[Federal Register Volume 60, Number 149 (Thursday, August 3, 1995)]
[Rules and Regulations]
[Pages 39649-39652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19028]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8606]
RIN 1545-AR64


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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

DATES: These regulations are effective August 3, 1995.
    For dates of applicability of these regulations, see Sec. 1.30-1(c) 
and Sec. 1.179A-1(h).

FOR FURTHER INFORMATION CONTACT: Joanne E. Johnson at (202) 622-3110 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On October 14, 1994, the IRS published in the Federal Register a 
notice of proposed rulemaking providing the definition of a qualified 
electric vehicle under section 30(c) and the rules for the recapture of 
the section 30 credit and section 179A deduction under sections 
30(d)(2) and 179A(e)(4), respectively (59 FR 52105).
    Written comments responding to the notice were received. No public 
hearing was requested or held. After consideration of all the comments, 
this Treasury decision adopts the regulations as proposed.

Explanation of Provisions

In General

    The final regulations define a qualified electric vehicle for 
purposes of section 30 of the Internal Revenue Code (Code). Several 
commentators recommended expanding the definition to include a vehicle 
converted from a used non-electric vehicle. The final regulations do 
not adopt this recommendation because section 30(c)(1)(B) provides that 
the original use of the vehicle must commence with the taxpayer. 
Moreover, conversion costs are deductible under section 179A.
    Some commentators suggested including a hybrid-electric vehicle in 
the definition of a qualified electric vehicle. This issue will be 
addressed along with other substantive rules in additional proposed 
regulations under sections 30 and 179A of the Code.

Effective Date

    The final regulations are effective on October 14, 1994. If the 
recapture date is before the effective date of these regulations, a 
taxpayer may use any reasonable method to recapture the benefit of any 
section 30 credit allowable or section 179A deduction allowable 
consistent with sections 30 and 179A and their legislative history.

Special Analyses
    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to 
these regulations, and, therefore, a Regulatory Flexibility Analysis is 
not required. Pursuant to section 7805(f) of the Internal Revenue Code, 
the notice of proposed rulemaking preceding these regulations was 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.
Drafting Information
    The principal author of these regulations is Joanne E. Johnson, 
Office of Assistant Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the IRS and Treasury 
Department participated in their development.
Adoption of Amendments to the Regulations
    Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
    Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read as follows:

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

    Par. 2. Section 1.30-1 is added immediately following the 
undesignated center heading ``Credits Allowable'' to read as follows:


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

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

[[Page 39650]]
motor vehicle that meets the requirements of section 30(c). 
Accordingly, a qualified electric vehicle does not include any motor 
vehicle that has ever been used (for either personal or business use) 
as a non-electric vehicle.
    (b) Recapture of credit for qualified electric vehicle--(1) In 
general--(i) Addition to tax. If a recapture event occurs with respect 
to a taxpayer's qualified electric vehicle, the taxpayer must add the 
recapture amount to the amount of tax due in the taxable year in which 
the recapture event occurs. The recapture amount is not treated as 
income tax imposed on the taxpayer by chapter 1 of the Internal Revenue 
Code for purposes of computing the alternative minimum tax or 
determining the amount of any other allowable credits for the taxable 
year in which the recapture event occurs.
    (ii) Reduction of carryover. If a recapture event occurs with 
respect to a taxpayer's qualified electric vehicle, and if a portion of 
the section 30 credit for the cost of that vehicle was disallowed under 
section 30(b)(3)(B) and consequently added to the taxpayer's minimum 
tax credit pursuant to section 53(d)(1)(B)(iii), the taxpayer must 
reduce its minimum tax credit carryover by an amount equal to the 
portion of any minimum tax credit carryover attributable to the 
disallowed section 30 credit, multiplied by the recapture percentage 
for the taxable year of recapture. Similarly, the taxpayer must reduce 
any other credit carryover amounts (such as under section 469) by the 
portion of the carryover attributable to section 30, multiplied by the 
recapture percentage.
    (2) Recapture event--(i) In general. A recapture event occurs if, 
within 3 full years from the date a qualified electric vehicle is 
placed in service, the vehicle ceases to be a qualified electric 
vehicle. A vehicle ceases to be a qualified electric vehicle if--
    (A) The vehicle is modified so that it is no longer primarily 
powered by electricity;
    (B) The vehicle is used in a manner described in section 50(b); or
    (C) The taxpayer receiving the credit under section 30 sells or 
disposes of the vehicle and knows or has reason to know that the 
vehicle will be used in a manner described in paragraph (b)(2)(i)(A) or 
(B) of this section.
    (ii) Exception for disposition. Except as provided in paragraph 
(b)(2)(i)(C) of this section, a sale or other disposition (including a 
disposition by reason of an accident or other casualty) of a qualified 
electric vehicle is not a recapture event.
    (3) Recapture amount. The recapture amount is equal to the 
recapture percentage times the decrease in the credits allowed under 
section 30 for all prior taxable years that would have resulted solely 
from reducing to zero the cost taken into account under section 30 with 
respect to such vehicle, including any credits allowed attributable to 
section 30 (such as under sections 53 and 469).
    (4) Recapture date. The recapture date is the actual date of the 
recapture event unless a recapture event described in paragraph 
(b)(2)(i)(B) of this section occurs, in which case the recapture date 
is the first day of the recapture year.
    (5) Recapture percentage. For purposes of this section, the 
recapture percentage is--
    (i) 100, if the recapture date is within the first full year after 
the date the vehicle is placed in service;
    (ii) 66 \2/3\, if the recapture date is within the second full year 
after the date the vehicle is placed in service; or
    (iii) 33 \1/3\, if the recapture date is within the third full year 
after the date the vehicle is placed in service.
    (6) Basis adjustment. As of the first day of the taxable year in 
which the recapture event occurs, the basis of the qualified electric 
vehicle is increased by the recapture amount and the carryover 
reductions taken into account under paragraphs (b)(1)(i) and (ii) of 
this section, respectively. For a vehicle that is of a character that 
is subject to an allowance for depreciation, this increase in basis is 
recoverable over the remaining recovery period for the vehicle 
beginning as of the first day of the taxable year of recapture.
    (7) Application of section 1245 for sales and other dispositions. 
For purposes of section 1245, the amount of the credit allowable under 
section 30(a) with respect to any qualified electric vehicle that is 
(or has been) of a character subject to an allowance for depreciation 
is treated as a deduction allowed for depreciation under section 167. 
Therefore, upon a sale or other disposition of a depreciable qualified 
electric vehicle, section 1245 will apply to any gain recognized to the 
extent the basis of the depreciable vehicle was reduced under section 
30(d)(1) net of any basis increase described in paragraph (b)(6) of 
this section.
    (8) Examples. The following examples illustrate the provisions of 
this section:

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

    (c) Effective date. This section is effective on October 14, 1994. 
If the recapture date is before the effective date of this section, a 
taxpayer may use any reasonable method to recapture the benefit of any 
credit allowable under section 30(a) consistent with section 30 and its 
legislative history. For this 

[[Page 39651]]
purpose, the recapture date is defined in paragraph (b)(4) of this 
section.
    Par. 3. Section 1.179A-1 is added to read as follows:


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

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

    Example 1. A, a calendar-year taxpayer, purchases and places in 
service for personal use on January 1, 1995, a clean-fuel vehicle, a 
portion of which is qualified clean-fuel vehicle property, costing 
$25,000. The qualified clean-fuel vehicle property costs $11,000. On 
A's 1995 federal income tax return, A claims a section 179A 
deduction of $2,000. On January 2, 1996, A sells the vehicle to an 
unrelated third party who subsequently converts the vehicle into a 
gasoline-propelled vehicle on October 15, 1996. There is no 
recapture upon the sale of the vehicle by A provided A did not know 
or have reason to know that the purchaser intended to convert the 
vehicle to a gasoline-propelled vehicle.
    Example 2. B, a calendar-year taxpayer, purchases and places in 
service for personal use on October 11, 1994, a clean-fuel vehicle 
costing $20,000, a portion of which is qualified clean-fuel vehicle 
property. The qualified clean-fuel vehicle property costs $10,000. 
On B's 1994 federal income tax return, B claims a deduction of 
$2,000, which reduces B's gross income by $2,000. The basis of the 
vehicle is reduced to $18,000 ($20,000-$2,000). On January 31, 1996, 
B sells the vehicle to a tax-exempt entity. Because B knowingly sold 
the vehicle to a tax-exempt entity described in section 50(b) in the 
second full year from the date the vehicle was placed in service, B 
must recapture $1,333 ($2,000  x  66\2/3\ percent). This recapture 
amount increases B's gross income by $1,333 on B's 1996 federal 
income tax return and is added to the basis of the motor vehicle as 
of January 1, 1996, the beginning of the taxable year of recapture.
    Example 3. X, a calendar-year taxpayer, purchases and places in 
service for its business use on January 1, 1994, qualified clean-
fuel vehicle refueling property costing $400,000. Assume this 
property has a 5-year recovery period. On X's 1994 federal income 
tax return, X claims a deduction of $100,000, which reduces X's 
gross income by $100,000. 

[[Page 39652]]
The basis of the property is reduced to $300,000 ($400,000-$100,000) 
prior to any adjustments for depreciation. In 1996, more than 50 
percent of the use of the property is other than in X's trade or 
business.
    Because the property is no longer used predominantly in X's 
business, X must recapture three-fifths of the section 179A 
deduction or $60,000 ($100,000 x (5-2)/5 = $60,000) and include that 
amount in gross income on its 1996 federal income tax return. The 
recapture amount of $60,000 is added to the basis of the property as 
of January 1, 1996, the beginning of the taxable year of recapture, 
and to the extent the property remains depreciable, the adjusted 
basis is recoverable over the remaining recovery period.
    Example 4. X, a calendar-year taxpayer, purchases and places in 
service for business use on January 1, 1994, qualified clean-fuel 
vehicle refueling property costing $350,000. Assume this property 
has a 5-year recovery period. On X's 1994 federal income tax return, 
X claims a deduction of $100,000, which reduces X's gross income by 
$100,000. The basis of the property is reduced to $250,000 
($350,000-$100,000) prior to any adjustments for depreciation. In 
1995, X converts the property to store and dispense gasoline. 
Because the property is no longer used as qualified clean-fuel 
vehicle refueling property in 1995, X must recapture four-fifths of 
the section 179A deduction or $80,000 ($100,000 x (5-1)/5 = $80,000) 
and include that amount in gross income on its 1995 federal income 
tax return. The recapture amount of $80,000 is added to the basis of 
the property as of January 1, 1995, the beginning of the taxable 
year of recapture, and to the extent the property remains 
depreciable, the adjusted basis is recoverable over the remaining 
recovery period.
    Example 5. The facts are the same as in Example 4. In 1996, X 
sells the refueling property for $351,000, recognizing a gain from 
this sale. Under paragraph (f) of this section, section 1245 will 
apply to any gain recognized on the sale of depreciable property to 
the extent the basis of the property was reduced by the section 179A 
deduction net of any basis increase from recapture of the section 
179A deduction. Accordingly, the gain from the sale of the property 
is subject to section 1245 to the extent of the depreciation 
allowance for the property plus the deduction allowed under section 
179A ($100,000), less the previous recapture amount ($80,000). Any 
remaining amount of gain may be subject to other applicable 
provisions of the Internal Revenue Code.

    (h) Effective date. This section is effective on October 14, 1994. 
If the recapture date is before the effective date of this section, a 
taxpayer may use any reasonable method to recapture the benefit of any 
deduction allowable under section 179A(a) consistent with section 179A 
and its legislative history. For this purpose, the recapture date is 
defined in paragraph (c) of this section.
Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved: June 21, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-19028 Filed 8-2-95; 8:45 am]
BILLING CODE 4830-01-U