Part IV. Items — Internal Revenue Bulletin 2003-37

Notice of Proposed Rulemaking by Cross Reference to Temporary Regulations

Depreciation of Vans and Light Trucks

REG–138495–02

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross reference to temporary regulations.

SUMMARY: In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9069) that modify the existing regulations promulgated under section 280F(a) of the Internal Revenue Code relating to limitations on the depreciation allowance for passenger automobiles. The temporary regulations, which amend the definition of passenger automobiles for purposes of section 280F(a), affect certain taxpayers that use vans and light trucks in their trade or business. The text of the temporary regulations also serves as the text of these proposed regulations.

DATES: Written comments and requests for a public hearing must be received by October 6, 2003.

ADDRESSES: Send submissions to: CC:PA:RU (REG–138495–02), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, submissions may be hand delivered Monday though Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:RU (REG–138495–02), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Comments may also be submitted electronically to the IRS Internet site at www.irs.gov/regs .

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Bernard P. Harvey, (202) 622–3110; concerning submissions and to request a hearing, LaNita Van Dyke, (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Explanation of Provisions

The temporary regulations in this issue of the Bulletin amend the Income Tax Regulations (26 CFR part 1) under section 280F of the Internal Revenue Code of 1986 (Code). The text of the temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains these proposed regulations.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because these regulations do not impose on small entities a collection of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, 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 Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (preferably a signed original and eight (8) copies) that are submitted timely to the IRS or electronically generated comments that are submitted timely to the IRS. The IRS generally requests any comments on the clarity of the proposed rule and how it may be made easier to understand. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by a person who timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register .

Drafting Information

The principal author of these regulations is Bernard P. Harvey, Office of Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

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Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.280F–6 also issued under 26 U.S.C. 280F. * * *

Par. 2. Section 1.280F–6 is amended as follows:

§1.280F–6 Special rules and definitions.

[The text of this proposed section is the same as the text of the amendments to §1.280F–6T published elsewhere in this issue of the Bulletin.]

Robert E. Wenzel, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on July 3, 2003, 8:45 a.m., and published in the issue of the Federal Register for July 7, 2003, 68 F.R. 40224)

Notice of Proposed Rulemaking and Notice of Public Hearing

Changes in Use Under Section 168(i)(5)

REG–138499–02

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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property occurs when the primary use of the MACRS property in the taxable year is different from its primary use in the immediately preceding taxable year. A change in the use of MACRS property also occurs when a taxpayer begins or ceases to use MACRS property predominantly outside the United States, when the property changes to tax-exempt bond financed property, or when the property changes to or from tax-exempt use property or imported property covered by an Executive order, during the taxable year. If a change in the use of MACRS property has occurred, the depreciation allowance for the MACRS property for the year of change is determined as though the change in the use of the MACRS property occurred on the first day of the year of change. The IRS and Treasury Department believe that this rule will help to simplify the computation of depreciation allowances in the year of change and subsequent taxable years. The IRS and Treasury Department invite comments on this rule and on a potential alternative rule that would treat a change in the use of MACRS property as occurring on the first day of the month in which the use changes and would allocate the depreciation allowance for that MACRS property for the year of change based on the number of full months of the old use and of the new use of the MACRS property during the year of change.

The proposed regulations also provide rules for determining the applicable depreciation method, recovery period, and convention used to determine the depreciation allowances for the MACRS property for the year of change and subsequent taxable years. If a change in the use of MACRS property results in a shorter recovery period and/or a more accelerated depreciation method (for example, MACRS property ceases to be used predominantly outside the United States), the adjusted depreciable basis of the property as of the beginning of the year of change is depreciated over the shorter recovery period and/or by the more accelerated depreciation method beginning with the year of change as though the MACRS property is first placed in service in the year of change. Under certain circumstances, this rule may adversely affect taxpayers. For example, under this rule, if a change in the use of

SUMMARY: This document contains proposed regulations relating to the depreciation of property subject to section 168 of the Internal Revenue Code (MACRS property). Specifically, these proposed regulations provide guidance on how to depreciate MACRS property for which the use changes in the hands of the same taxpayer. The proposed regulations reflect changes to the law made by the Tax Reform Act of 1986. This document also provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by October 20, 2003. Requests to speak and outlines of topics to be discussed at the public hearing scheduled for Wednesday, December 3, 2003, at 10 a.m., must be received by November 12, 2003.

ADDRESSES: Send submissions to: CC:PA:RU (REG–138499–02), room 5226, Internal Revenue Service, P. O. Box 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:RU (REG–138499–02), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the IRS Internet site at: www.irs.gov/regs .

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Sara Logan, (202) 622–3110; concerning submissions of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Treena Garrett, (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to 26 CFR part 1 to provide regulations under section 168(i)(5) of the Internal Revenue Code (Code). In addition, these proposed amendments provide change-in-use rules for assets in a general asset account under section 168(i)(4). Sections 168(i)(4) and 168(i)(5) were amended by section 201 of the Tax

Reform Act of 1986 (Public Law 99–514, 100 Stat. 2121).

Explanation of Provisions

Scope

The proposed regulations provide the rules for determining the annual depreciation allowance under section 168 for property for which the use changes in the hands of the taxpayer. Changes in use include a conversion of personal use property to a business or income-producing use, a conversion of MACRS property to personal use, or a change in use of MACRS property that results in a different recovery period, depreciation method, or both.

Conversion to Business or Personal Use

The proposed regulations provide that personal use property converted to business or income-producing use is treated as being placed in service by the taxpayer on the date of the conversion. Thus, the property is depreciated by using the applicable depreciation method, recovery period, and convention prescribed under section 168 for the property beginning in the taxable year the change of use (“year of change”) occurs. The depreciable basis of the property for the year of change is the lesser of its fair market value or adjusted depreciable basis at the time of the conversion.

A conversion of MACRS property from business or income-producing use to personal use is treated as a disposition of the property. Depreciation for the year of change is computed by taking into account the applicable convention. No gain, loss, or depreciation recapture is recognized upon the conversion. See Rev. Rul. 69–487, 1969–2 C.B. 165.

MACRS Property

Use Changes After Placed-in-service Year

The proposed regulations provide rules for MACRS property if a taxpayer changes the use of the property after the property’s placed-in-service year but the property continues to be MACRS property in the hands of the taxpayer.

In general, the proposed regulations provide that a change in the use of MACRS

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require taxpayers to track each property in a general asset account, the IRS and Treasury Department request comments on whether the IRS and Treasury should adopt a rule that disregards any change in the use of any MACRS property accounted for in a general asset account, except for a conversion to personal use.

Proposed Effective Date

These regulations are proposed to be applicable for any changes in the use of MACRS property in taxable years ending on or after the date of publication of the final regulations in the Federal Register . For any changes in use of MACRS property after December 31, 1986, in taxable years ending before the date of publication of the final regulations in the Federal Register, the IRS will allow any reasonable method of depreciating the property under section 168 in the year of change and the subsequent taxable years that is consistently applied to the MACRS property that changed use in the hands of the taxpayer.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because these regulations do not impose on small entities a collection of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply to these regulations. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the 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

MACRS property results in a shorter recovery period, a taxpayer must depreciate that MACRS property over the new shorter recovery period even if the remaining portion of the original longer recovery period is less than the new shorter recovery period. To avoid this adverse effect, the proposed regulations allow a taxpayer to elect to continue to depreciate the MACRS property for which the new recovery period is shorter or a more accelerated method is allowed as though the change in use had not occurred.

If a change in the use of MACRS property results in a longer recovery period and/or slower depreciation method (for example, MACRS property begins to be used predominantly outside the United States), the adjusted depreciable basis of the property is depreciated over the longer recovery period and/or by the slower depreciation method beginning with the year of change as though the taxpayer originally placed the MACRS property in service with the longer recovery period and/or slower depreciation method. Accordingly, the adjusted depreciable basis of the MACRS property as of the beginning of the year of change is depreciated over the remaining portion of the new, longer recovery period as of the beginning of the year of change.

For MACRS property depreciated under the optional depreciation tables in Rev. Proc. 87–57, 1987–2 C.B. 687, before the change in use, the taxpayer may continue to depreciate the property under the tables after the change in use. However, the taxpayer is not required to do so. If the taxpayer desires to use the optional depreciation tables after a change in the use instead of the formulas (for example, see section 6 of Rev. Proc. 87–57, 1987–2 C. B. at 692), the proposed regulations provide guidance on choosing the applicable optional depreciation table. If the change in use results in a longer recovery period and/or a slower depreciation method, the proposed regulations also provide guidance on how to modify the calculation involved to compute the depreciation allowances beginning in the year of change.

If a change in the use of MACRS property results in a shorter recovery period and/or more accelerated depreciation method, the taxpayer may use the optional depreciation table that corresponds to the applicable depreciation method, recovery period, and convention, determined as

though the property is placed in service in the year of change. Taxpayers should be aware that using this table will result in less depreciation than using the formulas, because the convention is factored into the optional depreciation tables, and taken into account in determining depreciation in the year of change. However, if the formulas are used, the convention is not taken into account in the year of change. The IRS and Treasury Department invite comments on this matter.

Use Changes During Placed-in-service Year

The proposed regulations provide rules for MACRS property if a change in the use occurs during the taxable year the property is placed-in-service and the property continues to be MACRS property in the hands of the taxpayer. If the use of MACRS property changes during its placed-in-service year, the depreciation allowance generally is determined by the primary use of the property during that taxable year. However, in determining whether MACRS property is used within or outside the United States during the placed-in-service year, the predominant use, instead of the primary use, of the MACRS property governs. Further, in determining whether MACRS property is tax-exempt use property or imported property covered by an Executive order during the placed-in-service year, the use of the property at the end of the placed-in-service year governs. Moreover, MACRS property is tax-exempt bond financed property during the placed-in-service year if a tax-exempt bond for the MACRS property is issued during that year.

General Asset Accounts

Finally, the proposed regulations amend the final regulations under section 168(i)(4) (T.D. 8566, 1994–2 C.B. 20

[59 FR 51369]) for property accounted for in a general asset account for which the use changes, resulting in a different recovery period and/or depreciation method. While this change in use does not cause or permit the revocation of the election to account for the property in a general asset account, the property generally is removed from its existing general asset account and placed in a separate general asset account. Because this rule would

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taxpayer’s trade or business (or for the production of income), for any portion of the basis the taxpayer properly elects to treat as an expense under section 179, and for any adjustments to basis provided by other provisions of the Internal Revenue Code and the regulations thereunder (other than section 1016(a)(2) and (3)) (for example, a reduction in basis by the amount of the disabled access credit pursuant to section 44(d)(7)). For property subject to a lease, see section 167(c)(2).

(4) Adjusted depreciable basis is the unadjusted depreciable basis of the property less the adjustments described in section 1016(a)(2) and (3). (b) Effective date . This section applies as of the date of publication of the final regulations in the Federal Register .

Par. 3. Section 1.168(i)–0 is amended by revising the entry for §1.168(i)–1(h)(2) to read as follows:

§1.168(i)–0 Table of contents for the general asset account rules.

§1.168(i)–1

(h) - - (2) Change in use results in a different recovery period and/or depreciation method.

- - - Par. 4. Section 1.168(i)–1 is amended by:

Revising paragraph (b)(1).
Amending paragraph (c)(2)(ii) by: a. Removing the language “and” from the end of paragraph (c)(2)(ii)(C).

b. Removing the period “.” from the end of paragraph (c)(2)(ii)(D) and adding “; and” in its place.

c. Adding paragraph (c)(2)(ii)(E). 3. Removing the language “(h)(1) (conversion to personal use)” from paragraphs (d)(2) and (i) and adding “(h) (changes in use)” in its place.

Removing the language “the change in use occurs and” from the last sentence of paragraph (h)(1) and adding “the change in use occurs (the year of change) and” in its place.
Revising paragraph (h)(2).
Removing the language “(h)(1)” from paragraph (j) and adding “(h)” in its place.

rules and how they can be made easier to understand. All comments will be available for public inspection and copying.

A public hearing has been scheduled for December 3, 2003, beginning at 10:00 a.m., in room number 4718, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by November 12, 2003. 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 Sara Logan, Office of Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

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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 an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * §1.168(i)–1 also issued under 26 U.S.C. 168(i)(4).

§1.168(i)–4 also issued under 26 U.S.C. 168(i)(5). Par. 2. Sections 1.168(a)–1 and 1.168(b)–1 are added to read as follows:

§1.168(a)–1 Modified accelerated cost recovery system.

Section 168 determines the depreciation allowance for tangible property that is of a character subject to the allowance for depreciation provided in section 167(a) and that is placed in service after December 31, 1986 (or after July 31, 1986, if the taxpayer made an election under section 203(a)(1)(B) of the Tax Reform Act of 1986; 100 Stat. 2143). Except for property excluded from the application of section 168 as a result of section 168(f) or as a result of a transitional rule, the provisions of section 168 are mandatory for all eligible property. The allowance for depreciation under section 168 constitutes the amount of depreciation allowable under section 167(a). The determination of whether tangible property is property of a character subject to the allowance for depreciation is made under section 167 and the regulations thereunder. This section is effective as of the date of publication of the final regulations in the Federal Register .

§1.168(b)–1 Definitions.

(a) Definitions . For purposes of section 168 and the regulations thereunder, the following definitions apply:

(1) Depreciable property is property that is of a character subject to the allowance for depreciation as determined under section 167 and the regulations thereunder.

(2) MACRS property is tangible, depreciable property that is placed in service after December 31, 1986 (or after July 31, 1986, if the taxpayer made an election under section 203(a)(1)(B) of the Tax Reform Act of 1986; 100 Stat. 2143), and subject to section 168, except for property excluded from the application of section 168 as a result of section 168(f) or as a result of a transitional rule.

(3) Unadjusted depreciable basis is the basis of property for purposes of section 1011 without regard to any adjustments described in section 1016(a)(2) and (3). This basis reflects the reduction in basis for the percentage of the taxpayer’s use of property for the taxable year other than in the

September 15, 2003 544 2003-37 I.R.B.

general asset account. For purposes of paragraph (c)(2) of this section, the applicable depreciation method, recovery period, and convention are determined under §1.168(i)–4(d)(4)(ii).

- - - (l) Effective date —(1) In general . Except as provided in paragraph (l)(2) of this section, 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.

(2) Exceptions —(i) In general . Paragraphs (c)(2)(ii)(E) and (h)(2) of this section apply to any changes in the use of depreciable assets pursuant to §1.168(i)–4(d) in taxable years ending on or after the date of publication of the final regulations in the Federal Register . For any changes in the use of depreciable assets as described in §1.168(i)–4(d) after December 31, 1986, in taxable years ending before the date of publication of the final regulations in the Federal Register, the Internal Revenue Service will allow any reasonable method that is consistently applied to the taxpayer’s general asset accounts.

(ii) Change in method of accounting . If a taxpayer adopted a method of accounting for general asset account treatment due to a change in the use of depreciable assets and the method is not in accordance with the method of accounting provided in paragraphs (c)(2)(ii)(E) and (h)(2) of this section, a change to the method of accounting provided in paragraphs (c)(2)(ii)(E) and (h)(2) of this section is a change in method of accounting to which the provisions of sections 446(e) and 481 apply. For any taxable year ending on or after the date of publication of the final regulations in the Federal Register, a taxpayer changing its method of accounting in accordance with this paragraph (l)(2)(ii) must follow the applicable administrative procedures issued under §1.446–1(e)(3)(ii) for obtaining the Commissioner’s automatic consent to a change in method of accounting (for further guidance, for example, see Rev. Proc. 2002–9, 2002–1 C.B. 327, and §601.601(d)(2)(ii)( b ) of this chapter). Because this change does not change the

Removing the language “(h)(1)” from paragraph (k)(1) and adding “(h)” in its place.
Revising paragraph (l). The addition and revisions read as follows:

§1.168(i)–1 General asset accounts.

- - - (b) - - (1) Unadjusted depreciable basis is the basis of an asset for purposes of section 1011 without regard to any adjustments described in section 1016(a)(2) and (3). This basis reflects the reduction in basis for the percentage of the taxpayer’s use of property for the taxable year other than in the taxpayer’s trade or business (or for the production of income), for any portion of the basis the taxpayer properly elects to treat as an expense under section 179, and for any adjustments to basis provided by other provisions of the Internal Revenue Code and the regulations thereunder (other than section 1016(a)(2) and (3)) (for example, a reduction in basis by the amount of the disabled access credit pursuant to section 44(d)(7)). For property subject to a lease, see section 167(c)(2).
- - - (c) - - (2) - - (ii) * - (E) Assets subject to paragraph (h)(2)(iii)(A) of this section (change in use results in a shorter recovery period and/or a more accelerated depreciation method) for which the depreciation allowance for the year of change is not determined by using an optional depreciation table must be grouped into a separate general asset account.
- - - (h) - - (2) Change in use results in a differ- ent recovery period and/or depreciation method —(i) No effect on general asset ac- count election . A change in the use described in §1.168(i)–4(d) (change in use results in a different recovery period and/or depreciation method) of an asset in a general asset account shall not cause or permit the revocation of the election made under this section.

(ii) Asset is removed from the general asset account . Upon a change in the use

described in §1.168(i)–4(d), the taxpayer must remove the asset from the general asset account as of the first day of the year of change and must make the adjustments to the general asset account described in paragraphs (e)(3)(iii)( C )( 2 ) through (4) of this section. If, however, the result of the change in use is described in §1.168(i)–4(d)(3) (change in use results in a shorter recovery period and/or a more accelerated depreciation method) and the taxpayer elects to treat the asset as though the change in use had not occurred pursuant to §1.168(i)–4(d)(3)(ii), no adjustment is made to the general asset account upon the change in use.

(iii) New general asset account is es- tablished —(A) Change in use results in a shorter recovery period and/or a more ac- celerated depreciation method . If the result of the change in use is described in §1.168(i)–4(d)(3) (change in use results in a shorter recovery period and/or a more accelerated depreciation method) and adjustments to the general asset account are made pursuant to paragraph (h)(2)(ii) of this section, the taxpayer must establish a new general asset account for the asset in the year of change in accordance with the rules in paragraph (c) of this section, except that the adjusted depreciable basis of the asset as of the first day of the year of change is included in the general asset account. For purposes of paragraph (c)(2) of this section, the applicable depreciation method, recovery period, and convention are determined under §1.168(i)–4(d)(3)(i).

(B) Change in use results in a longer recovery period and/or a slower depreci- ation method . If the result of the change in use is described in §1.168(i)–4(d)(4) (change in use results in a longer recovery period and/or a slower depreciation method), the taxpayer must establish a separate general asset account for the asset in the year of change in accordance with the rules in paragraph (c) of this section, except that the unadjusted depreciable basis of the asset, and the greater of the depreciation of the asset allowed or allowable in accordance with section 1016(a)(2), as of the first day of the year of change are included in the newly established general asset account. Consequently, this general asset account as of the first day of the year of change will have a beginning balance for both the unadjusted depreciable basis and the depreciation reserve of the

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adjusted depreciable basis of the asset, the method change is made on a cut-off basis and, therefore, no adjustment under section 481(a) is required or allowed.

- - - Par. 5. Section 1.168(i)–4 is added to read as follows:

§1.168(i)–4 Changes in use.

(a) Scope . This section provides the rules for determining the depreciation allowance for MACRS property for which the use changes in the hands of the same taxpayer. The allowance for depreciation under this section constitutes the amount of depreciation allowable under section 167(a) for the year of change and any subsequent taxable year. For purposes of this section, the year of change is the taxable year in which a change in the use occurs.

(b) Conversion to business or income- producing use —(1) Depreciation deduc- tion allowable . This paragraph (b) applies to property that is converted from personal use to use in a taxpayer’s trade or business, or for the production of income, during a taxable year. This conversion includes property that was previously used by the taxpayer for personal purposes, including real property (other than land) that is acquired before 1987 and converted from personal use to business or incomeproducing use after 1986, and depreciable property that was previously used by a tax-exempt entity before it changed to a taxable entity. Upon a conversion to business or income-producing use, the depreciation allowance for the year of change and any subsequent taxable year is determined as though the property is placed in service by the taxpayer on the date on which the conversion occurs. Thus, the taxpayer may choose any applicable depreciation method, recovery period, and convention prescribed under section 168 for the property in the year of change, consistent with any election made under section 168 by the taxpayer for that year (see, for example, section 168(b)(5)). The depreciable basis of the property for the year of change is the lesser of its fair market value or its adjusted depreciable basis, as applicable, at the time of the conversion to business or income-producing use.

(2) Example . The application of this paragraph (b) is illustrated by the following example:

Example . A, a calendar-year taxpayer, purchases a house in 1985 that she occupies as her principal residence. In February 2003, A ceases to occupy the house and converts it to residential rental property. At the time of the conversion to residential rental property, the house’s fair market value (excluding land) is $130,000 and adjusted depreciable basis attributable to the house (excluding land) is $150,000. Pursuant to this paragraph (b), A is considered to have placed in service residential rental property in February 2003 with a depreciable basis of $130,000. A depreciates the residential rental property under the general depreciation system by using the straight-line method, a 27.5-year recovery period, and the mid-month convention. This property is not eligible for the additional first year depreciation deduction provided by section 168(k) or section 1400L(b). Thus, the depreciation allowance for the house for 2003 is $4,137, after taking into account the mid-month convention (($130,000 adjusted depreciable basis multiplied by the applicable depreciation rate of 3.636% (1/27.5)) multiplied by the mid-month convention fraction of 10.5/12). The amount of depreciation computed under section 168, however, may be limited under other provisions of the Internal Revenue Code, such as, section 280A.

(c) Conversion to personal use . The conversion of MACRS property from business or income-producing use to personal use during a taxable year is treated as a disposition of the property in that taxable year. The depreciation allowance for MACRS property for the year of change in which the property is treated as being disposed of is determined by first multiplying the adjusted depreciable basis of the property as of the first day of the year of change by the applicable depreciation rate for that taxable year (for further guidance, for example, see section 6 of Rev. Proc. 87–57, 1987–2 C. B. 687, 692, and §601.601(d)(2)(ii)( b ) of this chapter). This amount is then multiplied by a fraction, the numerator of which is the number of months (including fractions of months) the property is deemed to be placed in service during the year of change (taking into account the applicable convention) and the denominator of which is 12. No depreciation deduction is allowable for MACRS property placed in service and disposed of in the same taxable year. Upon the conversion to personal use, no gain, loss, or depreciation recapture under section 1245 or section 1250 is recognized. However, the provisions of section 1245 or section 1250 apply to any disposition of the converted property by the taxpayer at a later date.

(d) Change in use results in a differ- ent recovery period and/or depreciation method —(1) In general . This paragraph

(d) applies to a change in the use of MACRS property during a taxable year subsequent to the placed-in-service year, if the property continues to be MACRS property owned by the same taxpayer and, as a result of the change in use, has a different recovery period, a different depreciation method, or both. For example, this paragraph (d) applies to MACRS property that—

(i) Begins or ceases to be used predominantly outside the United States;

(ii) Results in a reclassification of the property under section 168(e) due to a change in the use of the property; or

(iii) Begins or ceases to be tax-exempt use property (as defined in section 168(h)).

(2) Determination of change in use —(i) In general . Except as provided in paragraph (d)(2)(ii) of this section, a change in the use of MACRS property occurs when the primary use of the MACRS property in the taxable year is different from its primary use in the immediately preceding taxable year. The primary use of MACRS property may be determined in any reasonable manner that is consistently applied to the taxpayer’s MACRS property.

(ii) Alternative depreciation system property —(A) Property used within or outside the United States . A change in the use of MACRS property occurs when a taxpayer begins or ceases to use MACRS property predominantly outside the United States during the taxable year. The determination of whether MACRS property is used predominantly outside the United States is made in accordance with the test in §1.48–1(g)(1)(i) for determining predominant use.

(B) Tax-exempt bond financed property . A change in the use of MACRS property occurs when the property changes to tax-exempt bond financed property, as described in section 168(g)(1)(C) and (g)(5), during the taxable year. For purposes of this paragraph (d), MACRS property changes to tax-exempt bond financed property when a tax-exempt bond is first issued after the MACRS property is placed in service. MACRS property continues to be tax-exempt bond financed property in the hands of the taxpayer even if the tax-exempt bond (including any refunding issue) is no longer outstanding or is redeemed.

September 15, 2003 546 2003-37 I.R.B.

change are determined by multiplying the adjusted depreciable basis of the MACRS property as of the first day of each taxable year by the applicable depreciation rate for each taxable year. If there is a change in the use of MACRS property, the applicable convention that applies to the MACRS property is the same as the convention that applied before the change in the use of the MACRS property. If the year of change or any subsequent taxable year is less than 12 months, the depreciation allowance determined under this paragraph (d)(4)(ii) must be adjusted for a short taxable year (for further guidance, for example, see Rev. Proc. 89–15, 1989–1 C.B. 816, and §601.601(d)(2)(ii)( b ) of this chapter). See paragraph (d)(5) of this section for the rules relating to the computation of the depreciation allowance under the optional depreciation tables. In determining the applicable depreciation rate for the year of change and any subsequent taxable year—

(A) The applicable depreciation method is the depreciation method that would apply in the year of change and any subsequent taxable year for the MACRS property had the taxpayer used the longer recovery period and/or the slower depreciation method in the placed-in-service year of the property. If the 200- or 150-percent declining balance method would have applied in the placed-in-service year but the method would have switched to the straight line method in the year of change or any prior taxable year, the applicable depreciation method beginning with the year of change is the straight line method; and

(B) The applicable recovery period is either—

( 1 ) The longer recovery period resulting from the change in use if the applicable depreciation method is the 200- or 150-percent declining balance method (as determined under paragraph (d)(4)(ii)(A) of this section) unless the recovery period did not change as a result of the change in use, in which case the applicable recovery period is the same recovery period that applied before the change in use; or

( 2 ) The number of years remaining as of the beginning of each taxable year (taking into account the applicable convention) had the taxpayer used the longer recovery period in the placed-in-service year of the property if the applicable depreciation

the use of MACRS property occurs when the property changes to, or changes from, property described in section 168(g)(1)(B) (tax-exempt use property) or (D) (imported property covered by an Executive order) during the taxable year.

(iii) Change in use deemed to occur on first day of year . If a change in the use of MACRS property occurs under this paragraph (d)(2), the depreciation allowance for that MACRS property for the year of change is determined as though the use of the MACRS property changed on the first day of the year of change.

(3) Change in use results in a shorter recovery period and/or a more acceler- ated depreciation method —(i) Treated as placed in service in year of change —(A) In general . If the change in use results in the MACRS property changing to a shorter recovery period and/or a depreciation method that is more accelerated than the method used for the MACRS property before the change in use, the depreciation allowances beginning in the year of change are determined as though the MACRS property is placed in service by the taxpayer in the year of the change in use.

(B) Computation of depreciation al- lowance . The depreciation allowances for the MACRS property for any 12-month taxable year beginning with the year of change are determined by multiplying the adjusted depreciable basis of the MACRS property as of the first day of each taxable year by the applicable depreciation rate for each taxable year. In determining the applicable depreciation rate for the year of change and subsequent taxable years, the taxpayer may choose any applicable depreciation method and recovery period prescribed under section 168 for the MACRS property in the year of change, consistent with any election made under section 168 by the taxpayer for that year (see, for example, section 168(b)(5)). If there is a change in the use of MACRS property, the applicable convention that applies to the MACRS property is the same as the convention that applied before the change in the use of the MACRS property. However, the depreciation allowance for the year of change for the MACRS property is determined without applying the applicable convention, unless the MACRS property is disposed of during the year of change.

See paragraph (d)(5) of this section for the rules relating to the computation of the depreciation allowance under the optional depreciation tables. If the year of change or any subsequent taxable year is less than 12 months, the depreciation allowance determined under this paragraph (d)(3)(i) must be adjusted for a short taxable year (for further guidance, for example, see Rev. Proc. 89–15, 1989–1 C.B. 816, and §601.601(d)(2)(ii)( b ) of this chapter).

(C) Special rules . MACRS property affected by this paragraph (d)(3)(i) is not eligible in the year of change for the election provided under section 168(f)(1), 179, or 1400L(f), or for the additional first-year depreciation deduction provided in section 168(k) or 1400L(b). For purposes of determining whether the mid-quarter convention applies to other MACRS property placed in service during the year of change, the unadjusted depreciable basis or the adjusted depreciable basis of MACRS property affected by this paragraph (d)(3)(i) is not taken into account.

(ii) Option to disregard change in use . In lieu of applying paragraph (d)(3)(i) of this section, the taxpayer may elect to determine the depreciation allowance as though the change in use had not occurred. The taxpayer elects this option by claiming on the taxpayer’s timely filed (including extensions) income tax return for the year of change the depreciation allowance for the property as though the change in use had not occurred. See paragraph (g)(2) of this section for the manner for revoking this election.

(4) Change in use results in a longer recovery period and/or a slower depreci- ation method —(i) Treated as originally placed in service with longer recovery pe- riod and/or slower depreciation method . If the change in use results in a longer recovery period and/or a depreciation method for the MACRS property that is less accelerated than the method used for the MACRS property before the change in use, the depreciation allowances beginning with the year of change are determined as though the MACRS property had been originally placed in service by the taxpayer with the longer recovery period and/or the slower depreciation method.

(ii) Computation of the depreciation al- lowance . The depreciation allowances for the MACRS property for any 12-month taxable year beginning with the year of

2003-37 I.R.B. 547 September 15, 2003

corresponds to the year of change. For example, if the recovery year for the year of change would have been Year 4 in the table that applied before the change in the use of the MACRS property, then the recovery year for the year of change is Year 4 in the table identified under paragraph (d)(5)(ii)(B)( 1 ) of this section. Next, the annual depreciation rate (expressed as a decimal equivalent) for each recovery year is multiplied by a transaction coefficient. The transaction coefficient is the formula (1 / (1 - x)) where x equals the sum of the annual depreciation rates from the table identified under paragraph (d)(5)(ii)(B)( 1 ) of this section (expressed as a decimal equivalent) for the taxable years beginning with the placed-in-service year of the MACRS property through the taxable year immediately prior to the year of change. The product of the annual depreciation rate and the transaction coefficient is multiplied by the adjusted depreciable basis of the MACRS property as of the beginning of the year of change.

(6) Examples . The application of this paragraph (d) is illustrated by the following examples:

Example 1 . Change in use results in a shorter recovery period and/or a more accelerated depreci- ation method and optional depreciation table is not used —(i) X, a calendar-year corporation, places in service in 1998 equipment at a cost of $100,000 and uses this equipment from 1998 through 2002 primarily in its A business. X depreciates the equipment for 1998 through 2002 under the general depreciation system as 7-year property by using the 200-percent declining balance method (which switched to the straight-line method in 2002), a 7-year recovery period, and a half-year convention. Beginning in 2003, X primarily uses the equipment in its B business. As a result, the classification of the equipment under section 168(e) changes from 7-year property to 5-year property and the recovery period of the equipment under the general depreciation system changes from 7 years to 5 years. The depreciation method does not change. On January 1, 2003, the adjusted depreciable basis of the equipment is $22,311. X depreciates its 5-year recovery property placed in service in 2003 under the general depreciation system by using the 200-percent declining balance method and a 5-year recovery period. X does not use the optional depreciation tables.

(ii) Under paragraph (d)(3)(i) of this section, X ’s allowable depreciation deduction for the equipment for 2003 and subsequent taxable years is determined as though X placed the equipment in service in 2003 for use primarily in its B business. The depreciable basis of the equipment as of January 1, 2003, is $22,311 (the adjusted depreciable basis at January 1, 2003). Because X does not use the optional depreciation tables, the depreciation allowance for 2003 (the deemed placed-in-service year) for this equipment only is computed without taking into account

method is the straight line method (as determined under paragraph (d)(4)(ii)(A) of this section) unless the recovery period did not change as a result of the change in use, in which case the applicable recovery period is the number of years remaining as of the beginning of each taxable year (taking into account the applicable convention) based on the recovery period that applied before the change in use.

(5) Using optional depreciation ta- bles —(i) Taxpayer not bound by prior use of table . If a taxpayer used an optional depreciation table for the MACRS property before a change in the use, the taxpayer is not bound to use the appropriate new table for that MACRS property after the change in use (for further guidance, for example, see section 8 of Rev. Proc. 87–57, 1987–2 C.B. 687, 693, and §601.601(d)(2)(ii)( b ) of this chapter). If the taxpayer chooses not to continue to use the optional depreciation table, the depreciation allowances for the MACRS property beginning in the year of change are determined under paragraph (d)(3)(i) or (4) of this section, as applicable.

(ii) Taxpayer chooses to use optional depreciation table after change in use . If the taxpayer chooses to continue to use an optional depreciation table for the MACRS property after a change in the use, the depreciation allowances for the MACRS property for any 12-month taxable year beginning with the year of change are determined as follows:

(A) Change in use results in a shorter recovery period and/or a more acceler- ated depreciation method . If the change in use results in a shorter recovery period and/or a more accelerated depreciation method (as described in paragraph (d)(3)(i) of this section), the depreciation allowances for the MACRS property for any 12-month taxable year beginning with the year of change are determined by multiplying the adjusted depreciable basis of the MACRS property as of the first day of the year of change by the annual depreciation rate for each recovery year (expressed as a decimal equivalent) specified in the appropriate optional depreciation table. The appropriate optional depreciation table for the MACRS property is based on the depreciation system, depreciation method, recovery period, and convention applicable to the MACRS property in the

year of change as determined under paragraph (d)(3)(i) of this section. The depreciation allowance for the year of change for the MACRS property is determined by taking into account the applicable convention (which is already factored into the optional depreciation tables). If the year of change or any subsequent taxable year is less than 12 months, the depreciation allowance determined under this paragraph (d)(5)(ii)(A) must be adjusted for a short taxable year (for further guidance, for example, see Rev. Proc. 89–15, 1989–1 C.B. 816, and §601.601(d)(2)(ii)( b ) of this chapter).

(B) Change in use results in a longer recovery period and/or a slower depreci- ation method —( 1 ) Determination of the appropriate optional depreciation table . If the change in use results in a longer recovery period and/or a slower depreciation method (as described in paragraph (d)(4)(i) of this section), the depreciation allowances for the MACRS property for any 12-month taxable year beginning with the year of change are determined by choosing the optional depreciation table that corresponds to the depreciation system, depreciation method, recovery period, and convention that would have applied to the MACRS property in the placed-in-service year had that property been originally placed in service by the taxpayer with the longer recovery period and/or the slower depreciation method. If there is a change in the use of MACRS property, the applicable convention that applies to the MACRS property is the same as the convention that applied before the change in the use of the MACRS property. If the year of change or any subsequent taxable year is less than 12 months, the depreciation allowance determined under this paragraph (d)(5)(ii)(B) must be adjusted for a short taxable year (for further guidance, for example, see Rev. Proc. 89–15, 1989–1 C.B. 816, and §601.601(d)(2)(ii)( b ) of this chapter).

( 2 ) Computation of the depreciation al- lowance . The depreciation allowances for the MACRS property for any 12-month taxable year beginning with the year of change are computed by first determining the appropriate recovery year in the table identified under paragraph (d)(5)(ii)(B)( 1 ) of this section. The appropriate recovery year for the year of change is the year that

September 15, 2003 548 2003-37 I.R.B.

the half-year convention. This equipment is not eligible for the additional first year depreciation deduction provided by section 168(k) or section 1400L(b). Thus, X ’s allowable depreciation deduction for the equipment for 2003 is $8,924 ($22,311 adjusted depreciable basis at January 1, 2003, multiplied by the applicable depreciation rate of 40% (200/5)). X ’s allowable depreciation deduction for the equipment for 2004 is $5,355 ($13,387 adjusted depreciable basis at January 1, 2004, multiplied by the applicable depreciation rate of 40% (200/5)).

(iii) Alternatively, under paragraph (d)(3)(ii) of this section, X may elect to disregard the change in use and, as a result, may continue to treat the equipment as though it is used primarily in its A business. If the election is made, X ’s allowable depreciation deduction for the equipment for 2003 is $8,924 ($22,311 adjusted depreciable basis at January 1, 2003, multiplied by the applicable depreciation rate of 40% (1/2.5 years remaining at January 1, 2003)). X ’s allowable depreciation deduction for the equipment for 2004 is $8,925 ($13,387 adjusted depreciable basis at January 1, 2004, multiplied by the applicable depreciation rate of 66.67% (1/1.5 years remaining at January 1, 2004)).

Example 2 . Change in use results in a shorter recovery period and/or a more accelerated depre- ciation method and optional depreciation table is used —(i) Same facts as in Example 1, except that X used the optional depreciation tables for computing depreciation for 1998 through 2002. Pursuant to paragraph (d)(5) of this section, X chooses to continue to use the optional depreciation table for the equipment. X does not make the election provided in paragraph (d)(3)(ii) of this section to disregard the change in use.

(ii) In accordance with paragraph (d)(5)(ii)(A) of this section, X must first identify the appropriate optional depreciation table for the equipment. This table is table 1 in Rev. Proc. 87–57 because the equipment will be depreciated in the year of change (2003) under the general depreciation system using the 200-percent declining balance method, a 5-year recovery period, and the half-year convention (which is the convention that applied to the equipment in 1998). This equipment is not eligible for the additional first year depreciation deduction provided by section 168(k) or section 1400L(b). For 2003, X multiplies its adjusted depreciable basis in the equipment as of January 1, 2003, of $22,311, by the annual depreciation rate in table 1 for recovery year 1 for a 5-year recovery period (.20), to determine the depreciation allowance of $4,462. For 2004, X multiplies its adjusted depreciable basis in the equipment as of January 1, 2003, of $22,311, by the annual depreciation rate in table 1 for recovery year 2 for a 5-year recovery period (.32), to determine the depreciation allowance of $7,140.

Example 3 . Change in use results in a longer recovery period and/or a slower depreciation method —(i) Y, a calendar-year corporation, places in service in January 2001, equipment at a cost of $100,000 and uses this equipment in 2001 and 2002 only within the United States. Y depreciates the equipment for 2001 and 2002 under the general depreciation system by using the 200-percent declining balance method, a 5-year recovery period, and a half-year convention. Beginning in 2003, Y uses the equipment predominantly outside the United States. As a result of this change in use, the equipment is

subject to the alternative depreciation system beginning in 2003. Under the alternative depreciation system, the equipment is depreciated by using the straight-line method and a 9-year recovery period. The adjusted depreciable basis of the equipment at January 1, 2003, is $48,000.

(ii) Pursuant to paragraph (d)(4) of this section, Y ’s allowable depreciation deduction for 2003 and subsequent taxable years is determined as though the equipment had been placed in service in January 2001, as property used predominantly outside the United States. In determining the applicable depreciation rate for 2003, the applicable depreciation method is the straight-line method and the applicable recovery period is 7.5 years, which is the number of years remaining at January 1, 2003, for property placed in service in 2001 with a 9-year recovery period (taking into account the half-year convention). Thus, the depreciation allowance for 2003 is $6,398 ($48,000 adjusted depreciable basis at January 1, 2003, multiplied by the applicable depreciation rate of 13.33% (1/7.5 years)). The depreciation allowance for 2004 is $6,398 ($41,602 adjusted depreciable basis at January 1, 2004, multiplied by the applicable depreciation rate of 15.38% (1/6.5 years remaining at January 1, 2004)).

Example 4 . Change in use results in a longer re- covery period and/or a slower depreciation method and optional depreciation table is used —(i) Same facts as in Example 3, except that Y used the optional depreciation tables for computing depreciation in 2001 and 2002. Pursuant to paragraph (d)(5) of this section, Y chooses to continue to use the optional depreciation table for the equipment.

(ii) In accordance with paragraph (d)(5)(ii)(B) of this section, Y must first determine the appropriate optional depreciation table for the equipment pursuant to paragraph (d)(5)(ii)(B)( 1 ) of this section. This table is table 8 in Rev. Proc. 87–57, which corresponds to the alternative depreciation system, the straightline method, a 9-year recovery period, and the halfyear convention (because Y depreciated 5-year property in 2001 using a half-year convention). Next, Y must determine the appropriate recovery year in table 8. Because the year of change is 2003, the depreciation allowance for the equipment for 2003 is determined using recovery year 3 of table 8. For 2003, Y multiplies its adjusted depreciable basis in the equipment as of January 1, 2003, of $48,000, by the product of the annual depreciation rate in table 8 for recovery year 3 for a 9-year recovery period (.1111) and the transaction coefficient [1/(1−(.0556+.1111)), which equals 1.200], to determine the depreciation allowance of $6,399. For 2004, Y multiplies its adjusted depreciable basis in the equipment as of January 1, 2003, of $48,000, by the product of the annual depreciation rate in table 8 for recovery year 4 for a 9-year recovery period (.1111) and the transaction coefficient (1.200), to determine the depreciation allowance of $6,399.

(e) Change in the use of MACRS property during the placed-in-service year —(1) In general . Except as provided in paragraph (e)(2) of this section, if a change in the use of MACRS property occurs during the placed-in-service year and the property continues to be MACRS

property owned by the same taxpayer, the depreciation allowance for that property for the placed-in-service year is determined by its primary use during that year. The primary use of MACRS property may be determined in any reasonable manner that is consistently applied to the taxpayer’s MACRS property. For purposes of this paragraph (e), the determination of whether the mid-quarter convention applies to any MACRS property placed in service during the year of change is made in accordance with §1.168(d)–1.

(2) Alternative depreciation system property —(i) Property used within and outside the United States . The depreciation allowance for the placed-in-service year for MACRS property that is used within and outside the United States is determined by its predominant use during that year. The determination of whether MACRS property is used predominantly outside the United States during the placed-in-service year shall be made in accordance with the test in §1.48–1(g)(1)(i) for determining predominant use.

(ii) Tax-exempt bond financed prop- erty . The depreciation allowance for the placed-in-service year for MACRS property that changes to tax-exempt bond financed property, as described in section 168(g)(1)(C) and (g)(5), during that taxable year is determined under the alternative depreciation system. For purposes of this paragraph (e), MACRS property changes to tax-exempt bond financed property when a tax-exempt bond is first issued after the MACRS property is placed in service. MACRS property continues to be tax-exempt bond financed property in the hands of the taxpayer even if the tax-exempt bond (including any refunding issue) is not outstanding at, or is redeemed by, the end of the placed-in-service year.

(iii) Other mandatory alternative de- preciation system property . The depreciation allowance for the placed-in-service year for MACRS property that changes to, or changes from, property described in section 168(g)(1)(B) (tax-exempt use property) or (D) (imported property covered by an Executive order) during that taxable year is determined under—

(A) The alternative depreciation system if the MACRS property is described in section 168(g)(1)(B) or (D) at the end of the placed-in-service year; or

2003-37 I.R.B. 549 September 15, 2003

(B) The general depreciation system if the MACRS property is not described in section 168(g)(1)(B) or (D) at the end of the placed-in-service year.

(3) Examples . The application of this paragraph (e) is illustrated by the following examples:

Example 1 . (i) Z, a utility and calendar-year corporation, places in service on January 1, 2003, equipment at a cost of $100,000. Z uses this equipment in its combustion turbine production plant for 4 months and then uses the equipment in its steam production plant for the remainder of 2003. Z ’s combustion turbine production plant assets are classified as 15-year property and are depreciated by Z under the general depreciation system using a 15-year recovery period and the 150-percent declining balance method of depreciation. Z ’s steam production plant assets are classified as 20-year property and are depreciated by Z under the general depreciation system using a 20-year recovery period and the 150-percent declining balance method of depreciation. Z uses the optional depreciation tables. The equipment is qualified property for purposes of section 168(k)(1).

(ii) Pursuant to this paragraph (e), Z must determine depreciation based on the primary use of the equipment during the placed-in-service year. Z has consistently determined the primary use of all of its MACRS property by comparing the number of full months in the taxable year during which a MACRS property is used in one manner with the number of full months in that taxable year during which that MACRS property is used in another manner. Applying this approach, Z determines the depreciation allowance for the equipment for 2003 is based on the equipment being classified as 20-year property because the equipment was used by Z in its steam production plant for 8 months in 2003. If the half-year convention applies in 2003, the appropriate optional depreciation table is table 1 in Rev. Proc. 87–57, which is the table for MACRS property subject to the general depreciation system, the 150-percent declining balance method, a 20-year recovery period, and the half-year convention. Thus, the depreciation allowance for the equipment for 2003 is $32,625, which is the total of $30,000 for the additional 30-percent first-year depreciation deduction allowable (the unadjusted depreciable basis of $100,000 multiplied by .30), plus $2,625 for the 2003 depreciation allowance on the remaining basis of $70,000 [(the unadjusted depreciable basis of $100,000 less the additional first-year depreciation deduction of $30,000) multiplied by the annual depreciation rate of .0375 in table 1 for recovery year 1 for a 20-year recovery period].

Example 2 . T, a calendar year corporation, places in service on January 1, 2003, several computers at a total cost of $100,000. T uses these computers within the United States for 3 months in 2003 and then moves and uses the computers outside the United States for the remainder of 2003. Pursuant to §1.48–1(g)(1)(i), the computers are considered as used predominantly outside the United States in 2003. As a result, for 2003, the computers are required to be depreciated under the alternative depreciation system of section 168(g) with a recovery period of 5 years pursuant to section 168(g)(3)(C). T uses the optional depreciation tables. If the half-year

convention applies in 2003, the appropriate optional depreciation table is table 8 in Rev. Proc. 87–57, which is the table for MACRS property subject to the alternative depreciation system, the straight-line method, a 5-year recovery period, and the half-year convention. Thus, the depreciation allowance for the computers for 2003 is $10,000, which is equal to the unadjusted depreciable basis of $100,000 multiplied by the annual depreciation rate of .10 in table 8 for recovery year 1 for a 5-year recovery period. Because the computers are required to be depreciated under the alternative depreciation system in their placed-in-service year, the computers are not eligible for the additional first year depreciation deduction provided by section 168(k).

(f) No change in accounting method . A change in computing the depreciation allowance in the year of change for property subject to this section results from a change in underlying facts and, thus, is not a change in method of accounting under section 446(e).

(g) Effective date —(1) In general . This section applies to changes in the use of MACRS property in taxable years ending on or after the date of publication of the final regulations in the Federal Register . For changes in the use of MACRS property after December 31, 1986, in taxable years ending before the date of publication of the final regulations in the Federal Reg- ister, the Internal Revenue Service will allow any reasonable method of depreciating the property under section 168 in the year of change and the subsequent taxable years that is consistently applied to any property that changed use in the hands of the taxpayer.

(2) Change in method of account- ing —(i) In general . If a taxpayer adopted a method of accounting for depreciation due to a change in the use of MACRS property and the method is not in accordance with the method of accounting for depreciation provided in this section, a change to the method of accounting for depreciation provided in this section is a change in method of accounting to which the provisions of sections 446(e) and 481 and the regulations thereunder apply. Also, a revocation of the election provided in paragraph (d)(3)(ii) of this section to disregard a change in the use is a change in method of accounting to which the provisions of sections 446(e) and 481 and the regulations thereunder apply.

(ii) Automatic consent to change method of accounting . For any taxable year ending on or after the date of publication of the final regulations in the

Federal Register, a taxpayer changing its method of accounting in accordance with this paragraph (g)(2) must follow the applicable administrative procedures issued under §1.446–1(e)(3)(ii) for obtaining the Commissioner’s automatic consent to a change in method of accounting (for further guidance, for example, see Rev. Proc. 2002–9, 2002–1 C.B. 327, and §601.601(d)(2)(ii)( b ) of this chapter). Any change in method of accounting made under this paragraph (g)(2) must be made using an adjustment under section 481(a).

Robert E. Wenzel, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on July 18, 2003, 8:45 a.m., and published in the issue of the Federal Register for July 21, 2003, 68 F.R. 43047)

Notice of Proposed Rulemaking

Notarized Statements of Purchase Under Section 1042

REG–121122–03

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed amendments to the temporary regulations under section 1042 of the Internal Revenue Code of 1986. The proposed regulations would affect taxpayers making an election to defer the recognition of gain under section 1042 on the sale of stock to an employee stock ownership plan. The proposed regulations provide guidance on the notarization requirements of the temporary regulations.

DATES: Written and electronic comments and requests for a public hearing must be received by October 7, 2003.

ADDRESSES: Send submissions to: CC:ITA:RU (REG–121122–03), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:RU (REG–121122–03), Courier’s Desk, Internal Revenue Service, 1111

September 15, 2003 550 2003-37 I.R.B.

of corporations (within the meaning of section 1563(a)(1)) as such corporation.

Section 1042(c)(4)(B) defines an oper- ating corporation as a corporation more than 50 percent of the assets of which, at the time the security was purchased or before the close of the replacement period, were used in the active conduct of a trade or business.

Section 1.1042–1T A–3(a) of the Temporary Income Tax Regulations states that the election is to be made in a statement of election attached to the taxpayer’s income tax return filed on or before the due date (including extensions of time) for the taxable year in which the sale occurs.

Section 1.1042–1T A–3(b) states that the statement of election must provide that the taxpayer elects to treat the sale of securities as a sale of qualified securities under section 1042(a) and must contain the following information: (1) A description of the qualified securities sold, including the type and number of shares; (2) The date of the sale of the qualified securities; (3) The adjusted basis of the qualified securities; (4) The amount realized upon the sale of the qualified securities; (5) The identity of the ESOP or eligible worker-owned cooperative to which the qualified securities were sold; and (6) If the sale was part of a single interrelated transaction under a prearranged agreement between taxpayers involving other sales of qualified securities, the names and taxpayer identification numbers of the other taxpayers under the agreement and the number of shares sold by the other taxpayers.

Section 1.1042–1T, A–3(b) further provides that, if the taxpayer has purchased qualified replacement property at the time of the election, the taxpayer must attach as part of the statement of election a state- ment of purchase describing the qualified replacement property, the date of the purchase, and the cost of the property, and declaring such property to be qualified replacement property with respect to the sale of qualified securities.

The statement of purchase must be notarized no later than 30 days after the purchase. The purpose of the statement of purchase is to identify qualified replacement property with respect to a sale of qualified securities. The qualified replacement property will have its cost basis reduced under section 1042(d) to reflect

Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically directly to the IRS Internet site at www.irs.gov/regs .

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, John T. Ricotta at (202) 622–6060 (not a toll-free number); concerning submissions or hearing requests, Sonya Cruse, (202) 622–7180 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the requirement of §1.1042–1T, A–3(b) of the Temporary Income Tax regulations that a statement of purchase for qualified replacement property be notarized within 30 days of the date of purchase of the property (30-day notarization requirement).

The temporary regulations under section 1042 were published in T.D. 8073, 1986–1 C.B. 45, on February 4, 1986 (EE–63–84) (51 FR 4312) as part of a package of temporary regulations addressing effective dates and other issues under the Tax Reform Act of 1984. The text of the temporary regulations also served as a notice of proposed rulemaking (EE–96–85, 1986–1 C.B. 697 [51 FR 4391]). A public hearing was held on June 26, 1986, concerning the proposed regulations.

Explanation of Provisions

Overview

Section 1042(a) provides that a taxpayer or executor may elect in certain cases not to recognize long-term capital gain on the sale of qualified securities to an employee stock ownership plan (ESOP) (as defined in section 4975(e)(7)) or eligible worker owned cooperative (as defined in section 1042(c)(2)) if the taxpayer purchases qualified replacement property (as defined in section 1042(c)(4)) within the replacement period of section 1042(c)(3) and the requirements of section 1042(b) and §1.1042–1T of the Temporary Income Tax Regulations are satisfied.

Section 1042(c)(1) provides that the term qualified securities means employer

securities (as defined in section 409(l)) which are issued by a domestic C corporation that has no stock outstanding that is readily tradable on an established securities market and which were not received by the taxpayer in a distribution from a plan described in section 401(a) or in a transfer pursuant to an option or other right to acquire stock to which section 83, 422, or 423 applied. A sale of qualified securities meets the requirements of section 1042(b) if: (1) the qualified securities are sold to an ESOP (as defined in section 4975(e)(7)), or an eligible worker owned cooperative; (2) the plan or cooperative owns (after application of section 318(a)(4)), immediately after the sale, at least 30 percent of (a) each class of outstanding stock of the corporation (other than stock described in section 1504(a)(4)) which issued the securities or (b) the total value of all outstanding stock of the corporation (other than stock described in section 1504(a)(4)); (3) the taxpayer files with the Secretary a verified written statement of the employer whose employees are covered by the ESOP or an authorized officer of the cooperative consenting to the application of sections 4978 and 4979A (which provide for excise taxes on certain dispositions or allocations of securities acquired in a sale to which section 1042 applies) with respect to such employer or cooperative; and (4) the taxpayer’s holding period with respect to the qualified securities is at least three years (determined as of the time of the sale).

The taxpayer must purchase qualified replacement property within the replace- ment period, which is defined in section 1042(c)(3) as the period which begins three months before the date on which the sale of qualified securities occurs and ends 12 months after the date of such sale. Section 1042(c)(4)(A) defines quali- fied replacement property as any security issued by a domestic operating corporation which did not, for the taxable year preceding the taxable year in which such security was purchased, have passive investment income (as defined in section 1362(d)(3)(C)) in excess of 25 percent of the gross receipts of such corporation for such preceding taxable year, and is not the corporation which issued the qualified securities which such security is replacing or a member of the same controlled group

2003-37 I.R.B. 551 September 15, 2003

understand. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

Drafting Information

The principal author of these regulations is John T. Ricotta of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from The IRS and Treasury participated in their development.

- - - -

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 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. In §1.1042–1T, A–3, in the undesignated paragraph following paragraph (b)(6), the penultimate sentence is removed and three sentences added in its place to read as follows:

§1.1042–1T Questions and Answers relating to the sales of stock to employee stock ownership plans or certain cooperatives (temporary).

- - - Q–3. - - A–3. - * * Such statement of purchase must be notarized not later than the time the taxpayer files the income tax return for the taxable year in which the sale of qualified securities occurred in any case in which any qualified replacement property was purchased by such time and during the qualified replacement period. If qualified replacement property is purchased after such filing date but during the qualified replacement period, the statement of purchase must be notarized not later than the time the taxpayer’s income tax return is filed for the taxable year following the year for which the election under section

the gain on the sale of qualified securities that is being deferred by the taxpayer. Upon subsequent disposition of the qualified replacement property by the taxpayer, the deferred gain will be recognized by the taxpayer under section 1042(e). Under section 1042(f), the filing of the statement of purchase of qualified replacement property (or a statement of the taxpayer’s intention not to purchase replacement property) will begin the statutory period for assessment of any deficiency with respect to gain arising from the sale of the qualified securities. The purpose of the 30-day notarization requirement is to provide a contemporaneous identification of replacement property.

However, the 30-day notarization requirement leads to frequent mistakes by taxpayers and their advisors. Taxpayers are often unaware of this requirement and become aware of it only when they prepare their tax returns for the year of sale to the ESOP. By this time, the 30-day period is typically past because purchases of replacement property may have been made up to one year before. A number of private letter rulings have been issued granting relief to taxpayers in these situations as long as the statements were notarized shortly after the taxpayer became aware of the requirement and it was represented that the property listed was the only replacement property purchased for this sale.

A number of commentators on the temporary and proposed regulations criticized this requirement as without statutory authority, a trap for the unwary, and inconsistent with the definition of the qualified replacement period in section 1042(c)(3).

Proposed Amendment to the Regulations

In order to facilitate taxpayer compliance with the temporary regulations concerning identification of qualified replacement property through notarization of the statements of purchase, the proposed amendment to the temporary regulations would modify §1.1042–1T, A–3(b) to provide that the notarization requirements for the statement of purchase are satisfied if the taxpayer’s statement of purchase is notarized not later than the time the taxpayer files the income tax return for the taxable year in which the sale of qualified securities occurred in any case in which any qualified replacement property was

purchased by such time and during the qualified replacement period. If qualified replacement property was purchased after such filing date and during the qualified replacement period, the statement of purchase must be notarized not later than the time the taxpayer’s income tax return is filed for the taxable year following the year for which the election under section 1042(a) was made.

Proposed Effective Date

The proposed amendments to the temporary regulations would apply to taxable years of sellers ending on or after the date of publication of the Treasury decision adopting these amendments as final regulations in the Federal Register . However, taxpayers may rely upon these proposed regulations for guidance with respect to all open taxable years pending the issuance of final regulations. If, and to the extent, future guidance is more restrictive than the guidance in these proposed regulations, the future guidance will be applied without retroactive effect.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, these proposed regulations 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 (a signed original and 8 copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to

September 15, 2003 552 2003-37 I.R.B.

regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations do not have a significant impact on a substantial number of small entities. This certification is based on the fact that these regulations primarily will affect affiliated groups of corporations, which tend to be larger businesses. Moreover, the number of taxpayers affected is minimal and the regulations will simplify basis determinations. Pursuant to section 7805(f) of the Internal Revenue Code, these proposed regulations 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 (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the proposed regulations. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

Drafting Information

The principal authors of these regulations are Marlene Oppenheim and Ross Poulsen, Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

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 continues to read in part as follows:

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

1042(a) was made. The previous two sentences apply to taxable years of sellers ending on or after the date final regulations are published in the Federal Register . - * *

Robert E. Wenzel, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on July 9, 2003, 8:45 a.m., and published in the issue of the Federal Register for July 10, 2003, 68 F.R. 41087)

Notice of Proposed Rulemaking

Guidance Under Section 1502; Stock Basis After a Group Structure Change

REG–130262–03

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations under section 1502 that relate to stock basis after a group structure change. These proposed regulations affect corporations filing consolidated returns.

DATES: Written or electronic comments and requests for a public hearing must be received by October 6, 2003.

ADDRESSES: Send submissions to: CC:PA:RU (REG–130262–03), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:RU (REG–130262–03), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20044. Alternatively, taxpayers may submit comments electronically directly to the IRS Internet site at www.irs.gov/regs .

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Marlene Oppenheim or Ross Poulsen, (202) 622–7770; concerning submission of comments and/or requests for a public hearing, Sonya Cruse, (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Section 1.1502–31 applies if one corporation (P) succeeds another corporation (T) under the principles of §1.1502–75(d)(2) or (3) as the common parent of a consolidated group in a group structure change. If a corporation acquires stock of the former common parent in a group structure change, the basis of the members in the former common parent’s stock immediately after the group structure change is generally redetermined to reflect the former common parent’s net asset basis. In general, the group structure change regulations were designed to prevent disparate basis consequences resulting from different forms of transactions that effect a restructuring of a consolidated group that continues to exist following the restructuring.

The IRS and Treasury are concerned that the application of the net asset basis rule may produce inappropriate results on the disposition of stock acquired in a transaction in which, under generally applicable rules, the basis of the acquired stock would otherwise be determined by reference to the acquiror’s cost for the stock. Accordingly, this document proposes to modify the application of the provisions of §1.1502–31 to permit the basis of stock acquired in a recognition transaction to reflect the cost of the acquired stock.

In particular, this document excepts from the application of the net asset basis rule stock acquired in a transaction in which gain or loss was recognized in whole. These regulations are proposed to apply to group structure changes that occur after the date these regulations are published as temporary or final regulations in the Federal Register . With respect to group structure changes that occur on or before the date these regulations are published as temporary or final regulations in the Federal Register and during consolidated return years beginning on or after January 1, 1995, these regulations are proposed to apply at the election of the group.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant

2003-37 I.R.B. 553 September 15, 2003

Par. 2. Section 1.1502–31 is amended by revising paragraphs (b)(2), (d)(2)(ii), (g), and (h) to read as follows:

§1.1502–31 Stock basis after a group structure change.

- - - (b) - - (2) Stock acquisitions . If a corporation acquires stock of the former common parent in a transaction that is a group structure change, the basis of the members in the former common parent’s stock immediately after the group structure change (including any stock of the former common parent owned before the group structure change) that has, or would otherwise have, a basis determined in whole or in part by reference to the basis of the property exchanged for such stock is redetermined in accordance with the results for an asset acquisition described in paragraph (b)(1) of this section. For example, if all of T’s stock is contributed to P in a group structure change to which section 351 applies, P’s basis in T’s stock is T’s net asset basis, rather than the amount determined under section 362. Similarly, if S merges into T in a group structure change described in section 368(a)(2)(E) and P acquires all of the T stock, P’s basis in T’s stock is the basis that P would have in S’s stock under paragraph (b)(1) of this section if T had merged into S in a group structure change described in section 368(a)(2)(D).
- - - (d) - - (2) - - (ii) Stock acquisitions . If less than all of the former common parent’s stock is subject to the redetermination described in paragraph (b)(2) of this section, the percentage of the former common parent’s net asset basis taken into account in the redetermination equals the percentage (by fair market value) of the former common parent’s stock subject to the redetermination. For example, if P owns less than all of the former common parent’s stock immediately after the group structure change and the basis of such stock would otherwise be determined in whole or in part by reference to the basis of the property exchanged for such stock, only an allocable part of the basis determined under this section is reflected in the shares owned by P (and the amount allocable to shares owned

by nonmembers has no effect on the basis of their shares). Alternatively, if P acquired 10 percent of the former common parent’s stock in a transaction in which the stock basis was determined by P’s cost, and P later acquires the remaining 90 percent of the former common parent’s stock in a separate transaction that is described in paragraph (b)(2) of this section, P retains it cost basis in its original stock and the basis of P’s newly acquired shares reflects only an allocable part of the former common parent’s net asset basis.

- - - (g) Examples . For purposes of the examples in this section, unless otherwise stated, all corporations have only one class of stock outstanding, the tax year of all persons is the calendar year, all persons use the accrual method of accounting, the facts set forth the only corporate activity, all transactions are between unrelated persons, and tax liabilities are disregarded. The principles of this section are illustrated by the following examples:

Example 1 . Forward triangular merger . (i) Facts . P is the common parent of one group and T is the common parent of another. T has assets with an aggregate basis of $60 and fair market value of $100 and no liabilities. T’s shareholders have an aggregate basis of $50 in T’s stock. In Year 1, pursuant to a plan, P forms S and T merges into S with the T shareholders receiving $100 of P stock in exchange for their T stock. The transaction is a reorganization described in section 368(a)(2)(D). The transaction is also a reverse acquisition under §1.1502–75(d)(3) because the T shareholders, as a result of owning T’s stock, own more than 50% of the value of P’s stock immediately after the transaction. Thus, the transaction is a group structure change under §1.1502–33(f)(1), and P’s earnings and profits are adjusted to reflect T’s earnings and profits immediately before T ceases to be the common parent of the T group.

(ii) Analysis . Under paragraph (b)(1) of this section, P’s basis in S’s stock is adjusted to reflect T’s net asset basis. Under paragraph (c) of this section, T’s net asset basis is $60, the basis T would have in the stock of a subsidiary under section 358 if T had transferred all of its assets and liabilities to the subsidiary in a transaction to which section 351 applies. Thus, P has a $60 basis in S’s stock.

(iii) Pre-existing S . The facts are the same as in paragraph (i) of this Example 1, except that P has owned the stock of S for several years and P has a $50 basis in the S stock before the merger with T. Under paragraph (b)(1) of this section, P’s $50 basis in S’s stock is adjusted to reflect T’s net asset basis. Thus, P’s basis in S’s stock is $110 ($50 plus $60).

(iv) Excess loss account included in former com- mon parent’s net asset basis . The facts are the same as in paragraph (i) of this Example 1, except that T has two assets, an operating asset with an $80 basis and $90 fair market value, and stock of a subsidiary with a $20 excess loss account and $10 fair market value.

Under paragraph (c) of this section, T’s net asset basis is $60 ($80 minus $20). See sections 351 and 358, and §1.1502–19. Consequently, P has a $60 basis in S’s stock. Under section 362 and §1.1502–19, S has an $80 basis in the operating asset and a $20 excess loss account in the stock of the subsidiary.

(v) Liabilities in excess of basis . The facts are the same as in paragraph (i) of this Example 1, except that T’s assets have a fair market value of $170 (and $60 basis) and are subject to $70 of liabilities. Under paragraph (c) of this section, T’s net asset basis is negative $10 ($60 minus $70). See sections 351 and 358, and §§1.1502–19 and 1.1502–80(d). Thus, P has a $10 excess loss account in S’s stock. Under section 362, S has a $60 basis in its assets (which are subject to $70 of liabilities). (Under paragraph (a)(2) of this section, because the liabilities are taken into account in determining net asset basis under paragraph (c) of this section, the liabilities are not also taken into account as consideration not provided by P under paragraph (d)(1) of this section.)

(vi) Consideration provided by S . The facts are the same as in paragraph (i) of this Example 1, except that P forms S with a $100 contribution at the beginning of Year 1, and during Year 6, pursuant to a plan, S purchases $100 of P stock and T merges into S with the T shareholders receiving P stock in exchange for their T stock. Under paragraph (b)(1) of this section, P’s $100 basis in S’s stock is increased by $60 to reflect T’s net asset basis. Under paragraph (d)(1) of this section, P’s basis in S’s stock is decreased by $100 (the fair market value of the P stock) because the P stock purchased by S and used in the transaction is consideration not provided by P.

(vii) Appreciated asset provided by S . The facts are the same as in paragraph (i) of this Example 1, except that P has owned the stock of S for several years, and the shareholders of T receive $60 of P stock and an asset of S with a $30 adjusted basis and $40 fair market value. S recognizes a $10 gain from the asset under section 1001. Under paragraph (b)(1) of this section, P’s basis in S’s stock is increased by $60 to reflect T’s net asset basis. Under paragraph (d)(1) of this section, P’s basis in S’s stock is decreased by $40 (the fair market value of the asset provided by S). In addition, P’s basis in S’s stock is increased under §1.1502–32(b) by S’s $10 gain.

(viii) Depreciated asset provided by S . The facts are the same as in paragraph (i) of this Example 1, except that P has owned the stock of S for several years, and the shareholders of T receive $60 of P stock and an asset of S with a $50 adjusted basis and $40 fair market value. S recognizes a $10 loss from the asset under section 1001. Under paragraph (b)(1) of this section, P’s basis in S’s stock is increased by $60 to reflect T’s net asset basis. Under paragraph (d)(1) of this section, P’s basis in S’s stock is decreased by $40 (the fair market value of the asset provided by S). In addition, S’s $10 loss is taken into account under §1.1502–32(b) in determining P’s basis adjustments under that section.

Example 2 . Stock acquisition . (i) Facts . P is the common parent of one group and T is the common parent of another. T has assets with an aggregate basis of $60 and fair market value of $100 and no liabilities. T’s shareholders have an aggregate basis of $50 in T’s stock. Pursuant to a plan, P forms S and S acquires all of T’s stock in exchange for P stock in a transaction described in section 368(a)(1)(B). The transaction is

September 15, 2003 554 2003-37 I.R.B.

2003–61 (relating to guidance for taxpayers seeking equitable relief).

Foundations Status of Certain Organizations

Announcement 2003–57¶

The following organizations have failed to establish or have been unable to maintain their status as public charities or as operating foundations. Accordingly, grantors and contributors may not, after this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices under section 508(b) of the Code. This listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following organizations (which have been treated as organizations that are not private foundations described in section 509(a) of the Code) are now classified as private foundations:

7th Precinct Community Council, Inc., New York, NY A & A Foundation for Children,

Stockton, CA Aging Awareness Institute, Inc.,

Long Beach, NY Airship Research in Science and

Education, Inc., Terra Ceia, FL Albanian American Advisory Council,

Inc., Yonkers, NY Allen Temple Development Corporation,

Inc., Tampa, FL Amateur Radio Experimenters Assn.,

Fairlawn, OH American Charities Fund, Inc.,

Indianapolis, IN American Chelation Association, a

Public Education Service Organization, Anaheim, CA American Friends of the Restoration of

the Kuwait Museum of Islamic Art, Inc., Boston, MA Americas Future Leaders,

Denham Springs, LA Angel Center, Goodman, MS Appec, Inc., Brick, NJ A R C Action Recovery Cry International

Christian Assistance, Memphis, TN

also a reverse acquisition under §1.1502–75(d)(3). Thus, the transaction is a group structure change under §1.1502–33(f)(1), and the earnings and profits of P and S are adjusted to reflect T’s earnings and profits immediately before T ceases to be the common parent of the T group.

(ii) Analysis . Under paragraph (d)(4) of this section, although S is not the new common parent of the T group, adjustments must be made to S’s basis in T’s stock in accordance with the principles of this section. Although S’s basis in T’s stock would ordinarily be determined under section 362 by reference to the basis of T’s shareholders in T’s stock immediately before the group structure change, under the principles of paragraph (b)(2) of this section, S’s basis in T’s stock is determined by reference to T’s net asset basis. Thus, S’s basis in T’s stock is $60.

(iii) Higher-tier adjustments . Under paragraph (d)(4) of this section, P’s basis in S’s stock is increased by $60 (to be consistent with the adjustment to S’s basis in T’s stock).

(iv) Cross ownership . The facts are the same as in paragraph (i) of this Example 2, except that several years ago S purchased 10% of T’s stock from an unrelated person for cash and, pursuant to the plan, S acquires the remaining 90% of T’s stock in exchange for P stock. S’s basis in the initial 10% of T’s stock is not redetermined under this section. However, S’s basis in the additional 90% of T’s stock is redetermined under this section. S’s basis in that stock is adjusted to $54 (90% of T’s net asset basis).

(v) Allocable share . The facts are the same as in paragraph (i) of this Example 2, except that P owns only 90% of S’s stock immediately after the group structure change. S’s basis in T’s stock is the same as in paragraph (ii) of this Example 2 . Under paragraph (d)(2) of this section, P’s basis in its S stock is increased by $54 (90% of S’s $60 adjustment).

Example 3 . Taxable stock acquisition . (i) Facts . P is the common parent of one group and T is the common parent of another. T has assets with an aggregate basis of $60 and fair market value of $100 and no liabilities. T’s shareholders have an aggregate basis of $50 in T’s stock. Pursuant to a plan, P acquires all of T’s stock in exchange for $70 of P’s stock and $30 in a transaction that is a group structure change under §1.1502–33(f)(1). P’s basis in its acquired T stock is not determined in whole or in part by reference to the basis of the property exchanged for such stock. (Because of P’s use of cash, the acquisition is not a transaction described in section 368(a)(1)(B).)

(ii) Analysis . The rules of this section do not apply to determine P’s basis in T’s stock. Therefore, P’s basis in T’s stock is $100.

(h) Effective dates - (1) General rule . This section applies to group structure changes that occur after the date these regulations are published as temporary or final regulations in the Federal Register . However, after the date these regulations are published as temporary or final regulations in the Federal Register, a group may apply this section to group structure changes that occur on or before the date these regulations are published as temporary or final regulations in the Federal

Register and in consolidated return years beginning on or after January 1, 1995.

(2) Prior law . For group structure changes that occur on or before the date these regulations are published as temporary or final regulations in the Federal Register and in consolidated return years beginning on or after January 1, 1995, with respect to which the group does not elect to apply the provisions of this section, see §1.1502–31 as contained in the 26 CFR part 1 edition revised as of April 1, 2003. For group structure changes that occur in consolidated return years beginning before January 1, 1995, see §1.1502–31T as contained in the 26 CFR part 1 edition revised as of April 1, 1994.

Robert E. Wenzel, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on July 7, 2003, 8:45 a.m., and published in the issue of the Federal Register for July 8, 2003, 68 F.R. 40579)

New Revision of Publication 971, Innocent Spouse Relief (And Separation of Liability and Equitable Relief) (Revised July 2003.)

Announcement 2003–51

Publication 971 discusses the innocent spouse relief provisions available to taxpayers whose spouses improperly report items or omit items on their tax returns.

A new revision of Publication 971 is now available on the IRS website at www.irs.gov . This revision dated July 2003 replaces the June 2002 revision. This version covers final regulations under Internal Revenue Code section 6015 (relating to guidance for taxpayers requesting relief from joint and several liability).

Paper copies will not be issued for the July 2003 revision. The next revision, which should be out in the fall of 2003, will be available both on the IRS website and in paper copies. That revision will cover part of the final regulations under Internal Revenue Code section 66 (relating to relief from liability arising from community property law) and Revenue Procedure

2003-37 I.R.B. 555 September 15, 2003

Fruits From the Vine, Inc.,

North Canton, OH Gemach Yafehana, New York, NY Global Cultural Link, Inc., Jamaica, NY Global Marketplace Ministries, Inc.,

Woodstock, GA God Is Moving, Inc., Houston, TX God’s True Ministry Outreach, Inc.,

College Park, GA Greater Kelly Development Foundation,

Inc., Kelly Air Force Base, TX Guidance-Hall, Inc., Miami, FL Harris E & I Corporation, Chino, CA Healingworks Institute, Inc.,

Scottsdale, AZ Heartland Homes for Seniors, Inc.,

St. Paul, MN Helen Palmer Enneagram Archive Project,

Berkeley, CA Help for Africa Foundation, Inc.,

North Royalton, OH Helping the Under Privileged Foundation,

Norwalk, CA Higher Bound Company, Harrah, OK Hillcrest ASA Softball Association, Inc.,

Tuscaloosa, AL Holistic Advocates Institute,

Mount Hermon, CA Holy Grounds, Inc., Brookwood, AL Home Away From Home Family Life and

Educational Center, Inc., Hampton, VA Home Delaware County, Inc.,

Boothwyn, PA Homeward Bound Program, Bronx, NY HOPE, Inc., Hollywood, FL Houston Innovation Center, Inc.,

Houston, TX Hudson Foundation for Human

Development, Inc., Bronx, NY Hyperbaric Research Foundation, Inc.,

Boca Raton, FL IAMA Family Life and Educational

Center, Inc., Baltimore, MD Idaho High School Hall of Fame

Foundation, Inc., Meridian, ID Idyllwild Institute, Inc., Sandpoint, ID Independence 1st Owner Corp.,

Kew Gardens, NY Independence 2 ^nd Owner Corp.,

Kew Gardens, NY Information Resources Center, Inc.,

Kissimmee, FL Institute for the Study of Long Term

Economic Trends, Forest Hills, NY Intercommunity Good Shepherd

Association, Whitewater, CA International Children’s Medical

Foundation, Johnson City, TN

Art2Facts, New York, NY Arthur A. Monday Jr., Community

Development Corporation, New Orleans, LA Asianwired Information Services, Inc.,

Rowland Heights, CA Atlanta Technology Library and Museum,

Inc., Atlanta, GA B Team, New York, NY Bangladesh Social & Community

Development Institute USA, Jackson Heights, NY Barsimchap Foundation, Inc.,

Brooklyn, NY Beatrice Foundation for Homeless &

Needy People, Denver, CO Been There-Done That Counseling, Inc.,

Orlando, FL Bells Volunteer Fire Fighters Association,

Bells, TX Belmont Boulevard II Housing

Development Corporation, Bronx, NY Bluesprings Youth Soccer Association,

Inc., Loganville, GA Bronx School for Quality Education, Inc.,

Bronx, NY Brown Youth Development,

Harbor City, CA Calvary Community Development Center,

Inc., Garfield, NJ CASK – Creative Art Space for Kids, Inc.,

Lynbrook, NY Center for Housing & Economic

Opportunities Corporation, Austin, TX Center for National Software Studies,

Reston, VA Cerro Gordo Historical Society,

Keeler, CA Charm and Fteley Neighborhood Block

Association, Bronx, NY Children Counseling Services, Inc.,

Cincinnati, OH Children’s Museum of Buffalo,

Buffalo, NY Chora Ethiopian Center for Educational &

Sports Information, Boston, MA Christian Alliance for Community

Development, Inc., Tucson, AZ Christian Law Enforcement Officers

& Associates Foundation, Inc., Pompano Beach, FL Cincinnati Christian Taekwondo

Association, Cincinnati, OH C L A R A Foundation, Topeka, KS Coachella Valley Public Education

Foundation Spooktacular, La Quinta, CA Cobb Health Partners, Inc., Marietta, GA

Commercial Recycling Council,

Philadelphia, PA Committee for the Fourth R,

Lakewood, OH Commodity Resource Exchange, Inc.,

Rocky Mount, NC Community Consultants, Portsmouth, VA Community in Action Foundation, Inc.,

Thetford, VT Community Outreach for Youth into the

21st Century, Medford, OR Community Roundtable for Family

Preservation, Inc., Mt. Vernon, NY Comprehensive Action Network, Inc.,

Oakland, CA Conservacion de Vivienda en Zones

Historicas, Inc., San Juan, PR Creatures Great and Small, Inc.,

Callicoon Ctr, NY Daru Hijra Modification Halfway House

of New Jersey, Inc., Newark, NJ DAY Cancer Foundation, Long Beach, CA Development Enterprises of Central

Oklahoma, Incorporated, Shawnee, OK Diakonia Prison Ministries,

Corpus Christi, TX Discover Your Dreams Therapeutic

Riding Center, Inc., Fort Fairfield, ME Dobrowolski Family Foundation,

Exton, PA Earth Ed, Brookfield, VT Educational Vision Services-Parent

Advocates, New York, NY El Barrio Broadcasting Corporation,

New York, NY Ethopian Art Heritage Project,

Santa Barbara, CA Fannie Flowers, Inc., Baltimore, MD Fetal IQ Enhancement Studies,

Carmel, CA Fettersville Restoration and Development

Association, Inc., Camden, NJ Finbar Devine Memorial Dinner Corp.,

Brooklyn, NY Firemen’s Relief Benevolent Association,

Fort Worth, TX Fleet Ministries, Inc., Bedford, IN Footprints Day Care Center, Inc.,

Wanakena, NY Foundation for the Preservation of the

Individual, Prairie Grove, AR Foundation of Fresno, Pinedale, CA Foundation to Provide Opportunity for the

Differently Abled, Inc., Cleveland, OH Free Range Theater Company,

New York, NY Friends of the San Fernando Valley Fair,

Burbank, CA

September 15, 2003 556 2003-37 I.R.B.

Presque Isle Psychiatric Associates,

Erie, PA Project New Beginnings, Chicago, IL Promised Land Community Development

Corporation, Newark, NJ Pyramids, Inc., Richland, WA Rainbow, R P Llc, St. Paul, MN Ralph Country Brown Scholarship, Inc.,

Summerville, GA Reach for the Sky, Inc., South Boston, MA Right Step Home Care Services, Inc.,

Brooklyn, NY Riverhead Development Corporation,

Riverhead, NY Rocky H. Aoki Foundation,

New York, NY Room Two Grow Program, Covina, CA Sacramento Community Clinic

Association, Inc., West Sacramento, CA Self Accountable Children’s Society,

Moreno Valley, CA Servcorps, Inc., Farmington, CT Servicing Homeless Adults Released on

Parole, Inc., Yonkers, NY Sisters Society Ministries, Inc.,

Brooklyn, NY Solid Rock Foundation of South Florida,

Inc., Miami, FL Spine & Scoliosis Research Associates,

Inc., Summit, NJ Spiritual Society of Seekers, Inc.,

Long Beach, NY St. James Self-Help Program, Detroit, MI St. Michaels Housing Corporation,

Paterson, NJ Steven Starr Memorial Fund,

Acworth, GA Tabernacle Community Development,

Inc., Pompano Beach, FL Tecolotes of San Diego, San Diego, CA Teenwork Force, Leon, KS Tell It Like It is Ministries,

Thomaston, GA Temple of Praise Ministries,

Arlington, TX Tobe Foundation, Jefferson City, MO Toma Foundation, Austin, TX Transformation Association,

Altadena, CA Under Renovation Family Counseling

Center, Denver, CO Universal Missions, New Orleans, LA Vietnamese Interfaith Council of Northern

California, San Jose, CA Vineland Housing Development

Corporation, Vineland, NJ Vision Manor Assisted Living,

(Young/Elderly), Inc., Atlanta, GA

International Handicapped Service, Inc.,

Las Vegas, NV IOOF Fellows Terrace, Inc.,

Springfield, OH Janus Foundation USA, Inc., Miami, FL Jericho Educational Foundation, Inc.,

Jericho, NY Jewish Deaf Resource Center, Inc.,

New York, NY John and Mildred Medic Wuchenich

Foundation, Redlands, CA John Wesley Village II, Inc.,

Riverhead, NY Joseph Ching Memorial Scholarship

Fund, Hicksville, NY JSKWIC Foundation, W. Richland, WA Judge Harold A. Stevens Law Services

Fund, Inc., New York, NY Jungle Habitat, Inc., Coral Gables, FL Kennedy Danse Ensemble,

White Plains, NY Latino Coalition for Fair Media, Inc.,

Brooklyn, NY Leadership International Women for

Pharmacy, Richmond, VA Legal Ministries, Inc., Carrollton, TX Lincoln Beach Community Revitalization

Project, New Kennsington, PA Lo Society Branch of North Carolina,

Inc., Connelly Springs, NC Lokahi E Hawaii 1, Waimanlo, HI Los Angeles Theatre Arts Community

Youth Academy, Inglewood, CA Lucille Clark Housing Development Fund

Co., Inc., New York, NY M. W. El-Nanchef Foundation,

Grand Blanc, MI Margaret A. Nebel Charitable Trust,

Clinton, MO Media Heritage Group, Inc., Rockford, TN Memphis Uptown Alliance, Inc.,

Memphis, TN Mesopatamia Museum,

Prospect Heights, IL Michael E. & Carol B. Dantley Ministries

Foundation, Inc., Cincinnati, OH Millennium Community Housing Corp.,

Rye, NY Ministerio Accion En Cristo, Inc.,

Tarrytown, NY Monroe County School Music

Association, Inc., Pittsford, NY More Communities in Action,

Fort Worth, TX Mrs. Music, Chicago, IL Mt. Vernon Enrichment Programs, Inc.,

Mt. Vernon, NY

Muscatine Public Library Endowment

Foundation, Muscatine, IA Music at Greenlawn, Ltd.,

E. Northport, NY Nandi House, Inc., Oakland, CA Narrow Way Community Development,

Inc., Elmsford, NY National Affordable Housing Center, Inc.,

Columbus, OH National Council of Supervisors

of Mathematics Charitable Trust, Highlands Ranch, CO National Sorority of Phi Delta Beta

Omicron Chapter Early, Jamaica, NY New Center Community Development

Corporation, Detroit, MI New Hope Youth Coalition Project,

Magee, MS New Jersey Health Care Quality Inst.,

Inc., Edison, NJ New Light Development Corporation

Establishment, Irvington, NJ New York School for Quality Education,

Inc., New York, NY Newton Film Foundation, Inc.,

New York, NY NHA Properties, Inc., Newton, NJ North Carolina Assisted Living

Foundation, Cary, NC Oak Park Community Assistance

Network, Sacramento, CA Oakleaf Forest Youth Council, Inc.,

Norfolk, VA Oh Ottawa, Inc., Port Clinton, OH Opportunities and Enrichment Services,

Inc., Miami, FL OTSS Youth Program - OTSS Gospel

Entertainment, Lancaster, TX Parent Hood, Hawthorne, CA Parents of Murdered Children Outreach

Prog. for Secondary Victim, Shirley, NY Peachtree Christian Church Foundation,

Inc., Atlanta, GA People for Improvements, Inc.,

Pittsburg, CA Perseverence in Space Plus Mass

Foundation, Oakland, CA Pilgrim Rest Charitable Association,

Memphis, TN Pioneers West Historical Society,

Oaklawn, IL Pittsburgh Rebels Girls Softball,

Munhall, PA Plays the Thing Theatre Company, Inc.,

Brooklyn, NY Positive Community Images, Inc.,

New York, NY

2003-37 I.R.B. 557 September 15, 2003

If an organization listed above submits information that warrants the renewal of its classification as a public charity or as a private operating foundation, the Internal Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors and contributors may thereafter rely upon such ruling or determination letter as provided in section 1.509(a)–7 of the Income Tax Regulations. It is not the practice of the Service to announce such revised classification of foundation status in the Internal Revenue Bulletin.

Visions of the Soul V O T S, Inc.,

San Francisco, CA Voices for the Future, Inc., Jamesville, NY Westchester Theater Arts Association,

Inc., Hastings Hdsn, NY Western Pequot Mohegan, Inc.,

East Hartford, CT Williams’s Reach Advance Program, Inc.,

Jersey City, NJ Winterset Fire Fighters Association, Inc.,

Winterset, IA Womens Peace Land, Inc., Romulus, NY World Dynamics, Inc., Arlington, VA World Foundation for Smart

Communities, La Jolla, CA

World Hall of Fame, Chicago, IL World Law Institute, Inc., Cleveland, OH World Outreach Ministries, Inc.,

Newark, CA World Wide Harvest Ministries, Inc.,

Greenville, SC Yad Shaul Yehuda, Inc., New York, NY Yeshiva Yordim Volim, Brooklyn, NY Yonkers Partnership Housing

Development Fund Corporation, Yonkers, NY Youth Center for Cultural Enrichment,

Incorporation, Holly Springs, MS Yu Hwa Chinese School,

San Francisco, CA

September 15, 2003 558 2003-37 I.R.B.

Exceptions & meaning →