| |
|
|
|
When Property Is Placed In Service
The period for depreciation begins when property is placed in
service. Reg. Section 1.167(a)-10(b). Property is considered
placed in service when it is in a condition or state of readiness
and availability for a specifically assigned function, whether in
the taxpayer's trade or business or for the production of income.
The term "placed in service" does not necessarily mean
that actual use of the property must begin. For example, if a
machine is purchased, installed, and prepared for use in
production, depreciation begins at the time of installation even
though the machine might stand idle for a time at the beginning of
its service life.
EXAMPLE 1: Tom purchased a machine for use in his business on
November 22, 1997. The machine was delivered on December 7, 1997,
but was not installed or operational until January 3, 1998. The
machine is not considered placed in service until 1998. On the
other hand, if the machine had been ready for use when delivered
in 1997, it would have been considered placed in service in 1997,
even if Tom did not actually use it until 1998.
The rule that property need not be actually used to be
considered placed in service applies only to a taxpayer already
engaged in carrying on a trade or business or producing income.
Thus, if property is purchased with the intent of beginning a
business and is placed in a state of readiness, no depreciation is
allowed until the business in fact begins or the property is used
in a profit-making activity. See End Note
The period for depreciation ends when the asset is retired from
service. Reg. Section 1.167(a)-10(b). Retirement from service
means abandonment, sale, or other disposition. Note, however, that
periods of idleness during the service life of an asset do not end
the period for depreciation. For example, in one case, a court
held that taxicabs that were idle and in storage for four years
were nevertheless in service. Yellow Cab Co. v. Driscoll, 24 F.
Supp. 993 (W.D. Pa. 1938).
|
End Note |
|
OPINION
in CHARLES E. MCMANUS III v. COMMISSIONER.
Docket No. 32442-85.
Filed
September 14, 1987
.
Charles E. McManus III, pro se.
Robert A. Miller, for the respondent.
The threshold issue we must decide is whether Fluid
Technology was carrying
on any trade or business in 1981. Petitioner can receive the
benefit of the
deductions and credits at issue only if Fluid Technology was
carrying on a trade or business in 1981.
Section 162(a) provides a deduction for ordinary and
necessary expenses incurred
in carrying on a trade or business. Fluid Technology
deducted legal
expenses for tax advice under section 162(a).
Section 164(a) provides a deduction for taxes paid in
carrying on a trade
or business. Fluid Technology deducted the franchise tax it
paid to the
State of
Louisiana
under this section.
Section 174(a) provides a deduction for research and
experimental expenditures
incurred in connection with a trade or business. Fluid Technology
deducted maintenance and research and development expenses under
section 174(a). In the alternative, petitioner argues that
these were
ordinary and necessary business expenses incurred in
carrying on a trade
or business and deductible under section 162(a).
Section 168 provides for depreciation of recovery
property used in a trade
or business beginning in the year in which the property is
placed in service.
Fluid Technology deducted one month's depreciation on the component
parts received from Eufex in 1981 with an unadjusted basis
of $158,212.20.
In the alternative, petitioner claims that the progress payments
made to Eufex in 1981 which equal 20 percent of the
unadjusted basis
for depreciation, or $31,642.44, are deductible under
section 162(a).
Section 248 provides for amortization of
organizational expenses over a period
of not less than 60 months beginning with the month in which
the business
begins. Petitioner contends the Fluid Technology began
business in
December 1981 and is entitled to an amortization deduction
pursuant to section
248 on its 1981 return.
In spite of its frequent use, neither the Code nor
the regulations provide
a generally applicable definition of the term "trade or
business." The
Supreme Court recently reiterated that the question of
whether a taxpayer
is engaged in a trade or business requires an examination of
all of the
relevant facts. Commissioner v. Groetzinger, ____
U.S.
____, 107 S. Ct.
980, 988 (1987); see Higgins v. Commissioner, 312
U.S.
212, 217 (1941).
In applying the facts and circumstances test courts have
focused on three
factors indicative of whether a trade or business exists. <<ENDNOTE
9>>
First, the taxpayer must undertake an activity
intending to make a profit.
Drobny v. Commissioner, 86 T.C. 1326, 1340 (1986); Green v. Commissioner,
83 T.C. 667, 687 (1984). Respondent concedes Fluid Technology's
profit motive.
Second the taxpayer must be regularly and actively
involved in the activity.
Gajewski v. Commissioner, 723 F.2d 1062, 1065 (2d Cir.
1983); Snyder v.
United
States
,
674 F.2d 1359, 1364 (10th Cir. 1982). This requirement
contemplates extensive business activity over a substantial period
of time as opposed to a one-time venture or investment.
Stanton
v. Commissioner,
399 F.2d 326, 329-330 (5th Cir. 1968), affg. a Memorandum Opinion
of this Court. <<ENDNOTE 10>>
Third, the taxpayer's business operations must
actually have commenced. Courts
have consistently held that pre-opening and start-up
expenses are not
deductible under section 162(a). Johnsen v. Commissioner,
794 F.2d 1157,
1160 (6th Cir. 1986), revg. on other grounds, 83 T.C. 103
(1984); Aboussie
v.
United
States
,
779 F.2d 424, 428 (8th Cir. 1985); Central Texas
Savings and Loan Assn. v.
United
States
,
731 F.2d 1181, 1183 (5th Cir.
1984); Madison Gas and Electric Co. v. Commissioner, 633
F.2d 512, 517
(7th Cir. 1980); Richmond Television Corp. v.
United
States
,
345 F.2d 901,
907 (4th Cir. 1965), vacated per curiam on other grounds,
382
U.S.
68 (1965);
Goodwin v. Commissioner, 75 T.C. 424, 433 (1980), affd.
without published
opinion 691 F.2d 490 (3d Cir. 1982). See also section 195.
In Richmond
Television Corp. v.
United
States
,
the Fourth Circuit, to which an
appeal in this case would lie, set out the generally
accepted rule that even
though a taxpayer has made a firm decision to enter into a
business and
over a considerable period of time spent money in
preparation for entering
that business, he still has not "engaged in carrying on
any trade or
business" within the intendment of section 162(a) until
such time as the
business has begun to function as a going concern and
performed those activities
for which it was organized.
345
F.2d at 907. <<ENDNOTE 11>>
Petitioner contends that Fluid Technology began
business in December 1981,
when it sold the requisite number of shares, entered into
contracts with
Cybar and Eufex, and made payments out of corporate funds.
On
December 2, 1981
,
Fluid Technology entered into four contracts which became
effective on
December 16, 1981
upon the sale of two-thirds of the offered
shares in the corporation. Fluid Technology made payments
pursuant to the
contracts in 1981. In addition, Fluid Technology disbursed
funds for legal
fees and a state franchise tax. Fluid Technology also
received component
parts from Eufex to be used in manufacturing the mud logging
devices and,
pursuant to the Custom Manufacturing Contract, made progress
payments to
Eufex.
Petitioner argues that Fluid Technology began
business and placed assets
in service no later than
December
16, 1981
, when it received $212,000.00
cash from its investors for over two-thirds of the offered shares,
paid out $203,773.84 pursuant to its contracts with Eufex
and Cybar, and
began to acquire its operating assets from Eufex. Petitioner
relies on
section 1.248-1(a)(3), Income Tax Regs., which distinguishes
the mere
formation of a corporate entity from the date when it
actually begins to
function as a business:
The
determination of the date the corporation begins business
presents a question
of fact which must be determined in each case in light of
all the circumstances
of the particular case. The words "begins
business," however,
do not have the same meaning as "in existence."
Ordinarily, a corporation
begins business when it starts the business operations for which
it was organized, a corporation comes into existence on the
date of its
incorporation. Mere organizational activities, such as the
obtaining of the
corporate charter, are not alone sufficient to show the
beginning of
business. IF THE ACTIVITIES OF THE CORPORATION HAVE ADVANCED
TO THE EXTENT
NECESSARY TO ESTABLISH THE NATURE OF ITS BUSINESS
OPERATIONS, HOWEVER,
IT WILL BE DEEMED TO HAVE BEGUN BUSINESS. FOR EXAMPLE, THE ACQU
ISI
TION
OF OPERATING ASSETS WHICH ARE NECESSARY TO THE TYPE OF BUSINESS
CONTEMPLATED MAY CONSTITUTE THE BEGINNING OF BUSINESS.
[Emphasis added.]
The
regulation, however, does not help petitioner because
Fluid's activities
never "advanced to the extent necessary to establish
the nature of
its business operations." Fluid Technology was
organized to manufacture and
rent out 10 prototype mud logging devices and to perform
necessary research
and testing, and it expected to earn income only through its
rental
activities. Although in 1981, Fluid Technology had entered
into contracts
and begun to acquire component parts for use in
manufacturing the
mud logging devices, the devices never became operational.
Throughout its
existence Fluid Technology never rented devices or tested
them.
Fluid Technology did not acquire any of its operating
assets in 1981. Petitioner
asserts that Fluid Technology nonetheless had a depreciable asset
once it paid for a component part even though the part was
not yet included
in the mud logging prototype because Fluid Technology was involved
in a research and development project and had to "test
everything along
the way to make sure we would work out any intermediate bugs
before we got
the final product." The basis for depreciation (and
also for investment
credit purposes) was computed based on Fluid Technology's accrual
of amounts due Eufex under the Custom Manufacturing
Contract.
Fluid Technology was not in a position in 1981 to
engage in business, and
it did not engage in any business in 1981. First, only some
of the component
parts of the mud logging devices were acquired by Fluid Technology
in 1981. Second, these components had to be tested before
they could be
used to assemble the devices that were intended to be the
focus of Fluid
Technology's business, and Cybar, not Fluid Technology,
performed all
research and testing. Third, in 1981 and prior to its merger
with Cybar,
Fluid Technology performed no work other than paying Cybar
and Eufex. The
contracts that Fluid Technology entered into were written
such that Fluid
Technology had no duties other than to make payments and acquired
no rights except for the right to rent out devices if Cybar
and Eufex
completed them within the license period and Cybar did not
elect under the
License Agreement to purchase them from Fluid Technology at cost.
Consequently the assets to be used in Fluid Technology's
business were
not acquired by Fluid Technology because they were never
assembled. Moreover
even if, as petitioner claims, business assets could be
deemed to be
acquired as Fluid Technology acquired component parts, Fluid
Technology could
not begin to depreciate the assets in 1981 because they were
not in a state
of readiness to be used in either manufacturing of or rental
of mud logging
prototypes, i.e., they were not "placed in
service." Section 1.46-3(d)(1)(ii),
Income Tax Regs.; Simonson v.
United
States
,
752 F.2d 341
(8th Cir. 1985); Cooper v. Commissioner, 88 T.C. 84, 113-114
(1987).
Section 195 provides that pre-opening or start-up
expenses are not fully
deductible in the year incurred and must be amortized over a
period of not
less than 60 months beginning with the month in which the
taxpayer begins
business. Respondent argues that all of the expenses Fluid Technology
incurred in 1981 are pre-opening expenses which are not deductible
in that year because Fluid Technology had not yet begun business.
See section 195; Richmond Television Corp. v.
United
States
,
345 F.2d 901,
907 (4th Cir. 1965), vacated on other grounds, 362 U.S. 68 (1965).
We agree.
Although Fluid Technology made a firm commitment in
1981 to enter into business
and expended funds in furtherance of that goal, it had not
"begun to
function as a going concern and performed those activities
for which it was
organized." Richmond Television Corp. v.
United
States
,
345 F.2d at 907.
Consequently, respondent properly disallowed Fluid
Technology's claimed
deductions for legal fees pursuant to section 162(a), taxes pursuant
to section 164(a), depreciation pursuant to section 168 and amortization
of organizational expenses pursuant to section 248. In addition,
because it was not in business in 1981, Fluid Technology is
not entitled to
a section 38 investment tax credit.
Fluid Technology also claimed deductions in 1981
pursuant to section 174
for maintenance and research and development expenses
incurred "in connection
with a trade or business." Section 174(a)(1)
<<ENDNOTE 12>> provides
that research and experimental expenditures incurred during
the taxable year
in connection with a taxpayer's trade or business may, at
the taxpayer's
election, be deducted currently rather than capitalized. The
Supreme Court
has held that to obtain a deduction under section 174, a taxpayer
need not currently be engaged in a trade or business. Snow
v. Commissioner,
416
U.S.
500, 504 (1974). The Supreme Court, however, did not
entirely eliminate the "trade or business"
requirement from section 174.
As we stated in Green v. Commissioner, 83 T.C. 667, 686-687
(1984), For
section 174 to apply, the taxpayer must still be engaged in
a trade or business
AT SOME TIME, and we must still determine, through an
examination of
the facts of each case, whether the taxpayer's activities in
connection with
a product are sufficiently substantial and regular to
constitute a trade
or business for purposes of such section. * * * [Emphasis
original.] <<ENDNOTE
13>>
As we have previously found, Fluid Technology did not
begin business in 1981
and was not engaged in carrying on a trade or business in
1981. Fluid Technology,
in fact, never began business. Its exclusive license from Cybar
to use the technology developed by Sanderford expired in
1983, before any
mud logging devices were operational. At that point, Fluid Technology
exercised its option under the License Agreement to merge
into Cybar and
ceased to exist. Because Fluid Technology never began
business, it is
not entitled to any deductions under section 174.
The final issue we must decide is whether petitioner
is entitled to a $50.00
political contribution credit. Section 24 <<ENDNOTE
14>> allows a credit
not in excess of $50.00 for political contributions by
individuals to
candidates, political action committees or political
parties.
In 1981, the law firm of which petitioner's
professional corporation (the
"P.C.") was an employee made a contribution of
$740.00 to its political
action committee which it charged to petitioner's P.C. and deducted
from the P.C.'s salary. Respondent argues that petitioner
has not met his
burden of substantiating his entitlement to the credit. We
agree. The
contribution was made by or on behalf of petitioner's P.C.
and not by petitioner.
Petitioner contends that because a corporation may not contribute
to a political action committee and may not claim a credit under
section 24(a), we should attribute the contribution to him.
There is nothing
in the record to support petitioner's characterization of
the contribution.
If an amount was contributed, it was not contributed by petitioner.
See also section 24(b)(2) and section 1.41-5, Income Tax
Regs.
Decision will be entered
for the respondent.
<<ENDNOTES>>
1/ All section references are to the Internal Revenue
Code of 1954, as amended
and in effect during the year in issue.
Because of our holdings on the first two issues, we
do not reach several
alternative issues raised by the parties.
2/ The Deficit Reduction Act of 1984, Pub. L. No.
98-369, section 471(c)(1),
98 Stat. 494, 826, redesignated former section 41 as section
24 effective for
taxable years beginning after 1983. Although in 1981 the applicable
provision was in section 41, we will, for convenience, refer
to it as section
24.
3/ Petitioner listed
Houston
,
Texas
as his legal residence on his petition.
Respondent determined that petitioner's legal residence at
the time the
petition was filed was in
Maryland
.
For the purpose of an appeal in
this case, petitioner does not contest respondent's
determination.
4/ The mud logging device is attached to the wellhead
and used to analyze
the rock being drilled through to determine the likelihood
of finding oil.
The drilling equipment is lubricated with mud and the device
analyzes the mud
plus rock. Without this technology, the mud must be sent from
the well to a laboratory for analysis.
5/ Sanderford, together with a partner in
petitioner's law firm, had previously
set up an S corporation which was not yet fully capitalized.
Petitioner
discarded the prior corporation and started again with Fluid
Technology.
Sanderford commenced the work for which Fluid Technology was
to provide
funding in October or November 1981, before Fluid Technology
was formed.
6/ The four contracts entered into on
December 2, 1981
state that the offering
was to be for 272,000 shares. Only 262,000 shares were subscribed.
7/ Petitioner conceded that during the 18-19 month
license period coinciding
with the sole period during which Fluid Technology was in existence,
Fluid Technology did not have any complete systems or
anything usable.
Transcript of Proceedings of
February
4, 1987
at
Baltimore
,
Maryland
at 37-39.
8/ The Stipulation of Facts lists this check as dated
December
17, 1981
.
A copy of the check admitted into evidence, however,
indicates that the
correct date is
December 18, 1981
.
9/ In Commissioner v. Groetzinger, ____
U.S.
____ 107 S. Ct. 980 (1987),
the Supreme Court rejected a fourth factor whether the
taxpayer held
himself out to others as a provider of goods or services.
This Court had
previously rejected the goods and services test. See Ditunno
v. Commissioner,
80 T.C 362, 371 (1983).
10/ We need not discuss this requirement because of
our decision that Fluid
Technology never began business. See infra.
11/ The Court of Claims and its successor the Court
of Appeals for the Federal
Circuit in part have rejected Richmond Television Corp. v.
United States,
345 F.2d 901 (4th Cir. 1965), vacated per curiam on other
grounds 382 U.S.
68 (1965) and held that certain recurring expenses necessary
to maintain any
business enterprise are deductible under section 162 even if
incurred before
the business is in a position to earn income. El Paso Co. v.
United
States
,
694 F.2d 703, 714 (Fed. Cir. 1982); Blitzer v.
United
States
,
684 F.2d 874, 880 (Ct. Cl. 1982); see Bortherman v.
United
States
,
6
Cl. Ct.
407, 409-410 (1984), see also
United
States
v. Manor Care, Inc., 490
F. Supp. 355, 359 (D.
Md.
1980). But see Goodwin v. Commissioner, 75 T.C.
424, 433 n. 8 (1980) affd. without published opinion 691
F.2d 490 (3d Cir.
1982). In Blitzer, the Court of Claims concluded that
expenses such as
those for organization of the business, salaries, loans and
bills are not
start-up costs and are not intended to provide benefits
extending beyond
the year in question. They should, therefore, not be subject
to the rule
against current deduction of start-up expenses. 684 F.2d at
880. This Court
questioned the validity of that analysis in Goodwin v.
Commissioner, 75
T.C. at 433 n.8, discussing the district court's decision in
United
States
v. Manor Care, Inc., supra. We are bound in this case to
apply the Fourth
Circuit's decision on this issue, Golsen v. Commissioner, 54
T.C. 742 (1970),
affd. 445 F.2d 985 (10th Cir. 1971), cert. denied 404
U.S.
940 (1971).
12/ SEC. 174. RESEARCH AND EXPERIMENTAL EXPENDITURES.
(a) Treatment as Expenses.--
(1) In General.--A taxpayer may treat research or
experimental expenditures
which are paid or incurred by him during the taxable year in
connection with
his trade or business as expenses which are not chargeable to
capital account. The expenditures so treated shall be
allowed as a deduction.
13/ See also Levin v. Commissioner, 87 T.C. 698, 724
(1986); Drobny v. Commissioner,
86 T.C. 1326, 1340 (1986); Spellman v. Commissioner, T.C. Memo.
1986-403; Hoerrner v. Commissioner, T.C. Memo. 1985-347.
14/ Section 24 provides, in relevant part:
SEC. 24. CONTRIBUTIONS TO CANDIDATES FOR PUBLIC
OFFICE.
(a) General Rule.--In the case of an individual,
there shall be allowed,
subject to the limitations of subsection (b), as a credit
against the tax
imposed by this chapter for the taxable year, an amount
equal to one-half
of all political contributions and all newsletter fund contributions,
payment of which is made by the taxpayer within the taxable year.
(b) Limitations.--
(1) Maximum Credit.--The credit allowed by subsection
(a) for a taxable year
shall not exceed $50 ($100 in the case of a joint return
under section
6013).
(2) Verification.--The credit allowed by subsection
(a) shall be allowed,
with respect to any political contribution or newsletter
fund contribution,
only if such contribution is verified in such manner as the Secretary
shall prescribe by regulations.
* * *
Prior
to 1984, this provision was found in section 41. See note 2,
supra.
|
|
Tax Court's Decision
|
|
Kay,
Sr. v. Commissioner, T.C. Memo. 2002-197
T.C.
Memo. 2002-197
UNITED
STATES TAX COURT
PERRY
H. KAY, SR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE,
Respondent
Docket
No. 10828-00.
Filed
August
8, 2002
.
Emil
R. Sargent, for petitioner.
Portia
N. Rose, for respondent.
MEMORANDUM
FINDINGS OF FACT AND OPINION
GOLDBERG,
Special Trial Judge: Respondent determined a deficiency in
petitioner's Federal income tax for the taxable year 1998 in the
amount of $4,181.50. Unless otherwise indicated, section
references are to the Internal Revenue Code in effect for the year
at issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
After
concessions by respondent,<<ENDNOTE 1>> the remaining
issues for decision are (1) whether petitioner is entitled to
deduct certain Schedule C, Profit or Loss From Business, expenses
for the year at issue, and (2) whether petitioner is entitled to a
casualty loss deduction of $5,151.19 for 1998.
FINDINGS
OF FACT
Some
of the facts have been stipulated and are so found. The
stipulation of facts and the attached exhibits are incorporated
herein by this reference. At the time the petition was filed,
petitioner resided in
Houston
,
Texas
.
Petitioner
holds a master's degree in music education from the
University
of
North
Texas
.
Petitioner was employed as a full-time band teacher for 31 years,
26 of those years at
Lanier
Middle
School
in
Houston
,
Texas
.
Since retiring from full-time employment, petitioner has taught
band part time. During 1998, petitioner was employed as a
part-time assistant band director for the
North
Forest
Independent
School
District
.
During
1998, petitioner also operated PK Production and Management (PK
Production), a small business providing music entertainment
services. Petitioner managed and played in a band for
compensation. For the year at issue, the band only participated in
four or five paid engagements.
With
respect to PK Production, petitioner claimed that on
January
1, 1998
,
he placed in service a 1995 Dodge Caravan (van), which was
purchased in 1997. During the year at issue, petitioner used the
van to transport musical equipment to and from the band's
engagements. Petitioner testified that during 1998 the van was
used primarily for PK Production business purposes.
On
Schedule C, petitioner claimed various business expense deductions
in the operation of PK Production. Petitioner's claimed expense
deductions that are at issue include: (1) A section 179 expense
deduction of $7,000 for the van; (2) expenses in connection with
the van for business-related travel of $4,182; (3) production and
management fees of $999.20; and (4) music educator and
professional convention expenses of $333.95.
During
1998, petitioner owned a three-bedroom ranch-type house located at
5134
Heatherbrook Drive
,
Houston
,
Texas
.
On
September
11, 1998
,
a rain and wind storm damaged the roof and several rooms of
petitioner's house. Petitioner reported the incident to the State
Farm Insurance Company (State Farm), with whom petitioner
maintained a homeowner's insurance policy during 1998. On
October
12, 1998
,
State Farm settled the claim with petitioner for $857.12. On
October
29, 1998
,
petitioner retained a contractor to replace rotten decking and
install a new roof on petitioner's house. For the year at issue,
petitioner claimed a casualty loss deduction on Schedule A,
Itemized Deductions, of $5,151.19 related to the damage caused by
the storm.
In
the notice of deficiency, respondent disallowed the following:
(1)
The entire section 179 expense deduction claimed on Schedule C
because petitioner "did not establish the percentage of
business use" for the van and failed to provide other
supporting information required to substantiate the deduction;
(2)
the business-related travel expense for the van claimed on
Schedule C because petitioner failed to provide the supporting
information necessary to establish that the deduction was "
(a)
incurred during the taxable year, and
(b)
an ordinary and necessary business expense";
(3)
expenses claimed on Schedule C for
(a)
production and management fees, and
(b)
music educator and professional convention expenses because
petitioner did not substantiate that these expenses were paid or
incurred during the taxable year and were "ordinary and
necessary" business expenses; and
(4)
the entire casualty loss deduction claimed on Schedule A because
petitioner "did not establish that
(a)
a casualty or theft occurred, and
(b)
any loss was sustained".
OPINION
The
determinations of the Commissioner in a notice of deficiency are
presumed correct, and the burden is on the taxpayer to show that
the determinations are incorrect. Rule 142(a); Welch v. Helvering,
290
U.S.
111, 115 (1933).<<ENDNOTE 2>>
Deductions
are a matter of legislative grace, and the taxpayer bears the
burden of proving the entitlement to any deduction claimed.
INDOPCO, Inc. v. Commissioner, 503
U.S.
79, 84 (1992); New Colonial Ice Co. v. Helvering, 292
U.S.
435, 440 (1934). A taxpayer is required to maintain records
sufficient to establish the amount of his or her income and
deductions. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.
1.
SCHEDULE C--BUSINESS EXPENSE DEDUCTIONS
Section
162(a) allows a taxpayer to deduct all ordinary and necessary
business expenses paid or incurred during the taxable year in
carrying on any trade or business. To be "ordinary" the
transaction which gives rise to the expense must be of a common or
frequent occurrence in the type of business involved. Deputy v. Du
Pont, 308
U.S.
488, 495 (1940). To be "necessary" an expense must be
"appropriate and helpful" to the taxpayer's business.
Welch v. Helvering, supra at 113. Additionally, the expenditure
must be "directly connected with or pertaining to the
taxpayer's trade or business". Sec. 1.162-1(a), Income Tax
Regs.
Generally,
if a claimed business expense is deductible, but the taxpayer is
unable to fully substantiate it, the Court is permitted to make as
close an approximation as it can, bearing heavily against the
taxpayer whose inexactitude is of his or her own making. Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The estimate
must have a reasonable evidentiary basis. Vanicek v. Commissioner,
85 T.C. 731, 743 (1985). However, section 274 supersedes the
doctrine of Cohan v. Commissioner, supra, sec. 1.274-5T(a),
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (
Nov.
6, 1985
),
and requires strict substantiation of expenses for travel, meals
and entertainment, and gifts, and with respect to any listed
property as defined in section 280F(d)(4). Sec. 274(d). Listed
property includes any passenger automobile or any other property
used as a means of transportation. Sec. 280F(d)(4)(A)(i) and (ii).
A
taxpayer is required by section 274(d) to substantiate a claimed
expense by adequate records or by sufficient evidence
corroborating the taxpayer's own statement establishing the
amount, time, place, and business purpose of the expense. Sec.
274(d). Even if such an expense would otherwise be deductible, the
deduction may still be denied if there is insufficient
substantiation to support it. Sec. 1.274-5T(a), Temporary Income
Tax Regs., supra.
A.
Vehicle-Related Expenses
On
Schedule C, petitioner claimed both a section 179 expense
deduction for $7,000 and business-related vehicle expenses of
$4,182 on the same vehicle. It is unclear from the record whether
petitioner used actual expenses or the standard mileage rate to
calculate the claimed deduction of $4,182. No evidence was
introduced to substantiate any actual expenses incurred and the
number of business miles claimed on Schedule C multiplied by the
1998 standard mileage rate is not equal to the amount of the
claimed deduction.<<ENDNOTE 3>>
Actual
expenses related to the business use of a vehicle are deductible
under section 274, if substantiated. If actual expenses were used
to determine the business-related vehicle expenses claimed,
petitioner, having failed to substantiate any such expense, is not
entitled to the business-related vehicle expenses claimed. See
sec. 274(d).
Alternatively,
a taxpayer may choose to use the business standard mileage rate in
lieu of the actual automobile expenses. Nash v. Commissioner, 60
T.C. 503, 520 (1973); Parker v. Commissioner, T.C. Memo. 1993-15;
Rev. Proc. 97-58, 1997-2 C.B. 587. However, the business standard
mileage rate may not be used to compute deductible expenses if the
taxpayer has claimed a section 179 expense deduction on the same
vehicle. Rev. Proc. 97-58, 1997-2 C.B. 587. Thus, petitioner may
not claim deductions on the van for both the section 179 expense
and the standard mileage rate. Assuming petitioner could
substantiate entitlement to a deduction for both expenses,
petitioner would be limited to either the section 179 expense
deduction or the standard mileage rate deduction, but not both.
i.
Section 179 Expense
Petitioner
claimed a section 179 expense deduction of $7,000 on Schedule C
for the year at issue. For the 1998 taxable year, section 179
allows a taxpayer to elect to expense, as a deduction for the year
in which the property was placed in service, up to $18,500 of the
cost of certain property acquired for use in the active conduct of
a trade or business. Sec. 179(a), (b), (d). "The term 'placed
in service' means the time that property is first placed by the
taxpayer in a condition or state of readiness and availability for
a specifically assigned function, whether for use in a trade or
business, for the production of income, in a tax-exempt activity,
or in a personal activity." Sec. 1.179-4(e), Income Tax Regs.
Petitioner
claimed on Form 4562, Depreciation and Amortization, that the van
was placed in service on
January
1, 1998
.
However, petitioner presented an invoice at trial for the purchase
of the van dated
March
6, 1997
.
Further, petitioner testified that the van was driven for personal
use "part of the time." Therefore, the only evidence
presented on this point indicates that the van was first placed in
service in a personal activity in 1997. The section 179 expense is
allowed as a deduction only in the year the property is placed in
service. See sec. 179(a); Hendrix v. Commissioner, T.C. Memo.
1990-221; sec. 1.179-4(e), Income Tax Regs. Accordingly,
petitioner is not entitled to the section 179 expense deduction
claimed on the van in 1998.
ii.
Business Standard Mileage Rate Expense
Since
we found above that petitioner is not entitled to a section 179
expense deduction, petitioner may use the standard mileage rate to
calculate the business-related vehicle expenses on the van, if
substantiated.
The
business standard mileage rate in lieu of operating and fixed
costs allows the taxpayer to deduct an amount determined by
multiplying the business standard mileage rate for the year at
issue by the number of miles driven for business purposes. Rev.
Proc. 97-58, 1997-2 C.B. 587. The standard mileage rate for 1998
was 32.5 cents per mile.
Id.
Petitioner
reported 12,370 miles driven for business purposes on Schedule C
for the year at issue. Petitioner claimed a vehicle expense
deduction of $4,182. At trial, petitioner presented no evidence to
substantiate the business mileage reported or the vehicle expense
claimed. Petitioner testified that he did not "keep" his
business mileage. Petitioner's witness, Alonza O. C. Sargent,
testified that petitioner did maintain a mileage log, but no such
log was introduced at trial.
As
stated above, section 274 requires strict substantiation for
deductions claimed for transportation in a passenger car.
Petitioner is required to provide a mileage log or other
corroborative evidence sufficient to establish the amount, time,
place, and business purpose of the expense. Sec. 274(d). At trial,
petitioner failed to provide any corroborating evidence whatsoever
to satisfy the section 274 substantiation requirements.
Based
on a partial mileage log reviewed by respondent during an
examination prior to trial, respondent conceded that petitioner
was entitled to 5,742 business miles.<<ENDNOTE 4>>
Applying the standard mileage rate for 1998, respondent concedes
that petitioner is entitled to a vehicle expense deduction of
$1,866 for the year at issue. Although petitioner did not
substantiate entitlement to a deduction in any amount at trial, we
shall not disturb the respondent's concession. Accordingly,
petitioner is entitled to a vehicle expense deduction of $1,866
for the year at issue.
B.
Production and Management Fees
Petitioner
claimed a business expense deduction for production and management
fees in the amount of $999.20 on Schedule C for the year at issue.
At trial, petitioner presented documentation substantiating
$486.70 of the amount claimed. We are satisfied that the
substantiated items are ordinary and necessary business expenses
directly connected with petitioner's Schedule C business, as
required under section 162(a) and the regulations thereunder.
Petitioner
presented absolutely no evidence, either documentary or
testimonial, to substantiate the additional $512.50 of expenses
claimed. Petitioner is not entitled to a deduction for business
expenses that are completely unsubstantiated. Ronnen v.
Commissioner, 90 T.C. 74, 102 (1988).
Therefore,
petitioner is entitled to a Schedule C business expense deduction
only for production and management fees in the amount of $486.70
for the year at issue.
C.
Music Educator and Professional Convention Expense
Petitioner
claimed a business expense deduction for music educator and
professional convention expenses in the amount of $1,381.44 on
Schedule C for the year at issue. After respondent's concession
allowing a deduction of $1,047.49 for expenses related to the New
York City Convention, only $333.95 of the total claimed expense
remains at issue. The majority of the remaining expenses was
incurred in connection with two other conventions attended by
petitioner during 1998.
In
February 1998, petitioner attended the Texas Music Educators
Association Convention in
San
Antonio
,
Texas
.
Petitioner claimed business expenses relating to the convention in
the amount of $113.10.
In
July 1998, petitioner attended the Texas Bandmasters Association
Convention in
San
Antonio
,
Texas
.
Petitioner claimed business expenses relating to the convention in
the amount of $155.79.
Respondent
asserts that the expenses incurred with respect to both
San
Antonio
,
Texas
,
conventions relate to petitioner's employment as an assistant band
director and not to PK Production.
At
trial, petitioner testified that the claimed expenses relating to
the conventions pertained to both PK Production and his employment
as a band educator. However, petitioner failed to allocate the
expenses accordingly, claiming the expenses entirely as business
expenses on Schedule C.
Petitioner
further testified that the conventions were related to his
Schedule C business because the conventions (1) offered seminars
and workshops that benefited petitioner as a musician, (2) were
attended by other bands' members who shared "some different
techniques and various things *** that would benefit any
professional musician", and (3) provided exhibits featuring
manufacturers and distributors selling professional equipment.
While
petitioner may have attended seminars and engaged in conversations
with various individuals about techniques and equipment at the
conventions, we believe that these activities are not
"directly connected with or pertaining to" petitioner's
Schedule C business. Sec. 1.162-1(a), Income Tax Regs. The fact
that petitioner may have derived some incidental or indirect
benefit to his business by attending the conventions is not
sufficient to satisfy the requirements of section 162(a). See
Henry v. Commissioner, 36 T.C. 879, 884 (1961).
The
registration forms presented by petitioner at trial clearly
establish that the conventions were organized by educational
associations for the benefit of music educators.
The
Texas
Music Educators Association Convention Membership Application
requested information pertaining to the applicant's teaching
division and level. On the application, petitioner selected that
he taught band at the middle school/junior high school level.
Petitioner
completed the Texas Bandmasters Association Convention
Registration Form indicating that he was affiliated with the
Oak
Village
Middle
School
.
Further, petitioner only selected the middle school option when
asked to select the appropriate options that applied to the
applicant.
Petitioner
unequivocally completed both applications as an educator, making
no mention whatsoever of PK Production. Petitioner testified that
he had a choice of associating himself with the school or PK
Production when completing the applications, yet petitioner chose
to affiliate himself with the school on both occasions.
It
appears to the Court that from the evidence presented that
petitioner attended both
San
Antonio
,
Texas
,
conventions primarily in his capacity as an assistant band
director. The record is clear that petitioner has failed to
establish that the expenses associated with the
San
Antonio
,
Texas
,
conventions claimed on Schedule C were ordinary and necessary
expenses directly related to PK Production. See sec. 162(a); sec.
1.162-1(a), Income Tax Regs.
Petitioner
presented absolutely no evidence, either documentary or
testimonial, to substantiate the additional $65.06 of expenses
claimed as music educator and professional convention expenses.
Petitioner is not entitled to a deduction for business expenses
that are completely unsubstantiated. Ronnen v. Commissioner,
supra.
Therefore,
petitioner is not entitled to a Schedule C deduction in any amount
for the $333.95 of expense claimed as music educator and
professional convention expenses.
However,
since we found that petitioner incurred convention expenses of
$268.89 relating to his employment as an assistant band director,
we must determine whether these expenses are deductible as
unreimbursed employee expenses on Schedule A, Itemized Deductions,
subject to the 2-percent floor under section 67(a).
A
taxpayer is not allowed an unreimbursed employee expense deduction
if the employer maintains a reimbursement plan and the employee
fails to seek reimbursement for work-related expenses. Leamy v.
Commissioner, 85 T.C. 798, 810 (1985).
There
is absolutely nothing in the record to indicate whether
petitioner's employer maintained a reimbursement plan in the year
at issue, nor has petitioner provided any evidence to establish
that he sought reimbursement for the convention expenses.
Accordingly, petitioner is not entitled to claim unreimbursed
employee expenses on Schedule A for the expenses related to either
of the
San
Antonio
,
Texas
,
conventions.<<ENDNOTE
5>>
D.
Result of Schedule C Adjustments Above
Consistent
with the findings above, we have recalculated petitioner's
Schedule C loss from PK Production. Petitioner is entitled to a
loss of $1,748.19 on Schedule C for the year at issue.
Petitioner's adjusted gross income is also recomputed to reflect
this amount. Petitioner's recomputed adjusted gross income is
$28,919.35 for the year at issue.
2.
CASUALTY LOSS DEDUCTION
Section
165(a) allows a taxpayer to deduct any loss sustained during the
taxable year and not compensated for by insurance or otherwise. As
relevant here, section 165(c)(3) allows a deduction to an
individual for loss of "property not connected with a trade
or business or a transaction entered into for profit, if such loss
arises from fire, storm, shipwreck, or other casualty".
Pursuant
to section 165(h), personal casualty losses described under
section 165(c)(3) are deductible only to the extent that the loss
exceeds $100 and 10 percent of the taxpayer's adjusted gross
income. Moreover, such losses are deductible as itemized
deductions on Schedule A of the taxpayer's return.
Pursuant
to section 1.165-7(b)(1), Income Tax Regs., in the case of
property partially destroyed by casualty, the loss deductible for
purposes of section 165(a) is the difference between the fair
market value of the property immediately before the casualty and
the fair market value of the property immediately after the
casualty, with the deductible amount not to exceed the adjusted
basis of the property (fair market value approach).
To
establish the amount of the loss, the relevant fair market values
of the property "shall generally be ascertained by competent
appraisal." Sec. 1.165-7(a)(2)(i), Income Tax Regs. The
appraisal must be conducted in a manner to ensure that any
casualty loss deduction "be limited to the actual loss
resulting from damage to the property."
Id.
Section
1.165-7(a)(2)(ii), Income Tax Regs., provides that the cost of
repairs to the damaged property is acceptable as evidence of the
loss of value to the property (cost of repairs approach). In order
to use this alternative approach, the taxpayer must show: (1) The
repairs are necessary to restore the property to its condition
immediately before the casualty; (2) the amount spent for such
repairs is not excessive; (3) the repairs do not care for more
than the damage suffered; and (4) the value of the property after
the repairs does not as a result of the repairs exceed its value
immediately before the casualty.
Id.
For
the year at issue, petitioner claimed a casualty loss deduction of
$5,151.19 on Schedule A. Petitioner determined the casualty loss
amount on Form 4684, Casualties and Thefts, applying the fair
market value approach. On Form 4684, petitioner reported the fair
market value of the property before and after the casualty to be
$60,000 and $52,870, respectively. The $7,130 difference in the
fair market values reported was first reduced by $100, then
further reduced by $1,888.81, 10 percent of the adjusted gross
income shown on the return. Thereby, petitioner computed a
casualty loss of $5,151.19. No insurance reimbursement was
reported on the Form 4684.
A.
Fair Market Value Approach
At
trial, petitioner offered no evidence to substantiate the fair
market values reported on Form 4684. Petitioner did present a
Uniform Residential Appraisal Report (report), which estimated the
market value of petitioner's residence, as of
October
10, 1998
,
to be $53,000. The report makes no mention of the damage claimed
by petitioner, nor states that the appraised amount was based on a
value before or after the date of the storm. Because the appraised
value was determined as of
October
10, 1998
,
approximately 1 month after the storm and before any repairs were
made, we believe the $53,000 figure represents the fair market
value of the property taking into consideration any damage
resulting from the storm.<<ENDNOTE 6>> Since no
evidence of the fair market value of the property immediately
prior to the storm was presented at trial, petitioner has failed
to provide the information necessary to apply the fair market
value approach. Thus, petitioner is not entitled to the $5,151.19
casualty loss deduction claimed applying the fair market value
approach.
B.
Cost of Repairs Approach
At
trial, petitioner presented many documents in his attempt to
substantiate the casualty loss deduction applying the cost of
repairs approach. The documents were stipulated by the parties and
are part of the record. Petitioner presented a copy of: (1) The
insurance settlement claim from State Farm in the amount of
$857.12; (2) a contract with Carl B. Adams to install a new roof
and replace rotten decking for $1,500; (3) three receipts from
Carl B. Adams acknowledging payment of $1,500; (4) a receipt to
haul and dump roofing materials for $125; (5) two receipts from
Commercial Sand totaling $50; (6) three receipts from Builders
Square Store # 1409 totaling $123.64; (7) a receipt from Olshan
Lumber Company for $1,070.11; and (8) a credit invoice from Olshan
Lumber Company for items returned in the amount of $280.74.
Accordingly, petitioner presented documentation totaling $2,588.01
to replace his roof and received $857.12 in insurance proceeds.
Thus, petitioner's net out-of-pocket expense was $1,730.88 (net
expense).
Petitioner
testified that he spent "over $4,000" to repair the
damage to his residence, but could not remember the exact amount.
While we are permitted to estimate the amount of a deduction under
certain circumstances, there must be evidence in the record upon
which to base our decision. Cohan v. Commissioner, 39 F.2d 540 (2d
Cir. 1930). Petitioner did not corroborate his testimony with any
evidence whatsoever to establish the $4,000 figure. It is well
settled that we are not required to accept a taxpayer's
self-serving testimony in the absence of corroborating evidence.
Niedringhaus v. Commissioner, 99 T.C. 202, 212 (1992).
Petitioner
presented receipts totaling only $2,588.01 for labor and materials
to replace the roof and received $857.12 in insurance proceeds.
Therefore, only the $1,730.88 of net expense corroborated by
documentary evidence is considered in determining petitioner's
casualty loss deduction.
We
need not determine on the merits if petitioner has met the four
substantiation requirements of section 1.165-7(a)(2)(ii), Income
Tax Regs., because petitioner's net expense is less than the
amount of the section 165(h) limitations. Applying the section
165(h) limitations, petitioner's net expense of $1,730.88 minus
the $100 limitation, or $1,630.88, is far less than 10 percent of
petitioner's recomputed adjusted gross income for the year at
issue.<<ENDNOTE 7>>
Petitioner
has failed to meet the minimum dollar amount threshold required to
deduct a casualty loss.<<ENDNOTE 8>>Since petitioner's
net expense does not exceed the limitations under section 165(h),
petitioner is precluded from deducting any of the net expense
incurred. Accordingly, petitioner is not entitled to a casualty
loss deduction applying the cost of repairs approach.
To
reflect the foregoing,
Decision
will be entered
under
Rule 155.
<<ENDNOTES>>
1/
In a Stipulation of Settled Issues filed with the Court on
Oct.
22, 2001
,
respondent conceded for the 1998 taxable year that petitioner is
entitled to: (1) A dependency exemption claimed for his son; (2)
head of household filing status; (3) an educational credit of
$1,250; and (4) business expense deductions on Schedule C, Profit
or Loss From Business, of $751 for legal or professional expense
and $121 for professional and musician dues.
At
trial, respondent conceded that petitioner is entitled to a
Schedule C expense deduction of $1,047.49 for music educator and
professional convention expenses incurred with respect to
petitioner's attending the International Association of Jazz
Educators Convention in
New
York City
.
2/
Sec. 7491 does not apply in this case to place the burden of proof
on respondent because petitioner neither alleged that sec. 7491
was applicable nor established that he fully complied with the
substantiation requirements of sec. 7491(a)(2)(A).
3/
Petitioner reported 12,370 business-related miles and claimed a
deduction of $4,182. The 1998 standard mileage rate of 32.5 cents
per mile multiplied by 12,370 miles equals $4,020.25.
4/
The partial mileage log was not introduced at trial.
5/
Assuming, arguendo, that petitioner was entitled to claim
unreimbursed employee expenses of $268.89 on Schedule A,
petitioner would not be entitled to a deduction because the total
unreimbursed employee expenses are not greater than 2 percent of
the recomputed adjusted gross income, as required under sec.
67(a).
6/
The Uniform Residential Appraisal Report states that
Oct.
10, 1998
,
was
the date of inspection of the property.
7/
We recomputed petitioner's adjusted gross income to be $28,919.35,
10 percent of which is $2,892. See supra p. 16.
8/
Assuming, arguendo, that petitioner had corroborated $4,000 of
expense, the casualty loss deduction after the sec. 165(h)
limitations would be reduced to such a small amount that, when
added to the other items claimed on Schedule A, petitioner's total
itemized deductions would be less than the standard deduction for
the year at issue.
|
IRS Regulations
|
|
The
following is an IRS Regulation which defines a few terms including
"placed in service".
SECTION 1.179-4. DEFINITIONS.
The following definitions
apply for purposes of section 179 and Sections 1.179-1 through
1.179-6:
(a) SECTION 179
PROPERTY. The term "section 179 property" means any
tangible property described in section 179(d)(1) that is acquired
by purchase for use in the active conduct of the taxpayer's trade
or business (as described in Section 1.179-2(c)(6)). For purposes
of this paragraph (a), the term "trade or business" has
the same meaning as in section 162 and the regulations thereunder.
(b) SECTION 38 PROPERTY.
The term "section 38 property" shall have the same
meaning assigned to it in section 48(a) and the regulations
thereunder.
(c) PURCHASE.
(1)--
(i) Except as otherwise provided
in paragraph (d)(2) of this section, the term "purchase"
means any acquisition of the property, but only if all the
requirements of paragraphs (c)(1) (ii), (iii), and (iv) of this
section are satisfied.
(ii) Property is not acquired by
purchase if it is acquired from a person whose relationship to the
person acquiring it would result in the disallowance of losses
under section 267 or 707(b). The property is considered not
acquired by purchase only to the extent that losses would be
disallowed under section 267 or 707(b). Thus, for example, if
property is purchased by a husband and wife jointly from the
husband's father, the property will be treated as not acquired by
purchase only to the extent of the husband's interest in the
property. However, in applying the rules of section 267(b) and (c)
for this purpose, section 267(c)(4) shall be treated as providing
that the family of an individual will include only his spouse,
ancestors, and lineal descendants. For example, a purchase of
property from a corporation by a taxpayer who owns, directly or
indirectly, more than 50 percent in value of the outstanding stock
of such corporation does not qualify as a purchase under section
179(d)(2); nor does the purchase of property by a husband from his
wife. However, the purchase of section 179 property by a taxpayer
from his brother or sister does qualify as a purchase for purposes
of section 179(d)(2).
(iii) The property is not
acquired by purchase if acquired from a component member of a
controlled group of corporations (as defined in paragraph (g) of
this section) by another component member of the same group.
(iv) The property is not
acquired by purchase if the basis of the property in the hands of
the person acquiring it is determined in whole or in part by
reference to the adjusted basis of such property in the hands of
the person from whom acquired, or is determined under section
1014(a), relating to property acquired from a decedent. For
example, property acquired by gift or bequest does not qualify as
property acquired by purchase for purposes of section 179(d)(2);
nor does property received in a corporate distribution the basis
of which is determined under section 301(d)(2)(B), property
acquired by a corporation in a transaction to which section 351
applies, property acquired by a partnership through contribution
(section 723), or property received in a partnership distribution
which has a carryover basis under section 732(a)(1).
(2) Property deemed to have been
acquired by a new target corporation as a result of a section 338
election (relating to certain stock purchases treated as asset
acquisitions) will be considered acquired by purchase.
(d) COST. The cost of
section 179 property does not include so much of the basis of such
property as is determined by reference to the basis of other
property held at any time by the taxpayer. For example, X
Corporation purchases a new drill press costing $10,000 in
November 1984 which qualifies as section 179 property, and is
granted a trade-in allowance of $2,000 on its old drill press. The
old drill press had a basis of $1,200. Under the provisions of
sections 1012 and 1031(d), the basis of the new drill press is
$9,200 ($1,200 basis of oil drill press plus cash expended of
$8,000). However, only $8,000 of the basis of the new drill press
qualifies as cost for purposes of the section 179 expense
deduction; the remaining $1,200 is not part of the cost because it
is determined by reference to the basis of the old drill press.
(e) PLACED
IN SERVICE. The term "placed in service"
means the time that property is first placed by the taxpayer in a
condition or state of readiness and availability for a
specifically assigned function, whether for use in a trade or
business, for the production of income, in a tax-exempt activity,
or in a personal activity. See Section 1.46-3(d)(2) for examples
regarding when property shall be considered in a condition or
state of readiness and availability for a specifically assigned
function.
(f) CONTROLLED GROUP OF
CORPORATIONS AND COMPONENT MEMBER OF CONTROLLED GROUP. The terms
"controlled group of corporations" and "component
member" of a controlled group of corporations shall have the
same meaning assigned to those terms in section 1563(a) and (b),
except that the phrase "more than 50 percent" shall be
substituted for the phrase "at least 80 percent" each
place it appears in section 1563(a)(1).
[T.D. 8121, 52 FR 413,
Jan. 6, 1987
. Redesignated by T.D. 8455, 57 FR
61321, 61323,
Dec. 24, 1992
]
The following IRS Regulation uses examples to apply the
definitions:
SECTION
1.46-3. QUALIFIED
INVESTMENT.
(a)
IN GENERAL.
(1) With respect to any taxable year, the qualified
investment of the
taxpayer is the aggregate (expressed in dollars) of (i) the
applicable percentage of the basis of each new section 38
property
placed in service by the taxpayer during such taxable year,
plus (ii)
the applicable percentage of the cost of each used section
38 property
placed in service by the taxpayer during such taxable year.
With respect to any section 38 property, qualified
investment means the applicable percentage of the basis (or cost)
of such property. Section
38 property placed in service by the taxpayer during the taxable
year includes the taxpayer's share of the basis (or cost) of
section 38 property placed in service by a partnership in the
taxable year of such partnership ending with or within the
taxpayer's taxable year. In
the case of a shareholder of an electing small business
corporation (as defined in section 1371(b)), or a beneficiary of
an estate or trust, see sections 1.48-5 and 1.48-6, respectively,
for apportionment of the basis (or cost) of section 38 property
placed in service by such corporation, estate, or trust.
For the definitions of new section 38 property and used
section 38 property, see sections 1.48-2 and 1.48-3, respectively.
See section 1.46-5 for special rules for progress
expenditure property.
(2) The basis (or cost) of section 38 property placed in
service during a taxable year shall not be taken into account in
determining qualified investment for such year if such property is
disposed of or otherwise ceases to be section 38 property during
such year, except where section 1.47-3 applies.
Thus, if individual A places in service
during a taxable year section 38 property and later in the
same year sells such property, the basis (or cost) of such
property shall not be taken into account in determining A's
qualified investment. On
the other hand, if A places in service section 38 property during
a taxable year and dies later in the same year, the basis (or
cost) of
such property would be taken into account in computing
qualified investment. Similarly,
if section 38 property is destroyed by fire in the same year in
which it is placed in service and paragraph (h) of this section
applies to reduce the basis (or cost) of replacement property, the
basis (or cost) of the destroyed property would be
taken into account in computing qualified investment.
In order to determine whether section 38 property is
disposed of or otherwise ceases to be section 38 property see
section 1.47-2.
(3) Qualified investment is reduced in the case of property
which is
"public
utility property" (see paragraph (h) of this section), and in
the case of property of organizations to which section 593
applies,
regulated investment companies or real estate investment
trusts
subject to taxation under subchapter M, chapter 1 of the
Code, and
cooperative organizations described in section 1381(a) (see
section
1.46-4).
(b)
APPLICABLE PERCENTAGE. The
applicable percentage to be applied to the basis (or cost) of
property is 33 1/3 percent if the estimated useful life of the
property is 3 years or more but less than 5 years; 66 2/3 percent
if the estimated useful life is 5 years or more but less than 7
years; or 100 percent if the estimated useful life is 7 years or
more. In the case of
property which is not described in section 50, the preceding
sentence shall be applied by substituting "4 years" for
"3 years", "6 years" for "5 years",
and "8 years" for "7 years".
The provisions of this paragraph may be illustrated by the
following example: Example. Corporation
Y acquires and places in service during 1972 the following new and
used section 38 properties:
Estimated
Property
useful life
Basis (or
(years)
cost)
-------------------
-----------
---------
A (new)
4
$60,000
B (new)
10
90,000
C (new)
6
150,000
D (used)
3
30,000
Corporation
Y's qualified investment for 1972 is $220,000 determined
in
the following manner:
Basis (or Applicable
Qualified
Property
cost)
percentage
investment
---------
--------- ----------
----------
A
$60,000
33 1/3
$20,000
B
90,000
100
90,000
C
150,000
66 2/3
100,000
D
30,000
33 1/3
10,000
--------- ----------
----------
Total
220,000
(c)
BASIS OR COST.
(1) The basis of any new section 38 property shall be
determined in
accordance with the general rules for determining the basis
of property. Thus, the
basis of property would generally be its cost
(see section 1012), unreduced by the adjustment to basis
provided by
section 48(g)(1) with respect to property placed in service
before
January 1, 1964, and any other adjustment to basis, such as
that for
depreciation, and would include all items properly included
by the
taxpayer in the depreciable basis of the property, such as
installation and freight costs.
However, for purposes of determining
qualified investment, the basis of new section 38 property
constructed, reconstructed, or erected by the taxpayer
shall not
include any depreciation sustained with respect to any
other property
used in the construction, reconstruction, or erection of
such new
section 38 property. (See
paragraph (b)(4) of section 1.48-1.)
If new
section 38 property is acquired in exchange for cash and
other
property in a transaction described in section 1031 in
which no gain
or loss is recognized, the basis of the newly acquired
property for
purposes of determining qualified investment would be equal
to the
adjusted basis of the other property plus the cash paid.
See section
1.48-4 for the basis of property to a lessee where the
lessor has
elected to treat such lessee as a purchaser.
(2) The cost of any used section 38 property shall be
determined in
accordance with paragraph (b) of section 1.48-3.
However, the
aggregate cost of used section 38 property which may be
taken into
account in any taxable year in computing qualified
investment cannot
exceed $50,000 (see paragraph (c) of section 1.48-3).
(3) For reduction in the basis (or cost) of certain
property which
replaces other property which was destroyed or damaged by
fire,
storm, shipwreck, or other casualty, or which was stolen,
see paragraph
(h) of this section.
(d)
PLACED IN SERVICE.
(1) For purposes of the credit allowed by section 38,
property shall
be considered placed in service in the earlier of the
following
taxable years:
(i) The taxable year in which, under the taxpayer's
depreciation practice, the period for depreciation
with respect to such property begins; or
(ii) The taxable year in which the property is placed in a
condition or state of readiness and availability for a
specifically assigned function, whether in a
trade or business, in the production of income, in a
tax-exempt activity, or in a personal activity.
Thus, if property meets the conditions of subdivision (ii)
of this subparagraph in a taxable year, it shall be considered
placed in service in such year notwithstanding that the period for
depreciation with respect to such property begins in a succeeding
taxable year because, for example, under the taxpayer's
depreciation practice such property is accounted for in a multiple
asset account and depreciation is computed under an
"averaging convention" (see section
1.167(a)-10), or depreciation with respect to such property
is computed
under the completed contract method, the unit of production
method, or the retirement method.
(2) In the case of property acquired by a taxpayer for use
in his
trade or business (or in the production of income), the
following are
examples of cases where property shall be considered in a
condition or state of readiness and availability for a
specifically assigned function:
(i) Parts are acquired and set aside during the
taxable year for use as replacements for a particular
machine (or machines) in order to avoid operational
time loss.
(ii) Operational farm equipment is acquired during the
taxable year and it is not practicable to use such
equipment for its specifically assigned function in
the taxpayer's business of farming until the following
year.
(iii) Equipment is acquired for a specifically
assigned function and is operational but is undergoing
testing to eliminate any defects.
(iv) Reforestation expenditures (as defined in section
1.194-3(c)) are incurred during the taxable year in
connection with qualified timber property (as defined
in section 1.194-3(a)).
However, fruit-bearing trees and vines shall not be
considered in a
condition or state of readiness and availability for a
specifically
assigned function until they have reached an
income-producing stage. Moreover,
materials and parts acquired to be used in the construction
of an item of equipment shall not be considered in a
condition or
state of readiness and availability for a specifically
assigned
function.
(3) Notwithstanding subparagraph (1) of this paragraph,
property with
respect to which an election is made under section 1.48-4
to treat
the lessee as having purchased such property shall be
considered
placed in service by the lessor in the taxable year in
which
possession is transferred to such lessee.
(4)
(i) The credit allowed by section 38 with respect to
any property shall be allowed only
for the first
taxable year in which such property is placed in
service by the taxpayer.
The determination of whether
property is section 38 property in the hands of the
taxpayer shall be made with respect to such first
taxable year. Thus,
if a taxpayer places property in
service in a taxable year and such property does not
qualify as section 38 property (or only a portion of
such property qualifies as section 38 property) in
such year, no credit (or a credit only as to the
portion which qualifies in such year) shall be allowed
to the taxpayer with respect to such property
notwithstanding that such property (or a greater
portion of such property) qualifies as section 38
property in a subsequent taxable year. For example, if
a taxpayer places property in service in 1963 and uses
the property entirely for personal purposes in such
year, but in 1964 begins using the property in a trade
or business, no credit is allowable to the taxpayer
under section 38 with respect to such property.
See
section 1.48-1 for the definition of section 38
property.
(ii) Notwithstanding subdivision (i) of this
subparagraph, if, for the first taxable year in which
property is placed in service by the taxpayer, the
property qualifies as section 38 property but the
basis of the property does not reflect its full cost
for the reason that the total amount to be paid or
incurred by the taxpayer for the property is
indeterminate, a credit shall be allowed to the
taxpayer for such first taxable year with
respect to
so much of the cost as is reflected in the basis of
the property as of the close of such year, and an
additional credit shall be allowed to the taxpayer for
any subsequent taxable year with respect to the
additional cost paid or incurred during such year and
reflected in the basis of the property as of the close
of such year. The estimated useful life used in
computing each additional credit with respect to the
property shall be the same as the estimated useful
life used in computing the credit for the first
taxable year in which the property was placed in
service by the taxpayer.
Assume, for example, that in
1964 X Corporation, a utility company which makes its
return on the basis of a calendar year, enters into an
agreement with Y Corporation, a builder, to construct
certain utility facilities for a housing development
built by Y. Assume further that part of the funds for
the construction of the utility facilities is advanced
by Y under a contract providing that X will repay the
advances over a 10-year period in accordance with an
agreed formula, after which no further amounts will be
repayable by X even though the full amount advanced by
Y has not been repaid. Assuming that the utility
facilities are placed in service in 1964 and qualify
as section 38 property, X is allowed a credit for 1964
with respect to its basis in the utility facilities at
the close of 1964. For
each succeeding taxable year X
is allowed an additional credit with respect to the
increase in the basis of the utility facilities
resulting from the repayments to Y during such year.
(e)
ESTIMATED USEFUL LIFE--
(1)
(i) IN GENERAL. With
respect to assets placed in
service by the taxpayer during any taxable year, for
the purpose of computing qualified investment the
estimated useful lives assigned to all assets which
fall within a particular guideline class (within the
meaning of Revenue Procedure 62-21) may be determined,
at the taxpayer's option, under either subparagraph
(2) or (3) of this paragraph.
Thus, the taxpayer may
assign estimated useful lives to all the assets
falling in one guideline class in accordance with
subparagraph (2) of this paragraph, and may assign
estimated useful lives to all the assets falling
within another guideline class in accordance with
subparagraph (3) of this paragraph.
See subparagraphs
(4) and (5) of this paragraph for determination of
estimated useful lives of assets not subject to
subparagraph (2) or (3) of this paragraph.
(ii) Except as provided in subparagraph (7), this
paragraph shall not apply to property
described in
section 50.
(2) CLASS LIFE SYSTEM.
The taxpayer may assign to each asset falling
within a guideline class, which is placed in service during
the taxable
year, the class life of the taxpayer for the guideline class
for such year as determined under section 4, Part II of
Revenue
Procedure 62-21. The
preceding sentence may be applied to the assets
falling within a guideline class irrespective of whether
the taxpayer uses
single asset accounts or multiple asset accounts in computing
depreciation with respect to such assets and irrespective
of whether
the taxpayer chooses to have his depreciation allowance
with respect
to such assets examined under the rules provided in Revenue
Procedure
62-21.
(3) INDIVIDUAL USEFUL LIFE SYSTEM.
(i) The taxpayer may assign an individual estimated
useful life to each asset falling within a guideline
class which is placed in service during the taxable
year. With
respect to the assets falling within the
guideline class which are placed in single asset
accounts for purposes of computing depreciation, the
estimated useful life used for each asset for that
purpose shall be used in determining qualified
investment. With
respect to the assets falling within
the guideline class which are placed in multiple asset
accounts (including a guideline class account
described
in Revenue Procedure 62-21) for which a
group, classified, or composite rate is used in
computing depreciation (or in single asset accounts
for which an average life rate is used), the
determination of estimated useful life for each asset
in the account shall be made individually on the best
estimate obtainable on the basis of all the facts and
circumstances. The individual estimated useful lives
used for all the assets placed in a multiple asset
account, when viewed together, must be consistent with
the group, classified, or composite life used for the
account for purposes of computing depreciation.
(ii) In determining the individual estimated useful
lives of assets similar in kind contained in a
multiple asset account (or in single asset accounts
for which an average life rate is used), the taxpayer
may (a) assign to each of such assets the average
useful life of such assets used for purposes of
computing depreciation, or (b) assign separate lives
to such assets based on the estimated range of years
taken into consideration in establishing the average
useful life. Thus, for example, if a taxpayer places
nine similar trucks with an average estimated useful
life of 7 years, based on an estimated range of 6 to 8
years (two trucks with a useful life of 6 years, five
trucks with a useful life of 7 years, and two trucks
with a useful life of 8 years), in a multiple asset
account for which a group rate is used in computing
depreciation, he may either assign a useful life of 6
years to two of the trucks, 7 years to five of the
trucks, and 8 years to two of the trucks, or he may
assign the average useful life of the trucks (7 years)
to each of the nine trucks. Likewise, if a taxpayer
places 100
similar telephone poles with an average
useful life of 28 years, based on an estimated range
of 3 to 40 years (two with a useful life of less than
4 years, three with a useful life of 4 to 6 years,
four with a useful life of 6 to 8 years, and 91 with
a
useful life of more than 8 years), in a multiple asset
account for which a group rate is used in computing
depreciation, he may either assign useful lives
corresponding to the estimated range of years of the
poles (i.e., a useful life of less than 4 years to two
of the poles, etc.), or he may assign the average
useful life of the poles (28 years) to each of the
poles.
(iii) [reserved.]
(iv) For purposes of subdivision (ii) of this
subparagraph, assets (other than "mass assets")
shall
not be considered as "similar in kind" in respect
of
other assets unless all such assets are substantially
of the same value, nor shall used section 38 property
be considered as "similar in kind" to new section
38
property.
(4) USEFUL LIFE OF PROPERTY SUBJECT TO AMORTIZATION--
(i) IN GENERAL. In
the case of property with respect
to which amortization in lieu of depreciation is
allowable, the term over which amortization deductions
are taken shall be considered as the estimated useful
life of such property.
(ii) QUALIFIED
TIMBER PROPERTY. In
the case of
qualified timber property (within the meaning of
section 194(c)(1)), the normal growing period of such
property shall be considered its estimated useful
life.
(5) USEFUL LIFE OF PROPERTY SUBJECT TO
CERTAIN METHODS OF
DEPRECIATION. If
a taxpayer is using a method of depreciation, such
as the unit of production or retirement method, which does
not measure
the useful life of the property in terms of years, he must
estimate such useful life in years in order to compute his
qualified
investment.
(6) RECORD REQUIREMENTS.
The taxpayer shall maintain sufficient
records to determine whether section 47 (relating to
certain
dispositions, etc., of section 38 property) applies with
respect to
any asset.
(7) SECTION 50 PROPERTY.
(i) The provisions of this subparagraph and
subparagraphs (4) and (6) of this paragraph shall
apply to property which is described in section 50.
(ii) The estimated useful life of property for
purposes of computing qualified investment shall be
the useful life used or to be used by the taxpayer in
computing the allowance for depreciation with respect
to such property under section 167 for the taxable
year in which the property is placed in service.
Thus,
if property is placed in service by a taxpayer in a
taxable year but the period for depreciation with
respect to such property does not begin until a
succeeding taxable year (see paragraph (d)(1) of this
section), the estimated useful life for purposes of
computing qualified investment must be the estimated
useful life that the taxpayer uses in computing the
allowance for depreciation.
See subdivision (iv) of
this subparagraph for rules for determining the
estimated useful life of property with respect to
which the allowance for depreciation under section
167
is computed under the unit of production method, the
income-forecast method, or any other method which does
not measure the useful life of the property in terms
of years.
(iii)
(a) The estimated useful life of any section
38 property to which an election under section
167(m) applies shall be the asset depreciation
period selected for such property under section
1.167(a)-11(b)(4), whether or not such property
constitutes mass assets (as defined in section
1.47-1(e)(4)).
(b) The estimated useful life of any section
38 property to which an
election under section
167(m) does not apply and which is placed in a
multiple asset account for which a group,
classified, or composite rate is used in
computing depreciation (or in single asset
accounts for which an average life rate is used)
shall be determined individually for each asset
on the best estimate obtainable on the basis of
all the facts and circumstances. The individual
estimated useful life for each asset placed in a
multiple asset account (including a mass asset
account) must be the same as the useful life of
such asset used in determining the group,
classified, or composite life for the account for
purposes of computing depreciation.
The
individual estimated useful lives of assets
similar in kind may be determined in accordance
with subdivisions (ii) and (iv) of subparagraph
(3) of this paragraph.
In the case of mass
assets, subdivision (iii) of subparagraph (3) of
this paragraph shall apply.
(f)
PARTNERSHIPS--
(1) IN GENERAL. In
the case of a partnership, each partner shall take
into account separately, for his taxable year with or
within which
the partnership taxable year ends, his share of the basis
of partnership
new section 38 property and his share of the cost of
partnership used section 38 property placed in service by
the partnership
during such partnership taxable year.
Each partner shall
be treated as the taxpayer with respect to his share of the
basis of
partnership new section 38 property and his share of the
cost of
partnership used section 38 property.
The estimated useful life to
each partner of such property shall be deemed to be the
estimated
useful life of the property in the hands of the
partnership. Partnership
section 38 property shall not, by reason of each partner
taking his share of the basis or cost into account, lose
its character
as either new section 38 property or used section 38
property, as the case may be.
For computation of each partner's
qualified investment for the energy credit for a qualified
intercity
bus, see section 1.48-9(q)(9)(iv).
(2) DETERMINATION OF PARTNER'S SHARE.
(i) Each partner's share of the basis (or cost) of any
section 38 property shall be determined
in accordance
with the ratio in which the partners divide the
general profits of the partnership (that is, the
taxable income of the partnership as described in
section 702(a)(9)) regardless of whether the
partnership has a profit or a loss for its taxable
year during which the section 38 property is placed in
service. However,
if the ratio in which the partners
divide the general profits of the partnership changes
during the taxable year of the partnership, the ratio
effective for the date on which the property is placed
in service shall apply.
(ii) Notwithstanding subdivision (i) of this
subparagraph, if all related items of
income, gain,
loss, and deduction with respect to any item of
partnership section 38 property are specially
allocated in the same manner and if such special
allocation is recognized under section 704(a) and (b)
and paragraph (b) of section 1.704-1, then each
partner's share of the basis of such item of new
section 38 property or the cost of such item of used
section 38 property shall be determined by reference
to such special allocation effective for the date on
which the property is placed in service.
(iii) Notwithstanding subdivisions (i) and (ii) of
this subparagraph, if with respect to a partnership's
taxable year the conditions set forth in (a) through
(c) of this subdivision are satisfied with respect to
a partner, then such partner shall not take into
account the basis (or cost) of any section 38 property
placed in service by the partnership during such
taxable year. The
conditions referred to in the
preceding sentence are:
(a) Such partner's interest in the general
profits of the partnership during the taxable
year is 5 percent or less;
(b) Under the partnership agreement, such
partner will retire from the partnership during
the taxable year or within 7 years after the end
of
such year; and
(c) The partnership agreement provides that
the basis (or cost) of section 38 property placed
in service by the partnership during the taxable
year shall not be taken into account by a partner
described in (a) and (b) of this subdivision.
Any basis (or cost) of section 38 property which is
not taken into account by a partner because of the
provisions of this subdivision shall be taken into
account by the other partners in accordance with
subdivision (i) of this subparagraph.
(3) EXAMPLES. This
paragraph may be illustrated by the following
examples:
EXAMPLE 1. Partnership
ABCD acquires and places in
service on
January
1, 1962
,
an item of new section 38
property, and acquires and places in service on
September
1, 1962
,
another item of new section 38
property. The
ABCD partnership and each of its
partners reports income on the basis of the calendar
year. Partners
A, B, C, and D share partnership
profits equally. Each
partner's share of the basis of
each new partnership section 38 property is 25
percent.
EXAMPLE 2. Assume
the same facts as in example 1 and
the following additional facts: A dies on
June
30,
1962
,
and B purchases A's interest as of such date.
Each partner's share of the profits from January 1 to
June 30 is 25 percent.
From July 1 to December 31, B's
share of the profits is 50 percent, and C and D's
share of the profits is 25 percent each.
For A's last
taxable year (January 1 to June 30, 1962), A shall take
into account 25 percent of the basis of the
section 38 property placed in service on January 1.
B
shall take into account 25 percent of the basis of the
section 38 property placed in service on January 1 and
50 percent of the
basis of the section 38 property
placed in service on September 1, C and D shall each
take into account 25 percent of the basis of each new
section 38 property placed in service by the
partnership in 1962.
EXAMPLE 3. Partnership
MR is engaged in the business
of renting soda fountain equipment and icemakers to
restaurants. The
partnership makes no elections under
section 1.48-4 to treat its lessees as having
purchased such property.
Under the terms of the
partnership agreement, the income, gain or loss on
disposition, depreciation, and other deductions
attributable to the icemakers are specially allocated
70 percent to partner M and 30 percent to partner R.
In all other respects M and R share profits and losses
equally. If the
special allocation with respect to the
icemakers is recognized under section 704(a) and (b)
and paragraph (b) of section 1.704-1, the basis (or
cost) of the icemakers which qualify as partnership
section 38 property shall be taken into account 70
percent by M and 30 percent by R.
The basis (or cost)
of partnership section 38 property not subject to the
special allocation shall be taken into account equally
by M and R.
EXAMPLE 4. Assume
the same facts as in example 3 and
the following additional facts: During November 1962,
the partnership, which reports its income on the basis
of a fiscal year ending May 31, acquires and places in
service two items which qualify as new section 38
property, an icemaker and a soda fountain.
The
icemaker has an
estimated useful life of 8 years to
the partnership and a basis of $1,000.
The soda
fountain has an estimated useful life of 6 years to
the partnership and a basis of $600.
Partner M also
owns and operates a business as a sole proprietorship
and reports income on the calendar year basis.
During
1963, M acquires and places in service in his sole
proprietorship a machine which qualifies as new
section 38 property. This
machine has an estimated
useful life of 4 years and a basis of $300.
M owns no
interest in any other partnerships, electing small
business corporations, estates, or trusts.
M's total
qualified investment for 1963 is $1,000, computed as
follows:
(Table 1)
Estimated
M's share of
Property
useful life
Basis
basis
----------
-----------
------
------------
Partnership MR
Icemaker
8
$1,000
$700
Soda fountain
6
600
300
Sole proprietorship
Machine
4
300
----
Total
----
----
----
---------------------------------------------------------
(Table 2)
Applicable
Qualified
Property
percentage
investment
----------
------------
----------
Partnership MR
Icemaker
100
$700
Soda
fountain
66 2/3
200
Sole proprietorship
Machine
33 1/3
100
Total
-----
1,000
(g)
PUBLIC UTILITY PROPERTY--
(1) IN GENERAL--
(i) SCOPE OF PARAGRAPH.
This paragraph only applies to
property described in section 50.
For rules relating
to public utility property not described in section
50, see 26 CFR Part 1, section 1.46-3(g) (as revised
April
1, 1977
).
This paragraph does not reflect
amendments to section 46(c) made after enactment of
the Revenue Act of 1971.
(ii) AMOUNT OF QUALIFIED INVESTMENT.
A taxpayer's
qualified investment in section 38 property that is
public utility property is 4/7 of the amount otherwise
determined under this section.
(2) MEANING AND USES OF CERTAIN TERMS.
For purposes of this paragraph-
-
(i) PUBLIC UTILITY PROPERTY.
"Public utility property"
is property used by a taxpayer predominantly in a
trade or business that is a public utility activity
and property that is nonregulated communication
property.
(ii) PUBLIC UTILITY ACTIVITY.
A "public utility
activity" is any activity in which the goods or
services described in section 46(c)(3)(B)(i), (ii),
or (iii) are furnished or sold at regulated rates.
If
property is used by a taxpayer both in a public
utility activity and in another activity, the
characterization of such property is based on the
predominant use of such property during the taxable
year in which it is placed in service.
(iii) REGULATED RATES.
A taxpayer's rates are
"regulated" if they are established or approved
on a
rate-of-return basis. Rates
regulated on a rate-of-
return basis are
an authorization to collect revenues
that cover the taxpayer's cost of providing goods or
services, including a fair return on the taxpayer's
investment in providing such goods or services, where
the taxpayer's costs and investment
are determined by
use of a uniform system of accounts prescribed by the
regulatory body. A
taxpayer's rates are not
"regulated" if they are established or approved
on the
basis of maintaining competition within an industry,
insuring adequate service to customers of an industry,
or charging "reasonable" rates within an industry
since the taxpayer is not authorized to collect
revenues based on the taxpayer's cost of providing
goods or services. Rates
are considered to have been
"established or approved" if a schedule of rates
is
filed with a regulatory body that has the power to
approve such rates, even though the regulatory body
takes no action on the filed schedule or generally
leaves undisturbed rates filed by the taxpayer.
(iv) NONREGULATED COMMUNICATION PROPERTY.
"Nonregulated communication property" is property
that
is clearly the same type of property (and is used by
the taxpayer predominantly for the same type of
communication purposes) as communication property, but
it is used by the taxpayer predominantly in a trade or
business that is not a public utility activity.
For
purposes of this paragraph (g)(2)(iv), of this
section, communication property is property ordinarily
used for communication purposes by persons who provide
regulated
telephone or microwave communication
services described in section 46(c)(3)(B)(iii).
The
determination of whether property is clearly of this
same type and is used predominantly for these same
communication purposes as communication property is
made on the basis of the facts and circumstances of
each particular case, including the current state of
technology in the communications industry and the
range and type of services permitted or required to be
provided by the regulated telephone and microwave
communication industry. As of 1978, wires or cables
used predominantly to distribute to subscribers the
signals of one or more television broadcast stations
or cablecast stations (such as in a CATV system) are
not used for the same type of communication purposes
as communication property.
Communication property
includes microwave transmission equipment, private
communication equipment (other than land mobile radio
equipment for which the operator must obtain a license
from the Federal Communications Commission), private
switchboard (PBX) equipment, communications terminal
equipment connected to telephone networks, data
transmission equipment, and communications satellites.
Communication property does not include (as of 1978)
computer terminals or facsimile reproduction equipment
that is connected to telephone lines to transmit data.
It also does not include office furniture stands for
communication property, tools, repair vehicles, and
similar property, even if such property is exclusively
used in providing regulated telephone or microwave
communication services.
(3) LEASED PROPERTY. Public
utility property includes property which
is leased to others by a taxpayer where the leasing of such
property
is part of the lessor's public utility activity.
Thus, such leased
property is public utility property even though the lessee
uses such
property in an activity which is not a public utility
activity, and
whether or not the lessor of such property makes a valid
election
under section 1.48-4 to treat the lessee as having
purchased such
property for purposes of the credit allowed by section 38.
Property
leased by a lessor, where the leasing is not part of a
public utility activity,
to a lessee who uses such property predominantly in a
public utility activity is public utility property for
purposes of
computing the lessor's or lessee's qualified investment
with respect
to such property.
(4) PROPERTY USED IN BOTH THE PRODUCTION OR TRANSMISSION OF
GAS AND
THE LOCAL DISTRIBUTION OF GAS.
(i) With respect to properties of a taxpayer engaged
in both the production or transmission of gas and the
local distribution of gas, section 38 property shall
be considered as used predominantly in the trade or
business of the furnishing or sale of gas through a
local distribution system if expenditures for such
property are chargeable to any of the following
accounts under either the uniform system of accounts
prescribed for natural gas companies (class A and
class B) by the Federal Power Commission, effective
January 1, 1961, or the uniform system of accounts for
class A and B gas utilities adopted in 1958 by the
National Association of Railroad and Utility
Commissioners (or would be chargeable to any of the
following accounts if the taxpayer used either of such
systems):
(a) Accounts 360 through 363, inclusive
(Local Storage Plant), or
(b) Accounts 374 through 387, inclusive
(Distribution Plant).
(ii) If expenditures for section 38 property are
chargeable (or would be chargeable) to any of the
following accounts under either of the systems named
in subdivision (i) of this subparagraph, the
determination of whether or not such property is used
predominantly in the trade or business of the
furnishing or sale of gas through a local distribution
system shall be made under all the facts and
circumstances relating to the actual use of such
property in the year such property is placed in
service:
(a) Accounts 304 through 320, inclusive
(Manufactured Gas Production Plant), or
(b) Accounts 389 through 399, inclusive
(General Plant). For
example, if an office machine is used 55
percent of the time for billing customers of the
taxpayer's local distribution system in the year
in which it is placed in service, such office
machine shall be considered as used predominantly
in the trade or business of the furnishing or
sale of gas through a local distribution system.
(5) CERTAIN SUBMARINE CABLE PROPERTY.
In the case of any interest in
a submarine cable circuit which is property described in
section 50
used to furnish telegraph service between the United States
and a
point outside the United States of a taxpayer engaged in
furnishing
international telegraph service (if the rates for such
furnishing
have been established or approved by a governmental unit,
agency,
instrumentality, commission, or similar body described in
subparagraph (2) of this paragraph), the qualified
investment shall
not exceed the qualified investment attributable to so much
of the
interest of the taxpayer in the circuit as does not exceed
50 percent
of all interests in the circuit.
(h)
CERTAIN REPLACEMENT PROPERTY.
(1)
(i) If section 38 property is placed in service by the
taxpayer to replace property (whether or not section
38 property) similar or related in service or use,
which was destroyed or damaged before August 16, 1971,
by fire, storm, shipwreck, or other casualty, or was
stolen before such date, then for purposes of
paragraph (a) of this section the basis (or cost) of
the replacement section 38 property otherwise
determined under paragraph (c) of this section shall
be reduced by an amount equal to the lesser of--
(a) The amount of money, or the fair market
value of other property, received as
compensation, by insurance or otherwise, for the
property which was destroyed, damaged, or stolen,
or
(b) The adjusted basis of such destroyed,
damaged, or stolen property (immediately before
such destruction, damage, or theft).
(ii) For purposes of subdivision (i) of this
subparagraph--
(a) Section 38 property placed in service
after the due date (including extensions of time
thereof) for filing the taxpayer's income tax
return for the taxable year in which the other
property was destroyed, damaged, or stolen shall
not be considered as replacement section 38
property, and
(b) If the property which is destroyed,
damaged, or stolen, is leased property, no other
leased property shall be considered as
replacement property with respect to the property
destroyed, damaged, or stolen, in any case in
which the lessor makes or made an election under
section 48(d) (relating to election with respect
to certain leased property) with respect to
either the property destroyed, damaged, or
stolen, the other leased property, or both.
(2) Subparagraph (1) of this paragraph shall not apply to
replacement
property if the reduction, under such subparagraph (1), in
the basis
(or cost) of such replacement property is less than the
excess of--
(i) The qualified investment with respect to the
destroyed, damaged, or stolen property, over
(ii) The recomputed qualified investment with respect
to such property (determined under the principles of
paragraph (a) of section 1.47-1).
(3) This paragraph may be illustrated by the following
examples:
EXAMPLE 1.
(i) A acquired and placed in service on
January 1, 1962, machine No. 1, which qualified
as section 38 property, with a basis of $30,000
and an estimated useful life of 6 years.
The
amount of qualified investment with respect to
such machine was $20,000.
On
January
2, 1963
,
machine No. 1 is completely destroyed by fire.
On
January
1, 1963
,
the adjusted basis of such
machine in A's hands is $24,500.
On November 1,
1963, A receives $23,000 in insurance proceeds as
compensation for the destroyed machine, and on
December 15, 1963, A acquires and places in
service machine No. 2, which qualifies as section
38 property, with a basis of $41,000 and an
estimated useful life of 6 years to replace
machine No. 1.
(ii) Under subparagraph (1) of this
paragraph, the $41,000 basis of machine No. 2 is
reduced, for purposes of paragraph (a) of this
section, by $23,000 (that is, the $23,000
insurance proceeds since such amount is less than
the $24,500 adjusted basis of machine No. 1
immediately before it was destroyed) to $18,000
since such reduction (that is, $23,000) is
greater than the $20,000 reduction in qualified
investment which would be made if paragraph (a)
of section 1.47-1 were to apply to machine No. 1
($20,000 qualified investment less zero
recomputed qualified investment).
EXAMPLE 2.
(i) The facts are the same as in example 1
except that on
November 1, 1963
,
A receives only
$19,000 in insurance proceeds as compensation for
the destroyed machine.
(ii) The $41,000 basis of machine No. 2 is
not reduced, for purposes of paragraph (a) of
this section, under this paragraph since the
$19,000 reduction which would have been made
under this paragraph had it applied (that is, the
$19,000 insurance proceeds since such amount is
less than the $24,500 adjusted basis of machine
No. 1 immediately before it was destroyed) is
less than the $20,000 reduction in qualified
investment which is made since paragraph (a) of
section 1.47-1 applies to machine No. 1 ($20,000
qualified investment less zero recomputed
qualified investment).
(Secs.
194 (94 Stat. 1989; 26 U.S.C. 194) and 7805 (68A Stat. 917, 26
U.S.C. 7805) of the Internal Revenue Code of 1954; secs. 38(b) (76
Stat. 963, 26 U.S.C. 38(b)), 48(l)(16) (94 Stat. 264, 26 U.S.C.
48(l)(16)), and 7805 (68A Stat. 917, 26 U.S.C. 7805)
[T.D.
6731, 29 FR 6068, May 8, 1964, as amended by T.D. 6931, 32 FR
14026, Oct. 10, 1967; T.D. 7203, 37 FR 17125, Aug. 25, 1972; T.D.
7602, 44 FR 17667, Mar. 23, 1979; T.D. 7927, 48 FR 55849, Dec. 16,
1983; T.D. 7982, 49 FR 39541, Oct. 9, 1984; T.D. 8183, 53 FR 6618,
Mar. 2, 1988; T.D. 8474, 58 FR 25556-25558, Apr. 27, 1993.]
|
 |
pro1040
© 
- Help To Keep Your Life In Balance