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

[TD 8606]

RIN 1545-AR64

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: Final regulations.

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SUMMARY: This document contains final 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. These 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.

DATES: These regulations are effective August 3, 1995.

For dates of applicability of these regulations, see Sec. 1.30-1(c)

and Sec. 1.179A-1(h).

FOR FURTHER INFORMATION CONTACT: Joanne E. Johnson at (202) 622-3110

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On October 14, 1994, the IRS published in the Federal Register a

notice of proposed rulemaking providing the definition of a qualified

electric vehicle under section 30(c) and the rules for the recapture of

the section 30 credit and section 179A deduction under sections

30(d)(2) and 179A(e)(4), respectively (59 FR 52105).

Written comments responding to the notice were received. No public

hearing was requested or held. After consideration of all the comments,

this Treasury decision adopts the regulations as proposed.

Explanation of Provisions

In General

The final regulations define a qualified electric vehicle for

purposes of section 30 of the Internal Revenue Code (Code). Several

commentators recommended expanding the definition to include a vehicle

converted from a used non-electric vehicle. The final regulations do

not adopt this recommendation because section 30(c)(1)(B) provides that

the original use of the vehicle must commence with the taxpayer.

Moreover, conversion costs are deductible under section 179A.

Some commentators suggested including a hybrid-electric vehicle in

the definition of a qualified electric vehicle. This issue will be

addressed along with other substantive rules in additional proposed

regulations under sections 30 and 179A of the Code.

Effective Date

The final regulations are effective on October 14, 1994. 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 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 Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Drafting Information

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

Office of Assistant Chief Counsel (Passthroughs and Special

Industries). However, other personnel from the IRS and Treasury

Department participated in their development.

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

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 immediately following the

undesignated center 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

[[Page 39650]]

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 of the Internal Revenue

Code 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 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

[[Page 39651]]

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 ($2,000 x 66\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.

[[Page 39652]]

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 ($100,000 x (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 ($100,000 x (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 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.

Approved: June 21, 1995.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 95-19028 Filed 8-2-95; 8:45 am]

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