Federal Register/Vol. 69, No. 116/Thursday, June 17, 2004/Rules

33840 Federal Register / Vol. 69, No. 116 / Thursday, June 17, 2004 / Rules and Regulations

Authority: 21 U.S.C. 360b. notice of proposed rulemaking were as a disposition of the property. withdrawn (REG–138499–02; 69 FR Depreciation for the year of change is § 522.23 [Amended] 9560). No public hearing was requested computed by taking into account the I 2. Section 522.23 is amended in or held. Written or electronic comments applicable convention. No gain, loss, or paragraph (b), introductory text, by responding to the notice of proposed depreciation recapture is recognized removing ‘‘000856 and 059130’’ and by rulemaking were received. After upon the conversion. A commentator adding in its place ‘‘000010, 000856, and consideration of all the comments, the questioned whether recapture of excess 059130’’. proposed regulations are adopted as depreciation under section 280F(b)(2) Dated: May 18, 2004. amended by this Treasury decision. The occurs upon a conversion of listed Andrew J. Beaulieu, revisions are discussed below. property from business use to only personal use. Upon this conversion, the Acting Director, Center for Veterinary Explanation of Provisions Medicine. listed property is not predominantly Scope used in a qualified business use for that [FR Doc. 04–13602 Filed 4–16–04; 8:45 am] taxable year for purposes of section BILLING CODE 4160–01–S The final regulations provide the rules 280F(b) and, consequently, section for determining the annual depreciation 280F(b)(2) requires any excess allowance under section 168 for MACRS depreciation (as defined in section DEPARTMENT OF THE TREASURY property as a result of a change in the 280F(b)(2)(B)) to be included in gross use of such property. Changes in the use income for the taxable year in which the Internal Revenue Service include a conversion of personal use listed property is converted to personal property to a business or income- use. Accordingly, the IRS and Treasury 26 CFR Part 1 producing use, a conversion of MACRS Department have included a cross- property to personal use, or a change in [TD 9132] reference to section 280F(b)(2) in the the use of MACRS property that results final regulations. RIN 1545–BB05 in a different recovery period, depreciation method, or both. III. MACRS Property—Use Changes Changes in Use Under Section 168(i)(5) After Placed-In-Service Year I. Conversion to Business Use AGENCY: Internal Revenue Service (IRS), The final regulations provide rules for The final regulations retain the rules Treasury. MACRS property if a change in the use contained in the proposed regulations, of the property occurs after the ACTION: Final and temporary providing that personal use property regulations. property’s placed-in-service year but the converted to business or income- property continues to be MACRS SUMMARY: This document contains final producing use is treated as being placed property in the hands of the taxpayer. and temporary regulations relating to in service by the taxpayer on the date of A. Determination of a change in the the depreciation of property subject to the conversion. Thus, the property is use. The final regulations remain section 168 of the Internal Revenue depreciated by using the applicable unchanged from the proposed Code (MACRS property). Specifically, depreciation method, recovery period, regulations. Consequently, a change in these regulations provide guidance on and convention prescribed under the use of MACRS property generally how to depreciate MACRS property for section 168 for the property beginning occurs when the primary use of the which the use changes in the hands of in the taxable year the change in the use MACRS property in the taxable year is the same taxpayer. The regulations occurs (year of change). No comments different from its primary use in the reflect changes to the law made by the were received suggesting changes to immediately preceding taxable year. Tax Reform Act of 1986. these rules. The final regulations, However, in determining whether a however, clarify that these rules do not taxpayer begins or ceases to use MACRS DATES: Effective Date: These regulations apply when another section of the Code property predominantly outside the are effective June 17, 2004. (or regulations under that section) United States, the predominant use, Applicability Date: For dates of prescribes the depreciation treatment for instead of the primary use, of the applicability, see §§ 1.168(i)–1(l)(2) and a change to business use. For example, MACRS property governs. A 1.168(i)–4(g). if listed property (as defined in section commentator questioned how this FOR FURTHER INFORMATION CONTACT: Sara 280F(d)(4)) is predominantly used by a predominant use test is applied to Logan or Kathleen Reed, (202) 622–3110 taxpayer in a qualified business use in rolling stock (for example, locomotives, (not a toll-free number). a taxable year, then in a subsequent freight and passenger train cars) that is SUPPLEMENTARY INFORMATION: taxable year is exclusively used by the not described under section 168(g)(4)(B) taxpayer for personal purposes, and and that is used within and without the Background then in a later taxable year is United States. This question concerns This document contains amendments predominantly used by the taxpayer in how to trace the movement of this to 26 CFR part 1. On July 21, 2003, the a qualified business use, section rolling stock to determine its physical IRS and Treasury Department published 280F(b)(2)(A) requires that the property location, which the IRS and Treasury a notice of proposed rulemaking in the be depreciated under the alternative Department believe is beyond the scope Federal Register (REG–138499–02; 68 depreciation system of section 168(g) in of these regulations. FR 43047), relating to a change in the the later taxable year and subsequent B. Change in the use of MACRS use of MACRS property in the hands of taxable years. property resulting in a different recovery the same taxpayer (change in the use) period and/or depreciation method. The under section 168(i)(5) of the Internal II. Conversion to Personal Use final regulations retain the rules Revenue Code (Code) and relating to a The final regulations retain the rule contained in the proposed regulations change in the use of assets in a general contained in the proposed regulations for determining the applicable asset account under section 168(i)(4). providing that a conversion of MACRS depreciation method, recovery period, On March 1, 2004, §§ 1.168(a)–1 and property from business or income- and convention used to determine the 1.168(b)–1 that were contained in this producing use to personal use is treated depreciation allowances for the MACRS

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property for the year of change and may elect to disregard the change in the after June 17, 2004. For any change in subsequent taxable years. Consequently, use and determine the depreciation the use of MACRS property after if a change in the use of MACRS allowances as though the change in the December 31, 1986, in a taxable year property results in a shorter recovery use had not occurred. As a result, the ending before June 17, 2004, the IRS period and/or a more accelerated final regulations do not require a will allow any reasonable method of depreciation method (for example, recovery period that is longer than the depreciating the property under section MACRS property ceases to be used recovery period applicable for the 168 in the year of change and the predominantly outside the United MACRS property in the taxable year subsequent taxable years that is States), the adjusted depreciable basis of immediately preceding the year of consistently applied to the MACRS the MACRS property as of the beginning change. Accordingly, the commentator’s property for which the use changes in of the year of change is depreciated over suggestion was not accepted. the hands of the same taxpayer. the shorter recovery period and/or by Another commentator requested that However, a taxpayer may choose, on a the more accelerated depreciation Example 4 in § 1.168(i)–5(d)(6) be property-by-property basis, to apply the method beginning with the year of clarified by stating which optional final regulations to a change in the use change as though the MACRS property depreciation tables the transaction of MACRS property after December 31, is placed in service by the taxpayer in coefficient factors are drawn from. The 1986, in a taxable year ending before the year of change. If a change in the use IRS and Treasury Department have June 17, 2004. In this case and of MACRS property results in a longer adopted this suggestion. consistent with Chief Counsel Notice 2004–007, Change in Litigating recovery period and/or a slower IV. Change in the Use During the Position—Application of Section 446(e) depreciation method (for example, Placed-in-Service Year MACRS property begins to be used to Changes in Computing Depreciation predominantly outside the United The final regulations retain the rules (CC–2004–007, January 28, 2004, at the States), the adjusted depreciable basis of contained in the proposed regulations if IRS Internet site at www.irs.gov/foia), a the MACRS property as of the beginning a change in the use of MACRS property change to the method of accounting for of the year of change is depreciated over occurs during the taxable year the depreciation provided in the final the longer recovery period and/or by the property is placed in service and the regulations due to a change in the use slower depreciation method beginning property continues to be MACRS of MACRS property in a taxable year with the year of change as though the property in the hands of the taxpayer. ending on or after December 30, 2003, taxpayer originally placed the MACRS Accordingly, if the use of MACRS is a change in method of accounting and property in service with the longer property changes during its placed-in- a change to the method of accounting recovery period and/or slower service year, the depreciation allowance for depreciation provided in the final depreciation method. generally is determined by the primary regulations due to a change in the use use of the property during that taxable of MACRS property after December 31, A commentator suggested that the year. However, in determining whether 1986, in a taxable year ending before depreciation allowances for all changes MACRS property is used within or December 30, 2003, may be treated by in the use of MACRS property resulting outside the United States during the the taxpayer as a change in method of in a different recovery period and/or placed-in-service year, the predominant accounting. depreciation method be determined use, instead of the primary use, of the Special Analyses beginning with the year of change by MACRS property governs. Further, in treating the new depreciation method determining whether MACRS property It has been determined that this and/or recovery period as though they is tax-exempt use property or imported Treasury decision is not a significant applied from the date the MACRS property covered by an Executive order regulatory action as defined in property was originally placed in during the placed-in-service year, the Executive Order 12866. Therefore, a service by the taxpayer. The use of the property at the end of the regulatory assessment is not required. It commentator, in effect, is requesting placed-in-service year governs. also has been determined that section that the rule contained in the proposed Moreover, MACRS property is tax- 553(b) of the Administrative Procedure regulations for a change in the use of exempt bond financed property during Act (5 U.S.C. chapter 5) does not apply MACRS property that results in a longer the placed-in-service year if a tax- to these regulations and, because these recovery period and/or slower exempt bond for the MACRS property is regulations do not impose on small depreciation method also apply to a issued during the placed-in-service year. entities a collection of information change in the use of MACRS property requirement, the Regulatory Flexibility that results in a shorter recovery period V. General Asset Accounts Act (5 U.S.C. chapter 6) does not apply and/or a more accelerated depreciation Finally, the regulations amend the to these regulations. Therefore, a method. The IRS and Treasury final regulations under section 168(i)(4) Regulatory Flexibility Analysis is not Department continue to believe that the (TD 8566, 59 FR 51369 (1994) and the required. Pursuant to section 7805(f) of rules contained in the proposed temporary regulations under section the Code, the notice of proposed regulations are reasonable because the 168(i)(4) (TD 9115, 69 FR 9529 (2004)) rulemaking was submitted to the Chief rules determine the depreciation for property accounted for in a general Counsel for Advocacy of the Small allowance for any taxable year based on asset account for which the use of the Business Administration for comment the primary use of the MACRS property property changes, resulting in a on its impact on small business. by the taxpayer during that year. different recovery period and/or Drafting Information Further, for a change in the use of depreciation method. These MACRS property that results in a amendments are the same rules The principal author of these shorter recovery period and/or a more contained in the proposed regulations. regulations is Sara Logan, Office of accelerated depreciation method, the Associate Chief Counsel (Passthroughs taxpayer either may determine the Effective Dates and Special Industries). However, other depreciation allowances as though the These regulations are applicable for personnel from the IRS and Treasury MACRS property is placed-in-service by any change in the use of MACRS Department participated in their the taxpayer in the year of change or property in a taxable year ending on or development.

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List of Subjects in 26 CFR Part 1 adjustments described in section described in § 1.168(i)–4(d)(3) (change Income taxes, Reporting and 1016(a)(2) and (3). This basis reflects the in use results in a shorter recovery recordkeeping requirements. reduction in basis for the percentage of period and/or a more accelerated the taxpayer’s use of property for the depreciation method) and adjustments Adoption of Amendments to the taxable year other than in the taxpayer’s to the general asset account are made Regulations trade or business (or for the production pursuant to paragraph (h)(2)(ii) of this I Accordingly, 26 CFR part 1 is amended of income), for any portion of the basis section, the taxpayer must establish a as follows: the taxpayer properly elects to treat as new general asset account for the asset an expense under section 179, and for in the year of change in accordance with PART 1—INCOME TAXES any adjustments to basis provided by the rules in paragraph (c) of this section, other provisions of the Internal Revenue except that the adjusted depreciable I Paragraph 1. The authority citation for Code and the regulations under the basis of the asset as of the first day of part 1 is amended by adding an entry in Internal Revenue Code (other than the year of change is included in the numerical order to read as follows: section 1016(a)(2) and (3)) (for example, general asset account. For purposes of Authority: 26 U.S.C. 7805 * * * a reduction in basis by the amount of paragraph (c)(2) of this section, the Section 1.168(i)–4 also issued under 26 the disabled access credit pursuant to applicable depreciation method, U.S.C. 168(i)(5). * * * section 44(d)(7)). For property subject to recovery period, and convention are a lease, see section 167(c)(2). determined under § 1.168(i)–4(d)(3)(i). I Par. 2. Section 1.168(i)–0 is amended (B) Change in use results in a longer by revising the entry for § 1.168(i)– * * * * * recovery period and/or a slower 1(h)(2) and adding entries for § 1.168(i)– (c) * * * depreciation method. If the result of the 1(h)(2)(i) through (h)(2)(iii) to read as (2) * * * change in use is described in § 1.168(i)– follows: (ii) * * * (E) Assets subject to paragraph 4(d)(4) (change in use results in a longer § 1.168(i)–0 Table of contents for the (h)(2)(iii)(A) of this section (change in recovery period and/or a slower general asset account rules. use results in a shorter recovery period depreciation method), the taxpayer must * * * * * and/or a more accelerated depreciation establish a separate general asset method) for which the depreciation account for the asset in the year of § 1.168(i)–1 General asset accounts. allowance for the year of change (as change in accordance with the rules in * * * * * defined in § 1.168(i)–4(a)) is not paragraph (c) of this section, except that (h) * * * determined by using an optional the unadjusted depreciable basis of the (2) Change in use results in a different depreciation table must be grouped into asset, and the greater of the depreciation recovery period and/or depreciation a separate general asset account. of the asset allowed or allowable in method. * * * * * accordance with section 1016(a)(2), as of (i) No effect on general asset account (h) * * * the first day of the year of change are election. (2) Change in use results in a different included in the newly established (ii) Asset is removed from the general recovery period and/or depreciation general asset account. Consequently, asset account. method—(i) No effect on general asset this general asset account as of the first (iii) New general asset account is account election. A change in the use day of the year of change will have a established. described in § 1.168(i)–4(d) (change in beginning balance for both the * * * * * use results in a different recovery period unadjusted depreciable basis and the depreciation reserve of the general asset I Par. 3. Section 1.168(i)–1 is amended and/or depreciation method) of an asset in a general asset account shall not account. For purposes of paragraph by: (c)(2) of this section, the applicable I cause or permit the revocation of the 1. Revising paragraph (b)(1). depreciation method, recovery period, I election made under this section. 2. Amending paragraph (c)(2)(ii) by: and convention are determined under I (ii) Asset is removed from the general a. Removing the language ‘‘and’’ from § 1.168(i)–4(d)(4)(ii). the end of paragraph (c)(2)(ii)(C). asset account. Upon a change in the use I b. Removing the period ‘‘.’’ from the described in § 1.168(i)–4(d), the * * * * * end of paragraph (c)(2)(ii)(D) and adding taxpayer must remove the asset from the (l) Effective dates—(1) [Reserved]. For ‘‘; and’’ in its place. general asset account as of the first day further guidance, see § 1.168(i)–1T(l)(1). I c. Revising paragraph (c)(2)(ii)(E). of the year of change and must make the (2) Exceptions—(i) In general—(A) I 3. Removing the language ‘‘the change adjustments to the general asset account Paragraph (b)(1) of this section applies in use occurs and’’ from the last sentence described in paragraphs (e)(3)(iii)(C)(2) on or after June 17, 2004. For the of paragraph (h)(1) and adding ‘‘the through (4) of this section. If, however, applicability of § 1.168(i)–1(b)(1) before change in use occurs (the year of change) the result of the change in use is June 17, 2004, see § 1.168(i)–1(b)(1) in and’’ in its place. described in § 1.168(i)–4(d)(3) (change effect prior to June 17, 2004 (§ 1.168(i)– I 4. Revising paragraph (h)(2). in use results in a shorter recovery 1(b)(1) as contained in 26 CFR part 1 I 5. Removing the language ‘‘(h)(1)’’ period and/or a more accelerated edition revised as of April 1, 2004). from paragraph (k)(1) and adding ‘‘(h)’’ depreciation method) and the taxpayer (B) Paragraphs (c)(2)(ii)(E) and (h)(2) in its place. elects to treat the asset as though the of this section apply to any change in I 6. Revising paragraph (l). change in use had not occurred the use of depreciable assets pursuant to The revisions read as follows: pursuant to § 1.168(i)–4(d)(3)(ii), no § 1.168(i)–4(d) in a taxable year ending adjustment is made to the general asset on or after June 17, 2004. For any § 1.168(i)–1 General asset accounts. account upon the change in use. change in the use of depreciable assets * * * * * (iii) New general asset account is as described in § 1.168(i)–4(d) after (b) * * * established—(A) Change in use results December 31, 1986, in a taxable year (1) Unadjusted depreciable basis is in a shorter recovery period and/or a ending before June 17, 2004, the Internal the basis of an asset for purposes of more accelerated depreciation method. Revenue Service will allow any section 1011 without regard to any If the result of the change in use is reasonable method that is consistently

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applied to the taxpayer’s general asset I Par. 4. Section 1.168(i)–1T is amended placed in service by the taxpayer on the accounts or the taxpayer may choose, on by: date on which the conversion occurs. an asset-by-asset basis, to apply I 1. Revising paragraphs (c)(2)(ii)(E) and Thus, except as otherwise provided by paragraphs (c)(2)(ii)(E) and (h)(2) of this (l)(2). the Internal Revenue Code or section. I 2. Removing the language ‘‘(h)(1) regulations under the Internal Revenue (ii) Change in method of accounting— (conversion to personal use)’’ from Code, the taxpayer must use any (A) In general. If a taxpayer adopted a paragraphs (d)(2) and (i) and adding ‘‘(h) applicable depreciation method, method of accounting for general asset (changes in use)’’ in its place. recovery period, and convention account treatment due to a change in the I 3. Removing the language ‘‘(h)(1)’’ prescribed under section 168 for the use of depreciable assets pursuant to from paragraph (j) and adding ‘‘(h)’’ in its property in the year of change, § 1.168(i)–4(d) in a taxable year ending place. consistent with any election made on or after December 30, 2003, and the The revisions read as follows: under section 168 by the taxpayer for method adopted is not in accordance that year (see, for example, section § 1.168(i)–1T General asset accounts with the method of accounting provided (temporary). 168(b)(5)). See §§ 1.168(k)–1T(f)(6)(iii) in paragraphs (c)(2)(ii)(E) and (h)(2) of and 1.1400L(b)–1T(f)(6) for the this section, a change to the method of * * * * * additional first year depreciation accounting provided in paragraphs (c) * * * deduction rules applicable to a (c)(2)(ii)(E) and (h)(2) of this section is (2) * * * conversion to business or income- a change in method of accounting to (ii) * * * producing use. The depreciable basis of which the provisions of section 446(e) (E) [Reserved]. For further guidance, the property for the year of change is the and the regulations under section 446(e) see § 1.168(i)–1(c)(2)(ii)(E). lesser of its fair market value or its apply. However, if a taxpayer adopted a * * * * * adjusted depreciable basis (as defined in method of accounting for general asset (l) * * * § 1.168(b)–1T(a)(4)), as applicable, at the account treatment due to a change in the (2) [Reserved]. For further guidance, time of the conversion to business or use of depreciable assets pursuant to see § 1.168(i)–1(l)(2). income-producing use. § 1.168(i)–4(d) after December 31, 1986, * * * * * (2) Example. The application of this in a taxable year ending before I Par. 5. Section 1.168(i)–4 is added to paragraph (b) is illustrated by the December 30, 2003, and the method read as follows: §1.168(i)–4 Changes in following example: adopted is not in accordance with the use. Example. A, a calendar-year taxpayer, method of accounting provided in (a) Scope. This section provides the purchases a house in 1985 that she occupies paragraphs (c)(2)(ii)(E) and (h)(2) of this rules for determining the depreciation as her principal residence. In February 2004, section, the taxpayer may treat the allowance for MACRS property (as A ceases to occupy the house and converts change to the method of accounting defined in § 1.168(b)–1T(a)(2)) for which it to residential rental property. At the time provided in paragraphs (c)(2)(ii)(E) and of the conversion to residential rental the use changes in the hands of the property, the house’s fair market value (h)(2) of this section as a change in same taxpayer (change in the use). The (excluding land) is $130,000 and adjusted method of accounting to which the allowance for depreciation under this depreciable basis attributable to the house provisions of section 446(e) and the section constitutes the amount of (excluding land) is $150,000. Pursuant to this regulations under section 446(e) apply. depreciation allowable under section paragraph (b), A is considered to have placed (B) Automatic consent to change 167(a) for the year of change and any in service residential rental property in method of accounting. A taxpayer subsequent taxable year. For purposes of February 2004 with a depreciable basis of changing its method of accounting in this section, the year of change is the $130,000. A depreciates the residential rental accordance with this paragraph (l)(2)(ii) property under the general depreciation taxable year in which a change in the system by using the straight-line method, a must follow the applicable use occurs. 27.5-year recovery period, and the mid- administrative procedures issued under (b) Conversion to business or income- month convention. Pursuant to §§ 1.168(k)– § 1.446–1(e)(3)(ii) for obtaining the producing use—(1) Depreciation 1T(f)(6)(iii)(B) or 1.1400L(b)–1T(f)(6), this Commissioner’s automatic consent to a deduction allowable. This paragraph (b) property is not eligible for the additional first change in method of accounting (for applies to property that is converted year depreciation deduction provided by further guidance, for example, see Rev. from personal use to use in a taxpayer’s section 168(k) or section 1400L(b). Thus, the Proc. 2002–9 (2002–1 C.B. 327), as trade or business, or for the production depreciation allowance for the house for modified by Rev. Proc. 2004–11 (2004– of income, during a taxable year. This 2004 is $4,137, after taking into account the 3 I.R.B. 311) (see § 601.601(d)(2)(ii)(b) of mid-month convention (($130,000 adjusted conversion includes property that was depreciable basis multiplied by the this chapter)). Because this change does previously used by the taxpayer for applicable depreciation rate of 3.636% (1/ not change the adjusted depreciable personal purposes, including real 27.5)) multiplied by the mid-month basis of the asset, the method change is property (other than land) that is convention fraction of 10.5/12). The amount made on a cut-off basis and, therefore, acquired before 1987 and converted of depreciation computed under section 168, no adjustment under section 481(a) is from personal use to business or however, may be limited under other required or allowed. For purposes of income-producing use after 1986, and provisions of the Internal Revenue Code, Form 3115, Application for Change in depreciable property that was such as, section 280A. Accounting Method, the designated previously used by a tax-exempt entity (c) Conversion to personal use. The number for the automatic accounting before the entity changed to a taxable conversion of MACRS property from method change authorized by this entity. Except as otherwise provided by business or income-producing use to paragraph (l)(2)(ii) is ‘‘87.’’ If Form 3115 the Internal Revenue Code or personal use during a taxable year is is revised or renumbered, any reference regulations under the Internal Revenue treated as a disposition of the property in this section to that form is treated as Code, upon a conversion to business or in that taxable year. The depreciation a reference to the revised or renumbered income-producing use, the depreciation allowance for MACRS property for the form. allowance for the year of change and year of change in which the property is (3) [Reserved]. For further guidance, any subsequent taxable year is treated as being disposed of is see § 1.168(i)–1T(l)(3). determined as though the property is determined by first multiplying the

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adjusted depreciable basis of the manner that is consistently applied to year of change are determined by property as of the first day of the year the taxpayer’s MACRS property. multiplying the adjusted depreciable of change by the applicable depreciation (ii) Alternative depreciation system basis of the MACRS property as of the rate for that taxable year (for further property—(A) Property used within or first day of each taxable year by the guidance, for example, see section 6 of outside the United States. A change in applicable depreciation rate for each Rev. Proc. 87–57 (1987–2 C. B. 687, 692) the use of MACRS property occurs taxable year. In determining the (see § 601.601(d)(2)(ii)(b) of this when a taxpayer begins or ceases to use applicable depreciation rate for the year chapter)). This amount is then MACRS property predominantly outside of change and subsequent taxable years, multiplied by a fraction, the numerator the United States during the taxable the taxpayer must use any applicable of which is the number of months year. The determination of whether depreciation method and recovery (including fractions of months) the MACRS property is used predominantly period prescribed under section 168 for property is deemed to be placed in outside the United States is made in the MACRS property in the year of service during the year of change (taking accordance with the test in § 1.48– change, consistent with any election into account the applicable convention) 1(g)(1)(i) for determining predominant made under section 168 by the taxpayer and the denominator of which is 12. No use. for that year (see, for example, section depreciation deduction is allowable for (B) Tax-exempt bond financed 168(b)(5)). If there is a change in the use MACRS property placed in service and property. A change in the use of MACRS of MACRS property, the applicable disposed of in the same taxable year. property occurs when the property convention that applies to the MACRS See §§ 1.168(k)–1T(f)(6)(ii) and changes to tax-exempt bond financed property is the same as the convention 1.1400L(b)–1T(f)(6) for the additional property, as described in section that applied before the change in the use first year depreciation deduction rules 168(g)(1)(C) and (g)(5), during the of the MACRS property. However, the applicable to property placed in service taxable year. For purposes of this depreciation allowance for the year of and converted to personal use in the paragraph (d), MACRS property changes change for the MACRS property is same taxable year. Upon the conversion to tax-exempt bond financed property determined without applying the to personal use, no gain, loss, or when a tax-exempt bond is first issued applicable convention, unless the depreciation recapture under section after the MACRS property is placed in MACRS property is disposed of during 1245 or section 1250 is recognized. service. MACRS property continues to the year of change. See paragraph (d)(5) However, the provisions of section 1245 be tax-exempt bond financed property of this section for the rules relating to or section 1250 apply to any disposition in the hands of the taxpayer even if the the computation of the depreciation of the converted property by the tax-exempt bond (including any allowance under the optional taxpayer at a later date. For listed refunding issue) is no longer depreciation tables. If the year of change outstanding or is redeemed. property (as defined in section or any subsequent taxable year is less (C) Other mandatory alternative 280F(d)(4)), see section 280F(b)(2) for than 12 months, the depreciation depreciation system property. A change allowance determined under this the recapture of excess depreciation in the use of MACRS property occurs upon the conversion to personal use. paragraph (d)(3)(i) must be adjusted for when the property changes to, or a short taxable year (for further (d) Change in the use results in a changes from, property described in different recovery period and/or guidance, for example, see Rev. Proc. section 168(g)(1)(B) (tax-exempt use 89–15 (1989–1 C.B. 816) (see depreciation method—(1) In general. property) or (D) (imported property This paragraph (d) applies to a change § 601.601(d)(2)(ii)(b) of this chapter)). covered by an Executive order) during (C) Special rules. MACRS property in the use of MACRS property during a the taxable year. affected by this paragraph (d)(3)(i) is not taxable year subsequent to the placed- (iii) Change in the use deemed to eligible in the year of change for the in-service year, if the property continues occur on first day of the year of change. election provided under section to be MACRS property owned by the If a change in the use of MACRS 168(f)(1), 179, or 1400L(f), or for the same taxpayer and, as a result of the property occurs under this paragraph additional first year depreciation change in the use, has a different (d)(2), the depreciation allowance for deduction provided in section 168(k) or recovery period, a different depreciation that MACRS property for the year of 1400L(b). See §§ 1.168(k)–1T(f)(6)(iv) method, or both. For example, this change is determined as though the use and 1.1400L(b)–1T(f)(6) for other paragraph (d) applies to MACRS of the MACRS property changed on the additional first year depreciation property that— first day of the year of change. deduction rules applicable to a change (i) Begins or ceases to be used (3) Change in the use results in a in the use of MACRS property predominantly outside the United shorter recovery period and/or a more subsequent to its placed-in-service year. States; accelerated depreciation method—(i) For purposes of determining whether (ii) Results in a reclassification of the Treated as placed in service in the year the mid-quarter convention applies to property under section 168(e) due to a of change—(A) In general. If a change in other MACRS property placed in service change in the use of the property; or the use results in the MACRS property during the year of change, the (iii) Begins or ceases to be tax-exempt changing to a shorter recovery period unadjusted depreciable basis (as defined use property (as defined in section and/or a depreciation method that is in § 1.168(b)–1T(a)(3)) or the adjusted 168(h)). more accelerated than the method used depreciable basis of MACRS property (2) Determination of change in the for the MACRS property before the affected by this paragraph (d)(3)(i) is not use—(i) In general. Except as provided change in the use, the depreciation taken into account. in paragraph (d)(2)(ii) of this section, a allowances beginning in the year of (ii) Option to disregard the change in change in the use of MACRS property change are determined as though the the use. In lieu of applying paragraph occurs when the primary use of the MACRS property is placed in service by (d)(3)(i) of this section, the taxpayer may MACRS property in the taxable year is the taxpayer in the year of change. elect to determine the depreciation different from its primary use in the (B) Computation of depreciation allowance as though the change in the immediately preceding taxable year. allowance. The depreciation allowances use had not occurred. The taxpayer The primary use of MACRS property for the MACRS property for any 12- elects this option by claiming on the may be determined in any reasonable month taxable year beginning with the taxpayer’s timely filed (including

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extensions) Federal income tax return any subsequent taxable year for the depreciation allowances for the MACRS for the year of change the depreciation MACRS property had the taxpayer used property beginning in the year of change allowance for the property as though the the longer recovery period and/or the are determined under paragraph (d)(3)(i) change in the use had not occurred. See slower depreciation method in the or (4) of this section, as applicable. paragraph (g)(2) of this section for the placed-in-service year of the property. If (ii) Taxpayer chooses to use optional manner for revoking this election. the 200-or 150-percent declining depreciation table after a change in the (4) Change in the use results in a balance method would have applied in use. If a taxpayer chooses to use an longer recovery period and/or a slower the placed-in-service year but the optional depreciation table for the depreciation method—(i) Treated as method would have switched to the MACRS property after a change in the originally placed in service with longer straight line method in the year of use, the depreciation allowances for the recovery period and/or slower change or any prior taxable year, the MACRS property for any 12-month depreciation method. If a change in the applicable depreciation method taxable year beginning with the year of use results in a longer recovery period beginning with the year of change is the change are determined as follows: and/or a depreciation method for the straight line method; and (A) Change in the use results in a MACRS property that is less accelerated (B) The applicable recovery period is shorter recovery period and/or a more than the method used for the MACRS either— accelerated depreciation method. If a property before the change in the use, (1) The longer recovery period change in the use results in a shorter the depreciation allowances beginning resulting from the change in the use if recovery period and/or a more with the year of change are determined the applicable depreciation method is accelerated depreciation method (as as though the MACRS property had the 200-or 150-percent declining described in paragraph (d)(3)(i) of this been originally placed in service by the balance method (as determined under section), the depreciation allowances for taxpayer with the longer recovery paragraph (d)(4)(ii)(A) of this section) the MACRS property for any 12-month period and/or the slower depreciation unless the recovery period did not taxable year beginning with the year of method. MACRS property affected by change as a result of the change in the change are determined by multiplying this paragraph (d)(4) is not eligible in use, in which case the applicable the adjusted depreciable basis of the the year of change for the election recovery period is the same recovery MACRS property as of the first day of provided under section 168(f)(1), 179, or period that applied before the change in the year of change by the annual 1400L(f), or for the additional first year the use; or depreciation rate for each recovery year depreciation deduction provided in (2) The number of years remaining as (expressed as a decimal equivalent) section 168(k) or 1400L(b). See of the beginning of each taxable year specified in the appropriate optional §§ 1.168(k)–1T(f)(6)(iv) and 1.1400L(b)– (taking into account the applicable depreciation table. The appropriate 1T(f)(6) for other additional first year convention) had the taxpayer used the optional depreciation table for the depreciation deduction rules applicable longer recovery period in the placed-in- MACRS property is based on the to a change in the use of MACRS service year of the property if the depreciation system, depreciation property subsequent to its placed-in- applicable depreciation method is the method, recovery period, and service year. straight line method (as determined convention applicable to the MACRS (ii) Computation of the depreciation under paragraph (d)(4)(ii)(A) of this property in the year of change as allowance. The depreciation allowances section) unless the recovery period did determined under paragraph (d)(3)(i) of for the MACRS property for any 12- not change as a result of the change in this section. The depreciation allowance month taxable year beginning with the the use, in which case the applicable for the year of change for the MACRS year of change are determined by recovery period is the number of years property is determined by taking into multiplying the adjusted depreciable remaining as of the beginning of each account the applicable convention basis of the MACRS property as of the taxable year (taking into account the (which is already factored into the first day of each taxable year by the applicable convention) based on the optional depreciation tables). If the year applicable depreciation rate for each recovery period that applied before the of change or any subsequent taxable taxable year. If there is a change in the change in the use. year is less than 12 months, the use of MACRS property, the applicable (5) Using optional depreciation depreciation allowance determined convention that applies to the MACRS tables—(i) Taxpayer not bound by prior under this paragraph (d)(5)(ii)(A) must property is the same as the convention use of table. If a taxpayer used an be adjusted for a short taxable year (for that applied before the change in the use optional depreciation table for the further guidance, for example, see Rev. of the MACRS property. If the year of MACRS property before a change in the Proc. 89–15 (1989–1 C.B. 816) (see change or any subsequent taxable year use, the taxpayer is not bound to use the § 601.601(d)(2)(ii)(b) of this chapter)). is less than 12 months, the depreciation appropriate new table for that MACRS (B) Change in the use results in a allowance determined under this property beginning in the year of change longer recovery period and/or a slower paragraph (d)(4)(ii) must be adjusted for (for further guidance, for example, see depreciation method—(1) a short taxable year (for further section 8 of Rev. Proc. 87–57 (1987–2 Determination of the appropriate guidance, for example, see Rev. Proc. C.B. 687, 693) (see § 601.601(d)(2)(ii)(b) optional depreciation table. If a change 89–15 (1989–1 C.B. 816) (see of this chapter)). If a taxpayer did not in the use results in a longer recovery § 601.601(d)(2)(ii)(b) of this chapter)). use an optional depreciation table for period and/or a slower depreciation See paragraph (d)(5) of this section for MACRS property before a change in the method (as described in paragraph the rules relating to the computation of use and the change in the use results in (d)(4)(i) of this section), the depreciation the depreciation allowance under the a shorter recovery period and/or a more allowances for the MACRS property for optional depreciation tables. In accelerated depreciation method (as any 12-month taxable year beginning determining the applicable depreciation described in paragraph (d)(3)(i) of this with the year of change are determined rate for the year of change and any section), the taxpayer may use the by choosing the optional depreciation subsequent taxable year— appropriate new table for that MACRS table that corresponds to the (A) The applicable depreciation property beginning in the year of depreciation system, depreciation method is the depreciation method that change. If a taxpayer chooses not to use method, recovery period, and would apply in the year of change and the optional depreciation table, the convention that would have applied to

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the MACRS property in the placed-in- general depreciation system as 7-year election provided in paragraph (d)(3)(ii) of service year had that property been property by using the 200-percent declining this section to disregard the change in use. originally placed in service by the balance method (which switched to the (ii) In accordance with paragraph taxpayer with the longer recovery straight-line method in 2003), a 7-year (d)(5)(ii)(A) of this section, X must first recovery period, and a half-year convention. identify the appropriate optional period and/or the slower depreciation Beginning in 2004, X primarily uses the depreciation table for the equipment. This method. If there is a change in the use equipment in its B business. As a result, the table is table 1 in Rev. Proc. 87–57 because of MACRS property, the applicable classification of the equipment under section the equipment will be depreciated in the year convention that applies to the MACRS 168(e) changes from 7-year property to 5-year of change (2004) under the general property is the same as the convention property and the recovery period of the depreciation system using the 200-percent that applied before the change in the use equipment under the general depreciation declining balance method, a 5-year recovery of the MACRS property. If the year of system changes from 7 years to 5 years. The period, and the half-year convention (which change or any subsequent taxable year depreciation method does not change. On is the convention that applied to the January 1, 2004, the adjusted depreciable equipment in 1999). Pursuant to paragraph is less than 12 months, the depreciation basis of the equipment is $22,311. X (d)(3)(i)(C) of this section, this equipment is allowance determined under this depreciates its 5-year recovery property not eligible for the additional first year paragraph (d)(5)(ii)(B) must be adjusted placed in service in 2004 under the general depreciation deduction provided by section for a short taxable year (for further depreciation system by using the 200-percent 168(k) or section 1400L(b). For 2004, X guidance, for example, see Rev. Proc. declining balance method and a 5-year multiplies its adjusted depreciable basis in 89–15 (1989–1 C.B. 816) (see recovery period. X does not use the optional the equipment as of January 1, 2004, of § 601.601(d)(2)(ii)(b) of this chapter)). depreciation tables. $22,311, by the annual depreciation rate in (2) Computation of the depreciation (ii) Under paragraph (d)(3)(i) of this table 1 for recovery year 1 for a 5-year allowance. The depreciation allowances section, X’s allowable depreciation deduction recovery period (.20), to determine the for the equipment for 2004 and subsequent depreciation allowance of $4,462. For 2005, for the MACRS property for any 12- taxable years is determined as though X X multiplies its adjusted depreciable basis in month taxable year beginning with the placed the equipment in service in 2004 for the equipment as of January 1, 2004, of year of change are computed by first use primarily in its B business. The $22,311, by the annual depreciation rate in determining the appropriate recovery depreciable basis of the equipment as of table 1 for recovery year 2 for a 5-year year in the table identified under January 1, 2004, is $22,311 (the adjusted recovery period (.32), to determine the paragraph (d)(5)(ii)(B)(1) of this section. depreciable basis at January 1, 2004). Because depreciation allowance of $7,140. The appropriate recovery year for the X does not use the optional depreciation Example 3. Change in the use results in a year of change is the year that tables, the depreciation allowance for 2004 longer recovery period and/or a slower corresponds to the year of change. For (the deemed placed-in-service year) for this depreciation method—(i) Y, a calendar-year equipment only is computed without taking corporation, places in service in January example, if the recovery year for the into account the half-year convention. 2002, equipment at a cost of $100,000 and year of change would have been Year 4 Pursuant to paragraph (d)(3)(i)(C) of this uses this equipment in 2002 and 2003 only in the table that applied before the section, this equipment is not eligible for the within the United States. Y elects not to change in the use of the MACRS additional first year depreciation deduction deduct the additional first year depreciation property, then the recovery year for the provided by section 168(k) or section under section 168(k). Y depreciates the year of change is Year 4 in the table 1400L(b). Thus, X’s allowable depreciation equipment for 2002 and 2003 under the identified under paragraph deduction for the equipment for 2004 is general depreciation system by using the 200- (d)(5)(ii)(B)(1) of this section. Next, the $8,924 ($22,311 adjusted depreciable basis at percent declining balance method, a 5-year annual depreciation rate (expressed as a January 1, 2004, multiplied by the applicable recovery period, and a half-year convention. depreciation rate of 40% (200/5)). X’s Beginning in 2004, Y uses the equipment decimal equivalent) for each recovery allowable depreciation deduction for the predominantly outside the United States. As year is multiplied by a transaction equipment for 2005 is $5,355 ($13,387 a result of this change in the use, the coefficient. The transaction coefficient adjusted depreciable basis at January 1, 2005, equipment is subject to the alternative is the formula (1 / (1¥x)) where x multiplied by the applicable depreciation depreciation system beginning in 2004. equals the sum of the annual rate of 40% (200/5)). Under the alternative depreciation system, depreciation rates from the table (iii) Alternatively, under paragraph the equipment is depreciated by using the identified under paragraph (d)(3)(ii) of this section, X may elect to straight line method and a 9-year recovery (d)(5)(ii)(B)(1) of this section (expressed disregard the change in the use and, as a period. The adjusted depreciable basis of the as a decimal equivalent) for the taxable result, may continue to treat the equipment equipment at January 1, 2004, is $48,000. as though it is used primarily in its A (ii) Pursuant to paragraph (d)(4) of this years beginning with the placed-in- business. If the election is made, X’s section, Y’s allowable depreciation deduction service year of the MACRS property allowable depreciation deduction for the for 2004 and subsequent taxable years is through the taxable year immediately equipment for 2004 is $8,924 ($22,311 determined as though the equipment had prior to the year of change. The product adjusted depreciable basis at January 1, 2004, been placed in service in January 2002, as of the annual depreciation rate and the multiplied by the applicable depreciation property used predominantly outside the transaction coefficient is multiplied by rate of 40% (1/2.5 years remaining at January United States. Further, pursuant to paragraph the adjusted depreciable basis of the 1, 2004)). X’s allowable depreciation (d)(4)(i) of this section, the equipment is not MACRS property as of the beginning of deduction for the equipment for 2005 is eligible in 2004 for the additional first year the year of change. $8,925 ($13,387 adjusted depreciable basis at depreciation deduction provided by section (6) Examples. The application of this January 1, 2005, multiplied by the applicable 168(k) or section 1400L(b). In determining depreciation rate of 66.67% (1/1.5 years the applicable depreciation rate for 2004, the paragraph (d) is illustrated by the remaining at January 1, 2005)). applicable depreciation method is the following examples: Example 2. Change in the use results in a straight line method and the applicable Example 1. Change in the use results in a shorter recovery period and/or a more recovery period is 7.5 years, which is the shorter recovery period and/or a more accelerated depreciation method and number of years remaining at January 1, accelerated depreciation method and optional depreciation table is used—(i) Same 2004, for property placed in service in 2002 optional depreciation table is not used—(i) X, facts as in Example 1, except that X used the with a 9-year recovery period (taking into a calendar-year corporation, places in service optional depreciation tables for computing account the half-year convention). Thus, the in 1999 equipment at a cost of $100,000 and depreciation for 1999 through 2003. Pursuant depreciation allowance for 2004 is $6,398 uses this equipment from 1999 through 2003 to paragraph (d)(5) of this section, X chooses ($48,000 adjusted depreciable basis at primarily in its A business. X depreciates the to continue to use the optional depreciation January 1, 2004, multiplied by the applicable equipment for 1999 through 2003 under the table for the equipment. X does not make the depreciation rate of 13.33% (1/7.5 years)).

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The depreciation allowance for 2005 is in service during the year of change is combustion turbine production plant for 4 $6,398 ($41,602 adjusted depreciable basis at made in accordance with § 1.168(d)–1. months and then uses the equipment in its January 1, 2005, multiplied by the applicable (2) Alternative depreciation system steam production plant for the remainder of depreciation rate of 15.38% (1/6.5 years property—(i) Property used within and 2004. Z’s combustion turbine production remaining at January 1, 2005)). outside the United States. The plant assets are classified as 15-year property Example 4. Change in the use results in a and are depreciated by Z under the general longer recovery period and/or a slower depreciation allowance for the placed- depreciation system using a 15-year recovery depreciation method and optional in-service year for MACRS property that period and the 150-percent declining balance depreciation table is used—(i) Same facts as is used within and outside the United method of depreciation. Z’s steam production in Example 3, except that Y used the optional States is determined by its predominant plant assets are classified as 20-year property depreciation tables for computing use during that year. The determination and are depreciated by Z under the general depreciation in 2002 and 2003. Pursuant to of whether MACRS property is used depreciation system using a 20-year recovery paragraph (d)(5) of this section, Y chooses to predominantly outside the United States period and the 150-percent declining balance continue to use the optional depreciation during the placed-in-service year shall method of depreciation. Z uses the optional table for the equipment. Further, pursuant to be made in accordance with the test in depreciation tables. The equipment is 50- percent bonus depreciation property for paragraph (d)(4)(i) of this section, the § 1.48–1(g)(1)(i) for determining equipment is not eligible in 2004 for the purposes of section 168(k). additional first year depreciation deduction predominant use. (ii) Pursuant to this paragraph (e), Z must provided by section 168(k) or section (ii) Tax-exempt bond financed determine depreciation based on the primary 1400L(b). property. The depreciation allowance use of the equipment during the placed-in- (ii) In accordance with paragraph for the placed-in-service year for service year. Z has consistently determined (d)(5)(ii)(B) of this section, Y must first MACRS property that changes to tax- the primary use of all of its MACRS determine the appropriate optional exempt bond financed property, as properties by comparing the number of full depreciation table for the equipment described in section 168(g)(1)(C) and months in the taxable year during which a pursuant to paragraph (d)(5)(ii)(B)(1) of this (g)(5), during that taxable year is MACRS property is used in one manner with section. This table is table 8 in Rev. Proc. 87– determined under the alternative the number of full months in that taxable 57, which corresponds to the alternative year during which that MACRS property is depreciation system. For purposes of used in another manner. Applying this depreciation system, the straight line this paragraph (e), MACRS property method, a 9-year recovery period, and the approach, Z determines the depreciation half-year convention (because Y depreciated changes to tax-exempt bond financed allowance for the equipment for 2004 is 5-year property in 2002 using a half-year property when a tax-exempt bond is based on the equipment being classified as convention). Next, Y must determine the first issued after the MACRS property is 20-year property because the equipment was appropriate recovery year in table 8. Because placed in service. MACRS property used by Z in its steam production plant for the year of change is 2004, the depreciation continues to be tax-exempt bond 8 months in 2004. If the half-year convention allowance for the equipment for 2004 is financed property in the hands of the applies in 2004, the appropriate optional determined using recovery year 3 of table 8. taxpayer even if the tax-exempt bond depreciation table is table 1 in Rev. Proc. 87– For 2004, Y multiplies its adjusted 57, which is the table for MACRS property (including any refunding issue) is not subject to the general depreciation system, depreciable basis in the equipment as of outstanding at, or is redeemed by, the January 1, 2004, of $48,000, by the product the 150-percent declining balance method, a of the annual depreciation rate in table 8 for end of the placed-in-service year. 20-year recovery period, and the half-year recovery year 3 for a 9-year recovery period (iii) Other mandatory alternative convention. Thus, the depreciation (.1111) and the transaction coefficient of depreciation system property. The allowance for the equipment for 2004 is 1.200 [1/(1¥(.0556 (table 8 for recovery year depreciation allowance for the placed- $51,875, which is the total of $50,000 for the 1 for a 9-year recovery period) + .1111 (table in-service year for MACRS property that 50-percent additional first year depreciation 8 for recovery year 2 for a 9-year recovery changes to, or changes from, property deduction allowable (the unadjusted period)))], to determine the depreciation described in section 168(g)(1)(B) (tax- depreciable basis of $100,000 multiplied by allowance of $6,399. For 2005, Y multiplies exempt use property) or (D) (imported .50), plus $1,875 for the 2004 depreciation its adjusted depreciable basis in the allowance on the remaining adjusted property covered by an Executive order) depreciable basis of $50,000 [(the unadjusted equipment as of January 1, 2004, of $48,000, during that taxable year is determined by the product of the annual depreciation depreciable basis of $100,000 less the rate in table 8 for recovery year 4 for a 9-year under— additional first year depreciation deduction recovery period (.1111) and the transaction (A) The alternative depreciation of $50,000) multiplied by the annual coefficient (1.200), to determine the system if the MACRS property is depreciation rate of .0375 in table 1 for depreciation allowance of $6,399. described in section 168(g)(1)(B) or (D) recovery year 1 for a 20-year recovery at the end of the placed-in-service year; period]. (e) Change in the use of MACRS or Example 2. T, a calendar year corporation, property during the placed-in-service (B) The general depreciation system if places in service on January 1, 2004, several year—(1) In general. Except as provided the MACRS property is not described in computers at a total cost of $100,000. T uses in paragraph (e)(2) of this section, if a section 168(g)(1)(B) or (D) at the end of these computers within the United States for change in the use of MACRS property 3 months in 2004 and then moves and uses the placed-in-service year, unless other the computers outside the United States for occurs during the placed-in-service year provisions of the Internal Revenue Code the remainder of 2004. Pursuant to § 1.48– and the property continues to be or regulations under the Internal 1(g)(1)(i), the computers are considered as MACRS property owned by the same Revenue Code require the depreciation used predominantly outside the United taxpayer, the depreciation allowance for allowance for that MACRS property to States in 2004. As a result, for 2004, the that property for the placed-in-service be determined under the alternative computers are required to be depreciated year is determined by its primary use depreciation system (for example, under the alternative depreciation system of during that year. The primary use of section 168(g)(7)). section 168(g) with a recovery period of 5 MACRS property may be determined in (3) Examples. The application of this years pursuant to section 168(g)(3)(C). T uses any reasonable manner that is the optional depreciation tables. If the half- paragraph (e) is illustrated by the year convention applies in 2004, the consistently applied to the taxpayer’s following examples: appropriate optional depreciation table is MACRS property. For purposes of this Example 1. (i) Z, a utility and calendar- table 8 in Rev. Proc. 87–57, which is the table paragraph (e), the determination of year corporation, acquires and places in for MACRS property subject to the alternative whether the mid-quarter convention service on January 1, 2004, equipment at a depreciation system, the straight line applies to any MACRS property placed cost of $100,000. Z uses this equipment in its method, a 5-year recovery period, and the

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half-year convention. Thus, the depreciation depreciation provided in this section as revisions, and revised applications allowance for the computers for 2004 is a change in method of accounting to within certain time periods. The $10,000, which is equal to the unadjusted which the provisions of sections 446(e) amendment is intended to require the depreciable basis of $100,000 multiplied by the annual depreciation rate of .10 in table and 481 and the regulations under timely review of applications for open- 8 for recovery year 1 for a 5-year recovery sections 446(e) and 481 apply. pit mining permits. period. Because the computers are required (ii) Automatic consent to change DATES: Effective Date: June 17, 2004. method of accounting. A taxpayer to be depreciated under the alternative FOR FURTHER INFORMATION CONTACT: depreciation system in their placed-in- changing its method of accounting in George Rieger, Telephone: (412) 937– service year, pursuant to section accordance with this paragraph (g)(2) 2153. Internet: [email protected]. 168(k)(2)(C)(i) and § 1.168(k)–1T(b)(2)(ii), the must follow the applicable computers are not eligible for the additional administrative procedures issued under SUPPLEMENTARY INFORMATION: first year depreciation deduction provided by I. Background on the Maryland Program section 168(k). § 1.446–1(e)(3)(ii) for obtaining the Commissioner’s automatic consent to a II. Submission of the Proposed Amendment (f) No change in accounting method. change in method of accounting (for III. OSM’s Findings A change in computing the depreciation further guidance, for example, see Rev. IV. Summary and Disposition of Comments allowance in the year of change for Proc. 2002–9 (2002–1 C.B. 327), as V. OSM’s Decision VI. Procedural Determinations property subject to this section is not a modified by Rev. Proc. 2004–11 (2004– change in method of accounting under 3 I.R.B. 311) (see § 601.601(d)(2)(ii)(b) of I. Background on the Maryland section 446(e). See § 1.446– this chapter)). Any change in method of Program 1T(e)(2)(ii)(d)(3)(ii). accounting made under this paragraph (g) Effective dates—(1) In general. Section 503(a) of the Act permits a (g)(2) must be made using an adjustment State to assume primacy for the This section applies to any change in under section 481(a). For purposes of the use of MACRS property in a taxable regulation of surface coal mining and Form 3115, Application for Change in reclamation operations on non-Federal year ending on or after June 17, 2004. Accounting Method, the designated For any change in the use of MACRS and non-Indian lands within its borders number for the automatic accounting by demonstrating that its State program property after December 31, 1986, in a method change authorized by this taxable year ending before June 17, includes, among other things, ‘‘a State paragraph (g)(2) is ‘‘88.’’ If Form 3115 is 2004, the Internal Revenue Service will law which provides for the regulation of revised or renumbered, any reference in allow any reasonable method of surface coal mining and reclamation this section to that form is treated as a depreciating the property under section operations in accordance with the reference to the revised or renumbered 168 in the year of change and the requirements of the Act * * *; and form. subsequent taxable years that is rules and regulations consistent with consistently applied to any property for Mark E. Matthews, regulations issued by the Secretary which the use changes in the hands of Deputy Commissioner for Services and pursuant to the Act.’’ See 30 U.S.C. the same taxpayer or the taxpayer may Enforcement. 1253(a)(1) and (7). On the basis of these choose, on a property-by-property basis, Approved: June 7, 2004. criteria, the Secretary of the Interior to apply the provisions of this section. Gregory F. Jenner, conditionally approved the Maryland (2) Change in method of accounting— Acting Assistant Secretary of the Treasury program on December 1, 1980. You can (i) In general. If a taxpayer adopted a (Tax Policy). find background information on the method of accounting for depreciation [FR Doc. 04–13723 Filed 6–16–04; 8:45 am] Maryland program, including the due to a change in the use of MACRS Secretary’s findings, the disposition of BILLING CODE 4830–01–P property in a taxable year ending on or comments, and conditions of approval after December 30, 2003, and the in the December 1, 1980, Federal method adopted is not in accordance Register (45 FR 79430). You can also DEPARTMENT OF THE INTERIOR with the method of accounting for find later actions concerning Maryland’s depreciation provided in this section, a Office of Surface Mining Reclamation program and program amendments at 30 change to the method of accounting for and Enforcement CFR 920.12, 920.15 and 920.16. depreciation provided in this section is II. Submission of the Proposed a change in the method of accounting to 30 CFR Part 920 which the provisions of sections 446(e) Amendment and 481 and the regulations under [MD–053–FOR] By letter dated January 7, 2004 sections 446(e) and 481 apply. Also, a (Administrative Record Number MD– revocation of the election provided in Maryland Regulatory Program 586–00), Maryland sent us an paragraph (d)(3)(ii) of this section to AGENCY: Office of Surface Mining amendment to its program under disregard a change in the use is a change Reclamation and Enforcement, Interior. SMCRA (30 U.S.C. 1201 et seq.). in method of accounting to which the ACTION: Final rule; approval of Maryland sent the amendment to provisions of sections 446(e) and 481 amendment. include changes made at its own and the regulations under sections initiative. The amendment consists of 446(e) and 481 apply. However, if a SUMMARY: We are approving an Maryland House Bill 893, which was taxpayer adopted a method of amendment to the Maryland regulatory enacted to require the Department of the accounting for depreciation due to a program (the Maryland program) under Environment to review an application change in the use of MACRS property the Surface Mining Control and for an open-pit mining permit in a after December 31, 1986, in a taxable Reclamation Act of 1977 (SMCRA or the timely manner. The bill revises the year ending before December 30, 2003, Act). The program amendment consists Annotated Code of Maryland, and and the method adopted is not in of changes to the Annotated Code of requires the Department of the accordance with the method of Maryland as contained in House Bill Environment to take action for permit accounting for depreciation provided in 893. The amendment requires the applications, permit revisions, and this section, the taxpayer may treat the Department of the Environment to take revised applications within certain time change to the method of accounting for action for permit applications, permit periods.

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