[Federal Register Volume 68, Number 139 (Monday, July 21, 2003)]
[Proposed Rules]
[Pages 43047-43055]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-18325]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-138499-02]
RIN 1545-BB05


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

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

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

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

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

[[Page 43048]]


SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to 26 CFR part 1 to 
provide regulations under section 168(i)(5) of the Internal Revenue 
Code (Code). In addition, these proposed amendments provide change-in-
use rules for assets in a general asset account under section 
168(i)(4). Sections 168(i)(4) and 168(i)(5) were amended by section 201 
of the Tax Reform Act of 1986 (Public Law 99-514, 100 Stat. 2121).

Explanation of Provisions

Scope

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

Conversion to Business or Personal Use

    The proposed regulations provide that personal use property 
converted to business or income-producing use is treated as being 
placed in service by the taxpayer on the date of the conversion. Thus, 
the property is depreciated by using the applicable depreciation 
method, recovery period, and convention prescribed under section 168 
for the property beginning in the taxable year the change of use 
(``year of change'') occurs. The depreciable basis of the property for 
the year of change is the lesser of its fair market value or adjusted 
depreciable basis at the time of the conversion.
    A conversion of MACRS property from business or income-producing 
use to personal use is treated as a disposition of the property. 
Depreciation for the year of change is computed by taking into account 
the applicable convention. No gain, loss, or depreciation recapture is 
recognized upon the conversion. See Rev. Rul. 69-487 (1969-2 C.B. 165).

MACRS Property

Use Changes After Placed-In-Service Year
    The proposed regulations provide rules for MACRS property if a 
taxpayer changes the use of the property after the property's placed-
in-service year but the property continues to be MACRS property in the 
hands of the taxpayer.
    In general, the proposed regulations provide that a change in the 
use of MACRS property occurs when the primary use of the MACRS property 
in the taxable year is different from its primary use in the 
immediately preceding taxable year. A change in the use of MACRS 
property also occurs when a taxpayer begins or ceases to use MACRS 
property predominantly outside the United States, when the property 
changes to tax-exempt bond financed property, or when the property 
changes to or from tax-exempt use property or imported property covered 
by an Executive order, during the taxable year. If a change in the use 
of MACRS property has occurred, the depreciation allowance for the 
MACRS property for the year of change is determined as though the 
change in the use of the MACRS property occurred on the first day of 
the year of change. The IRS and Treasury Department believe that this 
rule will help to simplify the computation of depreciation allowances 
in the year of change and subsequent taxable years. The IRS and 
Treasury Department invite comments on this rule and on a potential 
alternative rule that would treat a change in the use of MACRS property 
as occurring on the first day of the month in which the use changes and 
would allocate the depreciation allowance for that MACRS property for 
the year of change based on the number of full months of the old use 
and of the new use of the MACRS property during the year of change.
    The proposed regulations also provide rules for determining the 
applicable depreciation method, recovery period, and convention used to 
determine the depreciation allowances for the MACRS property for the 
year of change and subsequent taxable years. If a change in the use of 
MACRS property results in a shorter recovery period and/or a more 
accelerated depreciation method (for example, MACRS property ceases to 
be used predominantly outside the United States), the adjusted 
depreciable basis of the property as of the beginning of the year of 
change is depreciated over the shorter recovery period and/or by the 
more accelerated depreciation method beginning with the year of change 
as though the MACRS property is first placed in service in the year of 
change. Under certain circumstances, this rule may adversely affect 
taxpayers. For example, under this rule, if a change in the use of 
MACRS property results in a shorter recovery period, a taxpayer must 
depreciate that MACRS property over the new shorter recovery period 
even if the remaining portion of the original longer recovery period is 
less than the new shorter recovery period. To avoid this adverse 
effect, the proposed regulations allow a taxpayer to elect to continue 
to depreciate the MACRS property for which the new recovery period is 
shorter or a more accelerated method is allowed as though the change in 
use had not occurred.
    If a change in the use of MACRS property results in a longer 
recovery period and/or slower depreciation method (for example, MACRS 
property begins to be used predominantly outside the United States), 
the adjusted depreciable basis of the property is depreciated over the 
longer recovery period and/or by the slower depreciation method 
beginning with the year of change as though the taxpayer originally 
placed the MACRS property in service with the longer recovery period 
and/or slower depreciation method. Accordingly, the adjusted 
depreciable basis of the MACRS property as of the beginning of the year 
of change is depreciated over the remaining portion of the new, longer 
recovery period as of the beginning of the year of change.
    For MACRS property depreciated under the optional depreciation 
tables in Rev. Proc. 87-57 (1987-2 C.B. 687) before the change in use, 
the taxpayer may continue to depreciate the property under the tables 
after the change in use. However, the taxpayer is not required to do 
so. If the taxpayer desires to use the optional depreciation tables 
after a change in the use instead of the formulas (for example, see 
section 6 of Rev. Proc. 87-57 (1987-2 C.B. at 692)), the proposed 
regulations provide guidance on choosing the applicable optional 
depreciation table. If the change in use results in a longer recovery 
period and/or a slower depreciation method, the proposed regulations 
also provide guidance on how to modify the calculation involved to 
compute the depreciation allowances beginning in the year of change.
    If a change in the use of MACRS property results in a shorter 
recovery period and/or more accelerated depreciation method, the 
taxpayer may use the optional depreciation table that corresponds to 
the applicable depreciation method, recovery period, and convention, 
determined as though the property is placed in service in the year of 
change. Taxpayers should be aware that using this table will result in 
less depreciation than using the formulas, because the convention is 
factored into the optional depreciation tables, and taken into account 
in determining depreciation in the year of change. However, if the 
formulas are used, the convention is not taken into

[[Page 43049]]

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

General Asset Accounts

    Finally, the proposed regulations amend the final regulations under 
section 168(i)(4) (TD 8566, 59 FR 51369 (1994)) for property accounted 
for in a general asset account for which the use changes, resulting in 
a different recovery period and/or depreciation method. While this 
change in use does not cause or permit the revocation of the election 
to account for the property in a general asset account, the property 
generally is removed from its existing general asset account and placed 
in a separate general asset account. Because this rule would require 
taxpayers to track each property in a general asset account, the IRS 
and Treasury Department request comments on whether the IRS and 
Treasury should adopt a rule that disregards any change in the use of 
any MACRS property accounted for in a general asset account, except for 
a conversion to personal use.

Proposed Effective Date

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

Special Analyses

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

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the clarity of 
the proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for December 3, 2003, beginning 
at 10 a.m., in room number 4718, Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit an outline of 
the topics to be discussed and the time to be devoted to each topic 
(signed original and eight (8) copies) by November 12, 2003. A period 
of 10 minutes will be allotted to each person for making comments. An 
agenda showing the scheduling of the speakers will be prepared after 
the deadline for receiving outlines has passed. Copies of the agenda 
will be available free of charge at the hearing.

Drafting Information

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

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

    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 * * *

    Sec.  1.168(i)-1 also issued under 26 U.S.C. 168(i)(4).
    Sec.  1.168(i)-4 also issued under 26 U.S.C. 168(i)(5).

    2. Sections 1.168(a)-1 and 1.168(b)-1 are added to read as follows:


Sec.  1.168(a)-1  Modified accelerated cost recovery system.

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

[[Page 43050]]

Sec.  1.168(b)-1  Definitions.

    (a) Definitions. For purposes of section 168 and the regulations 
thereunder, the following definitions apply:
    (1) Depreciable property is property that is of a character subject 
to the allowance for depreciation as determined under section 167 and 
the regulations thereunder.
    (2) MACRS property is tangible, depreciable property that is placed 
in service after December 31, 1986 (or after July 31, 1986, if the 
taxpayer made an election under section 203(a)(1)(B) of the Tax Reform 
Act of 1986; 100 Stat. 2143), and subject to section 168, except for 
property excluded from the application of section 168 as a result of 
section 168(f) or as a result of a transitional rule.
    (3) Unadjusted depreciable basis is the basis of property for 
purposes of section 1011 without regard to any adjustments described in 
section 1016(a)(2) and (3). This basis reflects the reduction in basis 
for the percentage of the taxpayer's use of property for the taxable 
year other than in the taxpayer's trade or business (or for the 
production of income), for any portion of the basis the taxpayer 
properly elects to treat as an expense under section 179, and for any 
adjustments to basis provided by other provisions of the Internal 
Revenue Code and the regulations thereunder (other than section 
1016(a)(2) and (3)) (for example, a reduction in basis by the amount of 
the disabled access credit pursuant to section 44(d)(7)). For property 
subject to a lease, see section 167(c)(2).
    (4) Adjusted depreciable basis is the unadjusted depreciable basis 
of the property less the adjustments described in section 1016(a)(2) 
and (3).
    (b) Effective date. This section applies as of the date of 
publication of the final regulations in the Federal Register.
    3. Section 1.168(i)-0 is amended by revising the entry for Sec.  
1.168(i)-1(h)(2) to read as follows:


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

* * * * *


Sec.  1.168(i)-1  

* * * * *
    (h) * * *
    (2) Change in use results in a different recovery period and/or 
depreciation method.
* * * * *
    4. Section 1.168(i)-1 is amended by:
    1. Revising paragraph (b)(1).
    2. Amending paragraph (c)(2)(ii) by:
    a. Removing the language ``and'' from the end of paragraph 
(c)(2)(ii)(C).
    b. Removing the period ``.'' from the end of paragraph 
(c)(2)(ii)(D) and adding ``; and'' in its place.
    c. Adding paragraph (c)(2)(ii)(E).
    3. Removing the language ``(h)(1) (conversion to personal use)'' 
from paragraphs (d)(2) and (i) and adding ``(h) (changes in use)'' in 
its place.
    4. Removing the language ``the change in use occurs and'' from the 
last sentence of paragraph (h)(1) and adding ``the change in use occurs 
(the year of change) and'' in its place.
    5. Revising paragraph (h)(2).
    6. Removing the language ``(h)(1)'' from paragraph (j) and adding 
``(h)'' in its place.
    7. Removing the language ``(h)(1)'' from paragraph (k)(1) and 
adding ``(h)'' in its place.
    8. Revising paragraph (l).
    The addition and revisions read as follows:


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

* * * * *
    (b) * * *
    (1) Unadjusted depreciable basis is the basis of an asset for 
purposes of section 1011 without regard to any adjustments described in 
section 1016(a)(2) and (3). This basis reflects the reduction in basis 
for the percentage of the taxpayer's use of property for the taxable 
year other than in the taxpayer's trade or business (or for the 
production of income), for any portion of the basis the taxpayer 
properly elects to treat as an expense under section 179, and for any 
adjustments to basis provided by other provisions of the Internal 
Revenue Code and the regulations thereunder (other than section 
1016(a)(2) and (3)) (for example, a reduction in basis by the amount of 
the disabled access credit pursuant to section 44(d)(7)). For property 
subject to a lease, see section 167(c)(2).
* * * * *
    (c) * * *
    (2) * * *
    (ii) * * *
    (E) Assets subject to paragraph (h)(2)(iii)(A) of this section 
(change in use results in a shorter recovery period and/or a more 
accelerated depreciation method) for which the depreciation allowance 
for the year of change is not determined by using an optional 
depreciation table must be grouped into a separate general asset 
account.
* * * * *
    (h) * * *
    (2) Change in use results in a different recovery period and/or 
depreciation method--(i) No effect on general asset account election. A 
change in the use described in Sec.  1.168(i)-4(d) (change in use 
results in a different recovery period and/or depreciation method) of 
an asset in a general asset account shall not cause or permit the 
revocation of the election made under this section.
    (ii) Asset is removed from the general asset account. Upon a change 
in the use described in Sec.  1.168(i)-4(d), the taxpayer must remove 
the asset from the general asset account as of the first day of the 
year of change and must make the adjustments to the general asset 
account described in paragraphs (e)(3)(iii)(C)(2) through (4) of this 
section. If, however, the result of the change in use is described in 
Sec.  1.168(i)-4(d)(3) (change in use results in a shorter recovery 
period and/or a more accelerated depreciation method) and the taxpayer 
elects to treat the asset as though the change in use had not occurred 
pursuant to Sec.  1.168(i)-4(d)(3)(ii), no adjustment is made to the 
general asset account upon the change in use.
    (iii) New general asset account is established--(A) Change in use 
results in a shorter recovery period and/or a more accelerated 
depreciation method. If the result of the change in use is described in 
Sec.  1.168(i)-4(d)(3) (change in use results in a shorter recovery 
period and/or a more accelerated depreciation method) and adjustments 
to the general asset account are made pursuant to paragraph (h)(2)(ii) 
of this section, the taxpayer must establish a new general asset 
account for the asset in the year of change in accordance with the 
rules in paragraph (c) of this section, except that the adjusted 
depreciable basis of the asset as of the first day of the year of 
change is included in the general asset account. For purposes of 
paragraph (c)(2) of this section, the applicable depreciation method, 
recovery period, and convention are determined under Sec.  1.168(i)-
4(d)(3)(i).
    (B) Change in use results in a longer recovery period and/or a 
slower depreciation method. If the result of the change in use is 
described in Sec.  1.168(i)-4(d)(4) (change in use results in a longer 
recovery period and/or a slower depreciation method), the taxpayer must 
establish a separate general asset account for the asset in the year of 
change in accordance with the rules in paragraph (c) of this section, 
except that the unadjusted depreciable basis of the asset, and the 
greater of the depreciation of the asset allowed or allowable in 
accordance with section 1016(a)(2), as of the first day of the year of 
change are included in the newly established general asset account. 
Consequently, this general asset account as of the first day of the 
year of change will have a beginning balance for both the unadjusted 
depreciable basis and the

[[Page 43051]]

depreciation reserve of the general asset account. For purposes of 
paragraph (c)(2) of this section, the applicable depreciation method, 
recovery period, and convention are determined under Sec.  1.168(i)-
4(d)(4)(ii).
* * * * *
    (l) Effective date--(1) In general. Except as provided in paragraph 
(l)(2) of this section, this section applies to depreciable assets 
placed in service in taxable years ending on or after October 11, 1994. 
For depreciable assets placed in service after December 31, 1986, in 
taxable years ending before October 11, 1994, the Internal Revenue 
Service will allow any reasonable method that is consistently applied 
to the taxpayer's general asset accounts.
    (2) Exceptions--(i) In general. Paragraphs (c)(2)(ii)(E) and (h)(2) 
of this section apply to any changes in the use of depreciable assets 
pursuant to Sec.  1.168(i)-4(d) in taxable years ending on or after the 
date of publication of the final regulations in the Federal Register. 
For any changes in the use of depreciable assets as described in Sec.  
1.168(i)-4(d) after December 31, 1986, in taxable years ending before 
the date of publication of the final regulations in the Federal 
Register, the Internal Revenue Service will allow any reasonable method 
that is consistently applied to the taxpayer's general asset accounts.
    (ii) Change in method of accounting. If a taxpayer adopted a method 
of accounting for general asset account treatment due to a change in 
the use of depreciable assets and the method is not in accordance with 
the method of accounting provided in paragraphs (c)(2)(ii)(E) and 
(h)(2) of this section, a change to the method of accounting provided 
in paragraphs (c)(2)(ii)(E) and (h)(2) of this section is a change in 
method of accounting to which the provisions of sections 446(e) and 481 
apply. For any taxable year ending on or after the date of publication 
of the final regulations in the Federal Register, a taxpayer changing 
its method of accounting in accordance with this paragraph (l)(2)(ii) 
must follow the applicable administrative procedures issued under Sec.  
1.446-1(e)(3)(ii) for obtaining the Commissioner's automatic consent to 
a change in method of accounting (for further guidance, for example, 
see Rev. Proc. 2002-9 (2002-1 C.B. 327) and Sec.  601.601(d)(2)(ii)(b) 
of this chapter). Because this change does not change the adjusted 
depreciable basis of the asset, the method change is made on a cut-off 
basis and, therefore, no adjustment under section 481(a) is required or 
allowed.
    5. Section 1.168(i)-4 is added to read as follows:


Sec.  1.168(i)-4  Changes in use.

    (a) Scope. This section provides the rules for determining the 
depreciation allowance for MACRS property for which the use changes in 
the hands of the same taxpayer. The allowance for depreciation under 
this section constitutes the amount of depreciation allowable under 
section 167(a) for the year of change and any subsequent taxable year. 
For purposes of this section, the year of change is the taxable year in 
which a change in the use occurs.
    (b) Conversion to business or income-producing use--(1) 
Depreciation deduction allowable. This paragraph (b) applies to 
property that is converted from personal use to use in a taxpayer's 
trade or business, or for the production of income, during a taxable 
year. This conversion includes property that was previously used by the 
taxpayer for personal purposes, including real property (other than 
land) that is acquired before 1987 and converted from personal use to 
business or income-producing use after 1986, and depreciable property 
that was previously used by a tax-exempt entity before it changed to a 
taxable entity. Upon a conversion to business or income-producing use, 
the depreciation allowance for the year of change and any subsequent 
taxable year is determined as though the property is placed in service 
by the taxpayer on the date on which the conversion occurs. Thus, the 
taxpayer may choose any applicable depreciation method, recovery 
period, and convention prescribed under section 168 for the property in 
the year of change, consistent with any election made under section 168 
by the taxpayer for that year (see, for example, section 168(b)(5)). 
The depreciable basis of the property for the year of change is the 
lesser of its fair market value or its adjusted depreciable basis, as 
applicable, at the time of the conversion to business or income-
producing use.
    (2) Example. The application of this paragraph (b) is illustrated 
by the following example:

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

    (c) Conversion to personal use. The conversion of MACRS property 
from business or income-producing use to personal use during a taxable 
year is treated as a disposition of the property in that taxable year. 
The depreciation allowance for MACRS property for the year of change in 
which the property is treated as being disposed of is determined by 
first multiplying the adjusted depreciable basis of the property as of 
the first day of the year of change by the applicable depreciation rate 
for that taxable year (for further guidance, for example, see section 6 
of Rev. Proc. 87-57 (1987-2 C. B. 687, 692), and Sec.  
601.601(d)(2)(ii)(b) of this chapter). This amount is then multiplied 
by a fraction, the numerator of which is the number of months 
(including fractions of months) the property is deemed to be placed in 
service during the year of change (taking into account the applicable 
convention) and the denominator of which is 12. No depreciation 
deduction is allowable for MACRS property placed in service and 
disposed of in the same taxable year. Upon the conversion to personal 
use, no gain, loss, or depreciation recapture under section 1245 or 
section 1250 is recognized. However, the provisions of section 1245 or 
section 1250 apply to any disposition of the converted property by the 
taxpayer at a later date.
    (d) Change in use results in a different recovery period and/or 
depreciation method--(1) In general. This paragraph (d) applies to a 
change in the use of MACRS property during a taxable year subsequent to 
the placed-in-service year, if the property continues to be MACRS 
property owned by the same taxpayer and, as a result of the change in 
use, has a different recovery period, a different depreciation method, 
or both. For example, this paragraph (d) applies to MACRS property 
that--

[[Page 43052]]

    (i) Begins or ceases to be used predominantly outside the United 
States;
    (ii) Results in a reclassification of the property under section 
168(e) due to a change in the use of the property; or
    (iii) Begins or ceases to be tax-exempt use property (as defined in 
section 168(h)).
    (2) Determination of change in use--(i) In general. Except as 
provided in paragraph (d)(2)(ii) of this section, a change in the use 
of MACRS property occurs when the primary use of the MACRS property in 
the taxable year is different from its primary use in the immediately 
preceding taxable year. The primary use of MACRS property may be 
determined in any reasonable manner that is consistently applied to the 
taxpayer's MACRS property.
    (ii) Alternative depreciation system property--(A) Property used 
within or outside the United States. A change in the use of MACRS 
property occurs when a taxpayer begins or ceases to use MACRS property 
predominantly outside the United States during the taxable year. The 
determination of whether MACRS property is used predominantly outside 
the United States is made in accordance with the test in Sec.  1.48-
1(g)(1)(i) for determining predominant use.
    (B) Tax-exempt bond financed property. A change in the use of MACRS 
property occurs when the property changes to tax-exempt bond financed 
property, as described in section 168(g)(1)(C) and (g)(5), during the 
taxable year. For purposes of this paragraph (d), MACRS property 
changes to tax-exempt bond financed property when a tax-exempt bond is 
first issued after the MACRS property is placed in service. MACRS 
property continues to be tax-exempt bond financed property in the hands 
of the taxpayer even if the tax-exempt bond (including any refunding 
issue) is no longer outstanding or is redeemed.
    (C) Other mandatory alternative depreciation system property. A 
change in the use of MACRS property occurs when the property changes 
to, or changes from, property described in section 168(g)(1)(B) (tax-
exempt use property) or (D) (imported property covered by an Executive 
order) during the taxable year.
    (iii) Change in use deemed to occur on first day of year. If a 
change in the use of MACRS property occurs under this paragraph (d)(2), 
the depreciation allowance for that MACRS property for the year of 
change is determined as though the use of the MACRS property changed on 
the first day of the year of change.
    (3) Change in use results in a shorter recovery period and/or a 
more accelerated depreciation method--(i) Treated as placed in service 
in year of change--(A) In general. If the change in use results in the 
MACRS property changing to a shorter recovery period and/or a 
depreciation method that is more accelerated than the method used for 
the MACRS property before the change in use, the depreciation 
allowances beginning in the year of change are determined as though the 
MACRS property is placed in service by the taxpayer in the year of the 
change in use.
    (B) Computation of depreciation allowance. The depreciation 
allowances for the MACRS property for any 12-month taxable year 
beginning with the year of change are determined by multiplying the 
adjusted depreciable basis of the MACRS property as of the first day of 
each taxable year by the applicable depreciation rate for each taxable 
year. In determining the applicable depreciation rate for the year of 
change and subsequent taxable years, the taxpayer may choose any 
applicable depreciation method and recovery period prescribed under 
section 168 for the MACRS property in the year of change, consistent 
with any election made under section 168 by the taxpayer for that year 
(see, for example, section 168(b)(5)). If there is a change in the use 
of MACRS property, the applicable convention that applies to the MACRS 
property is the same as the convention that applied before the change 
in the use of the MACRS property. However, the depreciation allowance 
for the year of change for the MACRS property is determined without 
applying the applicable convention, unless the MACRS property is 
disposed of during the year of change. See paragraph (d)(5) of this 
section for the rules relating to the computation of the depreciation 
allowance under the optional depreciation tables. If the year of change 
or any subsequent taxable year is less than 12 months, the depreciation 
allowance determined under this paragraph (d)(3)(i) must be adjusted 
for a short taxable year (for further guidance, for example, see Rev. 
Proc. 89-15 (1989-1 C.B. 816) and Sec.  601.601(d)(2)(ii)(b) of this 
chapter).
    (C) Special rules. MACRS property affected by this paragraph 
(d)(3)(i) is not eligible in the year of change for the election 
provided under section 168(f)(1), 179, or 1400L(f), or for the 
additional first-year depreciation deduction provided in section 168(k) 
or 1400L(b). For purposes of determining whether the mid-quarter 
convention applies to other MACRS property placed in service during the 
year of change, the unadjusted depreciable basis or the adjusted 
depreciable basis of MACRS property affected by this paragraph 
(d)(3)(i) is not taken into account.
    (ii) Option to disregard change in use. In lieu of applying 
paragraph (d)(3)(i) of this section, the taxpayer may elect to 
determine the depreciation allowance as though the change in use had 
not occurred. The taxpayer elects this option by claiming on the 
taxpayer's timely filed (including extensions) income tax return for 
the year of change the depreciation allowance for the property as 
though the change in use had not occurred. See paragraph (g)(2) of this 
section for the manner for revoking this election.
    (4) Change in use results in a longer recovery period and/or a 
slower depreciation method--(i) Treated as originally placed in service 
with longer recovery period and/or slower depreciation method. If the 
change in use results in a longer recovery period and/or a depreciation 
method for the MACRS property that is less accelerated than the method 
used for the MACRS property before the change in use, the depreciation 
allowances beginning with the year of change are determined as though 
the MACRS property had been originally placed in service by the 
taxpayer with the longer recovery period and/or the slower depreciation 
method.
    (ii) Computation of the depreciation allowance. The depreciation 
allowances for the MACRS property for any 12-month taxable year 
beginning with the year of change are determined by multiplying the 
adjusted depreciable basis of the MACRS property as of the first day of 
each taxable year by the applicable depreciation rate for each taxable 
year. If there is a change in the use of MACRS property, the applicable 
convention that applies to the MACRS property is the same as the 
convention that applied before the change in the use of the MACRS 
property. If the year of change or any subsequent taxable year is less 
than 12 months, the depreciation allowance determined under this 
paragraph (d)(4)(ii) must be adjusted for a short taxable year (for 
further guidance, for example, see Rev. Proc. 89-15 (1989-1 C.B. 816) 
and Sec.  601.601(d)(2)(ii)(b) of this chapter). See paragraph (d)(5) 
of this section for the rules relating to the computation of the 
depreciation allowance under the optional depreciation tables. In 
determining the applicable depreciation rate for the year of change and 
any subsequent taxable year--
    (A) The applicable depreciation method is the depreciation method 
that

[[Page 43053]]

would apply in the year of change and any subsequent taxable year for 
the MACRS property had the taxpayer used the longer recovery period 
and/or the slower depreciation method in the placed-in-service year of 
the property. If the 200- or 150-percent declining balance method would 
have applied in the placed-in-service year but the method would have 
switched to the straight line method in the year of change or any prior 
taxable year, the applicable depreciation method beginning with the 
year of change is the straight line method; and
    (B) The applicable recovery period is either--
    (1) The longer recovery period resulting from the change in use if 
the applicable depreciation method is the 200- or 150-percent declining 
balance method (as determined under paragraph (d)(4)(ii)(A) of this 
section) unless the recovery period did not change as a result of the 
change in use, in which case the applicable recovery period is the same 
recovery period that applied before the change in use; or
    (2) The number of years remaining as of the beginning of each 
taxable year (taking into account the applicable convention) had the 
taxpayer used the longer recovery period in the placed-in-service year 
of the property if the applicable depreciation method is the straight 
line method (as determined under paragraph (d)(4)(ii)(A) of this 
section) unless the recovery period did not change as a result of the 
change in use, in which case the applicable recovery period is the 
number of years remaining as of the beginning of each taxable year 
(taking into account the applicable convention) based on the recovery 
period that applied before the change in use.
    (5) Using optional depreciation tables--(i) Taxpayer not bound by 
prior use of table. If a taxpayer used an optional depreciation table 
for the MACRS property before a change in the use, the taxpayer is not 
bound to use the appropriate new table for that MACRS property after 
the change in use (for further guidance, for example, see section 8 of 
Rev. Proc. 87-57 (1987-2 C.B. 687, 693) and Sec.  601.601(d)(2)(ii)(b) 
of this chapter). If the taxpayer chooses not to continue to use the 
optional depreciation table, the depreciation allowances for the MACRS 
property beginning in the year of change are determined under paragraph 
(d)(3)(i) or (4) of this section, as applicable.
    (ii) Taxpayer chooses to use optional depreciation table after 
change in use. If the taxpayer chooses to continue to use an optional 
depreciation table for the MACRS property after a change in the use, 
the depreciation allowances for the MACRS property for any 12-month 
taxable year beginning with the year of change are determined as 
follows:
    (A) Change in use results in a shorter recovery period and/or a 
more accelerated depreciation method. If the change in use results in a 
shorter recovery period and/or a more accelerated depreciation method 
(as described in paragraph (d)(3)(i) of this section), the depreciation 
allowances for the MACRS property for any 12-month taxable year 
beginning with the year of change are determined by multiplying the 
adjusted depreciable basis of the MACRS property as of the first day of 
the year of change by the annual depreciation rate for each recovery 
year (expressed as a decimal equivalent) specified in the appropriate 
optional depreciation table. The appropriate optional depreciation 
table for the MACRS property is based on the depreciation system, 
depreciation method, recovery period, and convention applicable to the 
MACRS property in the year of change as determined under paragraph 
(d)(3)(i) of this section. The depreciation allowance for the year of 
change for the MACRS property is determined by taking into account the 
applicable convention (which is already factored into the optional 
depreciation tables). If the year of change or any subsequent taxable 
year is less than 12 months, the depreciation allowance determined 
under this paragraph (d)(5)(ii)(A) must be adjusted for a short taxable 
year (for further guidance, for example, see Rev. Proc. 89-15 (1989-1 
C.B. 816) and Sec.  601.601(d)(2)(ii)(b) of this chapter).
    (B) Change in use results in a longer recovery period and/or a 
slower depreciation method--(1) Determination of the appropriate 
optional depreciation table. If the change in use results in a longer 
recovery period and/or a slower depreciation method (as described in 
paragraph (d)(4)(i) of this section), the depreciation allowances for 
the MACRS property for any 12-month taxable year beginning with the 
year of change are determined by choosing the optional depreciation 
table that corresponds to the depreciation system, depreciation method, 
recovery period, and convention that would have applied to the MACRS 
property in the placed-in-service year had that property been 
originally placed in service by the taxpayer with the longer recovery 
period and/or the slower depreciation method. If there is a change in 
the use of MACRS property, the applicable convention that applies to 
the MACRS property is the same as the convention that applied before 
the change in the use of the MACRS property. If the year of change or 
any subsequent taxable year is less than 12 months, the depreciation 
allowance determined under this paragraph (d)(5)(ii)(B) must be 
adjusted for a short taxable year (for further guidance, for example, 
see Rev. Proc. 89-15 (1989-1 C.B. 816) and Sec.  601.601(d)(2)(ii)(b) 
of this chapter).
    (2) Computation of the depreciation allowance. The depreciation 
allowances for the MACRS property for any 12-month taxable year 
beginning with the year of change are computed by first determining the 
appropriate recovery year in the table identified under paragraph 
(d)(5)(ii)(B)(1) of this section. The appropriate recovery year for the 
year of change is the year that corresponds to the year of change. For 
example, if the recovery year for the year of change would have been 
Year 4 in the table that applied before the change in the use of the 
MACRS property, then the recovery year for the year of change is Year 4 
in the table identified under paragraph (d)(5)(ii)(B)(1) of this 
section. Next, the annual depreciation rate (expressed as a decimal 
equivalent) for each recovery year is multiplied by a transaction 
coefficient. The transaction coefficient is the formula (1/(1-x)) where 
x equals the sum of the annual depreciation rates from the table 
identified under paragraph (d)(5)(ii)(B)(1) of this section (expressed 
as a decimal equivalent) for the taxable years beginning with the 
placed-in-service year of the MACRS property through the taxable year 
immediately prior to the year of change. The product of the annual 
depreciation rate and the transaction coefficient is multiplied by the 
adjusted depreciable basis of the MACRS property as of the beginning of 
the year of change.
    (6) Examples. The application of this paragraph (d) is illustrated 
by the following examples:

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

[[Page 43054]]

system changes from 7 years to 5 years. The depreciation method does 
not change. On January 1, 2003, the adjusted depreciable basis of 
the equipment is $22,311. X depreciates its 5-year recovery property 
placed in service in 2003 under the general depreciation system by 
using the 200-percent declining balance method and a 5-year recovery 
period. X does not use the optional depreciation tables.
    (ii) Under paragraph (d)(3)(i) of this section, X's allowable 
depreciation deduction for the equipment for 2003 and subsequent 
taxable years is determined as though X placed the equipment in 
service in 2003 for use primarily in its B business. The depreciable 
basis of the equipment as of January 1, 2003, is $22,311 (the 
adjusted depreciable basis at January 1, 2003). Because X does not 
use the optional depreciation tables, the depreciation allowance for 
2003 (the deemed placed-in-service year) for this equipment only is 
computed without taking into account the half-year convention. This 
equipment is not eligible for the additional first year depreciation 
deduction provided by section 168(k) or section 1400L(b). Thus, X's 
allowable depreciation deduction for the equipment for 2003 is 
$8,924 ($22,311 adjusted depreciable basis at January 1, 2003, 
multiplied by the applicable depreciation rate of 40% (200/5)). X's 
allowable depreciation deduction for the equipment for 2004 is 
$5,355 ($13,387 adjusted depreciable basis at January 1, 2004 
multiplied by the applicable depreciation rate of 40% (200/5)).
    (iii) Alternatively, under paragraph (d)(3)(ii) of this section, 
X may elect to disregard the change in use and, as a result, may 
continue to treat the equipment as though it is used primarily in 
its A business. If the election is made, X's allowable depreciation 
deduction for the equipment for 2003 is $8,924 ($22,311 adjusted 
depreciable basis at January 1, 2003, multiplied by the applicable 
depreciation rate of 40% (1/2.5 years remaining at January 1, 
2003)). X's allowable depreciation deduction for the equipment for 
2004 is $8,925 ($13,387 adjusted depreciable basis at January 1, 
2004 multiplied by the applicable depreciation rate of 66.67% (1/1.5 
years remaining at January 1, 2004)).
    Example 2. Change in use results in a shorter recovery period 
and/or a more accelerated depreciation method and optional 
depreciation table is used--(i) Same facts as in Example 1, except 
that X used the optional depreciation tables for computing 
depreciation for 1998 through 2002. Pursuant to paragraph (d)(5) of 
this section, X chooses to continue to use the optional depreciation 
table for the equipment. X does not make the election provided in 
paragraph (d)(3)(ii) of this section to disregard the change in use.
    (ii) In accordance with paragraph (d)(5)(ii)(A) of this section, 
X must first identify the appropriate optional depreciation table 
for the equipment. This table is table 1 in Rev. Proc. 87-57 because 
the equipment will be depreciated in the year of change (2003) under 
the general depreciation system using the 200-percent declining 
balance method, a 5-year recovery period, and the half-year 
convention (which is the convention that applied to the equipment in 
1998). This equipment is not eligible for the additional first year 
depreciation deduction provided by section 168(k) or section 
1400L(b). For 2003, X multiplies its adjusted depreciable basis in 
the equipment as of January 1, 2003, of $22,311, by the annual 
depreciation rate in table 1 for recovery year 1 for a 5-year 
recovery period (.20), to determine the depreciation allowance of 
$4,462. For 2004, X multiplies its adjusted depreciable basis in the 
equipment as of January 1, 2003, of $22,311, by the annual 
depreciation rate in table 1 for recovery year 2 for a 5-year 
recovery period (.32), to determine the depreciation allowance of 
$7,140.
    Example 3. Change in use results in a longer recovery period 
and/or a slower depreciation method--(i) Y, a calendar-year 
corporation, places in service in January 2001, equipment at a cost 
of $100,000 and uses this equipment in 2001 and 2002 only within the 
United States. Y depreciates the equipment for 2001 and 2002 under 
the general depreciation system by using the 200-percent declining 
balance method, a 5-year recovery period, and a half-year 
convention. Beginning in 2003, Y uses the equipment predominantly 
outside the United States. As a result of this change in use, the 
equipment is subject to the alternative depreciation system 
beginning in 2003. Under the alternative depreciation system, the 
equipment is depreciated by using the straight-line method and a 9-
year recovery period. The adjusted depreciable basis of the 
equipment at January 1, 2003, is $48,000.
    (ii) Pursuant to paragraph (d)(4) of this section, Y's allowable 
depreciation deduction for 2003 and subsequent taxable years is 
determined as though the equipment had been placed in service in 
January 2001, as property used predominantly outside the United 
States. In determining the applicable depreciation rate for 2003, 
the applicable depreciation method is the straight-line method and 
the applicable recovery period is 7.5 years, which is the number of 
years remaining at January 1, 2003, for property placed in service 
in 2001 with a 9-year recovery period (taking into account the half-
year convention). Thus, the depreciation allowance for 2003 is 
$6,398 ($48,000 adjusted depreciable basis at January 1, 2003, 
multiplied by the applicable depreciation rate of 13.33% (1/7.5 
years)). The depreciation allowance for 2004 is $6,398 ($41,602 
adjusted depreciable basis at January 1, 2004, multiplied by the 
applicable depreciation rate of 15.38% (1/6.5 years remaining at 
January 1, 2004)).
    Example 4. Change in use results in a longer recovery period 
and/or a slower depreciation method and optional depreciation table 
is used--(i) Same facts as in Example 3, except that Y used the 
optional depreciation tables for computing depreciation in 2001 and 
2002. Pursuant to paragraph (d)(5) of this section, Y chooses to 
continue to use the optional depreciation table for the equipment.
    (ii) In accordance with paragraph (d)(5)(ii)(B) of this section, 
Y must first determine the appropriate optional depreciation table 
for the equipment pursuant to paragraph (d)(5)(ii)(B)(1) of this 
section. This table is table 8 in Rev. Proc. 87-57, which 
corresponds to the alternative depreciation system, the straight-
line method, a 9-year recovery period, and the half-year convention 
(because Y depreciated 5-year property in 2001 using a half-year 
convention). Next, Y must determine the appropriate recovery year in 
table 8. Because the year of change is 2003, the depreciation 
allowance for the equipment for 2003 is determined using recovery 
year 3 of table 8. For 2003, Y multiplies its adjusted depreciable 
basis in the equipment as of January 1, 2003, of $48,000, by the 
product of the annual depreciation rate in table 8 for recovery year 
3 for a 9-year recovery period (.1111) and the transaction 
coefficient [1/(1-(.0556+.1111)), which equals 1.200], to determine 
the depreciation allowance of $6,399. For 2004, Y multiplies its 
adjusted depreciable basis in the equipment as of January 1, 2003, 
of $48,000, by the product of the annual depreciation rate in table 
8 for recovery year 4 for a 9-year recovery period (.1111) and the 
transaction coefficient (1.200), to determine the depreciation 
allowance of $6,399.

    (e) Change in the use of MACRS property during the placed-in-
service year--(1) In general. Except as provided in paragraph (e)(2) of 
this section, if a change in the use of MACRS property occurs during 
the placed-in-service year and the property continues to be MACRS 
property owned by the same taxpayer, the depreciation allowance for 
that property for the placed-in-service year is determined by its 
primary use during that year. The primary use of MACRS property may be 
determined in any reasonable manner that is consistently applied to the 
taxpayer's MACRS property. For purposes of this paragraph (e), the 
determination of whether the mid-quarter convention applies to any 
MACRS property placed in service during the year of change is made in 
accordance with Sec.  1.168(d)-1.
    (2) Alternative depreciation system property--(i) Property used 
within and outside the United States. The depreciation allowance for 
the placed-in-service year for MACRS property that is used within and 
outside the United States is determined by its predominant use during 
that year. The determination of whether MACRS property is used 
predominantly outside the United States during the placed-in-service 
year shall be made in accordance with the test in Sec.  1.48-1(g)(1)(i) 
for determining predominant use.
    (ii) Tax-exempt bond financed property. The depreciation allowance 
for the placed-in-service year for MACRS property that changes to tax-
exempt bond financed property, as described in section 168(g)(1)(C) and 
(g)(5), during that taxable year is determined under the alternative 
depreciation system. For purposes of

[[Page 43055]]

this paragraph (e), MACRS property changes to tax-exempt bond financed 
property when a tax-exempt bond is first issued after the MACRS 
property is placed in service. MACRS property continues to be tax-
exempt bond financed property in the hands of the taxpayer even if the 
tax-exempt bond (including any refunding issue) is not outstanding at, 
or is redeemed by, the end of the placed-in-service year.
    (iii) Other mandatory alternative depreciation system property. The 
depreciation allowance for the placed-in-service year for MACRS 
property that changes to, or changes from, property described in 
section 168(g)(1)(B) (tax-exempt use property) or (D) (imported 
property covered by an Executive Order) during that taxable year is 
determined under--
    (A) The alternative depreciation system if the MACRS property is 
described in section 168(g)(1)(B) or (D) at the end of the placed-in-
service year; or
    (B) The general depreciation system if the MACRS property is not 
described in section 168(g)(1)(B) or (D) at the end of the placed-in-
service year.
    (3) Examples. The application of this paragraph (e) is illustrated 
by the following examples:

    Example 1. (i) Z, a utility and calendar-year corporation, 
places in service on January 1, 2003, equipment at a cost of 
$100,000. Z uses this equipment in its combustion turbine production 
plant for 4 months and then uses the equipment in its steam 
production plant for the remainder of 2003. Z's combustion turbine 
production plant assets are classified as 15-year property and are 
depreciated by Z under the general depreciation system using a 15-
year recovery period and the 150-percent declining balance method of 
depreciation. Z's steam production plant assets are classified as 
20-year property and are depreciated by Z under the general 
depreciation system using a 20-year recovery period and the 150-
percent declining balance method of depreciation. Z uses the 
optional depreciation tables. The equipment is qualified property 
for purposes of section 168(k)(1).
    (ii) Pursuant to this paragraph (e), Z must determine 
depreciation based on the primary use of the equipment during the 
placed-in-service year. Z has consistently determined the primary 
use of all of its MACRS property by comparing the number of full 
months in the taxable year during which a MACRS property is used in 
one manner with the number of full months in that taxable year 
during which that MACRS property is used in another manner. Applying 
this approach, Z determines the depreciation allowance for the 
equipment for 2003 is based on the equipment being classified as 20-
year property because the equipment was used by Z in its steam 
production plant for 8 months in 2003. If the half-year convention 
applies in 2003, the appropriate optional depreciation table is 
table 1 in Rev. Proc. 87-57, which is the table for MACRS property 
subject to the general depreciation system, the 150-percent 
declining balance method, a 20-year recovery period, and the half-
year convention. Thus, the depreciation allowance for the equipment 
for 2003 is $32,625, which is the total of $30,000 for the 
additional 30-percent first-year depreciation deduction allowable 
(the unadjusted depreciable basis of $100,000 multiplied by .30), 
plus $2,625 for the 2003 depreciation allowance on the remaining 
basis of $70,000 [(the unadjusted depreciable basis of $100,000 less 
the additional first-year depreciation deduction of $30,000) 
multiplied by the annual depreciation rate of .0375 in table 1 for 
recovery year 1 for a 20-year recovery period].
    Example 2. T, a calendar year corporation, places in service on 
January 1, 2003, several computers at a total cost of $100,000. T 
uses these computers within the United States for 3 months in 2003 
and then moves and uses the computers outside the United States for 
the remainder of 2003. Pursuant to Sec.  1.48-1(g)(1)(i), the 
computers are considered as used predominantly outside the United 
States in 2003. As a result, for 2003, the computers are required to 
be depreciated under the alternative depreciation system of section 
168(g) with a recovery period of 5 years pursuant to section 
168(g)(3)(C). T uses the optional depreciation tables. If the half-
year convention applies in 2003, the appropriate optional 
depreciation table is table 8 in Rev. Proc. 87-57, which is the 
table for MACRS property subject to the alternative depreciation 
system, the straight-line method, a 5-year recovery period, and the 
half-year convention. Thus, the depreciation allowance for the 
computers for 2003 is $10,000, which is equal to the unadjusted 
depreciable basis of $100,000 multiplied by the annual depreciation 
rate of .10 in table 8 for recovery year 1 for a 5-year recovery 
period. Because the computers are required to be depreciated under 
the alternative depreciation system in their placed-in-service year, 
the computers are not eligible for the additional first year 
depreciation deduction provided by section 168(k).

    (f) No change in accounting method. A change in computing the 
depreciation allowance in the year of change for property subject to 
this section results from a change in underlying facts and, thus, is 
not a change in method of accounting under section 446(e).
    (g) Effective date--(1) In general. This section applies to changes 
in the use of MACRS property in taxable years ending on or after the 
date of publication of the final regulations in the Federal Register. 
For changes in the use of MACRS property after December 31, 1986, in 
taxable years ending before the date of publication of the final 
regulations in the Federal Register, the Internal Revenue Service will 
allow any reasonable method of depreciating the property under section 
168 in the year of change and the subsequent taxable years that is 
consistently applied to any property that changed use in the hands of 
the taxpayer.
    (2) Change in method of accounting--(i) In general. If a taxpayer 
adopted a method of accounting for depreciation due to a change in the 
use of MACRS property and the method is not in accordance with the 
method of accounting for depreciation provided in this section, a 
change to the method of accounting for depreciation provided in this 
section is a change in method of accounting to which the provisions of 
sections 446(e) and 481 and the regulations thereunder apply. Also, a 
revocation of the election provided in paragraph (d)(3)(ii) of this 
section to disregard a change in the use is a change in method of 
accounting to which the provisions of sections 446(e) and 481 and the 
regulations thereunder apply.
    (ii) Automatic consent to change method of accounting. For any 
taxable year ending on or after the date of publication of the final 
regulations in the Federal Register, a taxpayer changing its method of 
accounting in accordance with this paragraph (g)(2) must follow the 
applicable administrative procedures issued under Sec.  1.446-
1(e)(3)(ii) for obtaining the Commissioner's automatic consent to a 
change in method of accounting (for further guidance, for example, see 
Rev. Proc. 2002-9 (2002-1 C.B. 327) and Sec.  601.601(d)(2)(ii)(b) of 
this chapter). Any change in method of accounting made under this 
paragraph (g)(2) must be made using an adjustment under section 481(a).

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 03-18325 Filed 7-18-03; 8:45 am]
BILLING CODE 4830-01-P