attributable to the

disallowed section 30 credit, multiplied by the recapture percentage

for the taxable year of recapture. Similarly, the taxpayer must reduce

any other credit carryover amounts (such as under section 469) by the

portion of the carryover attributable to section 30, multiplied by the

recapture percentage.

(2) Recapture event--(i) In general. A recapture event occurs if,

within 3 full years from the date a qualified electric vehicle is

placed in service, the vehicle ceases to be a qualified electric

vehicle. A vehicle ceases to be a qualified electric vehicle if--

(A) The vehicle is modified so that it is no longer primarily

powered by electricity;

(B) The vehicle is used in a manner described in section 50(b); or

(C) The taxpayer receiving the credit under section 30 sells or

disposes of the vehicle and knows or has reason to know that the

vehicle will be used in a manner described in paragraph (b)(2)(i) (A)

or (B) of this section.

(ii) Exception for disposition. Except as provided in paragraph

(b)(2)(i)(C) of this section, a sale or other disposition (including a

disposition by reason of an accident or other casualty) of a qualified

electric vehicle is not a recapture event.

(3) Recapture amount. The recapture amount is equal to the

recapture percentage times the decrease in the credits allowed under

section 30 for all prior taxable years that would have resulted solely

from reducing to zero the cost taken into account under section 30 with

respect to such vehicle, including any credits allowed attributable to

section 30 (such as under sections 53 and 469).

(4) Recapture date. The recapture date is the actual date of the

recapture event unless a recapture event described in paragraph

(b)(2)(i)(B) of this section occurs, in which case the recapture date

is the first day of the recapture year.

(5) Recapture percentage. For purposes of this section, the

recapture percentage is:

(i) 100, if the recapture date is within the first full year after

the date the vehicle is placed in service;

(ii) 66\2/3\, if the recapture date is within the second full year

after the date the vehicle is placed in service; or

(iii) 33\1/3\, if the recapture date is within the third full year

after the date the vehicle is placed in service.

(6) Basis adjustment. As of the first day of the taxable year in

which the recapture event occurs, the basis of the qualified electric

vehicle is increased by the recapture amount and the carryover

reductions taken into account under paragraphs (b)(1) (i) and (ii) of

this section, respectively. For a vehicle that is of a character that

is subject to an allowance for depreciation, this increase in basis is

recoverable over the remaining recovery period for the vehicle

beginning as of the first day of the taxable year of recapture.

(7) Application of section 1245 for sales and other dispositions.

For purposes of section 1245, the amount of the credit allowable under

section 30(a) with respect to any qualified electric vehicle that is

(or has been) of a character subject to an allowance for depreciation

is treated as a deduction allowed for depreciation under section 167.

Therefore, upon a sale or other disposition of a depreciable qualified

electric vehicle, section 1245 will apply to any gain recognized to the

extent the basis of the depreciable vehicle was reduced under section

30(d)(1) net of any basis increase described in paragraph (b)(6) of

this section.

(8) Examples. The following examples illustrate the provisions of

this section:

Example 1. A, a calendar-year taxpayer, purchases and places in

service for personal use on January 1, 1995, a qualified electric

vehicle costing $25,000. On A's 1995 federal income tax return, A

claims a credit of $2,500. On January 2, 1996, A sells the vehicle

to an unrelated third party who subsequently converts the vehicle

into a non-electric vehicle on October 15, 1996. There is no

recapture upon the sale of the vehicle by A provided A did not know

or have reason to know that the purchaser intended to convert the

vehicle to non-electric use.

Example 2. B, a calendar-year taxpayer, purchases and places in

service for personal use on October 11, 1994, a qualified electric

vehicle costing $20,000. On B's 1994 federal income tax return, B

claims a credit of $2,000, which reduces B's tax by $2,000. The

basis of the vehicle is reduced to $18,000 ($20,000-$2,000). On

March 8, 1996, B sells the vehicle to a tax-exempt entity. Because B

knowingly sold the vehicle to a tax-exempt entity described in

section 50(b) in the second full year from the date the vehicle was

placed in service, B must recapture $1,333 ($2,000 x 66\2/3\

percent). This recapture amount increases B's tax by $1,333 on B's

1996 federal income tax return and is added to the basis of the

vehicle as of January 1, 1996, the beginning of the taxable year in

which the recapture event occurred.

Example 3. X, a calendar-year taxpayer, purchases and places in

service for business use on January 1, 1994, a qualified electric

vehicle costing $30,000. On X's 1994 federal income tax return, X

claims a credit of $3,000, which reduces X's tax by $3,000. The

basis of the vehicle is reduced to $27,000 ($30,000-$3,000) prior to

any adjustments for depreciation. On March 8, 1995, X converts the

qualified electric vehicle into a gasoline-propelled vehicle.

Because X modified the vehicle so that it is no longer primarily

powered by electricity in the second full year from the date the

vehicle was placed in service, X must recapture $2,000

($3,000 x 66\2/3\ percent). This recapture amount increases X's tax

by $2,000 on X's 1995 federal income tax return. The recapture

amount of $2,000 is added to the basis of the vehicle as of January

1, 1995, the beginning of the taxable year of recapture, and to the

extent the property remains depreciable, the adjusted basis is

recoverable over the remaining recovery period.

Example 4. The facts are the same as in Example 3. In 1996, X

sells the vehicle for $31,000, recognizing a gain from this sale.

Under paragraph (b)(7) of this section, section 1245 of the Internal

Revenue Code will apply to any gain recognized on the sale of a

depreciable vehicle to the extent the basis of the vehicle was

reduced by the section 30 credit net of any basis increase from

recapture of the section 30 credit. Accordingly, the gain from the

sale of the vehicle is subject to section 1245 to the extent of the

depreciation allowance for the vehicle plus the credit allowed under

section 30 ($3,000), less the previous recapture amount ($2,000).

Any remaining amount of gain may be subject to other applicable

provisions of the Internal Revenue Code.

(c) Effective date. This section is effective on October 14, 1994.

If the recapture date is before the effective date of this section, a

taxpayer may use any reasonable method to recapture the benefit of any

credit allowable under section 30(a) consistent with section 30 and its

legislative history. For this purpose, the recapture date is defined in

paragraph (b)(4) of this section.

Par. 3. Section 1.179A-1 is added to read as follows:

Sec. 1.179A-1 Recapture of deduction for qualified clean-fuel vehicle

property and qualified clean-fuel vehicle refueling property.

(a) In general. If a recapture event occurs with respect to a

taxpayer's qualified clean-fuel vehicle property or qualified clean-

fuel vehicle refueling property, the taxpayer must include the

recapture amount in taxable income for the taxable year in which the

recapture event occurs.

(b) Recapture event--(1) Qualified clean-fuel vehicle property--(i)

In general. A recapture event occurs if, within 3 full years from the

date a vehicle of which qualified clean-fuel vehicle property is a part

is placed in service, the property ceases to be qualified clean-fuel

vehicle property. Property ceases to be qualified clean- fuel vehicle

property if--

(A) The vehicle is modified by the taxpayer so that it may no

longer be propelled by a clean-burning fuel;

(B) The vehicle is used by the taxpayer in a manner described in

section 50(b);

(C) The vehicle otherwise ceases to qualify as property defined in

section 179A(c); or

(D) The taxpayer receiving the deduction under section 179A sells

or disposes of the vehicle and knows or has reason to know that the

vehicle will be used in a manner described in paragraph (b)(1)(i)(A),

(B), or (C) of this section.

(ii) Exception for disposition. Except as provided in paragraph

(b)(1)(i)(D) of this section, a sale or other disposition (including a

disposition by reason of an accident or other casualty) of qualified

clean-fuel vehicle property is not a recapture event.

(2) Qualified clean-fuel vehicle refueling property--(i) In

general. A recapture event occurs if, at any time before the end of its

recovery period, the property ceases to be qualified clean-fuel vehicle

refueling property. Property ceases to be qualified clean-fuel vehicle

refueling property if--

(A) The property no longer qualifies as property described in

section 179A(d);

(B) The property is no longer used predominantly in a trade or

business (property will be treated as no longer used predominantly in a

trade or business if 50 percent or more of the use of the property in a

taxable year is for use other than in a trade or business);

(C) The property is used by the taxpayer in a manner described in

section 50(b); or

(D) The taxpayer receiving the deduction under section 179A sells

or disposes of the property and knows or has reason to know that the

property will be used in a manner described in paragraph (b)(2)(i)(A),

(B), or (C) of this section.

(ii) Exception for disposition. Except as provided in paragraph

(b)(2)(i)(D) of this section, a sale or other disposition (including a

disposition by reason of an accident or other casualty) of qualified

clean-fuel vehicle refueling property is not a recapture event.

(c) Recapture date--(1) Qualified clean-fuel vehicle property. The

recapture date is the actual date of the recapture event unless an

event described in paragraph (b)(1)(i)(B) of this section occurs, in

which case the recapture date is the first day of the recapture year.

(2) Qualified clean-fuel vehicle refueling property. The recapture

date is the actual date of the recapture event unless the recapture

occurs as a result of an event described in paragraph (b)(2)(i)(B) or

(C) of this section, in which case the recapture date is the first day

of the recapture year.

(d) Recapture amount--(1) Qualified clean-fuel vehicle property.

The recapture amount is equal to the benefit of the section 179A

deduction allowable multiplied by the recapture percentage. The

recapture percentage is--

(i) 100, if the recapture date is within the first full year after

the date the vehicle is placed in service;

(ii) 66\2/3\, if the recapture date is within the second full year

after the date the vehicle is placed in service; or

(iii) 33\1/3\, if the recapture date is within the third full year

after the date the vehicle is placed in service.

(2) Qualified clean-fuel vehicle refueling property. The recapture

amount is equal to the benefit of the section 179A deduction allowable

multiplied by the following fraction. The numerator of the fraction

equals the total recovery period for the property minus the number of

recovery years prior to, but not including, the recapture year. The

denominator of the fraction equals the total recovery period.

(e) Basis adjustment. As of the first day of the taxable year in

which the recapture event occurs, the basis of the vehicle of which

qualified clean-fuel vehicle property is a part or the basis of

qualified clean-fuel vehicle refueling property is increased by the

recapture amount. For a vehicle or refueling property that is of a

character that is subject to an allowance for depreciation, this

increase in basis is recoverable over its remaining recovery period

beginning as of the first day of the taxable year in which the

recapture event occurs.

(f) Application of section 1245 for sales and other dispositions.

For purposes of section 1245, the amount of the deduction allowable

under section 179A(a) with respect to any property that is (or has

been) of a character subject to an allowance for depreciation is

treated as a deduction allowed for depreciation under section 167.

Therefore, upon a sale or other disposition of depreciable qualified

clean-fuel vehicle refueling property or a depreciable vehicle of which

qualified clean-fuel vehicle property is a part, section 1245 will

apply to any gain recognized to the extent the basis of the depreciable

property or vehicle was reduced under section 179A(e)(6) net of any

basis increase described in paragraph (e) of this section.

(g) Examples. The following examples illustrate the provisions of

this section:

Example 1. A, a calendar-year taxpayer, purchases and places in

service for personal use on January 1, 1995, a clean-fuel vehicle, a

portion of which is qualified clean-fuel vehicle property, costing

$25,000. The qualified clean-fuel vehicle property costs $11,000. On

A's 1995 federal income tax return, A claims a section 179A

deduction of $2,000. On January 2, 1996, A sells the vehicle to an

unrelated third party who subsequently converts the vehicle into a

gasoline-propelled vehicle on October 15, 1996. There is no

recapture upon the sale of the vehicle by A provided A did not know

or have reason to know that the purchaser intended to convert the

vehicle to a gasoline-propelled vehicle.

Example 2. B, a calendar-year taxpayer, purchases and places in

service for personal use on October 11, 1994, a clean-fuel vehicle

costing $20,000, a portion of which is qualified clean-fuel vehicle

property. The qualified clean-fuel vehicle property costs $10,000.

On B's 1994 federal income tax return, B claims a deduction of

$2,000, which reduces B's gross income by $2,000. The basis of the

vehicle is reduced to $18,000 ($20,000-$2,000). On January 31, 1996,

B sells the vehicle to a tax-exempt entity. Because B knowingly sold

the vehicle to a tax-exempt entity described in section 50(b) in the

second full year from the date the vehicle was placed in service, B

must recapture $1,333 ($2,000x66\2/3\ percent). This recapture

amount increases B's gross income by $1,333 on B's 1996 federal

income tax return and is added to the basis of the motor vehicle as

of January 1, 1996, the beginning of the taxable year of recapture.

Example 3. X, a calendar-year taxpayer, purchases and places in

service for its business use on January 1, 1994, qualified clean-

fuel vehicle refueling property costing $400,000. Assume this

property has a 5 year recovery period. On X's 1994 federal income

tax return, X claims a deduction of $100,000, which reduces X's

gross income by $100,000. The basis of the property is reduced to

$300,000 ($400,000-$100,000) prior to any adjustments for

depreciation. In 1996, more than 50 percent of the use of the

property is other than in X's trade or business. Because the

property is no longer used predominantly in X's business, X must

recapture three-fifths of the section 179A deduction or $60,000

($100,000x(5-2)/5=$60,000) and include that amount in gross income

on its 1996 federal income tax return. The recapture amount of

$60,000 is added to the basis of the property as of January 1, 1996,

the beginning of the taxable year of recapture, and to the extent

the property remains depreciable, the adjusted basis is recoverable

over the remaining recovery period.

Example 4. X, a calendar-year taxpayer, purchases and places in

service for business use on January 1, 1994, qualified clean-fuel

vehicle refueling property costing $350,000. Assume this property

has a 5 year recovery period. On X's 1994 federal income tax return,

X claims a deduction of $100,000, which reduces X's gross income by

$100,000. The basis of the property is reduced to $250,000

($350,000-$100,000) prior to any adjustments for depreciation. In

1995, X converts the property to store and dispense gasoline.

Because the property is no longer used as qualified clean-fuel

vehicle refueling property in 1995, X must recapture four-fifths of

the section 179A deduction or $80,000 ($100,000x(5-1)/5=$80,000) and

include that amount in gross income on its 1995 federal income tax

return. The recapture amount of $80,000 is added to the basis of the

property as of January 1, 1995, the beginning of the taxable year of

recapture, and to the extent the property remains depreciable, the

adjusted basis is recoverable over the remaining recovery period.

Example 5. The facts are the same as in Example 4. In 1996, X

sells the refueling property for $351,000, recognizing a gain from

this sale. Under paragraph (f) of this section, section 1245 of the

Code will apply to any gain recognized on the sale of depreciable

property to the extent the basis of the property was reduced by the

section 179A deduction net of any basis increase from recapture of

the section 179A deduction. Accordingly, the gain from the sale of

the property is subject to section 1245 to the extent of the

depreciation allowance for the property plus the deduction allowed

under section 179A ($100,000), less the previous recapture amount

($80,000). Any remaining amount of gain may be subject to other

applicable provisions of the Internal Revenue Code.

(h) Effective date. This section is effective on October 14, 1994.

If the recapture date is before the effective date of this section, a

taxpayer may use any reasonable method to recapture the benefit of any

deduction allowable under section 179A(a) consistent with section 179A

and its legislative history. For this purpose, the recapture date is

defined in paragraph (c) of this section.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 94-25415 Filed 10-13-94; 8:45 am]

BILLING CODE 4830-01-U