[Federal Register Volume 59, Number 195 (Tuesday, October 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24949]


[[Page Unknown]]

[Federal Register: October 11, 1994]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8566]
RIN 1545-AN82

 

General Asset Accounts Under the Accelerated Cost Recovery System

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations on the election to 
maintain general asset accounts for depreciable assets to which section 
168 of the Internal Revenue Code applies. These regulations reflect 
changes to the law made by the Tax Reform Act of 1986. The regulations 
will simplify certain depreciation calculations.

EFFECTIVE DATE: October 11, 1994.
    For dates of applicability of these regulations, see Dates under 
SUPPLEMENTARY INFORMATION.

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

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the requirements of the Paperwork Reduction Act (44 
U.S.C 3504(h)) under control number 1545-1331. The estimated annual 
burden per respondent or recordkeeper varies from .20 to .30 hours, 
depending on individual circumstances, with an estimated average of .25 
hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, 
Washington, DC 20224, and to the Office of Management and Budget, Attn: 
Desk Officer for the Department of the Treasury, Office of Information 
and Regulatory Affairs, Washington, DC 20503.

Background

    On August 31, 1992, the IRS published a notice of proposed 
rulemaking in the Federal Register (57 FR 39374 [PS-55-89, 1992-2 C.B. 
870]) proposing amendments to the Income Tax Regulations (26 CFR part 
1) under section 168(i)(4). These amendments were proposed to reflect 
the amendments made by section 201 of the Tax Reform Act of 1986. The 
preamble to the notice contains an explanation of the proposed 
regulations.
    Written comments responding to the notice were received, and a 
public hearing was held on November 4, 1992. After considering all 
written and oral comments, the proposed regulations under section 
168(i)(4) are adopted as revised by this Treasury decision.

Explanation of Provisions

In General

    The final regulations would simplify the computation of 
depreciation by allowing taxpayers an election to group assets into one 
or more general asset accounts under section 168(i)(4). The assets in 
any particular general asset account are depreciated as a single asset. 
Unlike the rules under section 168 as in existence before enactment of 
the Tax Reform Act of 1986, general asset account treatment is not 
limited to ``mass assets.''
    As required by section 168(i)(4), the final regulations provide 
generally that the amount realized upon the disposition of an asset 
from a general asset account is recognized as ordinary income. In 
addition, special rules are provided for terminating general asset 
account treatment upon certain dispositions. For transactions described 
in section 168(i)(7)(B), the transferee generally is bound by the 
transferor's general asset account election.

Changes to the Proposed Regulations

    This Treasury decision generally adopts the rules in the proposed 
regulations. Certain changes to the proposed regulations have been 
made, however, in response to comments. These changes and the comments 
that were not adopted in the final regulations are discussed below.
    Assets Subject to Recapture. One commentator recommended that the 
proposed regulations be amended to allow general asset account 
treatment for assets qualifying for the credit under section 47 or 48. 
After considering this comment, the IRS and Treasury Department have 
concluded that it is appropriate to allow taxpayers greater flexibility 
in determining what assets will be included in a general asset account. 
Therefore, the proposed rule that prohibits general asset account 
treatment for investment credit property has been deleted. Accordingly, 
under the final regulations, a general asset account may include any 
depreciable asset for which a credit or deduction is allowable.
    A new rule, however, has been added in the final regulations to 
account for any basis increase upon recapture. The final regulations 
provide that upon recapture, the asset is removed from the general 
asset account as of the first day of the taxable year in which the 
recapture event occurs. In addition, corresponding adjustments to the 
unadjusted depreciable basis and depreciation reserve of the account 
must be made. This rule was formulated in view of the limited types of 
property currently eligible for the investment credit. The IRS, 
however, may consider other alternatives to take into account the basis 
increase upon recapture if the scope of property that qualifies for the 
investment credit is expanded.
    Assets Used in a Personal Activity. The final regulations retain 
the rule of the proposed regulations that a general asset account may 
not include an asset if a taxpayer uses the asset both in a trade or 
business (or for the production of income) and in a personal activity 
at any time during the taxable year in which the asset is first placed 
in service by the taxpayer. Consistent with the retention of this rule 
in the final regulations, a new rule has been added providing that an 
asset in a general asset account becomes ineligible for general asset 
account treatment if a taxpayer uses the asset in a personal activity 
in a taxable year after the taxable year the asset is placed in 
service. If this change in use occurs, the final regulations provide 
that the taxpayer must use the method provided in Sec. 1.168(i)-
1(e)(3)(iii)(C) for adjusting a general asset account when an asset 
becomes ineligible for general asset account treatment.
    Assets that Generate Foreign Source Income. A commentator suggested 
that the proposed regulations be amended to allow general asset account 
treatment for assets generating foreign source income.
    In response to this comment, the final regulations allow general 
asset account treatment for assets generating foreign source income. 
If, however, the inclusion of these assets in a general asset account 
results in a substantial distortion of income, the Commissioner may 
disregard the general asset account election and make reallocations of 
income or expense as necessary to clearly reflect income.
    The final regulations provide a rule coordinating the general asset 
account rules with the rules in Sec. 1.8611-9T(g)(3) relating to 
allocation and apportionment of interest expense under the asset 
method. A general asset account will be treated as a single asset for 
purposes of applying the rules in Sec. 1.861-9T(g)(3). If the general 
asset account generates income in more than one separate grouping 
(statutory and residual), then the account is a multiple category 
asset, as defined in Sec. 1.861-9T(g)(3)(ii), and the income yield from 
the general asset account must be computed as if the account were a 
single multiple category asset.
    The final regulations also provide rules for determining the source 
of income from a disposition of an asset in a general asset account. If 
the general asset account includes assets generating both United States 
and foreign source income, any amount of ordinary income, gain, or loss 
recognized on the disposition must be apportioned between United States 
and foreign sources based on the allocation and apportionment of 
depreciation allowed for the general asset account or for the disposed 
asset, as applicable. If the general asset account includes assets that 
generate foreign source income in more than one separate category under 
section 904(d)(1) or another section of the Internal Revenue Code, or 
under a United States income tax treaty that requires the foreign tax 
credit limitation to be determined separately for specified types of 
income, then the amount of ordinary income, gain, or loss recognized on 
the disposition that is treated as foreign source income must be 
allocated and apportioned to the applicable separate category or 
categories.
    Disposition of All Assets or the Last Asset. One commentator 
questioned whether the rule under the proposed regulations that 
provided that a general asset account terminates on the disposition of 
all of the assets in the account or the last asset in the account was 
mandatory. In response to this comment, the final regulations clarify 
that this rule is an optional rule for taxpayers that maintain records 
showing the disposition of assets in a general asset account. The final 
regulations also provide that a taxpayer adopts the rule by reporting 
the gain or loss on the taxpayer's income tax return for the taxable 
year in which the disposition of all of the assets, or the last asset, 
in the general asset account occurs.
    Qualifying Dispositions. Under the proposed regulations, a 
qualifying disposition of an asset in a general asset account occurs 
when the asset is disposed of as a direct result of a cessation, 
termination, curtailment, or disposition of a business, manufacturing 
or other income producing process, operation, facility, plant, or other 
unit (other than by transfer to a supplies, scrap, or similar account). 
One commentator recommended that the final regulations should provide 
an example showing that the sale of an undivided interest in mineral 
property, along with the related operating equipment, is a curtailment 
of a taxpayer's business and, thus, constitutes a qualifying 
disposition. A curtailment was intended to be limited to a genuine 
business contraction and not to include transactions involving the sale 
of an undivided interest, other than the taxpayer's entire interest in 
assets. To avoid any further misinterpretation, the final regulations 
delete the term ``curtailment.'' The final regulations also clarify 
that a taxpayer adopts the rule to terminate general asset account 
treatment for an asset in a qualifying disposition by reporting the 
gain, loss, or other deduction on the taxpayer's income tax return for 
the taxable year in which the qualifying disposition occurs.
    Anti-abuse rule. The final regulations add examples of transactions 
subject to the anti-abuse rule.
    Election. Some commentators noted that the proposed regulations do 
not address whether the election is made by the common parent 
corporation or each member of an affiliated group, by a partnership or 
its partners, or by an S corporation or the S corporation shareholders. 
The final regulations clarify that the election is made by each member 
of an affiliated group, by the partnership, or by the S corporation, 
respectively.
    The proposed regulations provide that the election to apply the 
regulations generally is binding on the taxpayer for computing taxable 
income as well as computing alternative minimum taxable income. A 
commentator suggested that the final regulations should allow taxpayers 
the option to make the election for either the regular income tax, the 
alternative minimum tax, or both. This rule was not adopted because of 
the separate and parallel nature of the regular tax and alternative 
minimum tax systems. Except as otherwise provided by statute or 
regulations, all Code provisions that apply in determining the regular 
taxable income of a taxpayer also apply in determining the alternative 
minimum taxable income of the taxpayer. The final regulations have not 
been expanded to include any exceptions. Consequently, an election to 
apply section 168(i)(4) for determining regular taxable income also 
applies for determining alternative minimum taxable income. Therefore, 
the language ``as well as alternative minimum taxable income'' in the 
proposed rule is redundant and has been deleted from the final 
regulations.
    Effective Date. For assets placed in service after December 31, 
1986, in taxable years ending before the effective date of the final 
regulations, one commentator recommended that the final regulations 
should provide a retroactive election or, alternatively, a prospective 
election. Another commentator also requested a provision allowing a 
prospective election. The final regulations retain the rule of the 
proposed regulations that, for prior periods, a taxpayer may use any 
reasonable method that is consistently applied to the taxpayer's 
general asset accounts.

Dates

    The final regulations are effective for property placed in service 
in taxable years ending on or after October 11, 1994. For property 
placed in service after December 31, 1986, in taxable years ending 
before October 11, 1994, the IRS will allow any reasonable method that 
is consistently applied to the taxpayer's general asset accounts.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to 
these regulations, and, therefore, a Regulatory Flexibility Analysis is 
not required. Pursuant to section 7805(f) of the Internal Revenue Code, 
the notice of proposed rulemaking preceding these regulations was 
submitted to the Small Business Administration for comment on its 
impact on small business.

Drafting Information

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

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

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

PART 1--INCOME TAXES

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

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

    Section 1.168(i)-1 also issued under 26 U.S.C. 168(i)(4). * * *
    Par. 2. Section 1.56(g)-1 is amended by adding a sentence at the 
end of paragraph (b), introductory text, to read as follows:


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

* * * * *
    (b) * * * See Sec. 1.168(i)-1(k) for an election to use general 
asset accounts.
* * * * *
    Par. 3. Sections 1.168(i)-0 and 1.168(i)-1 are added to read as 
follows:


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

    This section lists the major paragraphs contained in Sec. 1.168(i)-
1.

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

(a) Scope.
(b) Definitions.
    (1) Unadjusted depreciable basis.
    (2) Unadjusted depreciable basis of the general asset account.
    (3) Adjusted depreciable basis of the general asset account.
    (4) Expensed cost.
(c) Establishment of general asset accounts.
    (1) Assets eligible for general asset accounts.
    (i) General rules.
    (ii) Special rules for assets generating foreign source income.
    (2) Grouping assets in general asset accounts.
    (i) General rules.
    (ii) Special rules.
(d) Determination of depreciation allowance.
    (1) In general.
    (2) Special rule for passenger automobiles.
(e) Disposition of an asset from a general asset account.
    (1) Scope.
    (2) General rules for a disposition.
    (i) No immediate recovery of basis.
    (ii) Treatment of amount realized.
    (iii) Effect of disposition on a general asset account.
    (iv) Coordination with nonrecognition provisions.
    (v) Examples.
    (3) Special rules.
    (i) In general.
    (ii) Disposition of all assets remaining in a general asset 
account.
    (iii) Disposition of an asset in a qualifying disposition.
    (iv) Transactions subject to section 168(i)(7).
    (v) Anti-abuse rule.
(f) Assets generating foreign source income.
    (1) In general.
    (2) Source of ordinary income, gain, or loss.
    (i) Source determined by allocation and apportionment of 
depreciation allowed.
    (ii) Formula for determining foreign source income, gain, or loss.
    (3) Section 904(d) separate categories.
(g) Assets subject to recapture.
(h) Changes in use.
    (1) Conversion to personal use.
    (2) Other changes in use.
(i) Identification of disposed or converted asset.
(j) Effect of adjustments on prior dispositions.
(k) Election.
    (1) Irrevocable election.
    (2) Time for making election.
    (3) Manner of making election.
(l) Effective date.


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

    (a) Scope. This section provides rules for general asset accounts 
under section 168(i)(4). The provisions of this section apply only to 
assets for which an election has been made under paragraph (k) of this 
section.
    (b) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Unadjusted depreciable basis is the basis of an asset for 
purposes of section 1011 without regard to any adjustments described in 
sections 1016(a)(2) and (3).
    (2) Unadjusted depreciable basis of the general asset account is 
the sum of the unadjusted depreciable bases of all assets included in 
the general asset account.
    (3) Adjusted depreciable basis of the general asset account is the 
unadjusted depreciable basis of the general asset account less the 
adjustments to basis described in sections 1016(a)(2) and (3).
    (4) Expensed cost is the amount of any allowable credit or 
deduction treated as a deduction allowable for depreciation or 
amortization for purposes of section 1245 (for example, a credit 
allowable under section 30 or a deduction allowable under section 179, 
179A, or 190).
    (c) Establishment of general asset accounts--(1) Assets eligible 
for general asset accounts--(i) General rules. Assets that are subject 
to either the general depreciation system of section 168(a) or the 
alternative depreciation system of section 168(g) may be accounted for 
in one or more general asset accounts. An asset may be included in a 
general asset account only to the extent of the asset's unadjusted 
depreciable basis (for example, if, in 1995, a taxpayer places in 
service an asset that costs $20,000 and elects under section 179 to 
expense $17,500 of that asset's cost, the unadjusted depreciable basis 
of the asset is $2,500 and, therefore, only $2,500 of the asset's cost 
may be included in a general asset account). However, an asset is not 
to be included in a general asset account if the asset is used both in 
a trade or business (or for the production of income) and in a personal 
activity at any time during the taxable year in which the asset is 
first placed in service by the taxpayer.
    (ii) Special rules for assets generating foreign source income--(A) 
Assets that generate foreign source income, both United States and 
foreign source income, or combined gross income of a FSC (as defined in 
section 922), DISC (as defined in section 992(a)), or possessions 
corporation (as defined in section 936) and its related supplier, may 
be included in a general asset account if the requirements of paragraph 
(c)(2)(i) of this section are satisfied. If, however, the inclusion of 
these assets in a general asset account results in a substantial 
distortion of income, the Commissioner may disregard the general asset 
account election and make any reallocations of income or expense 
necessary to clearly reflect income.
    (B) A general asset account shall be treated as a single asset for 
purposes of applying the rules in Sec. 1.861- 9T(g)(3) (relating to 
allocation and apportionment of interest expense under the asset 
method). A general asset account that generates income in more than one 
grouping of income (statutory and residual) is a multiple category 
asset (as defined in Sec. 1.861-9T(g)(3)(ii)), and the income yield 
from the general asset account must be determined by applying the rules 
for multiple category assets as if the general asset account were a 
single asset.
    (2) Grouping assets in general asset accounts--(i) General rules. 
If a taxpayer makes the election under paragraph (k) of this section, 
assets that are subject to the election are grouped into one or more 
general asset accounts. Assets that are eligible to be grouped into a 
single general asset account may be divided into more than one general 
asset account. Each general asset account must include only assets 
that--
    (A) Have the same asset class (for further guidance, see Rev. Proc. 
87-56, 1987-2 C.B. 674, and Sec. 601.601(d)(2)(ii)(b) of this chapter);
    (B) Have the same applicable depreciation method;
    (C) Have the same applicable recovery period;
    (D) Have the same applicable convention; and
    (E) Are placed in service by the taxpayer in the same taxable year.
    (ii) Special rules. In addition to the general rules in paragraph 
(c)(2)(i) of this section, the following rules apply when establishing 
general asset accounts--
    (A) Assets without an asset class, but with the same 
characteristics described in paragraphs (c)(2)(i)(B), (C), (D), and (E) 
of this section, may be grouped into a general asset account;
    (B) Assets subject to the mid-quarter convention may only be 
grouped into a general asset account with assets that are placed in 
service in the same quarter of the taxable year;
    (C) Assets subject to the mid-month convention may only be grouped 
into a general asset account with assets that are placed in service in 
the same month of the taxable year; and
    (D) Passenger automobiles for which the depreciation allowance is 
limited under section 280F(a) must be grouped into a separate general 
asset account.
    (d) Determination of depreciation allowance--(1) In general. 
Depreciation allowances are determined for each general asset account 
by using the applicable depreciation method, recovery period, and 
convention for the assets in the account. The depreciation allowances 
are recorded in a depreciation reserve account for each general asset 
account. The allowance for depreciation under this section constitutes 
the amount of depreciation allowable under section 167(a).
    (2) Special rule for passenger automobiles. For purposes of 
applying section 280F(a), the depreciation allowance for a general 
asset account established for passenger automobiles is limited for each 
taxable year to the amount prescribed in section 280F(a) multiplied by 
the excess of the number of automobiles originally included in the 
account over the number of automobiles disposed of during the taxable 
year or in any prior taxable year in a transaction described in 
paragraph (e)(3)(iii) (disposition of an asset in a qualifying 
disposition), (e)(3)(iv) (transactions subject to section 168(i)(7)), 
(e)(3)(v) (anti-abuse rule), (g) (assets subject to recapture), or 
(h)(1) (conversion to personal use) of this section.
    (e) Disposition of an asset from a general asset account--(1) 
Scope. This paragraph (e) provides rules applicable to dispositions of 
assets included in a general asset account. For purposes of this 
paragraph (e), an asset in a general asset account is disposed of when 
ownership of the asset is transferred or when the asset is permanently 
withdrawn from use either in the taxpayer's trade or business or in the 
production of income. A disposition includes the sale, exchange, 
retirement, physical abandonment, or destruction of an asset. A 
disposition also occurs when an asset is transferred to a supplies, 
scrap, or similar account. A disposition does not include, however, the 
retirement of a structural component of real property.
    (2) General rules for a disposition--(i) No immediate recovery of 
basis. Immediately before a disposition of any asset in a general asset 
account, the asset is treated as having an adjusted basis of zero for 
purposes of section 1011. Therefore, no loss is realized upon the 
disposition of an asset from the general asset account. Similarly, 
where an asset is disposed of by transfer to a supplies, scrap, or 
similar account, the basis of the asset in the supplies, scrap, or 
similar account will be zero.
    (ii) Treatment of amount realized. Any amount realized on a 
disposition is recognized as ordinary income (notwithstanding any other 
provision of subtitle A of the Internal Revenue Code (Code)) to the 
extent the sum of the unadjusted depreciable basis of the general asset 
account and any expensed cost (as defined in paragraph (b)(4) of this 
section) for assets in the account exceeds any amounts previously 
recognized as ordinary income upon the disposition of other assets in 
the account. The recognition and character of any excess amount 
realized are determined under other applicable provisions of the Code 
(other than sections 1245 and 1250 or provisions of the Code that treat 
gain on a disposition as subject to section 1245 or 1250).
    (iii) Effect of disposition on a general asset account. The 
unadjusted depreciable basis and the depreciation reserve of the 
general asset account are not affected as a result of a disposition of 
an asset from the general asset account.
    (iv) Coordination with nonrecognition provisions. For purposes of 
determining the basis of an asset acquired in a transaction described 
in paragraph (e)(3)(iii)(B)(4) of this section (relating to certain 
nonrecognition provisions), the amount of ordinary income recognized 
under this paragraph (e)(2) is treated as the amount of gain recognized 
on the disposition.
    (v) Examples. The following examples illustrate the application of 
this paragraph (e)(2).

    Example 1. (i) R, a calendar-year corporation, maintains one 
general asset account for ten machines. The machines cost a total of 
$10,000 and were placed in service in June 1995. Of the ten 
machines, one machine costs $8,200 and nine machines cost a total of 
$1,800. Assume this general asset account has a depreciation method 
of 200 percent declining balance, a recovery period of 5 years, and 
a half-year convention. R does not make a section 179 election for 
any of the machines. As of January 1, 1996, the depreciation reserve 
of the account is $2,000 [(($10,000-$0)  x  40%)/2].
    (ii) On February 8, 1996, R sells the machine that cost $8,200 
to an unrelated party for $9,000. Under paragraph (e)(2)(i) of this 
section, this machine has an adjusted basis of zero.
    (iii) On its 1996 tax return, R recognizes the amount realized 
of $9,000 as ordinary income because such amount does not exceed the 
unadjusted depreciable basis of the general asset account ($10,000), 
plus any expensed cost for assets in the account ($0), less amounts 
previously recognized as ordinary income ($0). Moreover, the 
unadjusted depreciable basis and depreciation reserve of the account 
are not affected by the disposition of the machine. Thus, the 
depreciation allowance for the account in 1996 is $3,200 
(($10,000-$2,000) x 40%).

    Example 2. (i) The facts are the same as in Example 1. In 
addition, on June 4, 1997, R sells seven machines to an unrelated 
party for a total of $1,100. In accordance with paragraph (e)(2)(i) 
of this section, these machines have an adjusted basis of zero.
    (ii) On its 1997 tax return, R recognizes $1,000 as ordinary 
income (the unadjusted depreciable basis of $10,000, plus the 
expensed cost of $0, less the amount of $9,000 previously recognized 
as ordinary income). The recognition and character of the excess 
amount realized of $100 ($1,100-$1,000) are determined under 
applicable provisions of the Code other than section 1245 (such as 
section 1231). Moreover, the unadjusted depreciable basis and 
depreciation reserve of the account are not affected by the 
disposition of the machines. Thus, the depreciation allowance for 
the account in 1997 is $1,920 (($10,000-$5,200) x 40%).

    (3) Special rules--(i) In general. This paragraph (e)(3) provides 
the rules for terminating general asset account treatment upon certain 
dispositions. While the rules under paragraphs (e)(3)(ii) and (iii) of 
this section are optional rules, the rules under paragraphs (e)(3)(iv) 
and (v) of this section are mandatory rules. A taxpayer applies 
paragraph (e)(3)(ii) or (iii) of this section by reporting the gain, 
loss, or other deduction on the taxpayer's timely filed (including 
extensions) income tax return for the taxable year in which the 
disposition occurs. For purposes of applying paragraph (e)(3)(iii) 
through (v) of this section, see paragraph (i) of this section for 
identifying the unadjusted depreciable basis of a disposed asset.
    (ii) Disposition of all assets remaining in a general asset 
account--(A) Optional termination of a general asset account. Upon the 
disposition of all of the assets, or the last asset, in a general asset 
account, a taxpayer may apply this paragraph (e)(3)(ii) to recover the 
adjusted depreciable basis of the general asset account (rather than 
having paragraph (e)(2) of this section apply). Under this paragraph 
(e)(3)(ii), the general asset account terminates and the amount of gain 
or loss for the general asset account is determined under section 
1001(a) by taking into account the adjusted depreciable basis of the 
general asset account at the time of the disposition. The recognition 
and character of the gain or loss are determined under other applicable 
provisions of the Code, except that the amount of gain subject to 
section 1245 (or section 1250) is limited to the excess of the 
depreciation allowed or allowable for the general asset account, 
including any expensed cost (or the excess of the additional 
depreciation allowed or allowable for the general asset account), over 
any amounts previously recognized as ordinary income under paragraph 
(e)(2) of this section.
    (B) Example. The following example illustrates the application of 
this paragraph (e)(3)(ii).

    Example. (i) T, a calendar-year corporation, maintains a general 
asset account for 1,000 calculators. The calculators cost a total of 
$60,000 and were placed in service in 1995. Assume this general 
asset account has a depreciation method of 200 percent declining 
balance, a recovery period of 5 years, and a half-year convention. T 
does not make a section 179 election for any of the calculators. In 
1996, T sells 200 of the calculators to an unrelated party for a 
total of $10,000 and recognizes the $10,000 as ordinary income in 
accordance with paragraph (e)(2) of this section.
    (ii) On March 26, 1997, T sells the remaining calculators in the 
general asset account to an unrelated party for $35,000. T chooses 
to apply paragraph (e)(3)(ii) of this section. As a result, the 
account terminates and gain or loss is determined for the account.
    (iii) On the date of disposition, the adjusted depreciable basis 
of the account is $23,040 (unadjusted depreciable basis of $60,000 
less the depreciation allowed or allowable of $36,960). Thus, in 
1997, T recognizes gain of $11,960 (amount realized of $35,000 less 
the adjusted depreciable basis of $23,040). The gain of $11,960 is 
subject to section 1245 to the extent of the depreciation allowed or 
allowable for the account (plus the expensed cost for assets in the 
account) less the amounts previously recognized as ordinary income 
($36,960 + $0 - $10,000 = $26,960). As a result, the entire gain of 
$11,960 is subject to section 1245.

    (iii) Disposition of an asset in a qualifying disposition--(A) 
Optional determination of the amount of gain, loss, or other deduction. 
In the case of a qualifying disposition of an asset (described in 
paragraph (e)(3)(iii)(B) of this section), a taxpayer may apply this 
paragraph (e)(3)(iii) (rather than having paragraph (e)(2) of this 
section apply). Under this paragraph (e)(3)(iii), general asset account 
treatment for the asset terminates as of the first day of the taxable 
year in which the qualifying disposition occurs, and the amount of 
gain, loss, or other deduction for the asset is determined by taking 
into account the asset's adjusted basis. The adjusted basis of the 
asset at the time of the disposition equals the unadjusted depreciable 
basis of the asset less the depreciation allowed or allowable for the 
asset, computed by using the depreciation method, recovery period, and 
convention applicable to the general asset account in which the asset 
was included. The recognition and character of the gain, loss, or other 
deduction are determined under other applicable provisions of the Code, 
except that the amount of gain subject to section 1245 (or section 
1250) is limited to the lesser of--
    (1) The depreciation allowed or allowable for the asset, including 
any expensed cost (or the additional depreciation allowed or allowable 
for the asset); or
    (2) The excess of--
    (i) The original unadjusted depreciable basis of the general asset 
account plus, in the case of section 1245 property originally included 
in the general asset account, any expensed cost; over
    (ii) The cumulative amounts of gain previously recognized as 
ordinary income under either paragraph (e)(2) of this section or 
section 1245 (or section 1250).
    (B) Qualifying dispositions. A qualifying disposition is a 
disposition that does not involve all the assets, or the last asset, 
remaining in a general asset account and that is--
    (1) A direct result of a fire, storm, shipwreck, or other casualty, 
or from theft;
    (2) A charitable contribution for which a deduction is allowable 
under section 170;
    (3) A direct result of a cessation, termination, or disposition of 
a business, manufacturing or other income producing process, operation, 
facility, plant, or other unit (other than by transfer to a supplies, 
scrap, or similar account); or
    (4) A transaction, other than a transaction described in paragraph 
(e)(3)(iv) of this section (pertaining to transactions subject to 
section 168(i)(7)), to which a nonrecognition section of the Code 
applies (determined without regard to this section), such as section 
1031 or 1033.
    (C) Effect of a qualifying disposition on a general asset account. 
If the taxpayer applies this paragraph (e)(3)(iii) to a qualifying 
disposition of an asset, then--
    (1) The asset is removed from the general asset account as of the 
first day of the taxable year in which the qualifying disposition 
occurs;
    (2) The unadjusted depreciable basis of the general asset account 
is reduced by the unadjusted depreciable basis of the asset as of the 
first day of the taxable year in which the disposition occurs;
    (3) The depreciation reserve of the general asset account is 
reduced by the depreciation allowed or allowable for the asset as of 
the end of the taxable year immediately preceding the year of 
disposition, computed by using the depreciation method, recovery 
period, and convention applicable to the general asset account in which 
the asset was included; and
    (4) For purposes of determining the amount of gain realized on 
subsequent dispositions that is subject to ordinary income treatment 
under paragraph (e)(2)(ii) of this section, the amount of any expensed 
cost with respect to the asset is disregarded.
    (D) Example. The provisions of this paragraph (e)(3)(iii) are 
illustrated by the following example.

    Example. (i) Z, a calendar-year corporation, maintains one 
general asset account for 12 machines. Each machine costs $15,000 
and was placed in service in 1995. Of the 12 machines, nine machines 
that cost a total of $135,000 are used in Z's Kentucky plant, and 
three machines that cost a total of $45,000 are used in Z's Ohio 
plant. Assume this general asset account has a depreciation method 
of 200 percent declining balance, a recovery period of 5 years, and 
a half-year convention. Z does not make a section 179 election for 
any of the machines. As of January 1, 1997, the depreciation reserve 
for the account is $93,600.
    (ii) On May 27, 1997, Z sells its entire manufacturing plant in 
Ohio to an unrelated party. The sales proceeds allocated to each of 
the three machines at the Ohio plant is $5,000. Because this 
transaction is a qualifying disposition under paragraph 
(e)(3)(iii)(B)(3) of this section, Z chooses to apply paragraph 
(e)(3)(iii) of this section.
    (iii) For Z's 1997 return, the depreciation allowance for the 
account is computed as follows. As of December 31, 1996, the 
depreciation allowed or allowable for the three machines at the Ohio 
plant is $23,400. Thus, as of January 1, 1997, the unadjusted 
depreciable basis of the account is reduced from $180,000 to 
$135,000 ($180,000 less the unadjusted depreciable basis of $45,000 
for the three machines), and the depreciation reserve of the account 
is decreased from $93,600 to $70,200 ($93,600 less the depreciation 
allowed or allowable of $23,400 for the three machines as of 
December 31, 1996). Consequently, the depreciation allowance for the 
account in 1997 is $25,920 (($135,000 - $70,200)  x  40%).
    (iv) For Z's 1997 return, gain or loss for each of the three 
machines at the Ohio plant is determined as follows. The 
depreciation allowed or allowable in 1997 for each machine is $1,440 
[(($15,000 - $7,800)  x  40%) / 2]. Thus, the adjusted basis of each 
machine under section 1011 is $5,760 (the adjusted depreciable basis 
of $7,200 removed from the account less the depreciation allowed or 
allowable of $1,440 in 1997). As a result, the loss recognized in 
1997 for each machine is $760 ($5,000 - $5,760), which is subject to 
section 1231.

    (iv) Transactions subject to section 168(i)(7). If an asset in a 
general asset account is transferred in a transaction described in 
section 168(i)(7)(B) (pertaining to treatment of transferees in certain 
nonrecognition transactions), the transferor must remove the 
transferred asset from the general asset account as of the first day of 
the taxable year in which the transaction occurs. In addition, the 
adjustments to the general asset account described in paragraph 
(e)(3)(iii)(C)(2) through (4) of this section must be made. The 
transferee is bound by the transferor's election under paragraph (k) of 
this section with respect to so much of the asset's basis in the hands 
of the transferee as does not exceed the asset's adjusted basis in the 
hands of the transferor. If all of the assets, or the last asset, in a 
general asset account are transferred, the transferee's basis in the 
assets or asset transferred is equal to the adjusted depreciable basis 
of the general asset account as of the beginning of the transferor's 
taxable year in which the transaction occurs, decreased by the amount 
of depreciation allocable to the transferor for the year of the 
transfer.
    (v) Anti-abuse rule--(A) In general. If an asset in a general asset 
account is disposed of by a taxpayer in a transaction described in 
paragraph (e)(3)(v)(B) of this section, general asset account treatment 
for the asset terminates as of the first day of the taxable year in 
which the disposition occurs. Consequently, the taxpayer must determine 
the amount of gain, loss, or other deduction attributable to the 
disposition in the manner described in paragraph (e)(3)(iii)(A) of this 
section (notwithstanding that paragraph (e)(3)(iii)(A) of this section 
is an optional rule) and must make the adjustments to the general asset 
account described in paragraph (e)(3)(iii)(C)(1) through (4) of this 
section.
    (B) Abusive transactions. A transaction is described in this 
paragraph (e)(3)(v)(B) if the transaction is not described in paragraph 
(e)(3)(iv) of this section and the transaction is entered into, or 
made, with a principal purpose of achieving a tax benefit or result 
that would not be available absent an election under this section. 
Examples of these types of transactions include--
    (1) A transaction entered into with a principal purpose of shifting 
income or deductions among taxpayers in a manner that would not be 
possible absent an election under this section in order to take 
advantage of differing effective tax rates among the taxpayers; or
    (2) An election made under this section with a principal purpose of 
disposing of an asset from a general asset account in order to utilize 
an expiring net operating loss or credit. The fact that a taxpayer with 
a net operating loss carryover or a credit carryover transfers an asset 
to a related person or transfers an asset pursuant to an arrangement 
where the asset continues to be used (or is available for use) by the 
taxpayer pursuant to a lease (or otherwise) indicates, absent strong 
evidence to the contrary, that the transaction is described in this 
paragraph (e)(3)(v)(B).
    (f) Assets generating foreign source income--(1) In general. This 
paragraph (f) provides the rules for determining the source of any 
income, gain, or loss recognized, and the appropriate section 904(d) 
separate limitation category or categories for any foreign source 
income, gain, or loss recognized, on a disposition (within the meaning 
of paragraph (e)(1) of this section) of an asset in a general asset 
account that consists of assets generating both United States and 
foreign source income. These rules apply only to a disposition to which 
paragraph (e)(2) (general disposition rules), (e)(3)(ii) (disposition 
of all assets remaining in a general asset account), (e)(3)(iii) 
(disposition of an asset in a qualifying disposition), or (e)(3)(v) 
(anti-abuse rule) of this section applies.
    (2) Source of ordinary income, gain, or loss--(i) Source determined 
by allocation and apportionment of depreciation allowed. The amount of 
any ordinary income, gain, or loss that is recognized on the 
disposition of an asset in a general asset account must be apportioned 
between United States and foreign sources based on the allocation and 
apportionment of the--
    (A) Depreciation allowed for the general asset account as of the 
end of the taxable year in which the disposition occurs if paragraph 
(e)(2) of this section applies to the disposition;
    (B) Depreciation allowed for the general asset account as of the 
time of the disposition if the taxpayer applies paragraph (e)(3)(ii) of 
this section to the disposition of all of the assets, or the last 
asset, in the general asset account; or
    (C) Depreciation allowed for the disposed asset for only the 
taxable year in which the disposition occurs if the taxpayer applies 
paragraph (e)(3)(iii) to the disposition of the asset in a qualifying 
disposition or if the asset is disposed in a transaction described in 
paragraph (e)(3)(v) (anti-abuse rule) of this section.
    (ii) Formula for determining foreign source income, gain, or loss. 
The amount of ordinary income, gain, or loss recognized on the 
disposition that shall be treated as foreign source income, gain, or 
loss must be determined under the formula in this paragraph (f)(2)(ii). 
For purposes of this formula, the allowed depreciation deductions are 
determined for the applicable time period provided in paragraph 
(f)(2)(i) of this section. The formula is: 

                                                                                                                
                                                                                Allowed Depreciation Deductions 
                                                                                  Allocated and Apportioned to  
 Foreign Source Income, Gain, or        Total Ordinary Income, Gain, or           Foreign Source Income Total   
 Loss from the Disposition of an    =  Loss from Disposition of an Asset    x   Allowed Depreciation Deductions 
              Asset                                                             for the General Asset Account or
                                                                                   for the Disposed Asset (as   
                                                                                          applicable)           
                                                                                                                
                                                                                                                
                                                                                                                

    (3) Section 904(d) separate categories. If the assets in the 
general asset account generate foreign source income in more than one 
separate category under section 904(d)(1) or another section of the 
Code (for example, income treated as foreign source income under 
section 904(g)(10)), or under a United States income tax treaty that 
requires the foreign tax credit limitation to be determined separately 
for specified types of income, the amount of ``foreign source income, 
gain, or loss from the disposition of an asset'' (as determined under 
the formula in paragraph (f)(2)(ii) of this section) must be allocated 
and apportioned to the applicable separate category or categories under 
the formula in this paragraph (f)(3). For purposes of this formula, the 
allowed depreciation deductions are determined for the applicable time 
period provided in paragraph (f)(2)(i) of this section. The formula is: 


                                                                                                                
                                                                                Allowed Depreciation Deductions 
                                                                                 Allocated and Apportioned to a 
 Foreign Source Income, Gain, or    =    Forign Source Income, Gain, or     x   Separate Category Total Allowed 
   Loss In a Separate Category          Loss from the Disposition of an           Depreciation Deductions and   
                                                     Asset                       Apportioned to Foreign Source  
                                                                                             Income             
                                                                                                                
                                                                                                                
                                                                                                                

    (g) Assets subject to recapture. If the basis of an asset in a 
general asset account is increased as a result of the recapture of any 
allowable credit or deduction (for example, the basis adjustment for 
the recapture amount under section 30(d)(2), 50(c)(2), 179(d)(10), or 
179A(e)(4)), general asset account treatment for the asset terminates 
as of the first day of the taxable year in which the recapture event 
occurs. Consequently, the taxpayer must remove the asset from the 
general asset account as of that day and must make the adjustments to 
the general asset account described in paragraph (e)(3)(iii)(C)(2) 
through (4) of this section.
    (h) Changes in use--(1) Conversion to personal use. An asset in a 
general asset account becomes ineligible for general asset account 
treatment if a taxpayer uses the asset in a personal activity during a 
taxable year. Upon a conversion to personal use, the taxpayer must 
remove the asset from the general asset account as of the first day of 
the taxable year in which the change in use occurs and must make the 
adjustments to the general asset account described in paragraph 
(e)(3)(iii)(C)(2) through (4) of this section.
    (2) Other changes in use. [Reserved].
    (i) Identification of disposed or converted asset. A taxpayer may 
use any reasonable method that is consistently applied to the 
taxpayer's general asset accounts for purposes of determining the 
unadjusted depreciable basis of a disposed or converted asset in a 
transaction described in paragraph (e)(3)(iii) (disposition of an asset 
in a qualifying disposition), (e)(3)(iv) (transactions subject to 
section 168(i)(7)), (e)(3)(v) (anti-abuse rule), (g) (assets subject to 
recapture), or (h)(1) (conversion to personal use) of this section.
    (j) Effect of adjustments on prior dispositions. The adjustments to 
a general asset account under paragraph (e)(3)(iii), (e)(3)(iv), 
(e)(3)(v), (g), or (h)(1) of this section have no effect on the 
recognition and character of prior dispositions subject to paragraph 
(e)(2) of this section.
    (k) Election--(1) Irrevocable election. If a taxpayer makes an 
election under this paragraph (k), the taxpayer consents to, and agrees 
to apply, all of the provisions of this section to the assets included 
in a general asset account. Except as provided in paragraph 
(c)(1)(ii)(A), (e)(3), (g), or (h)(1) of this section, an election made 
under this section is irrevocable and will be binding on the taxpayer 
for computing taxable income for the taxable year for which the 
election is made and for all subsequent taxable years. An election 
under this paragraph (k) is made separately by each person owning an 
asset to which this section applies (for example, by each member of a 
consolidated group, at the partnership level (and not by the partner 
separately), or at the S corporation level (and not by the shareholder 
separately)).
    (2) Time for making election. The election to apply this section 
shall be made on the taxpayer's timely filed (including extensions) 
income tax return for the taxable year in which the assets included in 
the general asset account are placed in service by the taxpayer.
    (3) Manner of making election. In the year of election, a taxpayer 
makes the election under this section by typing or legibly printing at 
the top of the Form 4562, ``GENERAL ASSET ACCOUNT ELECTION MADE UNDER 
SECTION 168(i)(4),'' or in the manner provided for on Form 4562 and its 
instructions. The taxpayer shall maintain records (for example, 
``General Asset Account #1 - all 1995 additions in asset class 00.11 
for Salt Lake City, Utah facility'') that identify the assets included 
in each general asset account, that establish the unadjusted 
depreciable basis and depreciation reserve of the general asset 
account, and that reflect the amount realized during the taxable year 
upon dispositions from each general asset account. (But see section 
179(c) and Sec. 1.179-5 for the recordkeeping requirements for section 
179 property.) The taxpayer's recordkeeping practices should be 
consistently applied to the general asset accounts. If Form 4562 is 
revised or renumbered, any reference in this section to that form shall 
be treated as a reference to the revised or renumbered form.
    (l) Effective date. This section applies to depreciable assets 
placed in service in taxable years ending on or after October 11, 1994. 
For depreciable assets placed in service after December 31, 1986, in 
taxable years ending before October 11, 1994, the Internal Revenue 
Service will allow any reasonable method that is consistently applied 
to the taxpayer's general asset accounts.

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

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

    Authority: 26 U.S.C. 7805.


Sec. 602.101(c)  [Amended]

    Par. 5. Section 602.101(c) is amended by adding the entry 
``1.168(i)-1....1545-1331'' in numerical order to the table.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
    Approved: September 9, 1994
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-24949 Filed 10-7-94; 8:45 am]
BILLING CODE 4830-01-U