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 withdrawn (REG–138499–02; 69 FR Depreciation for the year of change is § 522.23 [Amended] 9560).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 VerDate jul<14>2003 15:24 Jun 16, 2004 Jkt 203001 PO 00000 Frm 00008 Fmt 4700 Sfmt 4700 E:\FR\FM\17JNR1.SGM 17JNR1 Federal Register / Vol. 69, No. 116 / Thursday, June 17, 2004 / Rules and Regulations 33841 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.