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Code · REGISTER · 2007-03-01 · Social Security Administration · Rules and Regulations

Rules and Regulations. Final rules

25,827 words·~117 min read·/register/2007/03/01/07-922·

A research copy — for the controlling text, always check the official state or federal source. Not legal advice.

BILLING CODE 4910-13-M SOCIAL SECURITY ADMINISTRATION 20 CFR Parts 404 and 416 [Docket No. SSA-2006-0085] RIN 0960-AG05 Optometrists as “Acceptable Medical Sources” To Establish a Medically Determinable Impairment AGENCY: Social Security Administration. ACTION: Final rules. SUMMARY: We are revising the Social Security and Supplemental Security Income
(SSI)disability regulations regarding sources of evidence for establishing a medically determinable impairment under titles II and XVI of the Social Security Act (the Act). The revised regulations expand the situations in which we consider licensed optometrists to be “acceptable medical sources.” DATES: These rules are effective April 2, 2007. FOR FURTHER INFORMATION CONTACT: Art Spencer, Director, Office of Disability Evaluation Policy, Social Security Administration, 4465 Annex Building, 6401 Security Boulevard, Baltimore, MD 21235-6401,
(410)966-5766 or TTY
(410)966-5609. For information on eligibility or filing for benefits, call our national toll-free number, 1-800-772-1213, or TTY 1-800-325-0778, or visit our Internet Web site, Social Security Online, at *http://www.socialsecurity.gov.* SUPPLEMENTARY INFORMATION: Electronic Version The electronic file of this document is available on the date of publication in the **Federal Register** at *http://www.gpoaccess.gov/fr/index.html.* What is an “acceptable medical source?” Our rules provide that you must show that you have a medically determinable impairment with evidence from an “acceptable medical source.” An “acceptable medical source” is an individual who has the training and expertise to provide us with the signs and laboratory findings based on medically acceptable clinical and laboratory diagnostic techniques that establish a medically determinable physical or mental impairment. Our regulations identify professionals whom we consider to be “acceptable medical sources.” (See §§ 404.1513(a) and 416.913(a).) In our prior rules, these sections provided that a licensed optometrist was an “acceptable medical source,” but only for the measurement of visual acuity and visual fields. They further indicated that, for claims under title II, we might need a report from a physician to determine other aspects of eye diseases. Our rules in §§ 404.1513(d) and 416.913(d) provide that, once we have established that you have a medically determinable impairment, we consider all other relevant evidence from other medical and non-medical sources, including your own statements, to determine its severity and how it affects you. Why are we changing our rules? In the early 1990s, we discussed expanding the role of optometrists as “acceptable medical sources” with the American Optometric Association (AOA). However, because licensing requirements and scope of practice varied considerably among jurisdictions at that time, we found that it was not feasible for us to revise our policy. More recently, we again met with representatives of the AOA and obtained information about the education, qualifications, and State scope-of-practice requirements related to optometrists. Based on our review of accreditation and practice requirements, we have determined that, with the exception of the U.S. Virgin Islands, the licensing requirements, scope of treatment, and diagnostic protocols for licensed optometrists are sufficient to qualify all licensed optometrists as “acceptable medical sources” for visual disorders. Therefore, it is now appropriate to revise our regulations to authorize licensed optometrists to be “acceptable medical sources” for visual disorders in all jurisdictions but the U.S. Virgin Islands. 1 1 The U.S. Virgin Islands does not allow optometrists to administer or prescribe pharmaceuticals, including topical application of pharmaceuticals for diagnostic or treatment purposes. Because a complete evaluation of the eye includes the use of diagnostic pharmaceuticals, optometrists in the U.S. Virgin Islands are not qualified to perform a complete evaluation of the eye. The revised regulations expand the situations in which we consider licensed optometrists to be “acceptable medical sources.” These revised regulations will allow us to make more decisions based on medical evidence supplied to us solely from optometrists, rather than having to purchase time-consuming and expensive consultative examinations with ophthalmologists. Therefore, these regulations will help some individuals with visual disorders qualify for benefits more quickly. What rules are we revising? We are revising §§ 404.1513(a)(3) and 416.913(a)(3) to provide that, except in the U.S. Virgin Islands, licensed optometrists are “acceptable medical sources” for purposes of establishing a medically determinable impairment for visual disorders only. However, we are maintaining our current rules for licensed optometrists in the U.S. Virgin Islands, where these individuals will continue to be “acceptable medical sources” for measurement of visual acuity and visual fields only. What programs do these revised regulations affect? These revised rules affect disability and blindness determinations and decisions that we make under titles II and XVI of the Act. In addition, to the extent that Medicare entitlement and Medicaid eligibility are based on whether you qualify for disability benefits under title II or disability or blindness under title XVI, these rules affect the Medicare and Medicaid programs. Who can get disability benefits? Under title II of the Act, we provide for the payment of disability benefits if you are disabled and belong to one of the following three groups: • Workers insured under the Act, • Children of insured workers, and • Widows, widowers, and surviving divorced spouses (see § 404.336) of insured workers. Under title II of the Act, you may qualify for a period of disability if you are insured for disability under Social Security and have a disability as defined in section 216(i)(1) of the Act. That section defines disability to include statutory blindness, for purposes of establishing a period of disability under title II. If we find that you are blind and you meet the insured status requirement, we may establish a period of disability for you regardless of whether you can do substantial gainful activity (SGA). A period of disability protects your earnings record under Social Security so that the time you are disabled will not count against you in determining whether you will have worked long enough to qualify for benefits and the amount of your benefits. See §§ 404.320, 404.1505, 404.1581, and 404.1582. Under title XVI of the Act, we provide for SSI payments on the basis of disability or blindness if you are disabled or blind and have limited income and resources. How do we define blindness? For both the title II and title XVI programs, the Act defines blindness as “central visual acuity of 20/200 or less in the better eye with the use of a correcting lens. An eye which is accompanied by a limitation in the fields of vision such that the widest diameter of the visual field subtends an angle no greater than 20 degrees shall be considered * * * as having a central visual acuity of 20/200 or less.” (See sections 216(i)(1) and 1614(a)(2) of the Act.) Title II of the Act does not provide a separate category of benefits based on blindness. However, you may be entitled to benefits based on disability under title II of the Act if you are blind. By contrast, title XVI of the Act provides for a category of payments based on blindness as well as a category of payments based on disability. If you are blind and meet the SSI income and resources requirements, you may be eligible for SSI payments based on blindness. Your blindness does not have to meet a 12-month duration requirement for you to be eligible for these payments. Also, there is no requirement that you must be unable to do any SGA. However, if you are working, we will consider your earnings to determine if you are eligible for SSI payments. How do we decide whether you are disabled? If you are applying for disability benefits under title II of the Act, § 404.1513(a) of our regulations provides that we need evidence from “acceptable medical sources” to establish whether you have a medically determinable impairment(s). Therefore, in general, to be entitled to disability benefits under title II, your blindness must result from a medically determinable impairment and meet the 12-month duration requirement. (See §§ 404.1508, 404.1513, and 404.1581.) Also, if you are under age 55, you must be unable to do any SGA. (See §§ 404.1582 and 404.1584(b).) Even though you are doing SGA, we may still find that you are entitled to title II disability benefits if— • You are blind; • You are age 55 or older; and • You are unable to use skills or abilities like the ones you used in any SGA which you did regularly and for a substantial period of time. However, we will not pay you any cash benefits for any month in which you are doing SGA. (See §§ 404.1583 and 404.1584(c).) Section 416.913(a) of our regulations provides that if you are claiming benefits under title XVI on the basis of disability, not blindness, your disability must result from a medically determinable impairment documented by “acceptable medical sources.” However, blindness is treated differently under title XVI of the Act. Under title XVI, blindness and disability are separate categories of SSI payments, and the requirements for eligibility based on blindness are different from the requirements for eligibility based on disability. Under title XVI, the only evidence we need to establish statutory blindness is evidence showing that your visual acuity or visual field, in the better eye, meets the criteria described in § 416.981 of our regulations, provided that those measurements are consistent with the other evidence in your case record. We do not need to determine the cause of your blindness for you to be eligible for SSI payments based on blindness. Also, as provided in § 416.983, there is no duration requirement for statutory blindness under title XVI. Section 416.913(f) provides that if you are applying for benefits under title XVI on the basis of statutory blindness, we will require an examination by a physician skilled in diseases of the eye or by an optometrist, whichever you may select. What is a “medically determinable impairment?” We will not consider you to be disabled or blind unless you furnish medical and other evidence that we need to show that you are disabled or blind. (See sections 223(d)(5)(A) and 1614(a)(3)(H)(i) of the Act and §§ 404.1512(a) and 416.912(a) of our regulations.) The Act requires that you show that your disability results from a medically determinable physical or mental impairment. A physical or mental impairment is an impairment that results from anatomical, physiological, or psychological abnormalities which are demonstrable by medically acceptable clinical and laboratory diagnostic techniques. (See sections 223(d)(3) and 1614(a)(3)(D) of the Act.) Our regulations provide that a physical or mental impairment must be established by medical evidence consisting of signs, symptoms, and laboratory findings. (See §§ 404.1508 and 416.908.) What is our authority to make rules and set procedures for determining whether a person is disabled under the statutory definition? Section 205(a) of the Act and, by reference to section 205(a), section 1631(d)(1) provide that: The Commissioner of Social Security shall have full power and authority to make rules and regulations and to establish procedures, not inconsistent with the provisions of this title, which are necessary or appropriate to carry out such provisions, and shall adopt reasonable and proper rules and regulations to regulate and provide for the nature and extent of the proofs and evidence and the method of taking and furnishing the same in order to establish the right to benefits hereunder. What do we mean by “final rules” and “prior rules?” Even though these rules will not go into effect until 30 days after publication of this notice, for clarity we refer to the changes we are making here as the “final rules” and to the rules that will be changed by these final rules as the “prior rules.” When will we start to use these final rules? We will use these rules on their effective date. We will continue to use our prior rules until the effective date of these final rules. When the final rules become effective, we will apply them to new applications filed on or after the effective date of these rules and to claims pending before us, as we describe below. As is our usual practice when we make changes to our regulations, we will apply these final rules on or after their effective date whenever we make a determination or decision, including in those claims in which we make a determination or decision after remand to us from a Federal court. With respect to claims in which we have made a final decision and that are pending judicial review in Federal court, we expect that the court's review of the Commissioner's final decision would be made in accordance with the rules in effect at the time the final decision of the Commissioner was issued. If a court reverses the Commissioner's final decision and remands the case for further administrative proceedings after the effective date of these final rules, we will apply the provisions of these final rules to the entire period at issue in the claim in our new decision issued pursuant to the court's remand. Public Comments In the notice of proposed rulemaking
(NPRM)we published in the **Federal Register** on March 1, 2006 (71 FR 10456), we provided the public with a 60-day comment period that ended on May 1, 2006. We received 25 sets of comments. The commenters included medical organizations, a professional association of individuals who evaluate and adjudicate Social Security disability claims, optometrists, and other individuals. Twenty-three commenters supported the proposed rules. Since these commenters did not recommend any changes to these rules, we have not summarized or responded to their comments below. Because some of the remaining comments were long, we have condensed, summarized, and paraphrased them below. We have tried to present the commenters' views adequately and to respond to the issues raised by the commenters that were within the scope of the rulemaking. We provide our reasons for adopting or not adopting the recommendations in the summaries of the comments and our responses below. *Comment:* A commenter disagreed with our proposed changes on the basis that licensed optometrists have less training than ophthalmologists. This commenter was concerned that the expansion of the definition of “acceptable medical sources” to include licensed optometrists might not be appropriate. *Response:* As we indicated in the NPRM, and as noted above, we obtained information about the education, qualifications, and States' scope-of-practice requirements related to optometrists. Based on our careful review of this information, we have determined that, with the exception of the U.S. Virgin Islands, the licensing requirements, scope of treatment, and diagnostic protocols for licensed optometrists are sufficient to qualify all licensed optometrists as “acceptable medical sources” for establishing the existence of visual disorders under our disability programs. Therefore, we have determined that it is appropriate to revise our regulations to make licensed optometrists “acceptable medical sources” for establishing visual disorders in all jurisdictions but the U.S. Virgin Islands. With this change, we will be able to make more decisions based on existing medical evidence, without having to purchase time-consuming and expensive consultative examinations, thereby allowing some individuals with visual disorders to qualify for benefits more quickly. While we respect the knowledge, skills, and education of ophthalmologists, our research shows that optometrists are capable of providing the evidence, including the signs and laboratory findings, that we need to establish a medically determinable visual disorder. *Comment:* Two commenters disagreed with our proposed changes because the law and our regulations require that a disability be “medically determinable.” They believed that this meant that we should continue to require an examination by a treating or consulting ophthalmologist (M.D. or D.O.) to diagnose and establish the pathology of disorder causing visual impairment. One of these commenters noted the differences between the criteria in titles II and XVI and indicated that in the case of title II disability findings related to blindness, the evidence must show, and an “acceptable medical source” must agree, that a medical condition caused the claimant's blindness. This commenter believed that optometrists are not qualified to identify or evaluate the underlying medical cause of blindness, or to monitor, treat, and provide prognoses for many eye diseases that could lead to disabling vision loss or the likely outcomes from those interventions, because they are not fully knowledgeable of the potential treatments and lack the medical training, knowledge, and expertise needed to interpret the clinical and laboratory findings that would be necessary to diagnose a medically determinable impairment. *Response:* While we agree that title II requires that a visual disorder must be established by evidence from an “acceptable medical source,” the Act does not define who is an “acceptable medical source.” Instead, and as we noted in the NPRM (71 FR at 10458) and earlier in this preamble, Congress gave the Commissioner the authority to make rules and regulations that provide for “the nature and extent of the proofs and evidence and the method of taking and furnishing the same in order to establish the right to benefits * * *.” See sections 205(a) and 1631(d)(1) of the Act. Under that authority, we have determined that, with the exception of the U.S. Virgin Islands, the licensing requirements, scope of treatment, and diagnostic protocols for licensed optometrists are sufficient to qualify all licensed optometrists as “acceptable medical sources” for establishing the existence of visual disorders for purposes of our disability programs, including for purposes of benefits under title II. We do not agree with these commenters that we also need evidence from a physician in these cases. *Comment:* One commenter questioned the differences between the eligibility requirements for benefits based on blindness under title XVI and benefits based on disability under title II and title XVI. This commenter noted that it is not necessary to establish the cause of the blindness in order to receive benefits based on blindness under title XVI, but it is necessary to establish the cause of any visual loss in order to receive disability benefits under either title XVI or title II, including disability benefits based on blindness under title II. The commenter indicated that these differences, as well as the fact that there is no duration requirement for benefits based on blindness under title XVI while there is such a requirement under title II, penalize individuals who receive title II disability benefits based on blindness. The commenter also recommended that if the title XVI eligibility requirements are statutory and cannot be changed, we should apply them when we determine whether individuals are disabled based on blindness under title II. *Response:* These rules are required by the Act. “Blindness” and “disability” are separate categories under title XVI, whereas under title II blindness is considered a type of “disability.” The statutory requirements for eligibility based on blindness under title XVI are different from the statutory requirements for eligibility based on disability under title II and title XVI. As a matter of law, we cannot apply the title XVI eligibility requirements for statutory blindness to title II claims for disability. Regulatory Procedures Executive Order 12866 We have consulted with the Office of Management and Budget
(OMB)and determined that these rules meet the requirements for a significant regulatory action under Executive Order 12866, as amended by Executive Order 13258. Thus, they were subject to OMB review. Regulatory Flexibility Act We certify that these rules will not have a significant economic impact on a substantial number of small entities because they will affect only individuals. Thus, a regulatory flexibility analysis as provided in the Regulatory Flexibility Act, as amended, is not required. Paperwork Reduction Act These rules do not impose any new or revised reporting or recordkeeping requirements on the public. (Catalog of Federal Domestic Assistance Program Nos. 96.001, Social Security—Disability Insurance; 96.002, Social Security—Retirement Insurance; 96.004, Social Security—Survivors Insurance; 96.006, Supplemental Security Income.) List of Subjects 20 CFR Part 404 Administrative practice and procedure, Blind, Disability benefits, Old-age, Survivors and Disability Insurance, Reporting and recordkeeping requirements, Social Security. 20 CFR Part 416 Administrative practice and procedure, Aged, Blind, Disability benefits, Public assistance programs, Reporting and recordkeeping requirements, Supplemental Security Income (SSI). Dated: November 27, 2006. Jo Anne B. Barnhart, Commissioner of Social Security. For the reasons set out in the preamble, we are amending subpart P of part 404 and subpart I of part 416 of chapter III of title 20 of the Code of Federal Regulations as set forth below: PART 404—FEDERAL OLD-AGE, SURVIVORS AND DISABILITY INSURANCE (1950—) Subpart P—[Amended] 1. The authority citation for subpart P of part 404 continues to read as follows: Authority: Secs. 202, 205(a), (b), and (d)-(h), 216(i), 221(a) and (i), 222(c), 223, 225, and 702(a)(5) of the Social Security Act (42 U.S.C. 402, 405(a), (b), and (d)-(h), 416(i), 421(a) and (i), 422(c), 423, 425, and 902(a)(5)); sec. 211(b), Pub. L. 104-193, 110 Stat. 2105, 2189. 2. Revise § 404.1513(a)(3) to read as follows: § 404.1513 Medical and other evidence of your impairment(s).
(a)* * *
(3)Licensed optometrists, for purposes of establishing visual disorders only (except, in the U.S. Virgin Islands, licensed optometrists, for the measurement of visual acuity and visual fields only); PART 416—SUPPLEMENTAL SECURITY INCOME FOR THE AGED, BLIND, AND DISABLED Subpart I—[Amended] 3. The authority citation for subpart I of part 416 continues to read as follows: Authority: Secs. 702(a)(5), 1611, 1614, 1619, 1631(a), (c), (d)(1), and (p), and 1633 of the Social Security Act (42 U.S.C. 902(a)(5), 1382, 1382c, 1382h, 1383(a), (c), (d)(1), and (p), and 1383(b); secs. 4(c) and 5, 6(c)-(e), 14(a), and 15, Pub. L. 98-460, 98 Stat. 1794, 1801, 1802, and 1808 (42 U.S.C. 421 note, 423 note, 1382h note). 4. Revise § 416.913(a)(3) to read as follows: § 416.913 Medical and other evidence of your impairment(s).
(a)* * *
(3)Licensed optometrists, for purposes of establishing visual disorders only (except, in the U.S. Virgin Islands, licensed optometrists, for the measurement of visual acuity and visual fields only). (See paragraph
(f)of this section for the evidence needed for statutory blindness); [FR Doc. E7-3577 Filed 2-28-07; 8:45 am] BILLING CODE 4191-02-P DEPARTMENT OF HEALTH AND HUMAN SERVICES Food and Drug Administration 21 CFR Parts 520 and 522 New Animal Drugs; Maropitant AGENCY: Food and Drug Administration, HHS. ACTION: Final rule. SUMMARY: The Food and Drug Administration
(FDA)is amending the animal drug regulations to reflect approval of two new animal drug applications (NADAs) filed by Pfizer, Inc. The NADAs provide for the veterinary prescription use of maropitant citrate tablets and maropitant citrate injectable solution for the management of vomiting in dogs. DATES: This rule is effective March 1, 2007. FOR FURTHER INFORMATION CONTACT: Melanie R. Berson, Center for Veterinary Medicine (HFV-110), Food and Drug Administration, 7500 Standish Pl., Rockville, MD 20855, 301-827-7540, e-mail: *melanie.berson@fda.hhs.gov* . SUPPLEMENTARY INFORMATION: Pfizer, Inc., 235 East 42d St., New York, NY 10017, filed NADA 141-262 for CERENIA (maropitant citrate) Tablets. The NADA provides for the veterinary prescription use of maropitant citrate tablets in dogs for the prevention of acute vomiting and for the prevention of vomiting due to motion sickness. The application is approved as of January 29, 2007, and 21 CFR part 520 is amended by adding new § 520.1315 to reflect the approval. Pfizer, Inc., also filed NADA 141-263 for CERENIA (maropitant citrate) Injectable Solution, used by veterinary prescription in dogs for the prevention and treatment of acute vomiting. The application is approved as of January 29, 2007, and 21 CFR part 522 is amended by adding new § 522.1315 to reflect the approval. In accordance with the freedom of information provisions of 21 CFR part 20 and 21 CFR 514.11(e)(2)(ii), summaries of safety and effectiveness data and information submitted to support approval of these applications may be seen in the Division of Dockets Management (HFA-305), Food and Drug Administration, 5630 Fishers Lane, rm. 1061, Rockville, MD 20852, between 9 a.m. and 4 p.m., Monday through Friday. Under section 512(c)(2)(F)(i) of the Federal Food, Drug, and Cosmetic Act (the act) (21 U.S.C. 360b(c)(2)(F)(i)), this original approval of NADA 141-262 qualifies for 5 years of marketing exclusivity beginning January 29, 2007. Under section 512(c)(2)(F)(ii) of the act, this original approval of NADA 141-263 qualifies for 3 years of marketing exclusivity beginning January 29, 2007. The agency has determined under 21 CFR 25.33(d)(1) that these actions are of a type that do not individually or cumulatively have a significant effect on the human environment. Therefore, neither an environmental assessment nor an environmental impact statement is required. This rule does not meet the definition of “rule” in 5 U.S.C. 804(3)(A) because it is a rule of “particular applicability.” Therefore, it is not subject to the congressional review requirements in 5 U.S.C. 801-808. List of Subjects in 21 CFR Parts 520 and 522 Animal drugs. Therefore, under the Federal Food, Drug, and Cosmetic Act and under authority delegated to the Commissioner of Food and Drugs and redelegated to the Center for Veterinary Medicine, 21 CFR parts 520 and 522 are amended as follows: PART 520—ORAL DOSAGE FORM NEW ANIMAL DRUGS 1. The authority citation for 21 CFR part 520 continues to read as follows: Authority: 21 U.S.C. 360b. 2. Section 520.1315 is added to read as follows: § 520.1315 Maropitant.
(a)*Specifications* . Each tablet contains 16, 24, 60, or 160 milligrams
(mg)maropitant as maropitant citrate.
(b)*Sponsor* . See No. 000069 in § 510.600(c) of this chapter.
(c)*Conditions of use in dogs* —(1) *Indications for use and amount* . For the prevention of acute vomiting, administer a minimum of 2.0 mg per kilogram (/kg) body weight once daily for up to 5 consecutive days. For the prevention of vomiting due to motion sickness, administer a minimum of 8.0 mg/kg body weight once daily for up to 2 consecutive days.
(2)*Limitations* . Federal law restricts this drug to use by or on the order of a licensed veterinarian. PART 522—IMPLANTATION OR INJECTABLE DOSAGE FORM NEW ANIMAL DRUGS 3. The authority citation for 21 CFR part 522 continues to read as follows: Authority: 21 U.S.C. 360b. 4. Section 522.1315 is added to read as follows: § 522.1315 Maropitant.
(a)*Specifications* . Each milliliter of solution contains 10 milligrams
(mg)maropitant as maropitant citrate.
(b)*Sponsor* . See No. 000069 in § 510.600(c) of this chapter.
(c)*Conditions of use in dogs* —(1) *Amount* . Administer 1.0 mg per kilogram body weight by subcutaneous injection once daily for up to 5 consecutive days.
(2)*Indications for use* . For the prevention and treatment of acute vomiting.
(3)*Limitations* . Federal law restricts this drug to use by or on the order of a licensed veterinarian. Dated: February 16, 2007. Stephen F. Sundlof, Director, Center for Veterinary Medicine. [FR Doc. E7-3402 Filed 2-28-07; 8:45 am] BILLING CODE 4160-01-S DEPARTMENT OF HEALTH AND HUMAN SERVICES Food and Drug Administration 21 CFR Part 522 Implantation or Injectable Dosage Form New Animal Drugs; Trenbolone and Estradiol AGENCY: Food and Drug Administration, HHS. ACTION: Final rule. SUMMARY: The Food and Drug Administration
(FDA)is amending the animal drug regulations to reflect approval of a supplemental abbreviated new animal drug application (ANADA) filed by Ivy Laboratories, Division of Ivy Animal Health, Inc. The supplemental ANADA provides for the addition of tylosin tartrate to an approved subcutaneous implant containing trenbolone and estradiol used for increased rate of weight gain and improved feed efficiency in steers and heifers fed in confinement for slaughter. DATES: This rule is effective March 1, 2007. FOR FURTHER INFORMATION CONTACT: Eric S. Dubbin, Center for Veterinary Medicine (HFV-126), Food and Drug Administration, 7500 Standish Pl., Rockville, MD 20855, 301-827-0232, e-mail: *eric.dubbin@fda.hhs.gov* . SUPPLEMENTARY INFORMATION: Ivy Laboratories, Div. of Ivy Animal Health, Inc., 8857 Bond St., Overland Park, KS 66214, filed a supplement to ANADA 200-346 for COMPONENT TE-200 with TYLAN (trenbolone acetate and estradiol with tylosin tartrate), a subcutaneous implant used for increased rate of weight gain and improved feed efficiency in steers and heifers fed in confinement for slaughter. The supplemental ANADA provides for the addition of a pellet containing 29 milligrams
(mg)tylosin tartrate to the approved COMPONENT TE-200 implant for steers and heifers fed in confinement for slaughter. The supplemental application is approved as of January 26, 2007, and the regulations are amended in 21 CFR 522.2477 to reflect the approval. The basis of approval is discussed in the freedom of information summary. In accordance with the freedom of information provisions of 21 CFR part 20 and 21 CFR 514.11(e)(2)(ii), a summary of safety and effectiveness data and information submitted to support approval of this application may be seen in the Division of Dockets Management (HFA-305), Food and Drug Administration, 5630 Fishers Lane, rm. 1061, Rockville, MD 20852, between 9 a.m. and 4 p.m., Monday through Friday. Under section 512(c)(2)(F)(iii) of the Federal Food, Drug, and Cosmetic Act (the act) (21 U.S.C. 360b(c)(2)(F)(iii)), this approval qualifies for 3 years of marketing exclusivity beginning January 26, 2007. The agency has determined under 21 CFR 25.33(a)(1) that this action is of a type that does not individually or cumulatively have a significant effect on the human environment. Therefore, neither an environmental assessment nor an environmental impact statement is required. This rule does not meet the definition of “rule” in 5 U.S.C. 804(3)(A) because it is a rule of “particular applicability.” Therefore, it is not subject to the congressional review requirements in 5 U.S.C. 801-808. List of Subjects in 21 CFR Part 522 Animal drugs. Therefore, under the Federal Food, Drug, and Cosmetic Act and under the authority delegated to the Commissioner of Food and Drugs and redelegated to the Center for Veterinary Medicine, 21 CFR part 522 is amended as follows: PART 522—IMPLANTATION OR INJECTABLE DOSAGE FORM NEW ANIMAL DRUGS 1. The authority citation for 21 CFR part 522 continues to read as follows: Authority: 21 U.S.C. 360b. 2. In § 522.2477, add paragraph (d)(2)(i)(F) to read as follows: § 522.2477 Trenbolone acetate and estradiol.
(d)* * *
(2)* * *
(i)* * *
(F)200 mg trenbolone acetate and 20 mg estradiol (one implant consisting of 11 pellets, each of 10 pellets containing 20 mg trenbolone acetate and 2 mg estradiol, and 1 pellet containing 29 mg tylosin tartrate) per implant dose. Dated: February 12, 2007. Steven D. Vaughn, Director, Office of New Animal Drug Evaluation, Center for Veterinary Medicine. [FR Doc. E7-3620 Filed 2-28-07; 8:45 am] BILLING CODE 4160-01-S DEPARTMENT OF HEALTH AND HUMAN SERVICES Food and Drug Administration 21 CFR Part 558 New Animal Drugs For Use in Animal Feeds; Monensin AGENCY: Food and Drug Administration, HHS. ACTION: Final rule; technical amendment. SUMMARY: The Food and Drug Administration
(FDA)is amending the animal drug regulations to reflect approval of a supplemental new animal drug application
(NADA)filed by Elanco Animal Health. The supplemental NADA provides for minor revisions to labeling of monensin Type A medicated articles for chickens. FDA is also amending the regulations to simplify the organization of special labeling requirements for formulations (Type A medicated articles, Type B and Type C medicated feeds) containing monensin for poultry and game birds. This action is being taken to improve the clarity of the regulations. DATES: This rule is effective March 1, 2007. FOR FURTHER INFORMATION CONTACT: Joan C. Gotthardt, Center for Veterinary Medicine (HFV-130), Food and Drug Administration, 7500 Standish Pl., Rockville, MD 20855, 301-827-7571, e-mail: *joan.gotthardt@fda.hhs.gov* . SUPPLEMENTARY INFORMATION: Elanco Animal Health, A Division of Eli Lilly & Co., Lilly Corporate Center, Indianapolis, IN 46285, filed a supplement to NADA 38-878 that provides for use of COBAN 60 and COBAN 90 (monensin, USP) Type A medicated articles in feed of chickens. The supplement provides for minor revisions to labeling. The supplemental NADA is approved as of February 7, 2007, and the regulations in 21 CFR 558.355 are amended to reflect the approval. In addition, FDA is taking this opportunity to amend the regulations to simplify the organization of special labeling requirements for formulations (Type A medicated articles, Type B and Type C medicated feeds) containing monensin for poultry and game birds. Similar restructuring was done recently for monensin formulations used in ruminants (71 FR 66231, November 14, 2006). This action is being taken to improve the clarity of the regulations. Approval of this supplemental NADA did not require review of additional safety or effectiveness data or information. Therefore, a freedom of information summary is not required. FDA has determined under 21 CFR 25.33(a)(1) that this action is of a type that does not individually or cumulatively have a significant effect on the human environment. Therefore, neither an environmental assessment nor an environmental impact statement is required. This rule does not meet the definition of “rule” in 5 U.S.C. 804(3)(A) because it is a rule of “particular applicability.” Therefore, it is not subject to the congressional review requirements in 5 U.S.C. 801-808. List of Subjects in 21 CFR Part 558 Animal drugs, Animal feeds. Therefore, under the Federal Food, Drug, and Cosmetic Act and under the authority delegated to the Commissioner of Food and Drugs and redelegated to the Center for Veterinary Medicine, 21 CFR part 558 is amended as follows: PART 558—NEW ANIMAL DRUGS FOR USE IN ANIMAL FEEDS 1. The authority citation for 21 CFR part 558 continues to read as follows: Authority: 21 U.S.C. 360b, 371. 2. In § 558.355, revise paragraphs (a), (b)(1), (b)(4), (b)(6), (d)(4), (d)(5), and (d)(8); and add paragraphs (d)(9)(iv) through (d)(9)(vi), and (d)(10)(iv) through (d)(10)(vi) to read as follows: § 558.355 Monensin.
(a)*Specifications* . Type A medicated articles containing monensin, USP.
(b)* * *
(1)To No. 000986: 36.3 (for export only), 44, 45, 60, or 90.7 grams per pound for use as in paragraphs (f)(1)(i) and (f)(4) of this section.
(4)To No. 000986: 45, 60, or 90.7 grams per pound for use as in paragraph (f)(2) of this section.
(6)To No. 000986: 45, 60, or 90.7 grams per pound for use as in paragraph (f)(5) of this section.
(d)* * *
(4)Liquid Type B feeds shall bear an expiration date of 8 weeks after its date of manufacture.
(5)All Type A medicated articles containing monensin shall bear the following warning statement: When mixing and handling monensin Type A medicated articles, use protective clothing, impervious gloves, and a dust mask. Operators should wash thoroughly with soap and water after handling. If accidental eye contact occurs, immediately rinse thoroughly with water.
(8)Type A medicated articles containing monensin intended for use in chickens, turkeys, and quail shall bear the following statements:
(i)Do not allow horses, other equines, mature turkeys, or guinea fowl access to feed containing monensin. Ingestion of monensin by horses and guinea fowl has been fatal.
(ii)Must be thoroughly mixed in feeds before use.
(iii)Do not feed undiluted.
(iv)Do not feed to laying chickens.
(v)Do not feed to chickens over 16 weeks of age.
(vi)For replacement chickens intended for use as cage layers only.
(vii)Some strains of turkey coccidia may be monensin tolerant or resistant. Monensin may interfere with development of immunity to turkey coccidiosis.
(viii)In the absence of coccidiosis in broiler chickens the use of monensin with no withdrawal period may limit feed intake resulting in reduced weight gain.
(9)* * *
(iv)*Chickens* : See paragraphs (d)(8)(i) through (d)(8)(vi), and (d)(8)(viii) of this section.
(v)*Turkeys:* See paragraphs (d)(8)(i), (d)(8)(ii), (d)(8)(iii), and (d)(8)(vii) of this section.
(vi)*Quail* : See paragraphs (d)(8)(i), (d)(8)(ii), and (d)(8)(iii) of this section.
(10)* * *
(iv)*Chickens* : See paragraphs (d)(8)(i), (d)(8)(iv), (d)(8)(v), (d)(8)(vi), and (d)(8)(viii) of this section.
(v)* Turkeys* : See paragraphs (d)(8)(i) and (d)(8)(vii) of this section.
(vi)* Quail* : See paragraph (d)(8)(i) of this section. Dated: February 12, 2007. Steven D. Vaughn, Director, Office of New Animal Drug Evaluation, Center for Veterinary Medicine. [FR Doc. E7-3621 Filed 2-28-07; 8:45 am] BILLING CODE 4160-01-S DEPARTMENT OF HEALTH AND HUMAN SERVICES Food and Drug Administration 21 CFR Part 558 New Animal Drugs For Use in Animal Feeds; Zilpaterol AGENCY: Food and Drug Administration, HHS. ACTION: Final rule. SUMMARY: The Food and Drug Administration
(FDA)is amending the animal drug regulations to reflect approval of a supplemental new animal drug application
(NADA)filed by Intervet Inc. The supplemental NADA provides for the removal of a caution statement against the formulation of pelleted feeds from labeling of zilpaterol hydrochloride Type A medicated article and Type B and Type C medicated feeds. DATES: This rule is effective March 1, 2007. FOR FURTHER INFORMATION CONTACT: Charles J. Andres, Center for Veterinary Medicine (HFV-120), Food and Drug Administration, 7500 Standish Pl., Rockville, MD 20855, 301 827-1600, e-mail: *charles.andres@.fda.hhs.gov* . SUPPLEMENTARY INFORMATION: Intervet Inc., P.O. Box 318, 29160 Intervet Ln., Millsboro, DE 19966, filed a supplement to NADA 141-258 for use of ZILMAX (zilpaterol hydrochloride 4.8%) Type A medicated article to formulate Type B and Type C medicated cattle feeds. The supplemental NADA provides for the removal of a caution statement against the formulation of pelleted feeds from labeling. The supplemental NADA is approved as of January 29, 2007, and the regulations are amended in 21 CFR 558.665 to reflect the approval. Approval of this supplemental NADA did not require review of additional safety or effectiveness data or information. Therefore, a freedom of information summary is not required. FDA has determined under 21 CFR 25.33(a)(1) that this action is of a type that does not individually or cumulatively have a significant effect on the human environment. Therefore, neither an environmental assessment nor an environmental impact statement is required. This rule does not meet the definition of “rule” in 5 U.S.C. 804(3)(A) because it is a rule of “particular applicability.” Therefore, it is not subject to the congressional review requirements in 5 U.S.C. 801-808. List of Subjects in 21 CFR Part 558 Animal drugs, Animal feeds. Therefore, under the Federal Food, Drug, and Cosmetic Act and under authority delegated to the Commissioner of Food and Drugs and redelegated to the Center for Veterinary Medicine, 21 CFR part 558 is amended as follows: PART 558—NEW ANIMAL DRUGS FOR USE IN ANIMAL FEEDS 1. The authority citation for 21 CFR part 558 continues to read as follows: Authority: 21 U.S.C. 360b, 371. § 558.665 [Amended] 2. Remove paragraph (d)(3) of § 558.665. Dated: February 12, 2007. Steven D. Vaughn, Director, Office of New Animal Drug Evaluation, Center for Veterinary Medicine. [FR Doc. E7-3615 Filed 2-28-07; 8:45 am] BILLING CODE 4160-01-S DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9314] RIN 1545-BF37 Depreciation of MACRS Property That Is Acquired in a Like-Kind Exchange or as a Result of an Involuntary Conversion AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations and removal of temporary regulations. SUMMARY: This document contains final regulations relating to the depreciation of property subject to the accelerated cost recovery system under section 168 of the Internal Revenue Code (MACRS property). Specifically, these final regulations provide guidance on how to depreciate MACRS property acquired in a like-kind exchange under section 1031 or as a result of an involuntary conversion under section 1033 when both the acquired and relinquished property are subject to MACRS in the hands of the acquiring taxpayer. These final regulations will affect taxpayers involved in a like-kind exchange under section 1031 or an involuntary conversion under section 1033. The corresponding temporary regulations are removed. DATES: *Effective Dates:* These regulations are effective on February 26, 2007. *Applicability Dates:* For dates of applicability, see §§ 1.168(a)-1(b), 1.168(b)-1(b), 1.168(d)-1(d)(3), 1.168(i)-1(l), 1.168(i)-6(k), and 1.168(k)-1(g)(3)(ii). FOR FURTHER INFORMATION CONTACT: Patrick S. Kirwan,
(202)622-3110 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background This document contains amendments to 26 CFR part 1 under section 168 of the Internal Revenue Code (Code). Section 168 provides the depreciation deduction for tangible property generally placed in service after December 31, 1986. On March 1, 2004, the IRS and the Treasury Department published in the **Federal Register** (69 FR 9529) temporary regulations (TD 9115) relating to the depreciation allowable for tangible property of a character subject to the allowance for depreciation provided in section 167(a) that is generally placed in service after December 31, 1986, and is subject to section 168 (MACRS property) that is acquired in a like-kind exchange or as a result of involuntary conversion. On the same date the IRS published a notice of proposed rulemaking related to this topic in the **Federal Register** (69 FR 9560). No public hearing on the regulations was requested or held. Several written comments to the notice of proposed rulemaking were received. After consideration of all the comments received, the proposed regulations are adopted as amended by this Treasury decision, and the corresponding temporary regulations are removed. The revisions to the proposed regulations are discussed in this preamble. Unless otherwise specifically stated, references to the temporary regulations are to TD 9115. General Overview Section 167 allows as a depreciation deduction a reasonable allowance for the exhaustion, wear, and tear of property used in a trade or business or held for the production of income. The depreciation allowable for depreciable tangible property placed in service after 1986 generally is determined under section 168. Section 1001 generally provides for the recognition of gain or loss on the sale or exchange of property. Under section 1031(a)(1), no gain or loss is recognized on an exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of like kind that is to be held either for productive use in a trade or business or for investment. Section 1031(b) provides that if an exchange would be within the provision of section 1031(a) were it not for the fact that the property received in the exchange consists not only of property permitted to be received in such an exchange, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. Under section 1031(c), no loss from a transaction that also involves other property or money is recognized. Under section 1031(d), the basis of property acquired in an exchange described in section 1031 is the same as that of the property exchanged, decreased by the amount of any money received by the taxpayer and increased by the amount of gain (or decreased by the amount of loss) that was recognized on such exchange. Section 1033(a)(1) provides that if property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, no gain is recognized. Under section 1033(b)(1), the basis of property acquired by the taxpayer in such a transaction is the basis of the converted property. Under section 1033(a)(2)(A), if property is compulsorily or involuntarily converted into money or into property not similar or related in service or use to the converted property, and, within the time frame described in section 1033(a)(2)(B), the taxpayer purchases other property that is related in service or use to the converted property or purchases stock in the acquisition of control of a corporation owning such property, then the taxpayer may elect to recognize gain only to the extent that the amount realized upon such conversion exceeds the cost of such other property or stock. Under section 1033(b)(2), if such an election is made, the basis of the replacement property acquired by the taxpayer generally is the cost of that property decreased by any gain not recognized by reason of section 1033(a)(2). Summary of Comments and Explanation of Provisions Scope In general, the final regulations adopt the rules outlined in the proposed and temporary regulations with the addition of some clarifying language and examples provided in response to comments. The temporary regulations provided guidance as to how to determine the annual depreciation allowance under section 168 for replacement property acquired in a like-kind exchange or involuntary conversion. However, the temporary regulations did not apply to a like-kind exchange or involuntary conversion if the allowance for depreciation of either the relinquished or replacement property is computed under a depreciation system other than section 168 (MACRS), or for which a taxpayer made a valid election under section 168(f)(1) to exclude it from the application of MACRS. A commentator requested that the final regulations apply to all property acquired in a like-kind exchange or involuntary conversion. However, it is anticipated that the vast majority of like-kind exchanges and involuntary conversions occurring after the effective date of the final regulations will involve the exchange of MACRS property. In addition, there are differences between MACRS and other depreciation systems which would require the creation of additional rules which would only apply in a limited number of circumstances. Furthermore, certain types of property are statutorily excluded from being treated as MACRS property. Therefore, the final regulations do not adopt the commentator's suggestion. However, the final regulations allow a taxpayer to elect to treat the sum of the exchanged basis and excess basis of the replacement property as MACRS property that is placed in service at the time of replacement if the tangible depreciable property acquired by a taxpayer in a like-kind exchange or involuntary conversion replaces tangible depreciable property for which the taxpayer made a valid election under section 168(f)(1) to exclude it from the application of MACRS. For example, a taxpayer that exchanges a machine depreciated under the unit of production method for a used machine may depreciate under MACRS the sum of the exchanged basis and excess basis of the used machine (replacement property) as a machine placed in service at the time of replacement. Optional Depreciation Tables For taxpayers who wish to use the optional depreciation tables to determine the depreciation allowances for the replacement MACRS property instead of the formulas (for example, see section 6 of Rev. Proc. 87-57 (1987-2 CB 687, 692)), the final regulations provide guidance on choosing the applicable optional table as well as how to modify the calculation for computing the depreciation allowances for the replacement MACRS property. A commentator noted that under the temporary regulations depreciation computed using the optional tables could be different than the depreciation computed using the formulas and suggested adopting a different transaction coefficient. The IRS and Treasury recognize that use of the optional depreciation tables may result in a different computation of depreciation. Nonetheless, the optional depreciation tables are intended to provide an alternative method of calculating depreciation for taxpayers. Furthermore, the transaction coefficient formula provided in the temporary regulations is consistent with transaction coefficient formulas provided in other depreciation guidance. Therefore, the final regulations retain the rules provided in the temporary regulations. Depreciation Convention Provisions Several comments were received about the application of the depreciation convention provisions under the temporary regulations. In response to these comments, several changes were made in the final regulations. Section 1.168(i)-6(c)(5)(ii)(A) was added in order to provide an explanation of the applicable convention separate from the explanation of the rule for determining the remaining recovery period for the replacement MACRS property. Section 1.168(i)-6(c)(4)(v) specifically addresses the convention that applies to the exchanged basis when the year of replacement is after the year of disposition and the relinquished MACRS property was placed in service in the year of disposition. Section 1.168(i)-6(c)(5)(i)(B) of the final regulations contains a new rule that provides that if, using the convention that applies to the relinquished MACRS property, the remaining recovery period of the relinquished MACRS property at the beginning of the year of disposition is less than the number of months between the first of that year and the time of disposition, the entire basis in the relinquished MACRS property is deductible in the year of disposition and the exchanged basis is zero. In light of this new rule, *Example 4* of § 1.168(i)-6T(c)(6) of the temporary regulations has been replaced by *Example 5* of § 1.168(i)-6(c)(6). Deferred Exchanges The temporary regulations did not permit a taxpayer to take depreciation on relinquished MACRS property during the period between the disposition of the relinquished MACRS property and the acquisition of the replacement MACRS property. A comment was received which noted that under the half-year convention if relinquished MACRS property is disposed of in year 1 and the replacement MACRS property is not acquired until year 2, the taxpayer would only be entitled to deduct a half-year of depreciation in each year. The IRS and Treasury Department recognize that this result could occur under the convention rules. However, similar results occur when property is disposed of and replaced in a transaction to which section 1031 or section 1033 do not apply. In addition, the IRS and Treasury Department believe that a taxpayer cannot depreciate property the taxpayer does not own. Therefore, the final regulations retain the rule provided in the temporary regulations with respect to this issue. The final regulations reserve on providing specific guidance as to whether an intermediary (such as an exchange accommodation titleholder) is entitled to depreciation. Acquisition Prior to Disposition for an Involuntary Conversion The temporary regulations allowed taxpayers to begin depreciating replacement property upon acquisition even if the acquisition occurs prior the disposition of the relinquished property if the replacement property is acquired to meet the requirements of section 1033(a)(2)(B) (acquisition under threat of condemnation). However, the temporary regulations also required taxpayers to include in taxable income any excess depreciation allowable on the unadjusted depreciable basis of the replacement MACRS property over the depreciation allowable on the excess basis of the replacement MACRS property from the date the replacement MACRS property was placed in service by the taxpayer to the time of disposition of the relinquished MACRS property. A comment was received suggesting that taxpayers be permitted to reduce the exchanged basis of the replacement property by the excess depreciation rather than requiring a taxpayer to recognize the excess depreciation as taxable income. This suggestion was not adopted in the final regulations because it would have the effect of inappropriately accelerating depreciation deductions for the replacement property. Exchanges of Multiple Properties The determination of the basis of property acquired in a like-kind exchange involving multiple properties is described in § 1.1031(j)-1 and the determination of the basis of multiple properties acquired as a result of an involuntary conversion is described in § 1.1033(b)-1. Commentators requested examples to show how the temporary regulations apply to the depreciation treatment of a like-kind exchange or an involuntary conversion involving multiple properties. Other commentators suggested that taxpayers be permitted to use any reasonable, consistent method of allocating basis among the properties. The IRS and Treasury Department believe that these comments concern the allocation of basis principles under sections 1031 and 1033, rather than the depreciation rules under section 168. Once basis in property is determined or allocated under section 1031 or section 1033, these final regulations would then apply for determining the depreciation allowable with respect to such basis. The IRS and Treasury Department believe that issues related to allocation of basis among multiple properties involved in like-kind exchanges or involuntary conversions for purposes of depreciation are beyond the scope of the final regulations. Therefore the final regulations do not address these issues. However, the IRS and Treasury Department intend to invite interested parties to submit written comments regarding whether additional published guidance is needed in this area, and to invite written comments that specifically propose or address possible resolutions to these issues. Transactions Involving Nondepreciable Property A commentator requested guidance as to how depreciation is calculated if the relinquished property was only partially used for business purposes. In response to this comment, the final regulations provide an example to show how depreciation is calculated on replacement property received in exchange for property that was used only partially for business purposes (see *Example 2* in § 1.168(i)-6(d)(3)(iii)). General Asset Accounts Under the temporary regulations, general asset account treatment terminates for the relinquished MACRS property as of the first day of the year of disposition. Because this rule would require taxpayers to track each property in a general asset account, the IRS and Treasury Department requested comments on alternative methods to account for a like-kind exchange or involuntary conversion involving MACRS property contained in a general asset account when the replacement MACRS property has a longer recovery period or less accelerated depreciation method than the relinquished MACRS property or when the basis of the general asset account would change as a result of the like-kind exchange or involuntary conversion. No comments were received on this rule and no alternatives were suggested. Therefore, the regulations are adopted as proposed. Effective Date These final regulations generally apply to a like-kind exchange or an involuntary conversion of MACRS property for which the time of disposition and the time of replacement both occur after February 27, 2004. For a like-kind exchange or an involuntary conversion of MACRS property for which the time of disposition, the time of replacement, or both occur on or before February 27, 2004, a taxpayer may apply these final regulations or rely on prior guidance issued by the IRS. Special Analyses It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because these regulations do not impose a collection of information requirement on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these final 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 Patrick S. Kirwan, Office of the 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. 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 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * **Par. 2.** Sections 1.168(a)-1 and 1.168(b)-1 are added to read as follows: § 1.168(a)-1 Modified accelerated cost recovery system.
(a)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 under section 167.
(b)This section is applicable on and after February 27, 2004. § 1.168(b)-1 Definitions.
(a)*Definitions.* For purposes of section 168 and the regulations under section 168, 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 under section 167.
(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, section 179C, or any similar provision, and for any adjustments to basis provided by other provisions of the Internal Revenue Code and the regulations under the Code (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, as defined in § 1.168(b)-1(a)(3), less the adjustments described in section 1016(a)(2) and (3).
(b)*Effective date.* This section is applicable on or after February 27, 2004. §§ 1.168(a)-1T and 1.168(b)-1T [Removed] **Par. 3.** Sections 1.168(a)-1T and 1.168(b)-1T are removed. **Par. 4.** Section 1.168(d)-1 is amended by revising the section heading and paragraphs (b)(3) and (d)(3) to read as follows: § 1.168(d)-1 Applicable conventions—half-year and mid-quarter conventions.
(b)* * *
(3)*Property placed in service and disposed of in the same taxable year.*
(i)Under section 168(d)(3)(B)(ii), the depreciable basis of property placed in service and disposed of in the same taxable year is not taken into account in determining whether the 40-percent test is satisfied. However, the depreciable basis of property placed in service, disposed of, subsequently reacquired, and again placed in service, by the taxpayer in the same taxable year must be taken into account in applying the 40-percent test, but the basis of the property is only taken into account on the later of the dates that the property is placed in service by the taxpayer during the taxable year. Further, see §§ 1.168(i)-6(c)(4)(v)(B) and 1.168(i)-6(f) for rules relating to property placed in service and exchanged or involuntarily converted during the same taxable year.
(ii)The applicable convention, as determined under this section, applies to all depreciable property (except nonresidential real property, residential rental property, and any railroad grading or tunnel bore) placed in service by the taxpayer during the taxable year, excluding property placed in service and disposed of in the same taxable year. However, see §§ 1.168(i)-6(c)(4)(v)(A) and 1.168(i)-6(f) for rules relating to MACRS property that has a basis determined under section 1031(d) or section 1033(b). No depreciation deduction is allowed for property placed in service and disposed of during the same taxable year. However, see § 1.168(k)-1(f)(1) for rules relating to qualified property or 50-percent bonus depreciation property, and § 1.1400L(b)-1(f)(1) for rules relating to qualified New York Liberty Zone property, that is placed in service by the taxpayer in the same taxable year in which either a partnership is terminated as a result of a technical termination under section 708(b)(1)(B) or the property is transferred in a transaction described in section 168(i)(7).
(d)* * *
(3)*Like-kind exchanges and involuntary conversions.* The last sentence in paragraph (b)(3)(i) and the second sentence in paragraph (b)(3)(ii) of this section apply to exchanges to which section 1031 applies, and involuntary conversions to which section 1033 applies, of MACRS property for which the time of disposition and the time of replacement both occur after February 27, 2004. § 1.168(d)-1T [Removed] **Par. 5.** Section 1.168(d)-1T is removed. **Par. 6.** Section 1.168(i)-0 is amended as follows: 1. The entries for § 1.168(i)-1(d)(2), (e)(3)(i), (e)(3)(v), (e)(3)(vi), (f), (f)(1), (f)(2), (f)(2)(i), (i), (j), and
(l)are revised. 2. The entries for § 1.168(i)-1(l)(1), (l)(2), and (l)(3) are added. The revisions and additions read as follows: § 1.168(i)-0 Table of contents for the general asset account rules. § 1.168(i)-1 General asset accounts.
(d)* * *
(2)Special rule for passenger automobiles.
(e)* * *
(3)* * *
(i)In general.
(v)Transactions subject to section 1031 or 1033.
(vi)Anti-abuse rule.
(f)Assets generating foreign source income.
(1)In general.
(2)Source of ordinary income, gain, or loss.
(i)Source determined by allocation and apportionment of depreciation allowed.
(i)Identification of disposed or converted asset.
(j)Effect of adjustments on prior dispositions.
(l)Effective date.
(1)In general.
(2)Exceptions.
(3)Like-kind exchanges and involuntary conversions. § 1.168(i)-0T [Removed] **Par. 7.** Section 1.168(i)-0T is removed. **Par. 8.** Section 1.168(i)-1 is amended as follows: 1. Paragraphs (d)(2), (e)(3)(i), (e)(3)(iii)(B)( *4* ), (e)(3)(v), (e)(3)(vi), (f)(1), (f)(2)(i), (i), (j), (l)(1), and (l)(3) are revised. 2. The first sentence in paragraph (l)(2)(ii)(B) is amended by removing the language “as modified by Rev. Proc. 2004-11 (2004-3 I.R.B. 311)”. The revisions read as follows: § 1.168(i)-1 General asset accounts.
(d)* * *
(2)*Special rule for passenger automobiles.* For purposes of applying section 280F(a), the depreciation allowance for a general asset account established for passenger automobiles is limited for each taxable year to the amount prescribed in section 280F(a) multiplied by the excess of the number of automobiles originally included in the account over the number of automobiles disposed of during the taxable year or in any prior taxable year in a transaction described in paragraph (e)(3)(iii) (disposition of an asset in a qualifying disposition), (e)(3)(iv) (transactions subject to section 168(i)(7)), (e)(3)(v) (transactions subject to section 1031 or 1033), (e)(3)(vi) (anti-abuse rule),
(g)(assets subject to recapture), or (h)(1) (conversion to personal use) of this section.
(e)* * *
(3)* * *
(i)*In general.* This paragraph (e)(3) provides the rules for terminating general asset account treatment upon certain dispositions. While the rules under paragraphs (e)(3)(ii) and
(iii)of this section are optional rules, the rules under paragraphs (e)(3)(iv), (v), and
(vi)of this section are mandatory rules. A taxpayer applies paragraph (e)(3)(ii) or
(iii)of this section by reporting the gain, loss, or other deduction on the taxpayer's timely filed Federal income tax return (including extensions) for the taxable year in which the disposition occurs. For purposes of applying paragraph (e)(3)(iii) through
(vi)of this section, see paragraph
(i)of this section for identifying the unadjusted depreciable basis of a disposed asset.
(iii)* * *
(B)* * * ( *4* ) A transaction, other than a transaction described in paragraphs (e)(3)(iv) (pertaining to transactions subject to section 168(i)(7)) and (e)(3)(v) (pertaining to transactions subject to section 1031 or 1033) of this section, to which a nonrecognition section of the Code applies (determined without regard to this section).
(v)*Transactions subject to section 1031 or section 1033* —(A) *Like-kind exchange or involuntary conversion of all assets remaining in a general asset account.* If all the assets, or the last asset, in a general asset account are transferred by a taxpayer in a like-kind exchange (as defined under § 1.168-6(b)(11)) or in an involuntary conversion (as defined under § 1.168-6(b)(12)), the taxpayer must apply this paragraph (e)(3)(v)(A) (instead of applying paragraph (e)(2), (e)(3)(ii), or (e)(3)(iii) of this section). Under this paragraph (e)(3)(v)(A), the general asset account terminates as of the first day of the year of disposition (as defined in § 1.168(i)-6(b)(5)) and— ( *1* ) The amount of gain or loss for the general asset account is determined under section 1001(a) by taking into account the adjusted depreciable basis of the general asset account at the time of disposition (as defined in § 1.168(i)-6(b)(3)). The depreciation allowance for the general asset account in the year of disposition is determined in the same manner as the depreciation allowance for the relinquished MACRS property (as defined in § 1.168(i)-6(b)(2)) in the year of disposition is determined under § 1.168(i)-6. The recognition and character of gain or loss are determined in accordance with paragraph (e)(3)(ii)(A) of this section (notwithstanding that paragraph (e)(3)(ii) of this section is an optional rule); and ( *2* ) The adjusted depreciable basis of the general asset account at the time of disposition is treated as the adjusted depreciable basis of the relinquished MACRS property.
(B)*Like-kind exchange or involuntary conversion of less than all assets remaining in a general asset account.* If an asset in a general asset account is transferred by a taxpayer in a like-kind exchange or in an involuntary conversion and if paragraph (e)(3)(v)(A) of this section does not apply to this asset, the taxpayer must apply this paragraph (e)(3)(v)(B) (instead of applying paragraph (e)(2), (e)(3)(ii), or (e)(3)(iii) of this section). Under this paragraph (e)(3)(v)(B), general asset account treatment for the asset terminates as of the first day of the year of disposition (as defined in § 1.168(i)-6(b)(5)), and— ( *1* ) The amount of gain or loss for the asset is determined by taking into account the asset's adjusted basis at the time of disposition (as defined in § 1.168(i)-6(b)(3)). The adjusted basis of the asset at the time of disposition equals the unadjusted depreciable basis of the asset less the depreciation allowed or allowable for the asset, computed by using the depreciation method, recovery period, and convention applicable to the general asset account in which the asset was included. The depreciation allowance for the asset in the year of disposition is determined in the same manner as the depreciation allowance for the relinquished MACRS property (as defined in § 1.168(i)-6(b)(2)) in the year of disposition is determined under § 1.168(i)-6. The recognition and character of the gain or loss are determined in accordance with paragraph (e)(3)(iii)(A) of this section (notwithstanding that paragraph (e)(3)(iii) of this section is an optional rule); and ( *2* ) As of the first day of the year of disposition, the taxpayer must remove the relinquished asset from the general asset account and make the adjustments to the general asset account described in paragraph (e)(3)(iii)(C)( *2* ) through ( *4* ) of this section.
(vi)*Anti-abuse rule* —(A) *In general.* If an asset in a general asset account is disposed of by a taxpayer in a transaction described in paragraph (e)(3)(vi)(B) of this section, general asset account treatment for the asset terminates as of the first day of the taxable year in which the disposition occurs. Consequently, the taxpayer must determine the amount of gain, loss, or other deduction attributable to the disposition in the manner described in paragraph (e)(3)(iii)(A) of this section (notwithstanding that paragraph (e)(3)(iii)(A) of this section is an optional rule) and must make the adjustments to the general asset account described in paragraph (e)(3)(iii)(C)( *1* ) through ( *4* ) of this section.
(B)*Abusive transactions.* A transaction is described in this paragraph (e)(3)(vi)(B) if the transaction is not described in paragraph (e)(3)(iv) or (e)(3)(v) of this section and the transaction is entered into, or made, with a principal purpose of achieving a tax benefit or result that would not be available absent an election under this section. Examples of these types of transactions include— ( *1* ) A transaction entered into with a principal purpose of shifting income or deductions among taxpayers in a manner that would not be possible absent an election under this section in order to take advantage of differing effective tax rates among the taxpayers; or ( *2* ) An election made under this section with a principal purpose of disposing of an asset from a general asset account in order to utilize an expiring net operating loss or credit. The fact that a taxpayer with a net operating loss carryover or a credit carryover transfers an asset to a related person or transfers an asset pursuant to an arrangement where the asset continues to be used (or is available for use) by the taxpayer pursuant to a lease (or otherwise) indicates, absent strong evidence to the contrary, that the transaction is described in this paragraph (e)(3)(vi)(B).
(f)* * *
(1)*In general.* This paragraph
(f)provides the rules for determining the source of any income, gain, or loss recognized, and the appropriate section 904(d) separate limitation category or categories for any foreign source income, gain, or loss recognized, on a disposition (within the meaning of paragraph (e)(1) of this section) of an asset in a general asset account that consists of assets generating both United States and foreign source income. These rules apply only to a disposition to which paragraph (e)(2) (general disposition rules), (e)(3)(ii) (disposition of all assets remaining in a general asset account), (e)(3)(iii) (disposition of an asset in a qualifying disposition), (e)(3)(v) (transactions subject to section 1031 or 1033), or (e)(3)(vi) (anti-abuse rule) of this section applies.
(2)* * *
(i)*Source determined by allocation and apportionment of depreciation allowed.* The amount of any ordinary income, gain, or loss that is recognized on the disposition of an asset in a general asset account must be apportioned between United States and foreign sources based on the allocation and apportionment of the—
(A)Depreciation allowed for the general asset account as of the end of the taxable year in which the disposition occurs if paragraph (e)(2) of this section applies to the disposition;
(B)Depreciation allowed for the general asset account as of the time of disposition if the taxpayer applies paragraph (e)(3)(ii) of this section to the disposition of all assets, or the last asset, in the general asset account, or if all the assets, or the last asset, in the general asset account are disposed of in a transaction described in paragraph (e)(3)(v)(A) of this section; or
(C)Depreciation allowed for the disposed asset for only the taxable year in which the disposition occurs if the taxpayer applies paragraph (e)(3)(iii) of this section to the disposition of the asset in a qualifying disposition, if the asset is disposed of in a transaction described in paragraph (e)(3)(v)(B) of this section (like-kind exchange or involuntary conversion), or if the asset is disposed in a transaction described in paragraph (e)(3)(vi) of this section (anti-abuse rule).
(i)*Identification of disposed or converted asset.* A taxpayer may use any reasonable method that is consistently applied to the taxpayer's general asset accounts for purposes of determining the unadjusted depreciable basis of a disposed or converted asset in a transaction described in paragraph (e)(3)(iii) (disposition of an asset in a qualifying disposition), (e)(3)(iv) (transactions subject to section 168(i)(7)), (e)(3)(v) (transactions subject to section 1031 or 1033), (e)(3)(vi) (anti-abuse rule),
(g)(assets subject to recapture), or (h)(1) (conversion to personal use) of this section.
(j)*Effect of adjustments on prior dispositions.* The adjustments to a general asset account under paragraph (e)(3)(iii), (e)(3)(iv), (e)(3)(v), (e)(3)(vi), (g), or (h)(1) of this section have no effect on the recognition and character of prior dispositions subject to paragraph (e)(2) of this section.
(l)* * *
(1)*In general.* Except as provided in paragraphs (l)(2) and (l)(3) 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.
(3)*Like-kind exchanges and involuntary conversions.* This section applies for an asset transferred by a taxpayer in a like-kind exchange (as defined under § 1.168-6(b)(11)) or in an involuntary conversion (as defined under § 1.168-6(b)(12)) for which the time of disposition (as defined in § 1.168(i)-6(b)(3)) and the time of replacement (as defined in § 1.168(i)-6(b)(4)) both occur after February 27, 2004. For an asset transferred by a taxpayer in a like-kind exchange or in an involuntary conversion for which the time of disposition, the time of replacement, or both occur on or before February 27, 2004, see § 1.168(i)-1 in effect prior to February 27, 2004 (§ 1.168(i)-1 as contained in 26 CFR part 1 edition revised as of April 1, 2003). § 1.168(i)-1T [Removed] **Par. 9.** Section 1.168(i)-1T is removed. **Par. 10.** Section 1.168(i)-5 is added to read as follows: § 1.168(i)-5 Table of contents. This section lists the major paragraphs contained in § 1.168(i)-6. § 1.168(i)-6 Like-kind exchanges and involuntary conversions.
(a)Scope.
(b)Definitions.
(1)Replacement MACRS property.
(2)Relinquished MACRS property.
(3)Time of disposition.
(4)Time of replacement.
(5)Year of disposition.
(6)Year of replacement.
(7)Exchanged basis.
(8)Excess basis.
(9)Depreciable exchanged basis.
(10)Depreciable excess basis.
(11)Like-kind exchange.
(12)Involuntary conversion.
(c)Determination of depreciation allowance.
(1)Computation of the depreciation allowance for depreciable exchanged basis beginning in the year of replacement.
(i)In general.
(ii)Applicable recovery period, depreciation method, and convention.
(2)Effect of depreciation treatment of the replacement MACRS property by previous owners of the acquired property.
(3)Recovery period and/or depreciation method of the properties are the same, or both are not the same.
(i)In general.
(ii)Both the recovery period and the depreciation method are the same.
(iii)Either the recovery period or the depreciation method is the same, or both are not the same.
(4)Recovery period or depreciation method of the properties is not the same.
(i)Longer recovery period.
(ii)Shorter recovery period.
(iii)Less accelerated depreciation method.
(iv)More accelerated depreciation method.
(v)Convention.
(A)Either the relinquished MACRS property or the replacement MACRS property is mid-month property.
(B)Neither the relinquished MACRS property nor the replacement MACRS property is mid-month property.
(5)Year of disposition and year of replacement.
(i)Relinquished MACRS property.
(A)General rule.
(B)Special rule.
(ii)Replacement MACRS property.
(A)Remaining recovery period of the replacement MACRS property.
(B)Year of replacement is 12 months.
(iii)Year of disposition or year of replacement is less than 12 months.
(iv)Deferred transactions.
(A)In general.
(B)Allowable depreciation for a qualified intermediary.
(v)Remaining recovery period.
(6)Examples.
(d)Special rules for determining depreciation allowances.
(1)Excess basis.
(i)In general.
(ii)Example.
(2)Depreciable and nondepreciable property.
(3)Depreciation limitations for automobiles.
(i)In general.
(ii)Order in which limitations on depreciation under section 280F(a) are applied.
(iii)Examples.
(4)Involuntary conversion for which the replacement MACRS property is acquired and placed in service before disposition of relinquished MACRS property.
(e)Use of optional depreciation tables.
(1)Taxpayer not bound by prior use of table.
(2)Determination of the depreciation deduction.
(i)Relinquished MACRS property.
(ii)Replacement MACRS property.
(A)Determination of the appropriate optional depreciation table.
(B)Calculating the depreciation deduction for the replacement MACRS property.
(iii)Unrecovered basis.
(3)Excess basis.
(4)Examples.
(f)Mid-quarter convention.
(1)Exchanged basis.
(2)Excess basis.
(3)Depreciable property acquired for nondepreciable property.
(g)Section 179 election.
(h)Additional first year depreciation deduction.
(i)Elections.
(1)Election not to apply this section.
(2)Election to treat certain replacement property as MACRS property.
(j)Time and manner of making election under paragraph (i)(1) of this section.
(1)In general.
(2)Time for making election.
(3)Manner of making election.
(4)Revocation.
(k)Effective date.
(1)In general.
(2)Application to pre-effective date like-kind exchanges and involuntary conversions.
(3)Like-kind exchanges and involuntary conversions where the taxpayer made the election under section 168(f)(1) for the relinquished property. § 1.168(i)-5T [Removed] **Par. 11.** Section 1.168(i)-5T is removed. **Par. 12.** Section 1.168(i)-6 is added to read as follows: § 1.168(i)-6 Like-kind exchanges and involuntary conversions.
(a)*Scope.* This section provides the rules for determining the depreciation allowance for MACRS property acquired in a like-kind exchange or an involuntary conversion, including a like-kind exchange or an involuntary conversion of MACRS property that is exchanged or replaced with other MACRS property in a transaction between members of the same affiliated group. The allowance for depreciation under this section constitutes the amount of depreciation allowable under section 167(a) for the year of replacement and any subsequent taxable year for the replacement MACRS property and for the year of disposition of the relinquished MACRS property. The provisions of this section apply only to MACRS property to which § 1.168(h)-1 (like-kind exchanges of tax-exempt use property) does not apply. Additionally, paragraphs
(c)through
(f)of this section apply only to MACRS property for which an election under paragraph
(i)of this section has not been made.
(b)*Definitions.* For purposes of this section, the following definitions apply:
(1)*Replacement MACRS property* is MACRS property (as defined in § 1.168(b)-1(a)(2)) in the hands of the acquiring taxpayer that is acquired for other MACRS property in a like-kind exchange or an involuntary conversion.
(2)*Relinquished MACRS property* is MACRS property that is transferred by the taxpayer in a like-kind exchange, or in an involuntary conversion.
(3)*Time of disposition* is when the disposition of the relinquished MACRS property takes place under the convention, as determined under § 1.168(d)-1, that applies to the relinquished MACRS property.
(4)*Time of replacement* is the later of—
(i)When the replacement MACRS property is placed in service under the convention, as determined under this section, that applies to the replacement MACRS property; or
(ii)The time of disposition of the exchanged or involuntarily converted property.
(5)*Year of disposition* is the taxable year that includes the time of disposition.
(6)*Year of replacement* is the taxable year that includes the time of replacement.
(7)*Exchanged basis* is determined after the depreciation deductions for the year of disposition are determined under paragraph (c)(5)(i) of this section and is the lesser of—
(i)The basis in the replacement MACRS property, as determined under section 1031(d) and the regulations under section 1031(d) or section 1033(b) and the regulations under section 1033(b); or
(ii)The adjusted depreciable basis (as defined in § 1.168(b)-1(a)(4)) of the relinquished MACRS property.
(8)*Excess basis* is any excess of the basis in the replacement MACRS property, as determined under section 1031(d) and the regulations under section 1031(d) or section 1033(b) and the regulations under section 1033(b), over the exchanged basis as determined under paragraph (b)(7) of this section.
(9)*Depreciable exchanged basis* is the exchanged basis as determined under paragraph (b)(7) of this section reduced by—
(i)The percentage of such basis attributable to 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); and
(ii)Any adjustments to basis provided by other provisions of the Internal Revenue Code
(Code)and the regulations under the Code (including section 1016(a)(2) and (3), for example, depreciation deductions in the year of replacement allowable under section 168(k) or 1400L(b)).
(10)*Depreciable excess basis* is the excess basis as determined under paragraph (b)(8) of this section reduced by—
(i)The percentage of such basis attributable to 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);
(ii)Any portion of the basis the taxpayer properly elects to treat as an expense under section 179; and
(iii)Any adjustments to basis provided by other provisions of the Code and the regulations under the Code (including section 1016(a)(2) and (3), for example, depreciation deductions in the year of replacement allowable under section 168(k) or 1400L(b)).
(11)*Like-kind exchange* is an exchange of property in a transaction to which section 1031(a)(1), (b), or
(c)applies.
(12)*Involuntary conversion* is a transaction described in section 1033(a)(1) or
(2)that resulted in the nonrecognition of any part of the gain realized as the result of the conversion.
(c)*Determination of depreciation allowance* —(1) *Computation of the depreciation allowance for depreciable exchanged basis beginning in the year of replacement* —(i) *In general.* This paragraph
(c)provides rules for determining the applicable recovery period, the applicable depreciation method, and the applicable convention used to determine the depreciation allowances for the depreciable exchanged basis beginning in the year of replacement. See paragraph (c)(5) of this section for rules relating to the computation of the depreciation allowance for the year of disposition and for the year of replacement. See paragraph (d)(1) of this section for rules relating to the computation of the depreciation allowance for depreciable excess basis. See paragraph (d)(4) of this section if the replacement MACRS property is acquired before disposition of the relinquished MACRS property in a transaction to which section 1033 applies. See paragraph
(e)of this section for rules relating to the computation of the depreciation allowance using the optional depreciation tables.
(ii)*Applicable recovery period, depreciation method, and convention.* The recovery period, depreciation method, and convention determined under this paragraph
(c)are the only permissible methods of accounting for MACRS property within the scope of this section unless the taxpayer makes the election under paragraph
(i)of this section not to apply this section.
(2)*Effect of depreciation treatment of the replacement MACRS property by previous owners of the acquired property.* If replacement MACRS property is acquired by a taxpayer in a like-kind exchange or an involuntary conversion, the depreciation treatment of the replacement MACRS property by previous owners has no effect on the determination of depreciation allowances for the replacement MACRS property in the hands of the acquiring taxpayer. For example, a taxpayer exchanging, in a like-kind exchange, MACRS property for property that was depreciated under section 168 of the Internal Revenue Code of 1954
(ACRS)by the previous owner must use this section because the replacement property will become MACRS property in the hands of the acquiring taxpayer. In addition, elections made by previous owners in determining depreciation allowances for the replacement MACRS property have no effect on the acquiring taxpayer. For example, a taxpayer exchanging, in a like-kind exchange, MACRS property that the taxpayer depreciates under the general depreciation system of section 168(a) for other MACRS property that the previous owner elected to depreciate under the alternative depreciation system pursuant to section 168(g)(7) does not have to continue using the alternative depreciation system for the replacement MACRS property.
(3)*Recovery period and/or depreciation method of the properties are the same, or both are not the same* —(i) *In general.* For purposes of paragraphs (c)(3) and (c)(4) of this section in determining whether the recovery period and the depreciation method prescribed under section 168 for the replacement MACRS property are the same as the recovery period and the depreciation method prescribed under section 168 for the relinquished MACRS property, the recovery period and the depreciation method for the replacement MACRS property are considered to be the recovery period and the depreciation method that would have applied under section 168, taking into account any elections made by the acquiring taxpayer under section 168(b)(5) or 168(g)(7), had the replacement MACRS property been placed in service by the acquiring taxpayer at the same time as the relinquished MACRS property.
(ii)*Both the recovery period and the depreciation method are the same.* If both the recovery period and the depreciation method prescribed under section 168 for the replacement MACRS property are the same as the recovery period and the depreciation method prescribed under section 168 for the relinquished MACRS property, the depreciation allowances for the replacement MACRS property beginning in the year of replacement are determined by using the same recovery period and depreciation method that were used for the relinquished MACRS property. Thus, the replacement MACRS property is depreciated over the remaining recovery period (taking into account the applicable convention), and by using the depreciation method, of the relinquished MACRS property. Except as provided in paragraph (c)(5) of this section, the depreciation allowances for the depreciable exchanged basis for any 12-month taxable year beginning with the year of replacement are determined by multiplying the depreciable exchanged basis by the applicable depreciation rate for each taxable year (for further guidance, for example, see section 6 of Rev. Proc. 87-57 (1987-2 CB 687, 692) and § 601.601(d)(2)(ii)( *b* ) of this chapter).
(iii)*Either the recovery period or the depreciation method is the same, or both are not the same.* If either the recovery period or the depreciation method prescribed under section 168 for the replacement MACRS property is the same as the recovery period or the depreciation method prescribed under section 168 for the relinquished MACRS property, the depreciation allowances for the depreciable exchanged basis beginning in the year of replacement are determined using the recovery period or the depreciation method that is the same as the relinquished MACRS property. See paragraph (c)(4) of this section to determine the depreciation allowances when the recovery period or the depreciation method of the replacement MACRS property is not the same as that of the relinquished MACRS property.
(4)*Recovery period or depreciation method of the properties is not the same.* If the recovery period prescribed under section 168 for the replacement MACRS property (as determined under paragraph (c)(3)(i) of this section) is not the same as the recovery period prescribed under section 168 for the relinquished MACRS property, the depreciation allowances for the depreciable exchanged basis beginning in the year of replacement are determined under this paragraph (c)(4). Similarly, if the depreciation method prescribed under section 168 for the replacement MACRS property (as determined under paragraph (c)(3)(i) of this section) is not the same as the depreciation method prescribed under section 168 for the relinquished MACRS property, the depreciation method used to determine the depreciation allowances for the depreciable exchanged basis beginning in the year of replacement is determined under this paragraph (c)(4).
(i)*Longer recovery period.* If the recovery period prescribed under section 168 for the replacement MACRS property (as determined under paragraph (c)(3)(i) of this section) is longer than that prescribed for the relinquished MACRS property, the depreciation allowances for the depreciable exchanged basis beginning in the year of replacement are determined as though the replacement MACRS property had originally been placed in service by the acquiring taxpayer in the same taxable year the relinquished MACRS property was placed in service by the acquiring taxpayer, but using the longer recovery period of the replacement MACRS property (as determined under paragraph (c)(3)(i) of this section) and the convention determined under paragraph (c)(4)(v) of this section. Thus, the depreciable exchanged basis is depreciated over the remaining recovery period (taking into account the applicable convention) of the replacement MACRS property.
(ii)*Shorter recovery period.* If the recovery period prescribed under section 168 for the replacement MACRS property (as determined under paragraph (c)(3)(i) of this section) is shorter than that of the relinquished MACRS property, the depreciation allowances for the depreciable exchanged basis beginning in the year of replacement are determined using the same recovery period as that of the relinquished MACRS property. Thus, the depreciable exchanged basis is depreciated over the remaining recovery period (taking into account the applicable convention) of the relinquished MACRS property.
(iii)*Less accelerated depreciation method* —(A) If the depreciation method prescribed under section 168 for the replacement MACRS property (as determined under paragraph (c)(3)(i) of this section) is less accelerated than that of the relinquished MACRS property at the time of disposition, the depreciation allowances for the depreciable exchanged basis beginning in the year of replacement are determined as though the replacement MACRS property had originally been placed in service by the acquiring taxpayer at the same time the relinquished MACRS property was placed in service by the acquiring taxpayer, but using the less accelerated depreciation method. Thus, the depreciable exchanged basis is depreciated using the less accelerated depreciation method.
(B)Except as provided in paragraph (c)(5) of this section, the depreciation allowances for the depreciable exchanged basis for any 12-month taxable year beginning in the year of replacement are determined by multiplying the adjusted depreciable basis by the applicable depreciation rate for each taxable year. If, for example, the depreciation method of the replacement MACRS property in the year of replacement is the 150-percent declining balance method and the depreciation method of the relinquished MACRS property in the year of replacement is the 200-percent declining balance method, and neither method had been switched to the straight line method in the year of replacement or any prior taxable year, the applicable depreciation rate for the year of replacement and subsequent taxable years is determined by using the depreciation rate of the replacement MACRS property as if the replacement MACRS property was placed in service by the acquiring taxpayer at the same time the relinquished MACRS property was placed in service by the acquiring taxpayer, until the 150-percent declining balance method has been switched to the straight line method. If, for example, the depreciation method of the replacement MACRS property is the straight line method, the applicable depreciation rate for the year of replacement is determined by using the remaining recovery period at the beginning of the year of disposition (as determined under this paragraph (c)(4) and taking into account the applicable convention).
(iv)*More accelerated depreciation method* —(A) If the depreciation method prescribed under section 168 for the replacement MACRS property (as determined under paragraph (c)(3)(i) of this section) is more accelerated than that of the relinquished MACRS property at the time of disposition, the depreciation allowances for the replacement MACRS property beginning in the year of replacement are determined using the same depreciation method as the relinquished MACRS property.
(B)Except as provided in paragraph (c)(5) of this section, the depreciation allowances for the depreciable exchanged basis for any 12-month taxable year beginning in the year of replacement are determined by multiplying the adjusted depreciable basis by the applicable depreciation rate for each taxable year. If, for example, the depreciation method of the relinquished MACRS property in the year of replacement is the 150-percent declining balance method and the depreciation method of the replacement MACRS property in the year of replacement is the 200-percent declining balance method, and neither method had been switched to the straight line method in the year of replacement or any prior taxable year, the applicable depreciation rate for the year of replacement and subsequent taxable years is the same depreciation rate that applied to the relinquished MACRS property in the year of replacement, until the 150-percent declining balance method has been switched to the straight line method. If, for example, the depreciation method is the straight line method, the applicable depreciation rate for the year of replacement is determined by using the remaining recovery period at the beginning of the year of disposition (as determined under this paragraph (c)(4) and taking into account the applicable convention).
(v)*Convention.* The applicable convention for the exchanged basis is determined under this paragraph (c)(4)(v).
(A)*Either the relinquished MACRS property or the replacement MACRS property is mid-month property.* If either the relinquished MACRS property or the replacement MACRS property is property for which the applicable convention (as determined under section 168(d)) is the mid-month convention, the exchanged basis must be depreciated using the mid-month convention.
(B)*Neither the relinquished MACRS property nor the replacement MACRS property is mid-month property.* If neither the relinquished MACRS property nor the replacement MACRS property is property for which the applicable convention (as determined under section 168(d)) is the mid-month convention, the applicable convention for the exchanged basis is the same convention that applied to the relinquished MACRS property. If the relinquished MACRS property is placed in service in the year of disposition, and the time of replacement is also in the year of disposition, the convention that applies to the relinquished MACRS property is determined under paragraph (f)(1)(i) of this section. If, however, relinquished MACRS property was placed in service in the year of disposition and the time of replacement is in a taxable year subsequent to the year of disposition, the convention that applies to the exchanged basis is the convention that applies in that subsequent taxable year (see paragraph (f)(1)(ii) of this section).
(5)*Year of disposition and year of replacement.* No depreciation deduction is allowable for MACRS property disposed of by a taxpayer in a like-kind exchange or involuntary conversion in the same taxable year that such property was placed in service by the taxpayer. If replacement MACRS property is disposed of by a taxpayer during the same taxable year that the relinquished MACRS property is placed in service by the taxpayer, no depreciation deduction is allowable for either MACRS property. Otherwise, the depreciation allowances for the year of disposition and for the year of replacement are determined as follows:
(i)*Relinquished MACRS property* —(A) *General rule.* Except as provided in paragraphs (c)(5)(i)(B), (c)(5)(iii), (e), and
(i)of this section, the depreciation allowance in the year of disposition for the relinquished MACRS property is computed by multiplying the allowable depreciation deduction for the property for that year 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 disposition (taking into account the applicable convention of the relinquished MACRS property), and the denominator of which is 12. In the case of termination under § 1.168(i)-1(e)(3)(v) of general asset account treatment of an asset, or of all the assets remaining, in a general asset account, the allowable depreciation deduction in the year of disposition for the asset or assets for which general asset account treatment is terminated is determined using the depreciation method, recovery period, and convention of the general asset account. This allowable depreciation deduction is adjusted to account for the period the asset or assets is deemed to be in service in accordance with this paragraph (c)(5)(i).
(B)*Special rule.* If, at the beginning of the year of disposition, the remaining recovery period of the relinquished MACRS property, taking into account the applicable convention of such property, is less than the period between the beginning of the year of disposition and the time of disposition, the depreciation deduction for the relinquished MACRS property for the year of disposition is equal to the adjusted depreciable basis of the relinquished MACRS property at the beginning of the year of disposition. If this paragraph applies, the exchanged basis is zero and no depreciation is allowable for the exchanged basis in the replacement MACRS property.
(ii)*Replacement MACRS property* —(A) *Remaining recovery period of the replacement MACRS property.* The replacement MACRS property is treated as placed in service at the time of replacement under the convention that applies to the replacement MACRS property as determined under this paragraph (c)(5)(ii). The remaining recovery period of the replacement MACRS property at the time of replacement is the excess of the recovery period for the replacement MACRS property, as determined under paragraph
(c)of this section, over the period of time that the replacement MACRS property would have been in service if it had been placed in service when the relinquished MACRS property was placed in service and removed from service at the time of disposition of the relinquished MACRS property. This period is determined by using the convention that applied to the relinquished MACRS property to determine the date that the relinquished MACRS property is deemed to have been placed in service and the date that it is deemed to have been disposed of. The length of time the replacement MACRS property would have been in service is determined by using these dates and the convention that applies to the replacement MACRS property.
(B)*Year of replacement is 12 months.* Except as provided in paragraphs (c)(5)(iii), (e), and
(i)of this section, the depreciation allowance in the year of replacement for the depreciable exchanged basis is determined by— ( *1* ) Calculating the applicable depreciation rate for the replacement MACRS property as of the beginning of the year of replacement taking into account the depreciation method prescribed for the replacement MACRS property under paragraph (c)(3) of this section and the remaining recovery period of the replacement MACRS property as of the beginning of the year of disposition as determined under this paragraph (c)(5)(ii); ( *2* ) Calculating the depreciable exchanged basis of the replacement MACRS property, and adding to that amount the amount determined under paragraph (c)(5)(i) of this section for the year of disposition; and ( *3* ) Multiplying the product of the amounts determined under paragraphs (c)(5)(ii)(B)( *1* ) and (B)( *2* ) of this section by a fraction, the numerator of which is the number of months (including fractions of months) the property is deemed to be in service during the year of replacement (in the year of replacement the replacement MACRS property is deemed to be placed in service by the acquiring taxpayer at the time of replacement under the convention determined under paragraph (c)(4)(v) of this section), and the denominator of which is 12.
(iii)*Year of disposition or year of replacement is less than 12 months.* If the year of disposition or the year of replacement is less than 12 months, the depreciation allowance determined under paragraph (c)(5)(ii)(A) of this section must be adjusted for a short taxable year (for further guidance, for example, see Rev. Proc. 89-15 (1989-1 CB 816) and § 601.601(d)(2)(ii)( *b* ) of this chapter).
(iv)*Deferred transactions* —(A) *In general.* If the replacement MACRS property is not acquired until after the disposition of the relinquished MACRS property, taking into account the applicable convention of the relinquished MACRS property and replacement MACRS property, depreciation is not allowable during the period between the disposition of the relinquished MACRS property and the acquisition of the replacement MACRS property. The recovery period for the replacement MACRS property is suspended during this period. For purposes of paragraph (c)(5)(ii) of this section, only the depreciable exchanged basis of the replacement MACRS property is taken into account for calculating the amount in paragraph (c)(5)(ii)(B)( *2* ) of this section if the year of replacement is a taxable year subsequent to the year of disposition.
(B)*Allowable depreciation for a qualified intermediary* . [Reserved].
(v)*Remaining recovery period* . The remaining recovery period of the replacement MACRS property is determined as of the beginning of the year of disposition of the relinquished MACRS property. For purposes of determining the remaining recovery period of the replacement MACRS property, the replacement MACRS property is deemed to have been originally placed in service under the convention determined under paragraph (c)(4)(v) of this section, but at the time the relinquished MACRS property was deemed to be placed in service under the convention that applied to it when it was placed in service.
(6)*Examples* . The application of this paragraph
(c)is illustrated by the following examples: Example 1. A1, a calendar-year taxpayer, exchanges Building M, an office building, for Building N, a warehouse in a like-kind exchange. Building M is relinquished in July 2004 and Building N is acquired and placed in service in October 2004. A1 did not make any elections under section 168 for either Building M or Building N. The unadjusted depreciable basis of Building M was $4,680,000 when placed in service in July 1997. Since the recovery period and depreciation method prescribed under section 168 for Building N (39 years, straight line method) are the same as the recovery period and depreciation method prescribed under section 168 for Building M (39 years, straight line method), Building N is depreciated over the remaining recovery period of, and using the same depreciation method and convention as that of, Building M. Applying the applicable convention, Building M is deemed disposed of on July 15, 2004, and Building N is placed in service on October 15, 2004. Thus, Building N will be depreciated using the straight line method over a remaining recovery period of 32 years beginning in October 2004 (the remaining recovery period of 32 years and 6.5 months at the beginning of 2004, less the 6.5 months of depreciation taken prior to the disposition of the exchanged MACRS property (Building M) in 2004). For 2004, the year in which the transaction takes place, the depreciation allowance for Building M is ($120,000)(6.5/12) which equals $65,000. The depreciation allowance for Building N for 2004 is ($120,000)(2.5/12) which equals $25,000. For 2005 and subsequent years, Building N is depreciated over the remaining recovery period of, and using the same depreciation method and convention as that of, Building M. Thus, the depreciation allowance for Building N is the same as Building M, namely $10,000 per month. Example 2. B, a calendar-year taxpayer, placed in service Bridge P in January 1998. Bridge P is depreciated using the half-year convention. In January 2004, B exchanges Bridge P for Building Q, an apartment building, in a like-kind exchange. Pursuant to paragraph (k)(2)(i) of this section, B decided to apply § 1.168(i)-6 to the exchange of Bridge P for Building Q, the replacement MACRS property. B did not make any elections under section 168 for either Bridge P or Building Q. Since the recovery period prescribed under section 168 for Building Q (27.5 years) is longer than that of Bridge P (15 years), Building Q is depreciated as if it had originally been placed in service in July 1998 and disposed of in July 2004 using a 27.5 year recovery period. Additionally, since the depreciation method prescribed under section 168 for Building Q (straight line method) is less accelerated than that of Bridge P (150-percent declining balance method), then the depreciation allowance for Building Q is computed using the straight line method. Thus, when Building Q is acquired and placed in service in 2004, its basis is depreciated over the remaining 21.5 year recovery period using the straight line method of depreciation and the mid-month convention beginning in July 2004. Example 3. C, a calendar-year taxpayer, placed in service Building R, a restaurant, in January 1996. In January 2004, C exchanges Building R for Tower S, a radio transmitting tower, in a like-kind exchange. Pursuant to paragraph (k)(2)(i) of this section, C decided to apply § 1.168(i)-6 to the exchange of Building R for Tower S, the replacement MACRS property. C did not make any elections under section 168 for either Building R or Tower S. Since the recovery period prescribed under section 168 for Tower S (15 years) is shorter than that of Building R (39 years), Tower S is depreciated over the remaining recovery period of Building R. Additionally, since the depreciation method prescribed under section 168 for Tower S (150% declining balance method) is more accelerated than that of Building R (straight line method), then the depreciation allowance for Tower S is also computed using the same depreciation method as Building R. Thus, Tower S is depreciated over the remaining 31 year recovery period of Building R using the straight line method of depreciation and the mid-month convention. Alternatively, C may elect under paragraph
(i)of this section to treat Tower S as though it is placed in service in January 2004. In such case, C uses the applicable recovery period, depreciation method, and convention prescribed under section 168 for Tower S. Example 4.
(i)In February 2002, D, a calendar-year taxpayer and manufacturer of rubber products, acquired for $60,000 and placed in service Asset T (a special tool) and depreciated Asset T using the straight line method election under section 168(b)(5) and the mid-quarter convention over its 3-year recovery period. D elected not to deduct the additional first year depreciation for 3-year property placed in service in 2002. In June 2004, D exchanges Asset T for Asset U (not a special tool) in a like-kind exchange. D elected not to deduct the additional first year depreciation for 7-year property placed in service in 2004. Since the recovery period prescribed under section 168 for Asset U (7 years) is longer than that of Asset T (3 years), Asset U is depreciated as if it had originally been placed in service in February 2002 using a 7-year recovery period. Additionally, since the depreciation method prescribed under section 168 for Asset U (200-percent declining balance method) is more accelerated than that of Asset T (straight line method) at the time of disposition, the depreciation allowance for Asset U is computed using the straight line method. Asset U is depreciated over its remaining recovery period of 4.75 years using the straight line method of depreciation and the mid-quarter convention.
(ii)The 2004 depreciation allowance for Asset T is $7,500 ($20,000 allowable depreciation deduction for 2004) × 4.5 months ÷ 12).
(iii)The depreciation rate in 2004 for Asset U is 0.1951 (1 ÷ 5.125 years (the length of the applicable recovery period remaining as of the beginning of 2004)). Therefore, the depreciation allowance for Asset U in 2004 is $2,744 (0.1951 × $22,500 (the sum of the $15,000 depreciable exchanged basis of Asset U ($22,500 adjusted depreciable basis at the beginning of 2004 for Asset T, less the $7,500 depreciation allowable for Asset T for 2004) and the $7,500 depreciation allowable for Asset T for 2004) × 7.5 months ÷ 12). Example 5. The facts are the same as in *Example 4* except that D exchanges Asset T for Asset U in June 2005, in a like-kind exchange. Under these facts, the remaining recovery period of Asset T at the beginning of 2005 is 1.5 months and, as a result, is less than the 5-month period between the beginning of 2005 (year of disposition) and June 2005 (time of disposition). Accordingly, pursuant to paragraph (c)(5)(i)(B) of this section, the 2005 depreciation allowance for Asset T is $2,500 ($2,500 adjusted depreciable basis at the beginning of 2005 ($60,000 original basis minus $17,500 depreciation deduction for 2002 minus $20,000 depreciation deduction for 2003 minus $20,000 depreciation deduction for 2004)). Because the exchanged basis of asset U is $0.00, no depreciation is allowable for asset U. Example 6. On January 1, 2004, E, a calendar-year taxpayer, acquired and placed in service Canopy V, a gas station canopy. The purchase price of Canopy V was $60,000. On August 1, 2004, Canopy V was destroyed in a hurricane and was therefore no longer usable in E's business. On October 1, 2004, as part of the involuntary conversion, E acquired and placed in service new Canopy W with the insurance proceeds E received due to the loss of Canopy V. E elected not to deduct the additional first year depreciation for 5-year property placed in service in 2004. E depreciates both canopies under the general depreciation system of section 168(a) by using the 200-percent declining balance method of depreciation, a 5-year recovery period, and the half-year convention. No depreciation deduction is allowable for Canopy V. The depreciation deduction allowable for Canopy W for 2004 is $12,000 ($60,000 × the annual depreciation rate of .40 × 1/2 year). For 2005, the depreciation deduction for Canopy W is $19,200 ($48,000 adjusted basis × the annual depreciation rate of .40). Example 7. The facts are the same as in *Example 6* , except that E did not make the election out of the additional first year depreciation for 5-year property placed in service in 2004. E depreciates both canopies under the general depreciation system of section 168(a) by using the 200-percent declining balance method of depreciation, a 5-year recovery period, and the half-year convention. No depreciation deduction is allowable for Canopy V. For 2004, E is allowed a 50-percent additional first year depreciation deduction of $30,000 for Canopy W (the unadjusted depreciable basis of $60,000 multiplied by .50), and a regular MACRS depreciation deduction of $6,000 for Canopy W (the depreciable exchanged basis of $30,000 multiplied by the annual depreciation rate of .40 × 1/2 year). For 2005, E is allowed a regular MACRS depreciation deduction of $9,600 for Canopy W (the depreciable exchanged basis of $24,000 ($30,000 minus regular 2003 depreciation of $6,000) multiplied by the annual depreciation rate of .40). Example 8. In January 2001, F, a calendar-year taxpayer, places in service a paved parking lot, Lot W, and begins depreciating Lot W over its 15-year recovery period. F's unadjusted depreciable basis in Lot W is $1,000x. On April 1, 2004, F disposes of Lot W in a like-kind exchange for Building X, which is nonresidential real property. Lot W is depreciated using the 150 percent declining balance method and the half-year convention. Building X is depreciated using the straight-line method with a 39-year recovery period and using the mid-month convention. Both Lot W and Building X were in service at the time of the exchange. Because Lot W was depreciated using the half-year convention, it is deemed to have been placed in service on July 1, 2001, the first day of the second half of 2001, and to have been disposed of on July 1, 2004, the first day of the second half of 2004. To determine the remaining recovery period of Building X at the time of replacement, Building X is deemed to have been placed in service on July 1, 2001, and removed from service on July 1, 2004. Thus, Building X is deemed to have been in service, at the time of replacement, for 3 years (36 months = 5.5 months in 2001 + 12 months in 2002 + 12 months in 2003 + 6.5 months in 2004) and its remaining recovery period is 36 years (39 − 3). Because Building X is deemed to be placed in service at the time of replacement, July 1, 2004, the first day of the second half of 2004, Building X is depreciated for 5.5 months in 2004. However, at the beginning of the year of replacement the remaining recovery period for Building X is 36 years and 6.5 months (39 years − 2 years and 5.5 months (5.5 months in 2001 + 12 months in 2002 + 12 months in 2003)). The depreciation rate for building X for 2004 is 0.02737 (= 1/(39-2-5.5/12)). For 2005, the depreciation rate for Building X is 0.02814 (= 1/(39-3-5.5/12)). Example 9. The facts are the same as in *Example 8* . F did not make the election under paragraph
(i)of this section for Building Y in the initial exchange. In January 2006, F exchanges Building Y for Building Z, an office building, in a like-kind exchange. F did not make any elections under section 168 for either Building Y or Building Z. Since the recovery period prescribed for Building Y as a result of the initial exchange (39 years) is longer than that of Building Z (27.5 years), Building Z is depreciated over the remaining 33 years of the recovery period of Building Y. The depreciation methods are the same for both Building Y and Building Z so F's exchanged basis in Building Z is depreciated over 33 years, using the straight-line method and the mid-month convention, beginning in January 2006. Alternatively, F could have made the election under paragraph
(i)of this section. If F makes such election, Building Z is treated as placed in service by F when acquired in January 2006 and F would recover its exchanged basis in Building Z over 27.5 years, using the straight line method and the mid-month convention, beginning in January 2006.
(d)*Special rules for determining depreciation allowances* —(1) *Excess basis* —(i) *In general* . Any excess basis in the replacement MACRS property is treated as property that is placed in service by the acquiring taxpayer in the year of replacement. Thus, the depreciation allowances for the depreciable excess basis are determined by using the applicable recovery period, depreciation method, and convention prescribed under section 168 for the property at the time of replacement. However, if replacement MACRS property is disposed of during the same taxable year the relinquished MACRS property is placed in service by the acquiring taxpayer, no depreciation deduction is allowable for either MACRS property. See paragraph
(g)of this section regarding the application of section 179. See paragraph
(h)of this section regarding the application of section 168(k) or 1400L(b).
(ii)*Example* . The application of this paragraph (d)(1) is illustrated by the following example: Example. In 1989, G placed in service a hospital. On January 16, 2004, G exchanges this hospital plus $2,000,000 cash for an office building in a like-kind exchange. On January 16, 2004, the hospital has an adjusted depreciable basis of $1,500,000. After the exchange, the basis of the office building is $3,500,000. Pursuant to paragraph (k)(2)(i) of this section, G decided to apply § 1.168(i)-6 to the exchange of the hospital for the office building, the replacement MACRS property. The depreciable exchanged basis of the office building is depreciated in accordance with paragraph
(c)of this section. The depreciable excess basis of $2,000,000 is treated as being placed in service by G in 2004 and, as a result, is depreciated using the applicable depreciation method, recovery period, and convention prescribed for the office building under section 168 at the time of replacement.
(2)*Depreciable and nondepreciable property* —(i) If land or other nondepreciable property is acquired in a like-kind exchange for, or as a result of an involuntary conversion of, depreciable property, the land or other nondepreciable property is not depreciated. If both MACRS and nondepreciable property are acquired in a like-kind exchange for, or as part of an involuntary conversion of, MACRS property, the basis allocated to the nondepreciable property (as determined under section 1031(d) and the regulations under section 1031(d) or section 1033(b) and the regulations under section 1033(b)) is not depreciated and the basis allocated to the replacement MACRS property (as determined under section 1031(d) and the regulations under section 1031(d) or section 1033(b) and the regulations under section 1033(b)) is depreciated in accordance with this section.
(ii)If MACRS property is acquired, or if both MACRS and nondepreciable property are acquired, in a like-kind exchange for, or as part of an involuntary conversion of, land or other nondepreciable property, the basis in the replacement MACRS property that is attributable to the relinquished nondepreciable property is treated as though the replacement MACRS property is placed in service by the acquiring taxpayer in the year of replacement. Thus, the depreciation allowances for the replacement MACRS property are determined by using the applicable recovery period, depreciation method, and convention prescribed under section 168 for the replacement MACRS property at the time of replacement. See paragraph
(g)of this section regarding the application of section 179. See paragraph
(h)of this section regarding the application of section 168(k) or 1400L(b).
(3)*Depreciation limitations for automobiles* —(i) *In general* . Depreciation allowances under section 179 and section 167 (including allowances under sections 168 and 1400L(b)) for a passenger automobile, as defined in section 280F(d)(5), are subject to the limitations of section 280F(a). The depreciation allowances for a passenger automobile that is replacement MACRS property (replacement MACRS passenger automobile) generally are limited in any taxable year to the replacement automobile section 280F limit for the taxable year. The taxpayer's basis in the replacement MACRS passenger automobile is treated as being comprised of two separate components. The first component is the exchanged basis and the second component is the excess basis, if any. The depreciation allowances for a passenger automobile that is relinquished MACRS property (relinquished MACRS passenger automobile) for the taxable year generally are limited to the relinquished automobile section 280F limit for that taxable year. In the year of disposition the sum of the depreciation deductions for the relinquished MACRS passenger automobile and the replacement MACRS passenger automobile may not exceed the replacement automobile section 280F limit unless the taxpayer makes the election under § 1.168(i)-6(i). For purposes of this paragraph (d)(3), the following definitions apply:
(A)*Replacement automobile section 280F limit* is the limit on depreciation deductions under section 280F(a) for the taxable year based on the time of replacement of the replacement MACRS passenger automobile (including the effect of any elections under section 168(k) or section 1400L(b), as applicable).
(B)*Relinquished automobile section 280F limit* is the limit on depreciation deductions under section 280F(a) for the taxable year based on when the relinquished MACRS passenger automobile was placed in service by the taxpayer.
(ii)*Order in which limitations on depreciation under section 280F(a) are applied.* Generally, depreciation deductions allowable under section 280F(a) reduce the basis in the relinquished MACRS passenger automobile and the exchanged basis of the replacement MACRS passenger automobile, before the excess basis of the replacement MACRS passenger automobile is reduced. The depreciation deductions for the relinquished MACRS passenger automobile in the year of disposition and the replacement MACRS passenger automobile in the year of replacement and each subsequent taxable year are allowable in the following order:
(A)The depreciation deduction allowable for the relinquished MACRS passenger automobile as determined under paragraph (c)(5)(i) of this section for the year of disposition to the extent of the smaller of the replacement automobile section 280F limit and the relinquished automobile section 280F limit, if the year of disposition is the year of replacement. If the year of replacement is a taxable year subsequent to the year of disposition, the depreciation deduction allowable for the relinquished MACRS passenger automobile for the year of disposition is limited to the relinquished automobile section 280F limit.
(B)The additional first year depreciation allowable on the remaining exchanged basis (remaining carryover basis as determined under § 1.168(k)-1(f)(5) or § 1.1400L(b)-1(f)(5), as applicable) of the replacement MACRS passenger automobile, as determined under § 1.168(k)-1(f)(5) or § 1.1400L(b)-1(f)(5), as applicable, to the extent of the excess of the replacement automobile section 280F limit over the amount allowable under paragraph (d)(3)(ii)(A) of this section.
(C)The depreciation deduction allowable for the taxable year on the depreciable exchanged basis of the replacement MACRS passenger automobile determined under paragraph
(c)of this section to the extent of any excess over the sum of the amounts allowable under paragraphs (d)(3)(ii)(A) and
(B)of this section of the smaller of the replacement automobile section 280F limit and the relinquished automobile section 280F limit.
(D)Any section 179 deduction allowable in the year of replacement on the excess basis of the replacement MACRS passenger automobile to the extent of the excess of the replacement automobile section 280F limit over the sum of the amounts allowable under paragraphs (d)(3)(ii)(A), (B), and
(C)of this section.
(E)The additional first year depreciation allowable on the remaining excess basis of the replacement MACRS passenger automobile, as determined under § 1.168(k)-1(f)(5) or § 1.1400L(b)-1(f)(5), as applicable, to the extent of the excess of the replacement automobile section 280F limit over the sum of the amounts allowable under paragraphs (d)(3)(ii)(A), (B), (C), and
(D)of this section.
(F)The depreciation deduction allowable under paragraph
(d)of this section for the depreciable excess basis of the replacement MACRS passenger automobile to the extent of the excess of the replacement automobile section 280F limit over the sum of the amounts allowable under paragraphs (d)(3)(ii)(A), (B), (C), (D), and
(E)of this section.
(iii)*Examples.* The application of this paragraph (d)(3) is illustrated by the following examples: Example 1. H, a calendar-year taxpayer, acquired and placed in service Automobile X in January 2000 for $30,000 to be used solely for H's business. In December 2003, H exchanges, in a like-kind exchange, Automobile X plus $15,000 cash for new Automobile Y that will also be used solely in H's business. Automobile Y is 50-percent bonus depreciation property for purposes of section 168(k)(4). Both automobiles are depreciated using the double declining balance method, the half-year convention, and a 5-year recovery period. Pursuant to § 1.168(k)-1(g)(3)(ii) and paragraph (k)(2)(i) of this section, H decided to apply § 1.168(i)-6 to the exchange of Automobile X for Automobile Y, the replacement MACRS property. The relinquished automobile section 280F limit for 2003 for Automobile X is $1,775. The replacement automobile section 280F limit for Automobile Y is $10,710. The exchanged basis for Automobile Y is $17,315 ($30,000 less total depreciation allowable of $12,685 (($3,060 for 2000, $4,900 for 2001, $2,950 for 2002, and $1,775 for 2003)). Without taking section 280F into account, the additional first year depreciation deduction for the remaining exchanged basis is $8,658 ($17,315 × 0.5). Because this amount is less than $8,935 ($10,710 (the replacement automobile section 280F limit for 2003 for Automobile Y) − $1,775 (the depreciation allowable for Automobile X for 2003)), the additional first year depreciation deduction for the exchanged basis is $8,658. No depreciation deduction is allowable in 2003 for the depreciable exchanged basis because the depreciation deductions taken for Automobile X and the remaining exchanged basis exceed the exchanged automobile section 280F limit. An additional first year depreciation deduction of $277 is allowable for the excess basis of $15,000 in Automobile Y. Thus, at the end of 2003 the adjusted depreciable basis in Automobile Y is $23,379 comprised of adjusted depreciable exchanged basis of $8,657 ($17,315 (exchanged basis) − $8,658 (additional first year depreciation for exchanged basis)) and of an adjusted depreciable excess basis of $14,723 ($15,000 (excess basis) − $277 (additional first year depreciation for 2003)). Example 2. The facts are the same as in *Example 1* , except that H used Automobile X only 75 percent for business use. As such, the total allowable depreciation for Automobile X is reduced to reflect that the automobile is only used 75 percent for business. The total allowable depreciation of Automobile X is $9,513.75 ($2,295 for 2000 ($3,060 limit × .75), $3,675 for 2001 ($4,900 limit × .75), $2,212.50 for 2002 ($2,950 limit × .75), and $1,331.25 for 2003 ($1,775 limit × .75). However, under § 1.280F-2T(g)(2)(ii)(A), the exchanged basis is reduced by the excess (if any) of the depreciation that would have been allowable if the exchanged automobile had been used solely for business over the depreciation that was allowable in those years. Thus, the exchanged basis, for purposes of computing depreciation, for Automobile Y is $17,315. Example 3. The facts are the same as in *Example 1,* except that H placed in service Automobile X in January 2002, and H elected not to claim the additional first year depreciation deduction for 5-year property placed in service in 2002 and 2003. The relinquished automobile section 280F limit for Automobile X for 2003 is $4,900. Because the replacement automobile section 280F limit for 2003 for Automobile Y ($3,060) is less than the relinquished automobile section 280F limit for Automobile X for 2003 and is less than $5,388 (($30,000
(cost)− $3,060 (depreciation allowable for 2002)) × 0.4 × 6/12), the depreciation that would be allowable for Automobile X (determined without regard to section 280F) in the year of disposition, the depreciation for Automobile X in the year of disposition is limited to $3,060. For 2003 no depreciation is allowable for the excess basis and the exchanged basis in Automobile Y. Example 4. AB, a calendar-year taxpayer, purchased and placed in service Automobile X1 in February 2000 for $10,000. X1 is a passenger automobile subject to section 280F(a) and is used solely for AB's business. AB depreciated X1 using a 5-year recovery period, the double declining balance method, and the half-year convention. As of January 1, 2003, the adjusted depreciable basis of X1 was $2,880 ($10,000 original cost minus $2,000 depreciation deduction for 2000, minus $3,200 depreciation deduction for 2001, and $1,920 depreciation deduction for 2002). In November 2003, AB exchanges, in a like-kind exchange, Automobile X1 plus $14,000 cash for new Automobile Y1 that will be used solely in AB's business. Automobile Y1 is 50-percent bonus depreciation property for purposes of section 168(k)(4) and qualifies for the expensing election under section 179. Pursuant to paragraph § 1.168(k)-1(g)(3)(ii) and paragraph (k)(2)(i) of this section, AB decided to apply § 1.168(i)-6 to the exchange of Automobile X1 for Automobile Y1, the replacement MACRS property. AB also makes the election under section 179 for the excess basis of Automobile Y1. AB depreciates Y1 using a five-year recovery period, the double declining balance method and the half-year convention. For 2003, the relinquished automobile section 280F limit for Automobile X1 is $1,775 and the replacement automobile section 280F limit for 2003 for Automobile Y1 is $10,710.
(i)The 2003 depreciation deduction for Automobile X1 is $576. The depreciation deduction calculated for X1 is $576 (the adjusted depreciable basis of Automobile X1 at the beginning of 2003 of $2,880 × 40% × 1/2 year), which is less than the relinquished automobile section 280F limit and the replacement automobile section 280F limit.
(ii)The additional first year depreciation deduction for the exchanged basis is $1,152. The additional first year depreciation deduction of $1,152 (remaining exchanged basis of $2,304 ($2,880 adjusted basis of Automobile X1 at the beginning of 2003 minus $576) − 0.5)) is less than the replacement automobile section 280F limit minus $576.
(iii)AB's MACRS depreciation deduction allowable in 2003 for the remaining exchanged basis of $1,152 is $47 (the relinquished automobile section 280F limit of $1,775 less the depreciation deduction of $576 taken for Automobile X1 less the additional first year depreciation deduction of $1,152 taken for the exchanged basis) which is less than the depreciation deduction calculated for the depreciable exchanged basis.
(iv)For 2003, AB takes a $1,400 section 179 deduction for the excess basis of Automobile Y1. AB must reduce the excess basis of $14,000 by the section 179 deduction of $1,400 to determine the remaining excess basis of $12,600.
(v)For 2003, AB is allowed a 50-percent additional first year depreciation deduction of $6,300 (the remaining excess basis of $12,600 multiplied by .50).
(vi)For 2003, AB's depreciation deduction for the depreciable excess basis is limited to $1,235. The depreciation deduction computed without regard to the replacement automobile section 280F limit is $1,260 ($6,300 depreciable excess basis × 0.4 × 6/12). However the depreciation deduction for the depreciable excess basis is limited to $1,235 ($10,710 (replacement automobile section 280F limit) − $576 (depreciation deduction for Automobile X1) − $1,152 (additional first year depreciation deduction for the exchanged basis) − $47 (depreciation deduction for exchanged basis) − 1,400 (section 179 deduction) − $6,300 (additional first year depreciation deduction for remaining excess basis)).
(4)*Involuntary conversion for which the replacement MACRS property is acquired and placed in service before disposition of relinquished MACRS property.* If, in an involuntary conversion, a taxpayer acquires and places in service the replacement MACRS property before the date of disposition of the relinquished MACRS property, the taxpayer depreciates the unadjusted depreciable basis of the replacement MACRS property under section 168 beginning in the taxable year when the replacement MACRS property is placed in service by the taxpayer and by using the applicable depreciation method, recovery period, and convention prescribed under section 168 for the replacement MACRS property at the placed-in-service date. However, at the time of disposition of the relinquished MACRS property, the taxpayer determines the exchanged basis and the excess basis of the replacement MACRS property and begins to depreciate the depreciable exchanged basis of the replacement MACRS property in accordance with paragraph
(c)of this section. The depreciable excess basis of the replacement MACRS property continues to be depreciated by the taxpayer in accordance with the first sentence of this paragraph (d)(4). Further, in the year of disposition of the relinquished MACRS property, the taxpayer must include in taxable income the excess of the depreciation deductions allowable on the unadjusted depreciable basis of the replacement MACRS property over the depreciation deductions that would have been allowable to the taxpayer on the depreciable excess basis of the replacement MACRS property from the date the replacement MACRS property was placed in service by the taxpayer (taking into account the applicable convention) to the time of disposition of the relinquished MACRS property. However, see § 1.168(k)-1(f)(5)(v) for replacement MACRS property that is qualified property or 50-percent bonus depreciation property and § 1.1400L(b)-1(f)(5) for replacement MACRS property that is qualified New York Liberty Zone property.
(e)*Use of optional depreciation tables* —(1) *Taxpayer not bound by prior use of table.* If a taxpayer used an optional depreciation table for the relinquished MACRS property, the taxpayer is not required to use an optional table for the depreciable exchanged basis of the replacement MACRS property. Conversely, if a taxpayer did not use an optional depreciation table for the relinquished MACRS property, the taxpayer may use the appropriate table for the depreciable exchanged basis of the replacement MACRS property. If a taxpayer decides not to use the table for the depreciable exchanged basis of the replacement MACRS property, the depreciation allowance for this property for the year of replacement and subsequent taxable years is determined under paragraph
(c)of this section. If a taxpayer decides to use the optional depreciation tables, no depreciation deduction is allowable for MACRS property placed in service by the acquiring taxpayer and subsequently exchanged or involuntarily converted by such taxpayer in the same taxable year, and, if, during the same taxable year, MACRS property is placed in service by the acquiring taxpayer, exchanged or involuntarily converted by such taxpayer, and the replacement MACRS property is disposed of by such taxpayer, no depreciation deduction is allowable for either MACRS property.
(2)*Determination of the depreciation deduction* —(i) *Relinquished MACRS property.* In the year of disposition, the depreciation allowance for the relinquished MACRS property is computed by multiplying the unadjusted depreciable basis (less the amount of the additional first year depreciation deduction allowed or allowable, whichever is greater, under section 168(k) or section 1400L(b), as applicable) of the relinquished MACRS property by the annual depreciation rate (expressed as a decimal equivalent) specified in the appropriate table for the recovery year corresponding to the year of disposition. This product 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 the exchange or involuntary conversion (taking into account the applicable convention) and the denominator of which is 12. However, if the year of disposition is less than 12 months, the depreciation allowance determined under this paragraph (e)(2)(i) must be adjusted for a short taxable year (for further guidance, for example, see Rev. Proc. 89-15 (1989-1 CB 816) and § 601.601(d)(2)(ii)( *b* ) of this chapter).
(ii)*Replacement MACRS property* —(A) *Determination of the appropriate optional depreciation table.* If a taxpayer chooses to use the appropriate optional depreciation table for the depreciable exchanged basis, the depreciation allowances for the depreciable exchanged basis beginning in the year of replacement are determined by choosing the optional depreciation table that corresponds to the recovery period, depreciation method, and convention of the replacement MACRS property determined under paragraph
(c)of this section.
(B)*Calculating the depreciation deduction for the replacement MACRS property.* ( *1* ) The depreciation deduction for the taxable year is computed by first determining the appropriate recovery year in the table identified under paragraph (e)(2)(ii)(A) of this section. The appropriate recovery year for the year of replacement is the same as the recovery year for the year of disposition, regardless of the taxable year in which the replacement property is acquired. For example, if the recovery year for the year of disposition would have been year 4 in the table that applied before the disposition of the relinquished MACRS property, then the recovery year for the year of replacement is Year 4 in the table identified under paragraph (e)(2)(ii)(A) of this section. ( *2* ) 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 (e)(2)(ii)(A) of this section (expressed as a decimal equivalent) corresponding to the replacement MACRS property (as determined under paragraph (e)(2)(ii)(A) of this section) for the taxable years beginning with the placed-in-service year of the relinquished MACRS property through the taxable year immediately prior to the year of disposition. The product of the annual depreciation rate and the transaction coefficient is multiplied by the depreciable exchanged basis (taking into account paragraph (e)(2)(i) of this section). In the year of replacement, this product 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 by the acquiring taxpayer during the year of replacement (taking into account the applicable convention) and the denominator of which is 12. However, if the year of replacement is the year the relinquished MACRS property is placed in service by the acquiring taxpayer, the preceding sentence does not apply. In addition, if the year of replacement is less than 12 months, the depreciation allowance determined under paragraph (e)(2)(ii) of this section must be adjusted for a short taxable year (for further guidance, for example, see Rev. Proc. 89-15 (1989-1 CB 816) and § 601.601(d)(2)(ii)( *b* ) of this chapter).
(iii)*Unrecovered basis.* If the replacement MACRS property would have unrecovered depreciable basis after the final recovery year (for example, due to a deferred exchange), the unrecovered basis is an allowable depreciation deduction in the taxable year that corresponds to the final recovery year unless the unrecovered basis is subject to a depreciation limitation such as section 280F.
(3)*Excess basis.* As provided in paragraph (d)(1) of this section, any excess basis in the replacement MACRS property is treated as property that is placed in service by the acquiring taxpayer at the time of replacement. Thus, if the taxpayer chooses to use the appropriate optional depreciation table for the depreciable excess basis in the replacement MACRS property, the depreciation allowances for the depreciable excess basis are determined by multiplying the depreciable excess basis by the annual depreciation rate (expressed as a decimal equivalent) specified in the appropriate table for each taxable year. The appropriate table for the depreciable excess basis is based on the depreciation method, recovery period, and convention applicable to the depreciable excess basis under section 168 at the time of replacement. However, If the year of replacement is less than 12 months, the depreciation allowance determined under this paragraph (e)(3) must be adjusted for a short taxable year (for further guidance, for example, see Rev. Proc. 89-15 (1989-1 CB 816) and § 601.601(d)(2)(ii)( *b* ) of this chapter).
(4)*Examples.* The application of this paragraph
(e)is illustrated by the following examples: Example 1. J, a calendar-year taxpayer, acquired 5-year property for $10,000 and placed it in service in January 2001. J uses the optional tables to depreciate the property. J uses the half-year convention and did not make any elections for the property. In December 2003, J exchanges the 5-year property for used 7-year property in a like-kind exchange. Pursuant to paragraph (k)(2)(i) of this section, J decided to apply § 1.168(i)-6 to the exchange of the 5-year property for the 7-year property, the replacement MACRS property. The depreciable exchanged basis of the 7-year property equals the adjusted depreciable basis of the 5-year property at the time of disposition of the relinquished MACRS property, namely $3,840 ($10,000 less $2,000 depreciation in 2001, $3,200 depreciation in 2002, and $960 depreciation in 2003). J must first determine the appropriate optional depreciation table pursuant to paragraph
(c)of this section. Since the replacement MACRS property has a longer recovery period and the same depreciation method as the relinquished MACRS property, J uses the optional depreciation table corresponding to a 7-year recovery period, the 200% declining balance method, and the half-year convention (because the 5-year property was depreciated using a half-year convention). Had the replacement MACRS property been placed in service in the same taxable year as the placed-in-service year of the relinquished MACRS property, the depreciation allowance for the replacement MACRS property for the year of replacement would be determined using recovery year 3 of the optional table. The depreciation allowance equals the depreciable exchanged basis ($3,840) multiplied by the annual depreciation rate for the current taxable year (.1749 for recovery year 3) as modified by the transaction coefficient [1 / (1 − (.1429 + .2449))] which equals 1.6335. Thus, J multiplies $3,840, its depreciable exchanged basis in the replacement MACRS property, by the product of .1749 and 1.6335, and then by one-half, to determine the depreciation allowance for 2003, $549. For 2004, J multiples its depreciable exchanged basis in the replacement MACRS property determined at the time of replacement of $3,840 by the product of the modified annual depreciation rate for the current taxable year (.1249 for recovery year 4) and the transaction coefficient (1.6335) to determine its depreciation allowance of $783. Example 2. K, a calendar-year taxpayer, acquired used Asset V for $100,000 and placed it in service in January 1999. K depreciated Asset V under the general depreciation system of section 168(a) by using a 5-year recovery period, the 200-percent declining balance method of depreciation, and the half-year convention. In December 2003, as part of the involuntary conversion, Asset V is involuntarily converted due to an earthquake. In October 2005, K purchases used Asset W with the insurance proceeds from the destruction of Asset V and places Asset W in service to replace Asset V. Pursuant to paragraph (k)(2)(i) of this section, K decided to apply § 1.168(i)-6 to the involuntary conversion of Asset V with the replacement of Asset W, the replacement MACRS property. If Asset W had been placed in service when Asset V was placed in service, it would have been depreciated using a 7-year recovery period, the 200-percent declining balance method, and the half-year convention. K uses the optional depreciation tables to depreciate Asset V and Asset W. For 2003 (recovery year 5 on the optional table), the depreciation deduction for Asset V is $5,760 ((0.1152)($100,000)(1/2)). Thus, the adjusted depreciable basis of Asset V at the time of replacement is $11,520 ($100,000 less $20,000 depreciation in 1999, $32,000 depreciation in 2000, $19,200 depreciation in 2001, $11,520 depreciation in 2002, and $5,760 depreciation in 2003). Under the table that applied to Asset V, the year of disposition was recovery year 5 and the depreciation deduction was determined under the straight line method. The table that applies for Asset W is the table that applies the straight line depreciation method, the half-year convention, and a 7-year recovery period. The appropriate recovery year under this table is recovery year 5. The depreciation deduction for Asset W for 2005 is $1,646 (($11,520)(0.1429)(1/(1−0.5))(1/2)). Thus, the depreciation deduction for Asset W in 2006 (recovery year 6) is $3,290 ($11,520)(0.1428)(1/(1−0.5)). The depreciation deduction for 2007 (recovery year 7) is $3,292 (($11,520)(.1429)(1/(1−.5))). The depreciation deduction for 2008 (recovery year 8) is $3292 ($11,520 less allowable depreciation for Asset W for 2005 through 2007 ($1,646 + $3,290 + $3,292)). Example 3. L, a calendar-year taxpayer, placed in service used Computer X in January 2002 for $5,000. L depreciated Computer X under the general depreciation system of section 168(a) by using the 200-percent declining balance method of depreciation, a 5-year recovery period, and the half-year convention. Computer X is destroyed in a fire in March 2004. For 2004, the depreciation deduction allowable for Computer X equals $480 ([($5,000)(.1920)] × (1/2)). Thus, the adjusted depreciable basis of Computer X was $1,920 when it was destroyed ($5,000 unadjusted depreciable basis less $1,000 depreciation for 2002, $1,600 depreciation for 2003, and $480 depreciation for 2004). In April 2004, as part of the involuntary conversion, L acquired and placed in service used Computer Y with insurance proceeds received due to the loss of Computer X. Computer Y will be depreciated using the same depreciation method, recovery period, and convention as Computer X. L elected to use the optional depreciation tables to compute the depreciation allowance for Computer X and Computer Y. The depreciation deduction allowable for 2004 for Computer Y equals $384 ([$1,920 × (.1920)(1/(1−.52))] × (1/2)).
(f)*Mid-quarter convention.* For purposes of applying the 40-percent test under section 168(d) and the regulations under section 168(d), the following rules apply:
(1)*Exchanged basis.* If, in a taxable year, MACRS property is placed in service by the acquiring taxpayer (but not as a result of a like-kind exchange or involuntary conversion) and—
(i)In the same taxable year, is disposed of by the acquiring taxpayer in a like-kind exchange or an involuntary conversion and replaced by the acquiring taxpayer with replacement MACRS property, the exchanged basis (determined without any adjustments for depreciation deductions during the taxable year) of the replacement MACRS property is taken into account in the year of replacement in the quarter the relinquished MACRS property was placed in service by the acquiring taxpayer; or
(ii)In the same taxable year, is disposed of by the acquiring taxpayer in a like-kind exchange or an involuntary conversion, and in a subsequent taxable year is replaced by the acquiring taxpayer with replacement MACRS property, the exchanged basis (determined without any adjustments for depreciation deductions during the taxable year) of the replacement MACRS property is taken into account in the year of replacement in the quarter the replacement MACRS property was placed in service by the acquiring taxpayer; or
(iii)In a subsequent taxable year, disposed of by the acquiring taxpayer in a like-kind exchange or involuntary conversion, the exchanged basis of the replacement MACRS property is not taken into account in the year of replacement.
(2)*Excess basis.* Any excess basis is taken into account in the quarter the replacement MACRS property is placed in service by the acquiring taxpayer.
(3)*Depreciable property acquired for nondepreciable property.* Both the exchanged basis and excess basis of the replacement MACRS property described in paragraph (d)(2)(ii) of this section (depreciable property acquired for nondepreciable property), are taken into account for determining whether the mid-quarter convention applies in the year of replacement.
(g)*Section 179 election.* In applying the section 179 election, only the excess basis, if any, in the replacement MACRS property is taken into account. If the replacement MACRS property is described in paragraph (d)(2)(ii) of this section (depreciable property acquired for nondepreciable property), only the excess basis in the replacement MACRS property is taken into account.
(h)*Additional first year depreciation deduction.* See § 1.168(k)-1(f)(5) (for qualified property or 50-percent bonus depreciation property) and § 1.1400L(b)-1(f)(5) (for qualified New York Liberty Zone property).
(i)*Elections* —(1) *Election not to apply this section.* A taxpayer may elect not to apply this section for any MACRS property involved in a like-kind exchange or involuntary conversion. An election under this paragraph (i)(1) applies only to the taxpayer making the election and the election applies to both the relinquished MACRS property and the replacement MACRS property. If an election is made under this paragraph (i)(1), the depreciation allowances for the replacement MACRS property beginning in the year of replacement and for the relinquished MACRS property in the year of disposition are not determined under this section (except as otherwise provided in this paragraph). Instead, for depreciation purposes only, the sum of the exchanged basis and excess basis, if any, in the replacement MACRS property is treated as property placed in service by the taxpayer at the time of replacement and the adjusted depreciable basis of the relinquished MACRS property is treated as being disposed of by the taxpayer at the time of disposition. While the relinquished MACRS property is treated as being disposed of at the time of disposition for depreciation purposes, the election not to apply this section does not affect the application of sections 1031 and 1033 (for example, if a taxpayer does not make the election under this paragraph (i)(1) and does not recognize gain or loss under section 1031, this result would not change if the taxpayer chose to make the election under this paragraph (i)(1)). In addition, the election not to apply this section does not affect the application of sections 1245 and 1250 to the relinquished MACRS property. Paragraphs (c)(5)(i) (determination of depreciation for relinquished MACRS property in the year of disposition), (c)(5)(iii) (rules for deferred transactions),
(g)(section 179 election), and
(h)(additional first year depreciation deduction) of this section apply to property to which this paragraph (i)(1) applies. See paragraph
(j)of this section for the time and manner of making the election under this paragraph (i)(1).
(2)*Election to treat certain replacement property as MACRS property.* If the tangible depreciable property acquired by a taxpayer in a like-kind exchange or involuntary conversion (the replacement property) replaces tangible depreciable property for which the taxpayer made a valid election under section 168(f)(1) to exclude it from the application of MACRS (the relinquished property), the taxpayer may elect to treat, for depreciation purposes only, the sum of the exchanged basis and excess basis, if any, of the replacement property as MACRS property that is placed in service by the taxpayer at the time of replacement. An election under this paragraph (i)(2) applies only to the taxpayer making the election and the election applies to both the relinquished property and the replacement property. If an election is made under this paragraph (i)(2), the adjusted depreciable basis of the relinquished property is treated as being disposed of by the taxpayer at the time of disposition. Rules similar to those provided in §§ 1.168(i)-6(b)(3) and
(4)apply for purposes of determining the time of disposition and time of replacement under this paragraph (i)(2). While the relinquished property is treated as being disposed of at the time of disposition for depreciation purposes, the election under this paragraph (i)(2) does not affect the application of sections 1031 and 1033, and the application of sections 1245 and 1250 to the relinquished property. If an election is made under this paragraph (i)(2), rules similar to those provided in paragraphs (c)(5)(iii) (rules for deferred transactions),
(g)(section 179 election), and
(h)(additional first year depreciation deduction) of this section apply to property. Except as provided in paragraph (k)(3)(ii) of this section, a taxpayer makes the election under this paragraph (i)(2) by claiming the depreciation allowance as determined under MACRS for the replacement property on the taxpayer's timely filed (including extensions) original Federal tax return for the placed-in-service year of the replacement property as determined under this paragraph (i)(2).
(j)*Time and manner of making election under paragraph (i)(1) of this section* —(1) *In general.* The election provided in paragraph (i)(1) of this section is made separately by each person acquiring replacement MACRS property. The election is made for each member of a consolidated group by the common parent of the group, by the partnership (and not by the partners separately) in the case of a partnership, or by the S corporation (and not by the shareholders separately) in the case of an S corporation. A separate election under paragraph (i)(1) of this section is required for each like-kind exchange or involuntary conversion. The election provided in paragraph (i)(1) of this section must be made within the time and manner provided in paragraph (j)(2) and
(3)of this section and may not be made by the taxpayer in any other manner (for example, the election cannot be made through a request under section 446(e) to change the taxpayer's method of accounting), except as provided in paragraph (k)(2) of this section.
(2)*Time for making election.* The election provided in paragraph (i)(1) of this section must be made by the due date (including extensions) of the taxpayer's Federal tax return for the year of replacement.
(3)*Manner of making election.* The election provided in paragraph (i)(1) of this section is made in the manner provided for on Form 4562, Depreciation and Amortization, and its instructions. If Form 4562 is revised or renumbered, any reference in this section to that form is treated as a reference to the revised or renumbered form.
(4)*Revocation.* The election provided in paragraph (i)(1) of this section, once made, may be revoked only with the consent of the Commissioner of Internal Revenue. Such consent will be granted only in extraordinary circumstances. Requests for consent are requests for a letter ruling and must be filed with the Commissioner of Internal Revenue, Washington, DC 20224. Requests for consent may not be made in any other manner (for example, through a request under section 446(e) to change the taxpayer's method of accounting).
(k)*Effective date* —(1) *In general.* Except as provided in paragraph (k)(3) of this section, this section applies to a like-kind exchange or an involuntary conversion of MACRS property for which the time of disposition and the time of replacement both occur after February 27, 2004.
(2)*Application to pre-effective date like-kind exchanges and involuntary conversions.* For a like-kind exchange or an involuntary conversion of MACRS property for which the time of disposition, the time of replacement, or both occur on or before February 27, 2004, a taxpayer may—
(i)Apply the provisions of this section. If a taxpayer's applicable Federal tax return has been filed on or before February 27, 2004, and the taxpayer has treated the replacement MACRS property as acquired, and the relinquished MACRS property as disposed of, in a like-kind exchange or an involuntary conversion, the taxpayer changes its method of accounting for depreciation of the replacement MACRS property and relinquished MACRS property in accordance with this paragraph (k)(2)(i) by following the applicable administrative procedures issued under § 1.446-1(e)(3)(ii) for obtaining the Commissioner's automatic consent to a change in method of accounting (for further guidance, see Rev. Proc. 2002-9 (2002-1 CB 327) and § 601.601(d)(2)(ii)( *b* ) of this chapter); or
(ii)Rely on prior guidance issued by the Internal Revenue Service for determining the depreciation deductions of replacement MACRS property and relinquished MACRS property (for further guidance, for example, see Notice 2000-4 (2001-1 CB 313) and § 601.601(d)(2)(ii)( *b* ) of this chapter). In relying on such guidance, a taxpayer may use any reasonable, consistent method of determining depreciation in the year of disposition and the year of replacement. If a taxpayer's applicable Federal tax return has been filed on or before February 27, 2004, and the taxpayer has treated the replacement MACRS property as acquired, and the relinquished MACRS property as disposed of, in a like-kind exchange or an involuntary conversion, the taxpayer changes its method of accounting for depreciation of the replacement MACRS property and relinquished MACRS property in accordance with this paragraph (k)(2)(ii) by following the applicable administrative procedures issued under § 1.446-1(e)(3)(ii) for obtaining the Commissioner's automatic consent to a change in method of accounting (for further guidance, see Rev. Proc. 2002-9 (2002-1 CB 327) and § 601.601(d)(2)(ii)( *b* ) of this chapter).
(3)*Like-kind exchanges and involuntary conversions where the taxpayer made the election under section 168(f)(1) for the relinquished property—*
(i)*In general.* If the tangible depreciable property acquired by a taxpayer in a like-kind exchange or involuntary conversion (the replacement property) replaces tangible depreciable property for which the taxpayer made a valid election under section 168(f)(1) to exclude it from the application of MACRS (the relinquished property), paragraph (i)(2) of this section applies to such relinquished property and replacement property for which the time of disposition and the time of replacement (both as determined under paragraph (i)(2) of this section) both occur after February 26, 2007.
(ii)*Application of paragraph (i)(2) of this section to pre-February 26, 2007 like-kind exchanges and involuntary conversions.* If the tangible depreciable property acquired by a taxpayer in a like-kind exchange or involuntary conversion (the replacement property) replaces tangible depreciable property for which the taxpayer made a valid election under section 168(f)(1) to exclude it from the application of MACRS (the relinquished property), the taxpayer may apply paragraph (i)(2) of this section to the relinquished property and the replacement property for which the time of disposition, the time of replacement (both as determined under paragraph (i)(2) of this section), or both occur on or before February 26, 2007. If the taxpayer wants to apply paragraph (i)(2) of this section and the taxpayer's applicable Federal tax return has been filed on or before February 26, 2007, the taxpayer must change its method of accounting for depreciation of the replacement property and relinquished property in accordance with this paragraph (k)(3)(ii) by following the applicable administrative procedures issued under § 1.446-1(e)(3)(ii) for obtaining the Commissioner's automatic consent to a change in method of accounting (for further guidance, see Rev. Proc. 2002-9 (2002-1 CB 327) and § 601.601(d)(2)(ii)(b) of this chapter). § 1.168(i)-6T [Removed] **Par. 13.** Section 1.168(i)-6T is removed. **Par. 14.** Section 1.168(k)-1 is amended as follows: 1. The second and third sentences in paragraph (f)(5)(v)(B) are revised. 2. The last sentences in Example 1(i), Example 3(i), Example 4(i), and Example 5(i) in paragraph (f)(5)(vi) are revised. 3. Paragraph (g)(3)(ii) is revised. The revisions read as follows: § 1.168(k)-1 Additional first year depreciation.
(f)* * *
(5)* * *
(v)* * *
(B)* * * However, at the time of disposition of the involuntarily converted MACRS property, the taxpayer determines the exchanged basis (as defined in § 1.168(i)-6(b)(7)) and the excess basis (as defined in § 1.168(i)-6(b)(8)) of the acquired MACRS property and begins to depreciate the depreciable exchanged basis (as defined in § 1.168(i)-6(b)(9) of the acquired MACRS property in accordance with § 1.168(i)-6(c). The depreciable excess basis (as defined in § 1.168(i)-6(b)(10)) of the acquired MACRS property continues to be depreciated by the taxpayer in accordance with the first sentence of this paragraph (f)(5)(v)(B).
(vi)* * * Example 1.
(i)* * * Pursuant to paragraph (g)(3)(ii) of this section and § 1.168(i)-6(k)(2)(i), EE decided to apply § 1.168(i)-6 to the involuntary conversion of Canopy V1 with the replacement of Canopy W1, the acquired MACRS property. Example 3.
(i)* * * Pursuant to paragraph (g)(3)(ii) of this section and § 1.168(i)-6(k)(2)(i), FF decided to apply § 1.168(i)-6 to the exchange of Computer X2 for Computer Y2, the acquired MACRS property. Example 4.
(i)* * * Pursuant to paragraph (g)(3)(ii) of this section and § 1.168(i)-6(k)(2)(i), GG decided to apply § 1.168(i)-6 to the exchange of Equipment X3 for Equipment Y3, the acquired MACRS property. Example 5.
(i)* * * Pursuant to paragraph (g)(3)(ii) of this section and § 1.168(i)-6(k)(2)(i), GG decided to apply § 1.168(i)-6 to the exchange of Equipment Y3 for Equipment Z1, the acquired MACRS property.
(g)* * *
(3)* * *
(ii)Paragraphs (f)(5)(ii)(F)( *2* ) and (f)(5)(v) of this section apply to a like-kind exchange or an involuntary conversion of MACRS property and computer software for which the time of disposition and the time of replacement both occur after February 27, 2004. For a like-kind exchange or an involuntary conversion of MACRS property for which the time of disposition, the time of replacement, or both occur on or before February 27, 2004, see § 1.168(i)-6(k)(2)(ii). For a like-kind exchange or involuntary conversion of computer software for which the time of disposition, the time of replacement, or both occur on or before February 27, 2004, a taxpayer may rely on prior guidance issued by the Internal Revenue Service for determining the depreciation deductions of the acquired computer software and the exchanged or involuntarily converted computer software (for further guidance, see § 1.168(k)-1T(f)(5) published in the **Federal Register** on September 8, 2003 (68 FR 53000)). In relying on such guidance, a taxpayer may use any reasonable, consistent method of determining depreciation in the year of disposition and the year of replacement. Kevin M. Brown, Deputy Commissioner for Services and Enforcement. Approved: February 23, 2007. Eric Solomon, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 07-922 Filed 2-26-07; 3:25 pm]
Connectionstraces to 14
18 references not yet in our index
  • 20 CFR 404
  • 20 CFR 416
  • Pub. L. 104-193
  • Pub. L. 98-460
  • 98 Stat. 1794
  • 21 CFR 520
  • 21 CFR 522
  • 21 CFR 20
  • 5 USC 801-808
  • 21 CFR 558
  • 26 CFR 1
  • T.D. 9314
  • T.D. 9115
  • Rev. Proc. 87-57
  • 100 Stat. 2143
  • Rev. Proc. 2004-11
  • Rev. Proc. 89-15
  • Rev. Proc. 2002-9
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Fed. Reg.Notices
Fed. Reg.Rules and Regulations
U.S.C.§ 402
Stat.Public Law 104–192
U.S.C.§ 902
U.S.C.§ 421
C.F.R.§ 514.11
U.S.C.§ 360b
C.F.R.§ 25.33
Cite20 CFR 404
Cite20 CFR 416
Pub. L.Pub. L. 104-193
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