[Federal Register Volume 59, Number 198 (Friday, October 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25415]


[[Page Unknown]]

[Federal Register: October 14, 1994]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[PS-72-92]
RIN 1545-AR23

 

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

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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SUMMARY: This document contains proposed regulations on the definition 
of a qualified electric vehicle, the recapture of any credit allowable 
for a qualified electric vehicle, and the recapture of any deduction 
allowable for qualified clean-fuel vehicle property or qualified clean-
fuel vehicle refueling property. The proposed regulations reflect 
changes to the law made by the Energy Policy Act of 1992 and affect 
taxpayers who are owners of qualified electric vehicles, clean-fuel 
vehicles, and clean-fuel vehicle refueling property. This document also 
provides notice of a public hearing on these proposed regulations.

DATES: Written comments and outlines of oral comments to be presented 
at the public hearing scheduled for January 19, 1995, at 10 a.m., must 
be received by December 16, 1994.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS-72-92), room 5228, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered between 
the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (PS-72-92), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW, 
Washington, DC.
    The public hearing will be held in the auditorium at 1111 
Constitution Ave. NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Joanne E. 
Johnson at (202) 622-3110; concerning submissions and the hearing, 
Carol Savage, (202) 622-8452 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed regulations under sections 30 and 
179A. These provisions were added to the Internal Revenue Code by 
section 1913 of the Energy Policy Act of 1992 (1992 Act) and apply to 
property placed in service after June 30, 1993.
    The proposed regulations provide the definition of a qualified 
electric vehicle under section 30(c) and also provide rules for the 
recapture of the section 30 credit and section 179A deduction under 
sections 30(d)(2) and 179A(e)(4), respectively. The regulations follow 
the legislative history to the 1992 Act, which provides guidance on 
when recapture occurs, how to determine the recapture amount, and how 
to adjust the basis of the property upon recapture.
    On June 9, 1993, the IRS published Notice 93-34 in the Federal 
Register inviting comments from the public on any issues under sections 
30 and 179A that should be addressed in proposed regulations. The IRS 
is reviewing these comments and will issue additional proposed 
regulations addressing certain issues raised in the comments.

Explanation of Provisions

Definition of Qualified Electric Vehicle

    A qualified electric vehicle is a motor vehicle that meets the 
requirements of section 30(c). Section 30(c) provides that the original 
use of the motor vehicle qualifying for the section 30 credit must 
commence with the taxpayer. Thus, under the proposed regulations, a 
qualified electric vehicle does not include any motor vehicle that has 
ever been used (for either personal or business use) as a non-electric 
vehicle.

Recapture of Section 30 Credit

    The proposed regulations incorporate rules under section 30(d) and 
the legislative history to provide that recapture occurs if, at any 
time within 3 years after the date the property is placed in service, 
the motor vehicle is modified so that it may no longer be primarily 
powered by electricity or is used in a manner described under section 
50(b) (for example, used predominantly outside the United States). 
Generally, no recapture occurs upon a sale or other disposition 
(including a disposition by reason of an accident or other casualty) of 
a qualified electric vehicle.
    The proposed regulations provide that recapture occurs if, within 3 
years from the date the vehicle is placed in service, the taxpayer 
sells or disposes of the vehicle and the taxpayer knows or has reason 
to know that the vehicle will be modified so that it may no longer be 
primarily powered by electricity or will be used in a manner described 
under section 50(b). This is necessary to prevent avoidance of 
recapture by taxpayers who transfer property to be used in a manner 
that would have triggered recapture if the taxpayers had so used the 
property themselves.
    The proposed regulations provide that the recapture amount equals 
the benefit of the section 30 credit that reduced tax liability in 
years prior to the taxable year of recapture multiplied by the 
recapture percentage. For this purpose, the benefit of the section 30 
credit includes the amount of any other credits, such as under sections 
53 (minimum tax credit) and 469 (passive activity credit), attributable 
to section 30 and allowed in years prior to the taxable year of 
recapture. Also, any credit carryover amounts attributable to section 
30 must be reduced by an amount equal to that credit carryover amount 
multiplied by the recapture percentage for the taxable year of 
recapture.
    Consistent with the legislative history, the proposed regulations 
provide that the recapture percentage is 100 percent if the recapture 
date is within the first full year from the date the qualified electric 
vehicle is placed in service, 66\2/3\ percent if the recapture date is 
in the second full year, or 33\1/3\ percent if the recapture date is in 
the third full year.
    The recapture amount is added to the amount of tax due for the 
taxable year in which a recapture event occurs. For this purpose, the 
recapture amount is not treated as an income tax imposed on the 
taxpayer by chapter 1 for purposes of computing alternative minimum tax 
or determining the amount of any other allowable credits for the 
taxable year of recapture.
    The basis of the qualified electric vehicle must be increased by 
the recapture amount and any amount that reduced other carryover 
credits attributable to section 30 as of the first day of the taxable 
year in which the recapture event occurs. For a vehicle that is 
eligible for depreciation, any additional basis resulting from 
recapture is recoverable over its remaining recovery period beginning 
as of the first day of the taxable year of recapture.
    Moreover, the rules of section 1245 are to apply upon a sale or 
other disposition of a depreciable qualified electric vehicle. Thus, 
the proposed regulations provide that section 1245 will apply to any 
gain recognized upon a sale or other disposition of a depreciable 
vehicle to the extent the basis of the vehicle was reduced, net of any 
basis increase resulting from any recapture previously taken into 
account.

Recapture of Section 179A Deduction

    The proposed regulations provide that recapture for qualified 
clean-fuel vehicle property occurs if, at any time within 3 years from 
the date the property is placed in service, the vehicle containing the 
qualified clean-fuel vehicle property (1) is modified so that it may no 
longer be propelled by a clean-burning fuel, (2) is used in a manner 
described in section 50(b) (for example, used predominantly outside the 
United States), or (3) otherwise ceases to qualify as property defined 
in section 179A(c). These rules are consistent with section 179A(e) and 
the specific recapture rules set forth in the legislative history to 
the 1992 Act.
    Similarly, the proposed regulations provide that recapture for the 
qualified clean-fuel vehicle refueling property occurs if, at any time 
before the end of the recovery period, the property (1) is no longer 
used predominantly in a trade or business, (2) ceases to qualify as 
property described in section 179A(d), or (3) is used in a manner 
described in section 50(b) (for example, used predominantly outside the 
United States).
    Generally, no recapture occurs upon a sale or other disposition 
(including a disposition by reason of an accident or other casualty) of 
a vehicle containing qualified clean-fuel vehicle property or of 
qualified clean-fuel vehicle refueling property.
    The proposed regulations provide that recapture occurs if the 
taxpayer sells or disposes of the clean-fuel vehicle within 3 years 
from the date the property is placed in service and the taxpayer knows 
or has reason to know that the vehicle will be converted to non-clean-
fuel use, will be used in a manner described in section 50(b), or will 
otherwise cease to qualify as property defined in section 179A(c). This 
is necessary to prevent avoidance of recapture by taxpayers who 
transfer property to be used in a manner that would have triggered 
recapture if the taxpayers had so used the property themselves.
    Similarly, the proposed regulations require recapture if the 
taxpayer sells or disposes of its qualified clean-fuel vehicle 
refueling property before the end of its recovery period, and the 
taxpayer knows or has reason to know that the property will cease to 
qualify as property described in section 179A(d), will not be used 
predominantly in a trade or business, or will be used in a manner 
described in section 50(b).
    Consistent with the legislative history, the proposed regulations 
provide that the recapture amount for qualified clean-fuel vehicle 
property equals 100 percent of the benefit of the section 179A 
deduction allowable if the recapture date is within the first full year 
from the date the property is placed in service, 66\2/3\ percent if the 
recapture date is in the second full year, or 33\1/3\ percent if the 
recapture date is in the third full year.
    However, for qualified clean-fuel vehicle refueling property, the 
legislative history states that the amount of the deduction for the 
property is to vest ratably over the recovery period for the property. 
Thus, the proposed regulations provide that the recapture amount is 
equal to the portion of the section 179A deduction attributable to the 
remaining recovery period including the taxable year of recapture.
    The legislative history indicates that the section 179A deduction 
is allowed as an adjustment to gross income. Consequently, the proposed 
regulations provide that the recapture amount for qualified clean-fuel 
vehicle property and refueling property is includable in the gross 
income for the taxable year in which the recapture event occurs.
    The basis of the vehicle containing qualified clean-fuel vehicle 
property or the basis of qualified clean-fuel vehicle refueling 
property is increased by the recapture amount as of the first day of 
the taxable year in which the recapture event occurs. For a depreciable 
vehicle or refueling property, any additional basis resulting from 
recapture is recoverable over the remaining recovery period for the 
vehicle or refueling property, beginning as of the first day of the 
taxable year of recapture.
    Moreover, under section 179A(e)(6)(B), the rules of section 1245 
are to apply upon a sale or other disposition of depreciable section 
179A property. Thus, the proposed regulations provide that section 1245 
will apply to any gain recognized upon a sale or other disposition to 
the extent the basis was reduced, net of any basis increase resulting 
from any recapture previously taken into account.

Proposed Effective Dates

    The regulations are proposed to be effective on the date of 
publication in the Federal Register. If the recapture date is before 
the effective date of these regulations, a taxpayer may use any 
reasonable method to recapture the benefit of any section 30 credit 
allowable or section 179A deduction allowable consistent with sections 
30 and 179A and their legislative history.

Special Analyses

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

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for Thursday, January 19, 1995, 
at 10 a.m. in the auditorium. Because of access restrictions, visitors 
will not be admitted beyond the Internal Revenue Building lobby more 
than 15 minutes before the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit written comments and outlines of the topics to be discussed and 
the time to be devoted to each topic (signed original and eight (8) 
copies) by December 16, 1994.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

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

    Authority: 26 U.S.C. 7805 * * * Section 1.30-1 also issued under 
26 U.S.C. 30(d)(2) * * * Section 1.179A-1 also issued under 26 
U.S.C. 179A(e)(4) * * *

    Par. 2. Section 1.30-1 is added under the heading ``Credits 
allowable'' to read as follows:


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

    (a) Definition of qualified electric vehicle. A qualified electric 
vehicle is a motor vehicle that meets the requirements of section 
30(c). Accordingly, a qualified electric vehicle does not include any 
motor vehicle that has ever been used (for either personal or business 
use) as a non-electric vehicle.
    (b) Recapture of credit for qualified electric vehicle--(1) In 
general--(i) Addition to tax. If a recapture event occurs with respect 
to a taxpayer's qualified electric vehicle, the taxpayer must add the 
recapture amount to the amount of tax due in the taxable year in which 
the recapture event occurs. The recapture amount is not treated as 
income tax imposed on the taxpayer by chapter 1 for purposes of 
computing the alternative minimum tax or determining the amount of any 
other allowable credits for the taxable year in which the recapture 
event occurs.
    (ii) Reduction of carryover. If a recapture event occurs with 
respect to a taxpayer's qualified electric vehicle, and if a portion of 
the section 30 credit for the cost of that vehicle was disallowed under 
section 30(b)(3)(B) and consequently added to the taxpayer's minimum 
tax credit pursuant to section 53(d)(1)(B)(iii), the taxpayer must 
reduce its minimum tax credit carryover by an amount equal to the 
portion of any minimum tax credit carryover attributable to the 
disallowed section 30 credit, multiplied by the recapture percentage 
for the taxable year of recapture. Similarly, the taxpayer must reduce 
any other credit carryover amounts (such as under section 469) by the 
portion of the carryover attributable to section 30, multiplied by the 
recapture percentage.
    (2) Recapture event--(i) In general. A recapture event occurs if, 
within 3 full years from the date a qualified electric vehicle is 
placed in service, the vehicle ceases to be a qualified electric 
vehicle. A vehicle ceases to be a qualified electric vehicle if--
    (A) The vehicle is modified so that it is no longer primarily 
powered by electricity;
    (B) The vehicle is used in a manner described in section 50(b); or
    (C) The taxpayer receiving the credit under section 30 sells or 
disposes of the vehicle and knows or has reason to know that the 
vehicle will be used in a manner described in paragraph (b)(2)(i) (A) 
or (B) of this section.
    (ii) Exception for disposition. Except as provided in paragraph 
(b)(2)(i)(C) of this section, a sale or other disposition (including a 
disposition by reason of an accident or other casualty) of a qualified 
electric vehicle is not a recapture event.
    (3) Recapture amount. The recapture amount is equal to the 
recapture percentage times the decrease in the credits allowed under 
section 30 for all prior taxable years that would have resulted solely 
from reducing to zero the cost taken into account under section 30 with 
respect to such vehicle, including any credits allowed attributable to 
section 30 (such as under sections 53 and 469).
    (4) Recapture date. The recapture date is the actual date of the 
recapture event unless a recapture event described in paragraph 
(b)(2)(i)(B) of this section occurs, in which case the recapture date 
is the first day of the recapture year.
    (5) Recapture percentage. For purposes of this section, the 
recapture percentage is:
    (i) 100, if the recapture date is within the first full year after 
the date the vehicle is placed in service;
    (ii) 66\2/3\, if the recapture date is within the second full year 
after the date the vehicle is placed in service; or
    (iii) 33\1/3\, if the recapture date is within the third full year 
after the date the vehicle is placed in service.
    (6) Basis adjustment. As of the first day of the taxable year in 
which the recapture event occurs, the basis of the qualified electric 
vehicle is increased by the recapture amount and the carryover 
reductions taken into account under paragraphs (b)(1) (i) and (ii) of 
this section, respectively. For a vehicle that is of a character that 
is subject to an allowance for depreciation, this increase in basis is 
recoverable over the remaining recovery period for the vehicle 
beginning as of the first day of the taxable year of recapture.
    (7) Application of section 1245 for sales and other dispositions. 
For purposes of section 1245, the amount of the credit allowable under 
section 30(a) with respect to any qualified electric vehicle that is 
(or has been) of a character subject to an allowance for depreciation 
is treated as a deduction allowed for depreciation under section 167. 
Therefore, upon a sale or other disposition of a depreciable qualified 
electric vehicle, section 1245 will apply to any gain recognized to the 
extent the basis of the depreciable vehicle was reduced under section 
30(d)(1) net of any basis increase described in paragraph (b)(6) of 
this section.
    (8) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. A, a calendar-year taxpayer, purchases and places in 
service for personal use on January 1, 1995, a qualified electric 
vehicle costing $25,000. On A's 1995 federal income tax return, A 
claims a credit of $2,500. On January 2, 1996, A sells the vehicle 
to an unrelated third party who subsequently converts the vehicle 
into a non-electric vehicle on October 15, 1996. There is no 
recapture upon the sale of the vehicle by A provided A did not know 
or have reason to know that the purchaser intended to convert the 
vehicle to non-electric use.
    Example 2. B, a calendar-year taxpayer, purchases and places in 
service for personal use on October 11, 1994, a qualified electric 
vehicle costing $20,000. On B's 1994 federal income tax return, B 
claims a credit of $2,000, which reduces B's tax by $2,000. The 
basis of the vehicle is reduced to $18,000 ($20,000-$2,000). On 
March 8, 1996, B sells the vehicle to a tax-exempt entity. Because B 
knowingly sold the vehicle to a tax-exempt entity described in 
section 50(b) in the second full year from the date the vehicle was 
placed in service, B must recapture $1,333 ($2,000 x 66\2/3\ 
percent). This recapture amount increases B's tax by $1,333 on B's 
1996 federal income tax return and is added to the basis of the 
vehicle as of January 1, 1996, the beginning of the taxable year in 
which the recapture event occurred.
    Example 3. X, a calendar-year taxpayer, purchases and places in 
service for business use on January 1, 1994, a qualified electric 
vehicle costing $30,000. On X's 1994 federal income tax return, X 
claims a credit of $3,000, which reduces X's tax by $3,000. The 
basis of the vehicle is reduced to $27,000 ($30,000-$3,000) prior to 
any adjustments for depreciation. On March 8, 1995, X converts the 
qualified electric vehicle into a gasoline-propelled vehicle. 
Because X modified the vehicle so that it is no longer primarily 
powered by electricity in the second full year from the date the 
vehicle was placed in service, X must recapture $2,000 
($3,000 x 66\2/3\ percent). This recapture amount increases X's tax 
by $2,000 on X's 1995 federal income tax return. The recapture 
amount of $2,000 is added to the basis of the vehicle as of January 
1, 1995, the beginning of the taxable year of recapture, and to the 
extent the property remains depreciable, the adjusted basis is 
recoverable over the remaining recovery period.
    Example 4. The facts are the same as in Example 3. In 1996, X 
sells the vehicle for $31,000, recognizing a gain from this sale. 
Under paragraph (b)(7) of this section, section 1245 of the Internal 
Revenue Code will apply to any gain recognized on the sale of a 
depreciable vehicle to the extent the basis of the vehicle was 
reduced by the section 30 credit net of any basis increase from 
recapture of the section 30 credit. Accordingly, the gain from the 
sale of the vehicle is subject to section 1245 to the extent of the 
depreciation allowance for the vehicle plus the credit allowed under 
section 30 ($3,000), less the previous recapture amount ($2,000). 
Any remaining amount of gain may be subject to other applicable 
provisions of the Internal Revenue Code.

    (c) Effective date. This section is effective on October 14, 1994. 
If the recapture date is before the effective date of this section, a 
taxpayer may use any reasonable method to recapture the benefit of any 
credit allowable under section 30(a) consistent with section 30 and its 
legislative history. For this purpose, the recapture date is defined in 
paragraph (b)(4) of this section.
    Par. 3. Section 1.179A-1 is added to read as follows:


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

    (a) In general. If a recapture event occurs with respect to a 
taxpayer's qualified clean-fuel vehicle property or qualified clean-
fuel vehicle refueling property, the taxpayer must include the 
recapture amount in taxable income for the taxable year in which the 
recapture event occurs.
    (b) Recapture event--(1) Qualified clean-fuel vehicle property--(i) 
In general. A recapture event occurs if, within 3 full years from the 
date a vehicle of which qualified clean-fuel vehicle property is a part 
is placed in service, the property ceases to be qualified clean-fuel 
vehicle property. Property ceases to be qualified clean- fuel vehicle 
property if--
    (A) The vehicle is modified by the taxpayer so that it may no 
longer be propelled by a clean-burning fuel;
    (B) The vehicle is used by the taxpayer in a manner described in 
section 50(b);
    (C) The vehicle otherwise ceases to qualify as property defined in 
section 179A(c); or
    (D) The taxpayer receiving the deduction under section 179A sells 
or disposes of the vehicle and knows or has reason to know that the 
vehicle will be used in a manner described in paragraph (b)(1)(i)(A), 
(B), or (C) of this section.
    (ii) Exception for disposition. Except as provided in paragraph 
(b)(1)(i)(D) of this section, a sale or other disposition (including a 
disposition by reason of an accident or other casualty) of qualified 
clean-fuel vehicle property is not a recapture event.
    (2) Qualified clean-fuel vehicle refueling property--(i) In 
general. A recapture event occurs if, at any time before the end of its 
recovery period, the property ceases to be qualified clean-fuel vehicle 
refueling property. Property ceases to be qualified clean-fuel vehicle 
refueling property if--
    (A) The property no longer qualifies as property described in 
section 179A(d);
    (B) The property is no longer used predominantly in a trade or 
business (property will be treated as no longer used predominantly in a 
trade or business if 50 percent or more of the use of the property in a 
taxable year is for use other than in a trade or business);
    (C) The property is used by the taxpayer in a manner described in 
section 50(b); or
    (D) The taxpayer receiving the deduction under section 179A sells 
or disposes of the property and knows or has reason to know that the 
property will be used in a manner described in paragraph (b)(2)(i)(A), 
(B), or (C) of this section.
    (ii) Exception for disposition. Except as provided in paragraph 
(b)(2)(i)(D) of this section, a sale or other disposition (including a 
disposition by reason of an accident or other casualty) of qualified 
clean-fuel vehicle refueling property is not a recapture event.
    (c) Recapture date--(1) Qualified clean-fuel vehicle property. The 
recapture date is the actual date of the recapture event unless an 
event described in paragraph (b)(1)(i)(B) of this section occurs, in 
which case the recapture date is the first day of the recapture year.
    (2) Qualified clean-fuel vehicle refueling property. The recapture 
date is the actual date of the recapture event unless the recapture 
occurs as a result of an event described in paragraph (b)(2)(i)(B) or 
(C) of this section, in which case the recapture date is the first day 
of the recapture year.
    (d) Recapture amount--(1) Qualified clean-fuel vehicle property. 
The recapture amount is equal to the benefit of the section 179A 
deduction allowable multiplied by the recapture percentage. The 
recapture percentage is--
    (i) 100, if the recapture date is within the first full year after 
the date the vehicle is placed in service;
    (ii) 66\2/3\, if the recapture date is within the second full year 
after the date the vehicle is placed in service; or
    (iii) 33\1/3\, if the recapture date is within the third full year 
after the date the vehicle is placed in service.
    (2) Qualified clean-fuel vehicle refueling property. The recapture 
amount is equal to the benefit of the section 179A deduction allowable 
multiplied by the following fraction. The numerator of the fraction 
equals the total recovery period for the property minus the number of 
recovery years prior to, but not including, the recapture year. The 
denominator of the fraction equals the total recovery period.
    (e) Basis adjustment. As of the first day of the taxable year in 
which the recapture event occurs, the basis of the vehicle of which 
qualified clean-fuel vehicle property is a part or the basis of 
qualified clean-fuel vehicle refueling property is increased by the 
recapture amount. For a vehicle or refueling property that is of a 
character that is subject to an allowance for depreciation, this 
increase in basis is recoverable over its remaining recovery period 
beginning as of the first day of the taxable year in which the 
recapture event occurs.
    (f) Application of section 1245 for sales and other dispositions. 
For purposes of section 1245, the amount of the deduction allowable 
under section 179A(a) with respect to any property that is (or has 
been) of a character subject to an allowance for depreciation is 
treated as a deduction allowed for depreciation under section 167. 
Therefore, upon a sale or other disposition of depreciable qualified 
clean-fuel vehicle refueling property or a depreciable vehicle of which 
qualified clean-fuel vehicle property is a part, section 1245 will 
apply to any gain recognized to the extent the basis of the depreciable 
property or vehicle was reduced under section 179A(e)(6) net of any 
basis increase described in paragraph (e) of this section.
    (g) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. A, a calendar-year taxpayer, purchases and places in 
service for personal use on January 1, 1995, a clean-fuel vehicle, a 
portion of which is qualified clean-fuel vehicle property, costing 
$25,000. The qualified clean-fuel vehicle property costs $11,000. On 
A's 1995 federal income tax return, A claims a section 179A 
deduction of $2,000. On January 2, 1996, A sells the vehicle to an 
unrelated third party who subsequently converts the vehicle into a 
gasoline-propelled vehicle on October 15, 1996. There is no 
recapture upon the sale of the vehicle by A provided A did not know 
or have reason to know that the purchaser intended to convert the 
vehicle to a gasoline-propelled vehicle.
    Example 2. B, a calendar-year taxpayer, purchases and places in 
service for personal use on October 11, 1994, a clean-fuel vehicle 
costing $20,000, a portion of which is qualified clean-fuel vehicle 
property. The qualified clean-fuel vehicle property costs $10,000. 
On B's 1994 federal income tax return, B claims a deduction of 
$2,000, which reduces B's gross income by $2,000. The basis of the 
vehicle is reduced to $18,000 ($20,000-$2,000). On January 31, 1996, 
B sells the vehicle to a tax-exempt entity. Because B knowingly sold 
the vehicle to a tax-exempt entity described in section 50(b) in the 
second full year from the date the vehicle was placed in service, B 
must recapture $1,333 ($2,000x66\2/3\ percent). This recapture 
amount increases B's gross income by $1,333 on B's 1996 federal 
income tax return and is added to the basis of the motor vehicle as 
of January 1, 1996, the beginning of the taxable year of recapture.
    Example 3. X, a calendar-year taxpayer, purchases and places in 
service for its business use on January 1, 1994, qualified clean-
fuel vehicle refueling property costing $400,000. Assume this 
property has a 5 year recovery period. On X's 1994 federal income 
tax return, X claims a deduction of $100,000, which reduces X's 
gross income by $100,000. The basis of the property is reduced to 
$300,000 ($400,000-$100,000) prior to any adjustments for 
depreciation. In 1996, more than 50 percent of the use of the 
property is other than in X's trade or business. Because the 
property is no longer used predominantly in X's business, X must 
recapture three-fifths of the section 179A deduction or $60,000 
($100,000x(5-2)/5=$60,000) and include that amount in gross income 
on its 1996 federal income tax return. The recapture amount of 
$60,000 is added to the basis of the property as of January 1, 1996, 
the beginning of the taxable year of recapture, and to the extent 
the property remains depreciable, the adjusted basis is recoverable 
over the remaining recovery period.
    Example 4. X, a calendar-year taxpayer, purchases and places in 
service for business use on January 1, 1994, qualified clean-fuel 
vehicle refueling property costing $350,000. Assume this property 
has a 5 year recovery period. On X's 1994 federal income tax return, 
X claims a deduction of $100,000, which reduces X's gross income by 
$100,000. The basis of the property is reduced to $250,000 
($350,000-$100,000) prior to any adjustments for depreciation. In 
1995, X converts the property to store and dispense gasoline. 
Because the property is no longer used as qualified clean-fuel 
vehicle refueling property in 1995, X must recapture four-fifths of 
the section 179A deduction or $80,000 ($100,000x(5-1)/5=$80,000) and 
include that amount in gross income on its 1995 federal income tax 
return. The recapture amount of $80,000 is added to the basis of the 
property as of January 1, 1995, the beginning of the taxable year of 
recapture, and to the extent the property remains depreciable, the 
adjusted basis is recoverable over the remaining recovery period.
    Example 5. The facts are the same as in Example 4. In 1996, X 
sells the refueling property for $351,000, recognizing a gain from 
this sale. Under paragraph (f) of this section, section 1245 of the 
Code will apply to any gain recognized on the sale of depreciable 
property to the extent the basis of the property was reduced by the 
section 179A deduction net of any basis increase from recapture of 
the section 179A deduction. Accordingly, the gain from the sale of 
the property is subject to section 1245 to the extent of the 
depreciation allowance for the property plus the deduction allowed 
under section 179A ($100,000), less the previous recapture amount 
($80,000). Any remaining amount of gain may be subject to other 
applicable provisions of the Internal Revenue Code.

    (h) Effective date. This section is effective on October 14, 1994. 
If the recapture date is before the effective date of this section, a 
taxpayer may use any reasonable method to recapture the benefit of any 
deduction allowable under section 179A(a) consistent with section 179A 
and its legislative history. For this purpose, the recapture date is 
defined in paragraph (c) of this section.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 94-25415 Filed 10-13-94; 8:45 am]
BILLING CODE 4830-01-U