Federal Register / Vol. 72, No. 40 / Thursday, March 1, 2007 / Rules and Regulations 9245 

(viii) In the absence of coccidiosis in 

broiler chickens the use of monensin 

with no withdrawal period may limit 

feed intake resulting in reduced weight 

gain. 

(9) * * * 

(iv) Chickens: See paragraphs (d)(8)(i) 

through (d)(8)(vi), and (d)(8)(viii) of this 

section. 

(v) Turkeys: See paragraphs (d)(8)(i), 

(d)(8)(ii), (d)(8)(iii), and (d)(8)(vii) of this 

section. 

(vi) Quail: See paragraphs (d)(8)(i), 

(d)(8)(ii), and (d)(8)(iii) of this section. 

(10) * * * 

(iv) Chickens: See paragraphs (d)(8)(i), 

(d)(8)(iv), (d)(8)(v), (d)(8)(vi), and 

(d)(8)(viii) of this section. 

(v) Turkeys: See paragraphs (d)(8)(i) 

and (d)(8)(vii) of this section. 

(vi) Quail: See paragraph (d)(8)(i) of 

this section. 

* * * * * 

Dated: February 12, 2007. 

Steven D. Vaughn, 

Director, Office of New Animal Drug 

Evaluation, Center for Veterinary Medicine. 

[FR Doc. E7–3621 Filed 2–28–07; 8:45 am] 

BILLING CODE 4160–01–S 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Food and Drug Administration 

21 CFR Part 558 

New Animal Drugs For Use in Animal 

Feeds; Zilpaterol 

AGENCY: Food and Drug Administration, 

HHS. 

ACTION: Final rule. 

SUMMARY: The Food and Drug 

Administration (FDA) is amending the 

animal drug regulations to reflect 

approval of a supplemental new animal 

drug application (NADA) filed by 

Intervet Inc. The supplemental NADA 

provides for the removal of a caution 

statement against the formulation of 

pelleted feeds from labeling of zilpaterol 

hydrochloride Type A medicated article 

and Type B and Type C medicated 

feeds. 

DATES: This rule is effective March 1, 

2007. 

FOR FURTHER INFORMATION CONTACT: 

Charles J. Andres, Center for Veterinary 

Medicine (HFV–120), Food and Drug 

Administration, 7500 Standish Pl., 

Rockville, MD 20855, 301 827–1600, email: charles.andres@.fda.hhs.gov. 

SUPPLEMENTARY INFORMATION: Intervet 

Inc., P.O. Box 318, 29160 Intervet Ln., 

Millsboro, DE 19966, filed a supplement 

to NADA 141–258 for use of ZILMAX 

(zilpaterol hydrochloride 4.8%) Type A 

medicated article to formulate Type B 

and Type C medicated cattle feeds. The 

supplemental NADA provides for the 

removal of a caution statement against 

the formulation of pelleted feeds from 

labeling. The supplemental NADA is 

approved as of January 29, 2007, and the 

regulations are amended in 21 CFR 

558.665 to reflect the approval. 

Approval of this supplemental NADA 

did not require review of additional 

safety or effectiveness data or 

information. Therefore, a freedom of 

information summary is not required. 

FDA has determined under 21 CFR 

25.33(a)(1) that this action is of a type 

that does not individually or 

cumulatively have a significant effect on 

the human environment. Therefore, 

neither an environmental assessment 

nor an environmental impact statement 

is required. 

This rule does not meet the definition 

of ‘‘rule’’ in 5 U.S.C. 804(3)(A) because 

it is a rule of ‘‘particular applicability.’’

Therefore, it is not subject to the 

congressional review requirements in 5 

U.S.C. 801–808. 

List of Subjects in 21 CFR Part 558 

Animal drugs, Animal feeds. 

■ Therefore, under the Federal Food, 

Drug, and Cosmetic Act and under 

authority delegated to the Commissioner 

of Food and Drugs and redelegated to 

the Center for Veterinary Medicine, 21 

CFR part 558 is amended as follows: 

PART 558—NEW ANIMAL DRUGS FOR 

USE IN ANIMAL FEEDS 

■ 1. The authority citation for 21 CFR 

part 558 continues to read as follows: 

Authority: 21 U.S.C. 360b, 371. 

§ 558.665 [Amended] 

■ 2. Remove paragraph (d)(3) of 

§ 558.665. 

Dated: February 12, 2007. 

Steven D. Vaughn, 

Director, Office of New Animal Drug 

Evaluation, Center for Veterinary Medicine. 

[FR Doc. E7–3615 Filed 2–28–07; 8:45 am] 

BILLING CODE 4160–01–S 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9314] 

RIN 1545–BF37 

Depreciation of MACRS Property That 

Is Acquired in a Like-Kind Exchange or 

as a Result of an Involuntary 

Conversion 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations and removal of 

temporary regulations. 

SUMMARY: This document contains final 

regulations relating to the depreciation 

of property subject to the accelerated 

cost recovery system under section 168 

of the Internal Revenue Code (MACRS 

property). Specifically, these final 

regulations provide guidance on how to 

depreciate MACRS property acquired in 

a like-kind exchange under section 1031 

or as a result of an involuntary 

conversion under section 1033 when 

both the acquired and relinquished 

property are subject to MACRS in the 

hands of the acquiring taxpayer. These 

final regulations will affect taxpayers 

involved in a like-kind exchange under 

section 1031 or an involuntary 

conversion under section 1033. The 

corresponding temporary regulations are 

removed. 

DATES: Effective Dates: These 

regulations are effective on February 26, 

2007. 

Applicability Dates: For dates of 

applicability, see §§ 1.168(a)-1(b), 

1.168(b)-1(b), 1.168(d)-1(d)(3), 1.168(i)- 

1(l), 1.168(i)-6(k), and 1.168(k)- 

1(g)(3)(ii). 

FOR FURTHER INFORMATION CONTACT: 

Patrick S. Kirwan, (202) 622–3110 (not 

a toll-free number). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains amendments 

to 26 CFR part 1 under section 168 of 

the Internal Revenue Code (Code). 

Section 168 provides the depreciation 

deduction for tangible property 

generally placed in service after 

December 31, 1986. 

On March 1, 2004, the IRS and the 

Treasury Department published in the 

Federal Register (69 FR 9529) 

temporary regulations (TD 9115) 

relating to the depreciation allowable 

for tangible property of a character 

subject to the allowance for depreciation 

provided in section 167(a) that is 

generally placed in service after 


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9246 Federal Register / Vol. 72, No. 40 / Thursday, March 1, 2007 / Rules and Regulations 

December 31, 1986, and is subject to 

section 168 (MACRS property) that is 

acquired in a like-kind exchange or as 

a result of involuntary conversion. On 

the same date the IRS published a notice 

of proposed rulemaking related to this 

topic in the Federal Register (69 FR 

9560). No public hearing on the 

regulations was requested or held. 

Several written comments to the notice 

of proposed rulemaking were received. 

After consideration of all the comments 

received, the proposed regulations are 

adopted as amended by this Treasury 

decision, and the corresponding 

temporary regulations are removed. The 

revisions to the proposed regulations are 

discussed in this preamble. Unless 

otherwise specifically stated, references 

to the temporary regulations are to TD 

9115. 

General Overview 

Section 167 allows as a depreciation 

deduction a reasonable allowance for 

the exhaustion, wear, and tear of 

property used in a trade or business or 

held for the production of income. The 

depreciation allowable for depreciable 

tangible property placed in service after 

1986 generally is determined under 

section 168. Section 1001 generally 

provides for the recognition of gain or 

loss on the sale or exchange of property. 

Under section 1031(a)(1), no gain or loss 

is recognized on an exchange of 

property held for productive use in a 

trade or business or for investment if the 

property is exchanged solely for 

property of like kind that is to be held 

either for productive use in a trade or 

business or for investment. Section 

1031(b) provides that if an exchange 

would be within the provision of 

section 1031(a) were it not for the fact 

that the property received in the 

exchange consists not only of property 

permitted to be received in such an 

exchange, but also of other property or 

money, then the gain, if any, to the 

recipient shall be recognized, but in an 

amount not in excess of the sum of such 

money and the fair market value of such 

other property. Under section 1031(c), 

no loss from a transaction that also 

involves other property or money is 

recognized. Under section 1031(d), the 

basis of property acquired in an 

exchange described in section 1031 is 

the same as that of the property 

exchanged, decreased by the amount of 

any money received by the taxpayer and 

increased by the amount of gain (or 

decreased by the amount of loss) that 

was recognized on such exchange. 

Section 1033(a)(1) provides that if 

property (as a result of its destruction in 

whole or in part, theft, seizure, or 

requisition or condemnation or threat or 

imminence thereof) is compulsorily or 

involuntarily converted into property 

similar or related in service or use to the 

property so converted, no gain is 

recognized. Under section 1033(b)(1), 

the basis of property acquired by the 

taxpayer in such a transaction is the 

basis of the converted property. Under 

section 1033(a)(2)(A), if property is 

compulsorily or involuntarily converted 

into money or into property not similar 

or related in service or use to the 

converted property, and, within the 

time frame described in section 

1033(a)(2)(B), the taxpayer purchases 

other property that is related in service 

or use to the converted property or 

purchases stock in the acquisition of 

control of a corporation owning such 

property, then the taxpayer may elect to 

recognize gain only to the extent that 

the amount realized upon such 

conversion exceeds the cost of such 

other property or stock. Under section 

1033(b)(2), if such an election is made, 

the basis of the replacement property 

acquired by the taxpayer generally is the 

cost of that property decreased by any 

gain not recognized by reason of section 

1033(a)(2). 

Summary of Comments and 

Explanation of Provisions 

Scope 

In general, the final regulations adopt 

the rules outlined in the proposed and 

temporary regulations with the addition 

of some clarifying language and 

examples provided in response to 

comments. The temporary regulations 

provided guidance as to how to 

determine the annual depreciation 

allowance under section 168 for 

replacement property acquired in a likekind exchange or involuntary 

conversion. However, the temporary 

regulations did not apply to a like-kind 

exchange or involuntary conversion if 

the allowance for depreciation of either 

the relinquished or replacement 

property is computed under a 

depreciation system other than section 

168 (MACRS), or for which a taxpayer 

made a valid election under section 

168(f)(1) to exclude it from the 

application of MACRS. A commentator 

requested that the final regulations 

apply to all property acquired in a likekind exchange or involuntary 

conversion. However, it is anticipated 

that the vast majority of like-kind 

exchanges and involuntary conversions 

occurring after the effective date of the 

final regulations will involve the 

exchange of MACRS property. In 

addition, there are differences between 

MACRS and other depreciation systems 

which would require the creation of 

additional rules which would only 

apply in a limited number of 

circumstances. Furthermore, certain 

types of property are statutorily 

excluded from being treated as MACRS 

property. Therefore, the final 

regulations do not adopt the 

commentator’s suggestion. However, the 

final regulations allow a taxpayer to 

elect to treat the sum of the exchanged 

basis and excess basis of the 

replacement property as MACRS 

property that is placed in service at the 

time of replacement if the tangible 

depreciable property acquired by a 

taxpayer in a like-kind exchange or 

involuntary conversion replaces 

tangible depreciable property for which 

the taxpayer made a valid election 

under section 168(f)(1) to exclude it 

from the application of MACRS. For 

example, a taxpayer that exchanges a 

machine depreciated under the unit of 

production method for a used machine 

may depreciate under MACRS the sum 

of the exchanged basis and excess basis 

of the used machine (replacement 

property) as a machine placed in service 

at the time of replacement. 

Optional Depreciation Tables 

For taxpayers who wish to use the 

optional depreciation tables to 

determine the depreciation allowances 

for the replacement MACRS property 

instead of the formulas (for example, see 

section 6 of Rev. Proc. 87–57 (1987–2 

CB 687, 692)), the final regulations 

provide guidance on choosing the 

applicable optional table as well as how 

to modify the calculation for computing 

the depreciation allowances for the 

replacement MACRS property. A 

commentator noted that under the 

temporary regulations depreciation 

computed using the optional tables 

could be different than the depreciation 

computed using the formulas and 

suggested adopting a different 

transaction coefficient. The IRS and 

Treasury recognize that use of the 

optional depreciation tables may result 

in a different computation of 

depreciation. Nonetheless, the optional 

depreciation tables are intended to 

provide an alternative method of 

calculating depreciation for taxpayers. 

Furthermore, the transaction coefficient 

formula provided in the temporary 

regulations is consistent with 

transaction coefficient formulas 

provided in other depreciation 

guidance. Therefore, the final 

regulations retain the rules provided in 

the temporary regulations. 

Depreciation Convention Provisions 

Several comments were received 

about the application of the 


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Federal Register / Vol. 72, No. 40 / Thursday, March 1, 2007 / Rules and Regulations 9247 

depreciation convention provisions 

under the temporary regulations. In 

response to these comments, several 

changes were made in the final 

regulations. Section 1.168(i)–

6(c)(5)(ii)(A) was added in order to 

provide an explanation of the applicable 

convention separate from the 

explanation of the rule for determining 

the remaining recovery period for the 

replacement MACRS property. Section 

1.168(i)–6(c)(4)(v) specifically addresses 

the convention that applies to the 

exchanged basis when the year of 

replacement is after the year of 

disposition and the relinquished 

MACRS property was placed in service 

in the year of disposition. Section 

1.168(i)–6(c)(5)(i)(B) of the final 

regulations contains a new rule that 

provides that if, using the convention 

that applies to the relinquished MACRS 

property, the remaining recovery period 

of the relinquished MACRS property at 

the beginning of the year of disposition 

is less than the number of months 

between the first of that year and the 

time of disposition, the entire basis in 

the relinquished MACRS property is 

deductible in the year of disposition and 

the exchanged basis is zero. In light of 

this new rule, Example 4 of § 1.168(i)–

6T(c)(6) of the temporary regulations 

has been replaced by Example 5 of 

§ 1.168(i)–6(c)(6). 

Deferred Exchanges 

The temporary regulations did not 

permit a taxpayer to take depreciation 

on relinquished MACRS property 

during the period between the 

disposition of the relinquished MACRS 

property and the acquisition of the 

replacement MACRS property. A 

comment was received which noted that 

under the half-year convention if 

relinquished MACRS property is 

disposed of in year 1 and the 

replacement MACRS property is not 

acquired until year 2, the taxpayer 

would only be entitled to deduct a halfyear of depreciation in each year. The 

IRS and Treasury Department recognize 

that this result could occur under the 

convention rules. However, similar 

results occur when property is disposed 

of and replaced in a transaction to 

which section 1031 or section 1033 do 

not apply. In addition, the IRS and 

Treasury Department believe that a 

taxpayer cannot depreciate property the 

taxpayer does not own. Therefore, the 

final regulations retain the rule 

provided in the temporary regulations 

with respect to this issue. The final 

regulations reserve on providing 

specific guidance as to whether an 

intermediary (such as an exchange 

accommodation titleholder) is entitled 

to depreciation. 

Acquisition Prior to Disposition for an 

Involuntary Conversion 

The temporary regulations allowed 

taxpayers to begin depreciating 

replacement property upon acquisition 

even if the acquisition occurs prior the 

disposition of the relinquished property 

if the replacement property is acquired 

to meet the requirements of section 

1033(a)(2)(B) (acquisition under threat 

of condemnation). However, the 

temporary regulations also required 

taxpayers to include in taxable income 

any excess depreciation allowable on 

the unadjusted depreciable basis of the 

replacement MACRS property over the 

depreciation allowable on the excess 

basis of the replacement MACRS 

property from the date the replacement 

MACRS property was placed in service 

by the taxpayer to the time of 

disposition of the relinquished MACRS 

property. A comment was received 

suggesting that taxpayers be permitted 

to reduce the exchanged basis of the 

replacement property by the excess 

depreciation rather than requiring a 

taxpayer to recognize the excess 

depreciation as taxable income. This 

suggestion was not adopted in the final 

regulations because it would have the 

effect of inappropriately accelerating 

depreciation deductions for the 

replacement property. 

Exchanges of Multiple Properties 

The determination of the basis of 

property acquired in a like-kind 

exchange involving multiple properties 

is described in § 1.1031(j)–1 and the 

determination of the basis of multiple 

properties acquired as a result of an 

involuntary conversion is described in 

§ 1.1033(b)–1. Commentators requested 

examples to show how the temporary 

regulations apply to the depreciation 

treatment of a like-kind exchange or an 

involuntary conversion involving 

multiple properties. Other 

commentators suggested that taxpayers 

be permitted to use any reasonable, 

consistent method of allocating basis 

among the properties. The IRS and 

Treasury Department believe that these 

comments concern the allocation of 

basis principles under sections 1031 

and 1033, rather than the depreciation 

rules under section 168. Once basis in 

property is determined or allocated 

under section 1031 or section 1033, 

these final regulations would then apply 

for determining the depreciation 

allowable with respect to such basis. 

The IRS and Treasury Department 

believe that issues related to allocation 

of basis among multiple properties 

involved in like-kind exchanges or 

involuntary conversions for purposes of 

depreciation are beyond the scope of the 

final regulations. Therefore the final 

regulations do not address these issues. 

However, the IRS and Treasury 

Department intend to invite interested 

parties to submit written comments 

regarding whether additional published 

guidance is needed in this area, and to 

invite written comments that 

specifically propose or address possible 

resolutions to these issues. 

Transactions Involving Nondepreciable 

Property 

A commentator requested guidance as 

to how depreciation is calculated if the 

relinquished property was only partially 

used for business purposes. In response 

to this comment, the final regulations 

provide an example to show how 

depreciation is calculated on 

replacement property received in 

exchange for property that was used 

only partially for business purposes (see 

Example 2 in § 1.168(i)–6(d)(3)(iii)). 

General Asset Accounts 

Under the temporary regulations, 

general asset account treatment 

terminates for the relinquished MACRS 

property as of the first day of the year 

of disposition. Because this rule would 

require taxpayers to track each property 

in a general asset account, the IRS and 

Treasury Department requested 

comments on alternative methods to 

account for a like-kind exchange or 

involuntary conversion involving 

MACRS property contained in a general 

asset account when the replacement 

MACRS property has a longer recovery 

period or less accelerated depreciation 

method than the relinquished MACRS 

property or when the basis of the 

general asset account would change as 

a result of the like-kind exchange or 

involuntary conversion. No comments 

were received on this rule and no 

alternatives were suggested. Therefore, 

the regulations are adopted as proposed. 

Effective Date 

These final regulations generally 

apply to a like-kind exchange or an 

involuntary conversion of MACRS 

property for which the time of 

disposition and the time of replacement 

both occur after February 27, 2004. For 

a like-kind exchange or an involuntary 

conversion of MACRS property for 

which the time of disposition, the time 

of replacement, or both occur on or 

before February 27, 2004, a taxpayer 

may apply these final regulations or rely 

on prior guidance issued by the IRS. 


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9248 Federal Register / Vol. 72, No. 40 / Thursday, March 1, 2007 / Rules and Regulations 

Special Analyses 

It has been determined that this 

Treasury decision is not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

also has been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) does not apply 

to these regulations and, because these 

regulations do not impose a collection 

of information requirement on small 

entities, the Regulatory Flexibility Act 

(5 U.S.C. chapter 6) does not apply. 

Therefore, a Regulatory Flexibility 

Analysis is not required. Pursuant to 

section 7805(f) of the Code, the notice 

of proposed rulemaking preceding these 

final regulations was submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Drafting Information 

The principal author of these 

regulations is Patrick S. Kirwan, Office 

of the Associate Chief Counsel 

(Passthroughs and Special Industries). 

However, other personnel from the IRS 

and Treasury Department participated 

in their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Adoption of Amendments to the 

Regulations 

■ Accordingly, 26 CFR part 1 is 

amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

■ Par. 2. Sections 1.168(a)–1 and 

1.168(b)–1 are added to read as follows: 

§ 1.168(a)–1 Modified accelerated cost 

recovery system. 

(a) Section 168 determines the 

depreciation allowance for tangible 

property that is of a character subject to 

the allowance for depreciation provided 

in section 167(a) and that is placed in 

service after December 31, 1986 (or after 

July 31, 1986, if the taxpayer made an 

election under section 203(a)(1)(B) of 

the Tax Reform Act of 1986; 100 Stat. 

2143). Except for property excluded 

from the application of section 168 as a 

result of section 168(f) or as a result of 

a transitional rule, the provisions of 

section 168 are mandatory for all 

eligible property. The allowance for 

depreciation under section 168 

constitutes the amount of depreciation 

allowable under section 167(a). The 

determination of whether tangible 

property is property of a character 

subject to the allowance for depreciation 

is made under section 167 and the 

regulations under section 167. 

(b) This section is applicable on and 

after February 27, 2004. 

§ 1.168(b)–1 Definitions. 

(a) Definitions. For purposes of 

section 168 and the regulations under 

section 168, the following definitions 

apply: 

(1) Depreciable property is property 

that is of a character subject to the 

allowance for depreciation as 

determined under section 167 and the 

regulations under section 167. 

(2) MACRS property is tangible, 

depreciable property that is placed in 

service after December 31, 1986 (or after 

July 31, 1986, if the taxpayer made an 

election under section 203(a)(1)(B) of 

the Tax Reform Act of 1986; 100 Stat. 

2143) and subject to section 168, except 

for property excluded from the 

application of section 168 as a result of 

section 168(f) or as a result of a 

transitional rule. 

(3) Unadjusted depreciable basis is 

the basis of property for purposes of 

section 1011 without regard to any 

adjustments described in section 

1016(a)(2) and (3). This basis reflects the 

reduction in basis for the percentage of 

the taxpayer’s use of property for the 

taxable year other than in the taxpayer’s 

trade or business (or for the production 

of income), for any portion of the basis 

the taxpayer properly elects to treat as 

an expense under section 179, section 

179C, or any similar provision, and for 

any adjustments to basis provided by 

other provisions of the Internal Revenue 

Code and the regulations under the 

Code (other than section 1016(a)(2) and 

(3)) (for example, a reduction in basis by 

the amount of the disabled access credit 

pursuant to section 44(d)(7)). For 

property subject to a lease, see section 

167(c)(2). 

(4) Adjusted depreciable basis is the 

unadjusted depreciable basis of the 

property, as defined in § 1.168(b)–

1(a)(3), less the adjustments described 

in section 1016(a)(2) and (3). 

(b) Effective date. This section is 

applicable on or after February 27, 2004. 

§§ 1.168(a)–1T and 1.168(b)–1T [Removed] 

■ Par. 3. Sections 1.168(a)–1T and 

1.168(b)–1T are removed. 

■ Par. 4. Section 1.168(d)–1 is amended 

by revising the section heading and 

paragraphs (b)(3) and (d)(3) to read as 

follows: 

§ 1.168(d)–1 Applicable conventions—halfyear and mid-quarter conventions. 

* * * * * 

(b) * * * 

(3) Property placed in service and 

disposed of in the same taxable year. (i) 

Under section 168(d)(3)(B)(ii), the 

depreciable basis of property placed in 

service and disposed of in the same 

taxable year is not taken into account in 

determining whether the 40-percent test 

is satisfied. However, the depreciable 

basis of property placed in service, 

disposed of, subsequently reacquired, 

and again placed in service, by the 

taxpayer in the same taxable year must 

be taken into account in applying the 

40-percent test, but the basis of the 

property is only taken into account on 

the later of the dates that the property 

is placed in service by the taxpayer 

during the taxable year. Further, see 

§§ 1.168(i)–6(c)(4)(v)(B) and 1.168(i)–

6(f) for rules relating to property placed 

in service and exchanged or 

involuntarily converted during the same 

taxable year. 

(ii) The applicable convention, as 

determined under this section, applies 

to all depreciable property (except 

nonresidential real property, residential 

rental property, and any railroad 

grading or tunnel bore) placed in service 

by the taxpayer during the taxable year, 

excluding property placed in service 

and disposed of in the same taxable 

year. However, see §§ 1.168(i)–

6(c)(4)(v)(A) and 1.168(i)–6(f) for rules 

relating to MACRS property that has a 

basis determined under section 1031(d) 

or section 1033(b). No depreciation 

deduction is allowed for property 

placed in service and disposed of during 

the same taxable year. However, see 

§ 1.168(k)–1(f)(1) for rules relating to 

qualified property or 50-percent bonus 

depreciation property, and 

§ 1.1400L(b)–1(f)(1) for rules relating to 

qualified New York Liberty Zone 

property, that is placed in service by the 

taxpayer in the same taxable year in 

which either a partnership is terminated 

as a result of a technical termination 

under section 708(b)(1)(B) or the 

property is transferred in a transaction 

described in section 168(i)(7). 

* * * * * 

(d) * * * 

(3) Like-kind exchanges and 

involuntary conversions. The last 

sentence in paragraph (b)(3)(i) and the 

second sentence in paragraph (b)(3)(ii) 

of this section apply to exchanges to 

which section 1031 applies, and 

involuntary conversions to which 

section 1033 applies, of MACRS 

property for which the time of 

disposition and the time of replacement 

both occur after February 27, 2004. 


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Federal Register / Vol. 72, No. 40 / Thursday, March 1, 2007 / Rules and Regulations 9249 

§ 1.168(d)–1T [Removed] 

■ Par. 5. Section 1.168(d)–1T is 

removed. 

■ Par. 6. Section 1.168(i)–0 is amended 

as follows: 

■ 1. The entries for § 1.168(i)–1(d)(2), 

(e)(3)(i), (e)(3)(v), (e)(3)(vi), (f), (f)(1), 

(f)(2), (f)(2)(i), (i), (j), and (l) are revised. 

■ 2. The entries for § 1.168(i)–1(l)(1), 

(l)(2), and (l)(3) are added. 

The revisions and additions read as 

follows: 

§ 1.168(i)–0 Table of contents for the 

general asset account rules. 

* * * * * 

§ 1.168(i)–1 General asset accounts. 

* * * * * 

(d) * * * 

(2) Special rule for passenger automobiles. 

* * * * * 

(e) * * * 

(3) * * * 

(i) In general. 

* * * * * 

(v) Transactions subject to section 1031 or 

1033. 

(vi) Anti-abuse rule. 

* * * * * 

(f) Assets generating foreign source income. 

(1) In general. 

(2) Source of ordinary income, gain, or 

loss. 

(i) Source determined by allocation and 

apportionment of depreciation allowed. 

* * * * * 

(i) Identification of disposed or converted 

asset. 

(j) Effect of adjustments on prior 

dispositions. 

* * * * * 

(l) Effective date. 

(1) In general. 

(2) Exceptions. 

(3) Like-kind exchanges and involuntary 

conversions. 

§ 1.168(i)–0T [Removed] 

■ Par. 7. Section 1.168(i)–0T is 

removed. 

■ Par. 8. Section 1.168(i)–1 is amended 

as follows: 

■ 1. Paragraphs (d)(2), (e)(3)(i), 

(e)(3)(iii)(B)(4), (e)(3)(v), (e)(3)(vi), (f)(1), 

(f)(2)(i), (i), (j), (l)(1), and (l)(3) are 

revised. 

■ 2. The first sentence in paragraph 

(l)(2)(ii)(B) is amended by removing the 

language ‘‘as modified by Rev. Proc. 

2004–11 (2004–3 I.R.B. 311)’’. 

The revisions read as follows: 

§ 1.168(i)–1 General asset accounts. 

* * * * * 

(d) * * * 

(2) Special rule for passenger 

automobiles. For purposes of applying 

section 280F(a), the depreciation 

allowance for a general asset account 

established for passenger automobiles is 

limited for each taxable year to the 

amount prescribed in section 280F(a) 

multiplied by the excess of the number 

of automobiles originally included in 

the account over the number of 

automobiles disposed of during the 

taxable year or in any prior taxable year 

in a transaction described in paragraph 

(e)(3)(iii) (disposition of an asset in a 

qualifying disposition), (e)(3)(iv) 

(transactions subject to section 

168(i)(7)), (e)(3)(v) (transactions subject 

to section 1031 or 1033), (e)(3)(vi) (antiabuse rule), (g) (assets subject to 

recapture), or (h)(1) (conversion to 

personal use) of this section. 

(e) * * * 

(3) * * * 

(i) In general. This paragraph (e)(3) 

provides the rules for terminating 

general asset account treatment upon 

certain dispositions. While the rules 

under paragraphs (e)(3)(ii) and (iii) of 

this section are optional rules, the rules 

under paragraphs (e)(3)(iv), (v), and (vi) 

of this section are mandatory rules. A 

taxpayer applies paragraph (e)(3)(ii) or 

(iii) of this section by reporting the gain, 

loss, or other deduction on the 

taxpayer’s timely filed Federal income 

tax return (including extensions) for the 

taxable year in which the disposition 

occurs. For purposes of applying 

paragraph (e)(3)(iii) through (vi) of this 

section, see paragraph (i) of this section 

for identifying the unadjusted 

depreciable basis of a disposed asset. 

* * * * * 

(iii) * * * 

(B) * * * 

(4) A transaction, other than a 

transaction described in paragraphs 

(e)(3)(iv) (pertaining to transactions 

subject to section 168(i)(7)) and (e)(3)(v) 

(pertaining to transactions subject to 

section 1031 or 1033) of this section, to 

which a nonrecognition section of the 

Code applies (determined without 

regard to this section). 

* * * * * 

(v) Transactions subject to section 

1031 or section 1033—(A) Like-kind 

exchange or involuntary conversion of 

all assets remaining in a general asset 

account. If all the assets, or the last 

asset, in a general asset account are 

transferred by a taxpayer in a like-kind 

exchange (as defined under § 1.168–

6(b)(11)) or in an involuntary 

conversion (as defined under § 1.168–

6(b)(12)), the taxpayer must apply this 

paragraph (e)(3)(v)(A) (instead of 

applying paragraph (e)(2), (e)(3)(ii), or 

(e)(3)(iii) of this section). Under this 

paragraph (e)(3)(v)(A), the general asset 

account terminates as of the first day of 

the year of disposition (as defined in 

§ 1.168(i)–6(b)(5)) and—

(1) The amount of gain or loss for the 

general asset account is determined 

under section 1001(a) by taking into 

account the adjusted depreciable basis 

of the general asset account at the time 

of disposition (as defined in § 1.168(i)–

6(b)(3)). The depreciation allowance for 

the general asset account in the year of 

disposition is determined in the same 

manner as the depreciation allowance 

for the relinquished MACRS property 

(as defined in § 1.168(i)–6(b)(2)) in the 

year of disposition is determined under 

§ 1.168(i)–6. The recognition and 

character of gain or loss are determined 

in accordance with paragraph 

(e)(3)(ii)(A) of this section 

(notwithstanding that paragraph 

(e)(3)(ii) of this section is an optional 

rule); and 

(2) The adjusted depreciable basis of 

the general asset account at the time of 

disposition is treated as the adjusted 

depreciable basis of the relinquished 

MACRS property. 

(B) Like-kind exchange or involuntary 

conversion of less than all assets 

remaining in a general asset account. If 

an asset in a general asset account is 

transferred by a taxpayer in a like-kind 

exchange or in an involuntary 

conversion and if paragraph (e)(3)(v)(A) 

of this section does not apply to this 

asset, the taxpayer must apply this 

paragraph (e)(3)(v)(B) (instead of 

applying paragraph (e)(2), (e)(3)(ii), or 

(e)(3)(iii) of this section). Under this 

paragraph (e)(3)(v)(B), general asset 

account treatment for the asset 

terminates as of the first day of the year 

of disposition (as defined in § 1.168(i)–

6(b)(5)), and—

(1) The amount of gain or loss for the 

asset is determined by taking into 

account the asset’s adjusted basis at the 

time of disposition (as defined in 

§ 1.168(i)–6(b)(3)). The adjusted basis of 

the asset at the time of disposition 

equals the unadjusted depreciable basis 

of the asset less the depreciation 

allowed or allowable for the asset, 

computed by using the depreciation 

method, recovery period, and 

convention applicable to the general 

asset account in which the asset was 

included. The depreciation allowance 

for the asset in the year of disposition 

is determined in the same manner as the 

depreciation allowance for the 

relinquished MACRS property (as 

defined in § 1.168(i)–6(b)(2)) in the year 

of disposition is determined under 

§ 1.168(i)–6. The recognition and 

character of the gain or loss are 

determined in accordance with 

paragraph (e)(3)(iii)(A) of this section 

(notwithstanding that paragraph 


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(e)(3)(iii) of this section is an optional 

rule); and 

(2) As of the first day of the year of 

disposition, the taxpayer must remove 

the relinquished asset from the general 

asset account and make the adjustments 

to the general asset account described in 

paragraph (e)(3)(iii)(C)(2) through (4) of 

this section. 

(vi) Anti-abuse rule—(A) In general. If 

an asset in a general asset account is 

disposed of by a taxpayer in a 

transaction described in paragraph 

(e)(3)(vi)(B) of this section, general asset 

account treatment for the asset 

terminates as of the first day of the 

taxable year in which the disposition 

occurs. Consequently, the taxpayer must 

determine the amount of gain, loss, or 

other deduction attributable to the 

disposition in the manner described in 

paragraph (e)(3)(iii)(A) of this section 

(notwithstanding that paragraph 

(e)(3)(iii)(A) of this section is an 

optional rule) and must make the 

adjustments to the general asset account 

described in paragraph (e)(3)(iii)(C)(1) 

through (4) of this section. 

(B) Abusive transactions. A 

transaction is described in this 

paragraph (e)(3)(vi)(B) if the transaction 

is not described in paragraph (e)(3)(iv) 

or (e)(3)(v) of this section and the 

transaction is entered into, or made, 

with a principal purpose of achieving a 

tax benefit or result that would not be 

available absent an election under this 

section. Examples of these types of 

transactions include—

(1) A transaction entered into with a 

principal purpose of shifting income or 

deductions among taxpayers in a 

manner that would not be possible 

absent an election under this section in 

order to take advantage of differing 

effective tax rates among the taxpayers; 

or 

(2) An election made under this 

section with a principal purpose of 

disposing of an asset from a general 

asset account in order to utilize an 

expiring net operating loss or credit. 

The fact that a taxpayer with a net 

operating loss carryover or a credit 

carryover transfers an asset to a related 

person or transfers an asset pursuant to 

an arrangement where the asset 

continues to be used (or is available for 

use) by the taxpayer pursuant to a lease 

(or otherwise) indicates, absent strong 

evidence to the contrary, that the 

transaction is described in this 

paragraph (e)(3)(vi)(B). 

(f) * * *

(1) In general. This paragraph (f) 

provides the rules for determining the 

source of any income, gain, or loss 

recognized, and the appropriate section 

904(d) separate limitation category or 

categories for any foreign source 

income, gain, or loss recognized, on a 

disposition (within the meaning of 

paragraph (e)(1) of this section) of an 

asset in a general asset account that 

consists of assets generating both United 

States and foreign source income. These 

rules apply only to a disposition to 

which paragraph (e)(2) (general 

disposition rules), (e)(3)(ii) (disposition 

of all assets remaining in a general asset 

account), (e)(3)(iii) (disposition of an 

asset in a qualifying disposition), 

(e)(3)(v) (transactions subject to section 

1031 or 1033), or (e)(3)(vi) (anti-abuse 

rule) of this section applies. 

(2) *** 

(i) Source determined by allocation 

and apportionment of depreciation 

allowed. The amount of any ordinary 

income, gain, or loss that is recognized 

on the disposition of an asset in a 

general asset account must be 

apportioned between United States and 

foreign sources based on the allocation 

and apportionment of the—

(A) Depreciation allowed for the 

general asset account as of the end of 

the taxable year in which the 

disposition occurs if paragraph (e)(2) of 

this section applies to the disposition; 

(B) Depreciation allowed for the 

general asset account as of the time of 

disposition if the taxpayer applies 

paragraph (e)(3)(ii) of this section to the 

disposition of all assets, or the last asset, 

in the general asset account, or if all the 

assets, or the last asset, in the general 

asset account are disposed of in a 

transaction described in paragraph 

(e)(3)(v)(A) of this section; or 

(C) Depreciation allowed for the 

disposed asset for only the taxable year 

in which the disposition occurs if the 

taxpayer applies paragraph (e)(3)(iii) of 

this section to the disposition of the 

asset in a qualifying disposition, if the 

asset is disposed of in a transaction 

described in paragraph (e)(3)(v)(B) of 

this section (like-kind exchange or 

involuntary conversion), or if the asset 

is disposed in a transaction described in 

paragraph (e)(3)(vi) of this section (antiabuse rule). 

* * * * * 

(i) Identification of disposed or 

converted asset. A taxpayer may use any 

reasonable method that is consistently 

applied to the taxpayer’s general asset 

accounts for purposes of determining 

the unadjusted depreciable basis of a 

disposed or converted asset in a 

transaction described in paragraph 

(e)(3)(iii) (disposition of an asset in a 

qualifying disposition), (e)(3)(iv) 

(transactions subject to section 

168(i)(7)), (e)(3)(v) (transactions subject 

to section 1031 or 1033), (e)(3)(vi) (antiabuse rule), (g) (assets subject to 

recapture), or (h)(1) (conversion to 

personal use) of this section. 

(j) Effect of adjustments on prior 

dispositions. The adjustments to a 

general asset account under paragraph 

(e)(3)(iii), (e)(3)(iv), (e)(3)(v), (e)(3)(vi), 

(g), or (h)(1) of this section have no 

effect on the recognition and character 

of prior dispositions subject to 

paragraph (e)(2) of this section. 

* * * * * 

(l) * * * 

(1) In general. Except as provided in 

paragraphs (l)(2) and (l)(3) of this 

section, this section applies to 

depreciable assets placed in service in 

taxable years ending on or after October 

11, 1994. For depreciable assets placed 

in service after December 31, 1986, in 

taxable years ending before October 11, 

1994, the Internal Revenue Service will 

allow any reasonable method that is 

consistently applied to the taxpayer’s 

general asset accounts. 

* * * * * 

(3) Like-kind exchanges and 

involuntary conversions. This section 

applies for an asset transferred by a 

taxpayer in a like-kind exchange (as 

defined under § 1.168–6(b)(11)) or in an 

involuntary conversion (as defined 

under § 1.168–6(b)(12)) for which the 

time of disposition (as defined in 

§ 1.168(i)–6(b)(3)) and the time of 

replacement (as defined in § 1.168(i)–

6(b)(4)) both occur after February 27, 

2004. For an asset transferred by a 

taxpayer in a like-kind exchange or in 

an involuntary conversion for which the 

time of disposition, the time of 

replacement, or both occur on or before 

February 27, 2004, see § 1.168(i)–1 in 

effect prior to February 27, 2004 

(§ 1.168(i)–1 as contained in 26 CFR part 

1 edition revised as of April 1, 2003). 

§ 1.168(i)–1T [Removed] 

■ Par. 9. Section 1.168(i)–1T is 

removed. 

■ Par. 10. Section 1.168(i)–5 is added to 

read as follows: 

§ 1.168(i)–5 Table of contents. 

This section lists the major 

paragraphs contained in § 1.168(i)–6. 

§ 1.168(i)–6 Like-kind exchanges and 

involuntary conversions. 

(a) Scope. 

(b) Definitions. 

(1) Replacement MACRS property. 

(2) Relinquished MACRS property. 

(3) Time of disposition. 

(4) Time of replacement. 

(5) Year of disposition. 

(6) Year of replacement. 

(7) Exchanged basis. 

(8) Excess basis. 


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(9) Depreciable exchanged basis. 

(10) Depreciable excess basis. 

(11) Like-kind exchange. 

(12) Involuntary conversion. 

(c) Determination of depreciation 

allowance. 

(1) Computation of the depreciation 

allowance for depreciable exchanged basis 

beginning in the year of replacement. 

(i) In general. 

(ii) Applicable recovery period, 

depreciation method, and convention. 

(2) Effect of depreciation treatment of the 

replacement MACRS property by previous 

owners of the acquired property. 

(3) Recovery period and/or depreciation 

method of the properties are the same, or 

both are not the same. 

(i) In general. 

(ii) Both the recovery period and the 

depreciation method are the same. 

(iii) Either the recovery period or the 

depreciation method is the same, or both are 

not the same. 

(4) Recovery period or depreciation 

method of the properties is not the same. 

(i) Longer recovery period. 

(ii) Shorter recovery period. 

(iii) Less accelerated depreciation method. 

(iv) More accelerated depreciation method. 

(v) Convention. 

(A) Either the relinquished MACRS 

property or the replacement MACRS property 

is mid-month property. 

(B) Neither the relinquished MACRS 

property nor the replacement MACRS 

property is mid-month property. 

(5) Year of disposition and year of 

replacement. 

(i) Relinquished MACRS property. 

(A) General rule. 

(B) Special rule. 

(ii) Replacement MACRS property. 

(A) Remaining recovery period of the 

replacement MACRS property. 

(B) Year of replacement is 12 months. 

(iii) Year of disposition or year of 

replacement is less than 12 months. 

(iv) Deferred transactions. 

(A) In general. 

(B) Allowable depreciation for a qualified 

intermediary. 

(v) Remaining recovery period. 

(6) Examples. 

(d) Special rules for determining 

depreciation allowances. 

(1) Excess basis. 

(i) In general. 

(ii) Example. 

(2) Depreciable and nondepreciable 

property. 

(3) Depreciation limitations for 

automobiles. 

(i) In general. 

(ii) Order in which limitations on 

depreciation under section 280F(a) are 

applied. 

(iii) Examples. 

(4) Involuntary conversion for which the 

replacement MACRS property is acquired 

and placed in service before disposition of 

relinquished MACRS property. 

(e) Use of optional depreciation tables. 

(1) Taxpayer not bound by prior use of 

table. 

(2) Determination of the depreciation 

deduction. 

(i) Relinquished MACRS property. 

(ii) Replacement MACRS property. 

(A) Determination of the appropriate 

optional depreciation table. 

(B) Calculating the depreciation deduction 

for the replacement MACRS property. 

(iii) Unrecovered basis. 

(3) Excess basis. 

(4) Examples. 

(f) Mid-quarter convention. 

(1) Exchanged basis. 

(2) Excess basis. 

(3) Depreciable property acquired for 

nondepreciable property. 

(g) Section 179 election. 

(h) Additional first year depreciation 

deduction. 

(i) Elections. 

(1) Election not to apply this section. 

(2) Election to treat certain replacement 

property as MACRS property. 

(j) Time and manner of making election 

under paragraph (i)(1) of this section. 

(1) In general. 

(2) Time for making election. 

(3) Manner of making election. 

(4) Revocation. 

(k) Effective date. 

(1) In general. 

(2) Application to pre-effective date likekind exchanges and involuntary conversions. 

(3) Like-kind exchanges and involuntary 

conversions where the taxpayer made the 

election under section 168(f)(1) for the 

relinquished property. 

§ 1.168(i)–5T [Removed] 

■ Par. 11. Section 1.168(i)–5T is 

removed. 

■ Par. 12. Section 1.168(i)–6 is added to 

read as follows: 

§ 1.168(i)–6 Like-kind exchanges and 

involuntary conversions. 

(a) Scope. This section provides the 

rules for determining the depreciation 

allowance for MACRS property acquired 

in a like-kind exchange or an 

involuntary conversion, including a 

like-kind exchange or an involuntary 

conversion of MACRS property that is 

exchanged or replaced with other 

MACRS property in a transaction 

between members of the same affiliated 

group. The allowance for depreciation 

under this section constitutes the 

amount of depreciation allowable under 

section 167(a) for the year of 

replacement and any subsequent taxable 

year for the replacement MACRS 

property and for the year of disposition 

of the relinquished MACRS property. 

The provisions of this section apply 

only to MACRS property to which 

§ 1.168(h)–1 (like-kind exchanges of taxexempt use property) does not apply. 

Additionally, paragraphs (c) through (f) 

of this section apply only to MACRS 

property for which an election under 

paragraph (i) of this section has not been 

made. 

(b) Definitions. For purposes of this 

section, the following definitions apply: 

(1) Replacement MACRS property is 

MACRS property (as defined in 

§ 1.168(b)–1(a)(2)) in the hands of the 

acquiring taxpayer that is acquired for 

other MACRS property in a like-kind 

exchange or an involuntary conversion. 

(2) Relinquished MACRS property is 

MACRS property that is transferred by 

the taxpayer in a like-kind exchange, or 

in an involuntary conversion. 

(3) Time of disposition is when the 

disposition of the relinquished MACRS 

property takes place under the 

convention, as determined under 

§ 1.168(d)–1, that applies to the 

relinquished MACRS property. 

(4) Time of replacement is the later 

of—

(i) When the replacement MACRS 

property is placed in service under the 

convention, as determined under this 

section, that applies to the replacement 

MACRS property; or 

(ii) The time of disposition of the 

exchanged or involuntarily converted 

property. 

(5) Year of disposition is the taxable 

year that includes the time of 

disposition. 

(6) Year of replacement is the taxable 

year that includes the time of 

replacement. 

(7) Exchanged basis is determined 

after the depreciation deductions for the 

year of disposition are determined 

under paragraph (c)(5)(i) of this section 

and is the lesser of—

(i) The basis in the replacement 

MACRS property, as determined under 

section 1031(d) and the regulations 

under section 1031(d) or section 1033(b) 

and the regulations under section 

1033(b); or 

(ii) The adjusted depreciable basis (as 

defined in § 1.168(b)–1(a)(4)) of the 

relinquished MACRS property. 

(8) Excess basis is any excess of the 

basis in the replacement MACRS 

property, as determined under section 

1031(d) and the regulations under 

section 1031(d) or section 1033(b) and 

the regulations under section 1033(b), 

over the exchanged basis as determined 

under paragraph (b)(7) of this section. 

(9) Depreciable exchanged basis is the 

exchanged basis as determined under 

paragraph (b)(7) of this section reduced 

by—

(i) The percentage of such basis 

attributable to the taxpayer’s use of 

property for the taxable year other than 

in the taxpayer’s trade or business (or 

for the production of income); and 

(ii) Any adjustments to basis provided 

by other provisions of the Internal 

Revenue Code (Code) and the 

regulations under the Code (including 

section 1016(a)(2) and (3), for example, 

depreciation deductions in the year of 


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9252 Federal Register / Vol. 72, No. 40 / Thursday, March 1, 2007 / Rules and Regulations 

replacement allowable under section 

168(k) or 1400L(b)). 

(10) Depreciable excess basis is the 

excess basis as determined under 

paragraph (b)(8) of this section reduced 

by—

(i) The percentage of such basis 

attributable to the taxpayer’s use of 

property for the taxable year other than 

in the taxpayer’s trade or business (or 

for the production of income); 

(ii) Any portion of the basis the 

taxpayer properly elects to treat as an 

expense under section 179; and 

(iii) Any adjustments to basis 

provided by other provisions of the 

Code and the regulations under the 

Code (including section 1016(a)(2) and 

(3), for example, depreciation 

deductions in the year of replacement 

allowable under section 168(k) or 

1400L(b)). 

(11) Like-kind exchange is an 

exchange of property in a transaction to 

which section 1031(a)(1), (b), or (c) 

applies. 

(12) Involuntary conversion is a 

transaction described in section 

1033(a)(1) or (2) that resulted in the 

nonrecognition of any part of the gain 

realized as the result of the conversion. 

(c) Determination of depreciation 

allowance—(1) Computation of the 

depreciation allowance for depreciable 

exchanged basis beginning in the year of 

replacement—(i) In general. This 

paragraph (c) provides rules for 

determining the applicable recovery 

period, the applicable depreciation 

method, and the applicable convention 

used to determine the depreciation 

allowances for the depreciable 

exchanged basis beginning in the year of 

replacement. See paragraph (c)(5) of this 

section for rules relating to the 

computation of the depreciation 

allowance for the year of disposition 

and for the year of replacement. See 

paragraph (d)(1) of this section for rules 

relating to the computation of the 

depreciation allowance for depreciable 

excess basis. See paragraph (d)(4) of this 

section if the replacement MACRS 

property is acquired before disposition 

of the relinquished MACRS property in 

a transaction to which section 1033 

applies. See paragraph (e) of this section 

for rules relating to the computation of 

the depreciation allowance using the 

optional depreciation tables. 

(ii) Applicable recovery period, 

depreciation method, and convention. 

The recovery period, depreciation 

method, and convention determined 

under this paragraph (c) are the only 

permissible methods of accounting for 

MACRS property within the scope of 

this section unless the taxpayer makes 

the election under paragraph (i) of this 

section not to apply this section. 

(2) Effect of depreciation treatment of 

the replacement MACRS property by 

previous owners of the acquired 

property. If replacement MACRS 

property is acquired by a taxpayer in a 

like-kind exchange or an involuntary 

conversion, the depreciation treatment 

of the replacement MACRS property by 

previous owners has no effect on the 

determination of depreciation 

allowances for the replacement MACRS 

property in the hands of the acquiring 

taxpayer. For example, a taxpayer 

exchanging, in a like-kind exchange, 

MACRS property for property that was 

depreciated under section 168 of the 

Internal Revenue Code of 1954 (ACRS) 

by the previous owner must use this 

section because the replacement 

property will become MACRS property 

in the hands of the acquiring taxpayer. 

In addition, elections made by previous 

owners in determining depreciation 

allowances for the replacement MACRS 

property have no effect on the acquiring 

taxpayer. For example, a taxpayer 

exchanging, in a like-kind exchange, 

MACRS property that the taxpayer 

depreciates under the general 

depreciation system of section 168(a) for 

other MACRS property that the previous 

owner elected to depreciate under the 

alternative depreciation system 

pursuant to section 168(g)(7) does not 

have to continue using the alternative 

depreciation system for the replacement 

MACRS property. 

(3) Recovery period and/or 

depreciation method of the properties 

are the same, or both are not the same—

(i) In general. For purposes of 

paragraphs (c)(3) and (c)(4) of this 

section in determining whether the 

recovery period and the depreciation 

method prescribed under section 168 for 

the replacement MACRS property are 

the same as the recovery period and the 

depreciation method prescribed under 

section 168 for the relinquished MACRS 

property, the recovery period and the 

depreciation method for the 

replacement MACRS property are 

considered to be the recovery period 

and the depreciation method that would 

have applied under section 168, taking 

into account any elections made by the 

acquiring taxpayer under section 

168(b)(5) or 168(g)(7), had the 

replacement MACRS property been 

placed in service by the acquiring 

taxpayer at the same time as the 

relinquished MACRS property. 

(ii) Both the recovery period and the 

depreciation method are the same. If 

both the recovery period and the 

depreciation method prescribed under 

section 168 for the replacement MACRS 

property are the same as the recovery 

period and the depreciation method 

prescribed under section 168 for the 

relinquished MACRS property, the 

depreciation allowances for the 

replacement MACRS property beginning 

in the year of replacement are 

determined by using the same recovery 

period and depreciation method that 

were used for the relinquished MACRS 

property. Thus, the replacement 

MACRS property is depreciated over the 

remaining recovery period (taking into 

account the applicable convention), and 

by using the depreciation method, of the 

relinquished MACRS property. Except 

as provided in paragraph (c)(5) of this 

section, the depreciation allowances for 

the depreciable exchanged basis for any 

12-month taxable year beginning with 

the year of replacement are determined 

by multiplying the depreciable 

exchanged basis by the applicable 

depreciation rate for each taxable year 

(for further guidance, for example, see 

section 6 of Rev. Proc. 87–57 (1987–2 

CB 687, 692) and § 601.601(d)(2)(ii)(b) of 

this chapter). 

(iii) Either the recovery period or the 

depreciation method is the same, or 

both are not the same. If either the 

recovery period or the depreciation 

method prescribed under section 168 for 

the replacement MACRS property is the 

same as the recovery period or the 

depreciation method prescribed under 

section 168 for the relinquished MACRS 

property, the depreciation allowances 

for the depreciable exchanged basis 

beginning in the year of replacement are 

determined using the recovery period or 

the depreciation method that is the 

same as the relinquished MACRS 

property. See paragraph (c)(4) of this 

section to determine the depreciation 

allowances when the recovery period or 

the depreciation method of the 

replacement MACRS property is not the 

same as that of the relinquished MACRS 

property. 

(4) Recovery period or depreciation 

method of the properties is not the 

same. If the recovery period prescribed 

under section 168 for the replacement 

MACRS property (as determined under 

paragraph (c)(3)(i) of this section) is not 

the same as the recovery period 

prescribed under section 168 for the 

relinquished MACRS property, the 

depreciation allowances for the 

depreciable exchanged basis beginning 

in the year of replacement are 

determined under this paragraph (c)(4). 

Similarly, if the depreciation method 

prescribed under section 168 for the 

replacement MACRS property (as 

determined under paragraph (c)(3)(i) of 

this section) is not the same as the 

depreciation method prescribed under 


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section 168 for the relinquished MACRS 

property, the depreciation method used 

to determine the depreciation 

allowances for the depreciable 

exchanged basis beginning in the year of 

replacement is determined under this 

paragraph (c)(4). 

(i) Longer recovery period. If the 

recovery period prescribed under 

section 168 for the replacement MACRS 

property (as determined under 

paragraph (c)(3)(i) of this section) is 

longer than that prescribed for the 

relinquished MACRS property, the 

depreciation allowances for the 

depreciable exchanged basis beginning 

in the year of replacement are 

determined as though the replacement 

MACRS property had originally been 

placed in service by the acquiring 

taxpayer in the same taxable year the 

relinquished MACRS property was 

placed in service by the acquiring 

taxpayer, but using the longer recovery 

period of the replacement MACRS 

property (as determined under 

paragraph (c)(3)(i) of this section) and 

the convention determined under 

paragraph (c)(4)(v) of this section. Thus, 

the depreciable exchanged basis is 

depreciated over the remaining recovery 

period (taking into account the 

applicable convention) of the 

replacement MACRS property. 

(ii) Shorter recovery period. If the 

recovery period prescribed under 

section 168 for the replacement MACRS 

property (as determined under 

paragraph (c)(3)(i) of this section) is 

shorter than that of the relinquished 

MACRS property, the depreciation 

allowances for the depreciable 

exchanged basis beginning in the year of 

replacement are determined using the 

same recovery period as that of the 

relinquished MACRS property. Thus, 

the depreciable exchanged basis is 

depreciated over the remaining recovery 

period (taking into account the 

applicable convention) of the 

relinquished MACRS property. 

(iii) Less accelerated depreciation 

method—(A) If the depreciation method 

prescribed under section 168 for the 

replacement MACRS property (as 

determined under paragraph (c)(3)(i) of 

this section) is less accelerated than that 

of the relinquished MACRS property at 

the time of disposition, the depreciation 

allowances for the depreciable 

exchanged basis beginning in the year of 

replacement are determined as though 

the replacement MACRS property had 

originally been placed in service by the 

acquiring taxpayer at the same time the 

relinquished MACRS property was 

placed in service by the acquiring 

taxpayer, but using the less accelerated 

depreciation method. Thus, the 

depreciable exchanged basis is 

depreciated using the less accelerated 

depreciation method. 

(B) Except as provided in paragraph 

(c)(5) of this section, the depreciation 

allowances for the depreciable 

exchanged basis for any 12-month 

taxable year beginning in the year of 

replacement are determined by 

multiplying the adjusted depreciable 

basis by the applicable depreciation rate 

for each taxable year. If, for example, the 

depreciation method of the replacement 

MACRS property in the year of 

replacement is the 150-percent 

declining balance method and the 

depreciation method of the relinquished 

MACRS property in the year of 

replacement is the 200-percent 

declining balance method, and neither 

method had been switched to the 

straight line method in the year of 

replacement or any prior taxable year, 

the applicable depreciation rate for the 

year of replacement and subsequent 

taxable years is determined by using the 

depreciation rate of the replacement 

MACRS property as if the replacement 

MACRS property was placed in service 

by the acquiring taxpayer at the same 

time the relinquished MACRS property 

was placed in service by the acquiring 

taxpayer, until the 150-percent 

declining balance method has been 

switched to the straight line method. If, 

for example, the depreciation method of 

the replacement MACRS property is the 

straight line method, the applicable 

depreciation rate for the year of 

replacement is determined by using the 

remaining recovery period at the 

beginning of the year of disposition (as 

determined under this paragraph (c)(4) 

and taking into account the applicable 

convention). 

(iv) More accelerated depreciation 

method—(A) If the depreciation method 

prescribed under section 168 for the 

replacement MACRS property (as 

determined under paragraph (c)(3)(i) of 

this section) is more accelerated than 

that of the relinquished MACRS 

property at the time of disposition, the 

depreciation allowances for the 

replacement MACRS property beginning 

in the year of replacement are 

determined using the same depreciation 

method as the relinquished MACRS 

property. 

(B) Except as provided in paragraph 

(c)(5) of this section, the depreciation 

allowances for the depreciable 

exchanged basis for any 12-month 

taxable year beginning in the year of 

replacement are determined by 

multiplying the adjusted depreciable 

basis by the applicable depreciation rate 

for each taxable year. If, for example, the 

depreciation method of the relinquished 

MACRS property in the year of 

replacement is the 150-percent 

declining balance method and the 

depreciation method of the replacement 

MACRS property in the year of 

replacement is the 200-percent 

declining balance method, and neither 

method had been switched to the 

straight line method in the year of 

replacement or any prior taxable year, 

the applicable depreciation rate for the 

year of replacement and subsequent 

taxable years is the same depreciation 

rate that applied to the relinquished 

MACRS property in the year of 

replacement, until the 150-percent 

declining balance method has been 

switched to the straight line method. If, 

for example, the depreciation method is 

the straight line method, the applicable 

depreciation rate for the year of 

replacement is determined by using the 

remaining recovery period at the 

beginning of the year of disposition (as 

determined under this paragraph (c)(4) 

and taking into account the applicable 

convention). 

(v) Convention. The applicable 

convention for the exchanged basis is 

determined under this paragraph 

(c)(4)(v). 

(A) Either the relinquished MACRS 

property or the replacement MACRS 

property is mid-month property. If 

either the relinquished MACRS property 

or the replacement MACRS property is 

property for which the applicable 

convention (as determined under 

section 168(d)) is the mid-month 

convention, the exchanged basis must 

be depreciated using the mid-month 

convention. 

(B) Neither the relinquished MACRS 

property nor the replacement MACRS 

property is mid-month property. If 

neither the relinquished MACRS 

property nor the replacement MACRS 

property is property for which the 

applicable convention (as determined 

under section 168(d)) is the mid-month 

convention, the applicable convention 

for the exchanged basis is the same 

convention that applied to the 

relinquished MACRS property. If the 

relinquished MACRS property is placed 

in service in the year of disposition, and 

the time of replacement is also in the 

year of disposition, the convention that 

applies to the relinquished MACRS 

property is determined under paragraph 

(f)(1)(i) of this section. If, however, 

relinquished MACRS property was 

placed in service in the year of 

disposition and the time of replacement 

is in a taxable year subsequent to the 

year of disposition, the convention that 

applies to the exchanged basis is the 

convention that applies in that 


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subsequent taxable year (see paragraph 

(f)(1)(ii) of this section). 

(5) Year of disposition and year of 

replacement. No depreciation deduction 

is allowable for MACRS property 

disposed of by a taxpayer in a like-kind 

exchange or involuntary conversion in 

the same taxable year that such property 

was placed in service by the taxpayer. 

If replacement MACRS property is 

disposed of by a taxpayer during the 

same taxable year that the relinquished 

MACRS property is placed in service by 

the taxpayer, no depreciation deduction 

is allowable for either MACRS property. 

Otherwise, the depreciation allowances 

for the year of disposition and for the 

year of replacement are determined as 

follows: 

(i) Relinquished MACRS property—

(A) General rule. Except as provided in 

paragraphs (c)(5)(i)(B), (c)(5)(iii), (e), and 

(i) of this section, the depreciation 

allowance in the year of disposition for 

the relinquished MACRS property is 

computed by multiplying the allowable 

depreciation deduction for the property 

for that year by a fraction, the numerator 

of which is the number of months 

(including fractions of months) the 

property is deemed to be placed in 

service during the year of disposition 

(taking into account the applicable 

convention of the relinquished MACRS 

property), and the denominator of 

which is 12. In the case of termination 

under § 1.168(i)–1(e)(3)(v) of general 

asset account treatment of an asset, or of 

all the assets remaining, in a general 

asset account, the allowable 

depreciation deduction in the year of 

disposition for the asset or assets for 

which general asset account treatment is 

terminated is determined using the 

depreciation method, recovery period, 

and convention of the general asset 

account. This allowable depreciation 

deduction is adjusted to account for the 

period the asset or assets is deemed to 

be in service in accordance with this 

paragraph (c)(5)(i). 

(B) Special rule. If, at the beginning of 

the year of disposition, the remaining 

recovery period of the relinquished 

MACRS property, taking into account 

the applicable convention of such 

property, is less than the period 

between the beginning of the year of 

disposition and the time of disposition, 

the depreciation deduction for the 

relinquished MACRS property for the 

year of disposition is equal to the 

adjusted depreciable basis of the 

relinquished MACRS property at the 

beginning of the year of disposition. If 

this paragraph applies, the exchanged 

basis is zero and no depreciation is 

allowable for the exchanged basis in the 

replacement MACRS property. 

(ii) Replacement MACRS property—

(A) Remaining recovery period of the 

replacement MACRS property. The 

replacement MACRS property is treated 

as placed in service at the time of 

replacement under the convention that 

applies to the replacement MACRS 

property as determined under this 

paragraph (c)(5)(ii). The remaining 

recovery period of the replacement 

MACRS property at the time of 

replacement is the excess of the 

recovery period for the replacement 

MACRS property, as determined under 

paragraph (c) of this section, over the 

period of time that the replacement 

MACRS property would have been in 

service if it had been placed in service 

when the relinquished MACRS property 

was placed in service and removed from 

service at the time of disposition of the 

relinquished MACRS property. This 

period is determined by using the 

convention that applied to the 

relinquished MACRS property to 

determine the date that the relinquished 

MACRS property is deemed to have 

been placed in service and the date that 

it is deemed to have been disposed of. 

The length of time the replacement 

MACRS property would have been in 

service is determined by using these 

dates and the convention that applies to 

the replacement MACRS property. 

(B) Year of replacement is 12 months. 

Except as provided in paragraphs 

(c)(5)(iii), (e), and (i) of this section, the 

depreciation allowance in the year of 

replacement for the depreciable 

exchanged basis is determined by—

(1) Calculating the applicable 

depreciation rate for the replacement 

MACRS property as of the beginning of 

the year of replacement taking into 

account the depreciation method 

prescribed for the replacement MACRS 

property under paragraph (c)(3) of this 

section and the remaining recovery 

period of the replacement MACRS 

property as of the beginning of the year 

of disposition as determined under this 

paragraph (c)(5)(ii); 

(2) Calculating the depreciable 

exchanged basis of the replacement 

MACRS property, and adding to that 

amount the amount determined under 

paragraph (c)(5)(i) of this section for the 

year of disposition; and 

(3) Multiplying the product of the 

amounts determined under paragraphs 

(c)(5)(ii)(B)(1) and (B)(2) of this section 

by a fraction, the numerator of which is 

the number of months (including 

fractions of months) the property is 

deemed to be in service during the year 

of replacement (in the year of 

replacement the replacement MACRS 

property is deemed to be placed in 

service by the acquiring taxpayer at the 

time of replacement under the 

convention determined under paragraph 

(c)(4)(v) of this section), and the 

denominator of which is 12. 

(iii) Year of disposition or year of 

replacement is less than 12 months. If 

the year of disposition or the year of 

replacement is less than 12 months, the 

depreciation allowance determined 

under paragraph (c)(5)(ii)(A) of this 

section must be adjusted for a short 

taxable year (for further guidance, for 

example, see Rev. Proc. 89–15 (1989–1 

CB 816) and § 601.601(d)(2)(ii)(b) of this 

chapter). 

(iv) Deferred transactions—(A) In 

general. If the replacement MACRS 

property is not acquired until after the 

disposition of the relinquished MACRS 

property, taking into account the 

applicable convention of the 

relinquished MACRS property and 

replacement MACRS property, 

depreciation is not allowable during the 

period between the disposition of the 

relinquished MACRS property and the 

acquisition of the replacement MACRS 

property. The recovery period for the 

replacement MACRS property is 

suspended during this period. For 

purposes of paragraph (c)(5)(ii) of this 

section, only the depreciable exchanged 

basis of the replacement MACRS 

property is taken into account for 

calculating the amount in paragraph 

(c)(5)(ii)(B)(2) of this section if the year 

of replacement is a taxable year 

subsequent to the year of disposition. 

(B) Allowable depreciation for a 

qualified intermediary. [Reserved]. 

(v) Remaining recovery period. The 

remaining recovery period of the 

replacement MACRS property is 

determined as of the beginning of the 

year of disposition of the relinquished 

MACRS property. For purposes of 

determining the remaining recovery 

period of the replacement MACRS 

property, the replacement MACRS 

property is deemed to have been 

originally placed in service under the 

convention determined under paragraph 

(c)(4)(v) of this section, but at the time 

the relinquished MACRS property was 

deemed to be placed in service under 

the convention that applied to it when 

it was placed in service. 

(6) Examples. The application of this 

paragraph (c) is illustrated by the 

following examples: 

Example 1. A1, a calendar-year taxpayer, 

exchanges Building M, an office building, for 

Building N, a warehouse in a like-kind 

exchange. Building M is relinquished in July 

2004 and Building N is acquired and placed 

in service in October 2004. A1 did not make 

any elections under section 168 for either 

Building M or Building N. The unadjusted 

depreciable basis of Building M was 


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$4,680,000 when placed in service in July 

1997. Since the recovery period and 

depreciation method prescribed under 

section 168 for Building N (39 years, straight 

line method) are the same as the recovery 

period and depreciation method prescribed 

under section 168 for Building M (39 years, 

straight line method), Building N is 

depreciated over the remaining recovery 

period of, and using the same depreciation 

method and convention as that of, Building 

M. Applying the applicable convention, 

Building M is deemed disposed of on July 15, 

2004, and Building N is placed in service on 

October 15, 2004. Thus, Building N will be 

depreciated using the straight line method 

over a remaining recovery period of 32 years 

beginning in October 2004 (the remaining 

recovery period of 32 years and 6.5 months 

at the beginning of 2004, less the 6.5 months 

of depreciation taken prior to the disposition 

of the exchanged MACRS property (Building 

M) in 2004). For 2004, the year in which the 

transaction takes place, the depreciation 

allowance for Building M is ($120,000)(6.5/ 

12) which equals $65,000. The depreciation 

allowance for Building N for 2004 is 

($120,000)(2.5/12) which equals $25,000. For 

2005 and subsequent years, Building N is 

depreciated over the remaining recovery 

period of, and using the same depreciation 

method and convention as that of, Building 

M. Thus, the depreciation allowance for 

Building N is the same as Building M, 

namely $10,000 per month. 

Example 2. B, a calendar-year taxpayer, 

placed in service Bridge P in January 1998. 

Bridge P is depreciated using the half-year 

convention. In January 2004, B exchanges 

Bridge P for Building Q, an apartment 

building, in a like-kind exchange. Pursuant to 

paragraph (k)(2)(i) of this section, B decided 

to apply § 1.168(i)-6 to the exchange of 

Bridge P for Building Q, the replacement 

MACRS property. B did not make any 

elections under section 168 for either Bridge 

P or Building Q. Since the recovery period 

prescribed under section 168 for Building Q 

(27.5 years) is longer than that of Bridge P (15 

years), Building Q is depreciated as if it had 

originally been placed in service in July 1998 

and disposed of in July 2004 using a 27.5 

year recovery period. Additionally, since the 

depreciation method prescribed under 

section 168 for Building Q (straight line 

method) is less accelerated than that of 

Bridge P (150-percent declining balance 

method), then the depreciation allowance for 

Building Q is computed using the straight 

line method. Thus, when Building Q is 

acquired and placed in service in 2004, its 

basis is depreciated over the remaining 21.5 

year recovery period using the straight line 

method of depreciation and the mid-month 

convention beginning in July 2004. 

Example 3. C, a calendar-year taxpayer, 

placed in service Building R, a restaurant, in 

January 1996. In January 2004, C exchanges 

Building R for Tower S, a radio transmitting 

tower, in a like-kind exchange. Pursuant to 

paragraph (k)(2)(i) of this section, C decided 

to apply § 1.168(i)-6 to the exchange of 

Building R for Tower S, the replacement 

MACRS property. C did not make any 

elections under section 168 for either 

Building R or Tower S. Since the recovery 

period prescribed under section 168 for 

Tower S (15 years) is shorter than that of 

Building R (39 years), Tower S is depreciated 

over the remaining recovery period of 

Building R. Additionally, since the 

depreciation method prescribed under 

section 168 for Tower S (150% declining 

balance method) is more accelerated than 

that of Building R (straight line method), then 

the depreciation allowance for Tower S is 

also computed using the same depreciation 

method as Building R. Thus, Tower S is 

depreciated over the remaining 31 year 

recovery period of Building R using the 

straight line method of depreciation and the 

mid-month convention. Alternatively, C may 

elect under paragraph (i) of this section to 

treat Tower S as though it is placed in service 

in January 2004. In such case, C uses the 

applicable recovery period, depreciation 

method, and convention prescribed under 

section 168 for Tower S. 

Example 4. (i) In February 2002, D, a 

calendar-year taxpayer and manufacturer of 

rubber products, acquired for $60,000 and 

placed in service Asset T (a special tool) and 

depreciated Asset T using the straight line 

method election under section 168(b)(5) and 

the mid-quarter convention over its 3-year 

recovery period. D elected not to deduct the 

additional first year depreciation for 3-year 

property placed in service in 2002. In June 

2004, D exchanges Asset T for Asset U (not 

a special tool) in a like-kind exchange. D 

elected not to deduct the additional first year 

depreciation for 7-year property placed in 

service in 2004. Since the recovery period 

prescribed under section 168 for Asset U (7 

years) is longer than that of Asset T (3 years), 

Asset U is depreciated as if it had originally 

been placed in service in February 2002 

using a 7-year recovery period. Additionally, 

since the depreciation method prescribed 

under section 168 for Asset U (200-percent 

declining balance method) is more 

accelerated than that of Asset T (straight line 

method) at the time of disposition, the 

depreciation allowance for Asset U is 

computed using the straight line method. 

Asset U is depreciated over its remaining 

recovery period of 4.75 years using the 

straight line method of depreciation and the 

mid-quarter convention. 

(ii) The 2004 depreciation allowance for 

Asset T is $7,500 ($20,000 allowable 

depreciation deduction for 2004) × 4.5 

months ÷ 12). 

(iii) The depreciation rate in 2004 for Asset 

U is 0.1951 (1 ÷ 5.125 years (the length of the 

applicable recovery period remaining as of 

the beginning of 2004)). Therefore, the 

depreciation allowance for Asset U in 2004 

is $2,744 (0.1951 × $22,500 (the sum of the 

$15,000 depreciable exchanged basis of Asset 

U ($22,500 adjusted depreciable basis at the 

beginning of 2004 for Asset T, less the $7,500 

depreciation allowable for Asset T for 2004) 

and the $7,500 depreciation allowable for 

Asset T for 2004) × 7.5 months ÷ 12). 

Example 5. The facts are the same as in 

Example 4 except that D exchanges Asset T 

for Asset U in June 2005, in a like-kind 

exchange. Under these facts, the remaining 

recovery period of Asset T at the beginning 

of 2005 is 1.5 months and, as a result, is less 

than the 5-month period between the 

beginning of 2005 (year of disposition) and 

June 2005 (time of disposition). Accordingly, 

pursuant to paragraph (c)(5)(i)(B) of this 

section, the 2005 depreciation allowance for 

Asset T is $2,500 ($2,500 adjusted 

depreciable basis at the beginning of 2005 

($60,000 original basis minus $17,500 

depreciation deduction for 2002 minus 

$20,000 depreciation deduction for 2003 

minus $20,000 depreciation deduction for 

2004)). Because the exchanged basis of asset 

U is $0.00, no depreciation is allowable for 

asset U. 

Example 6. On January 1, 2004, E, a 

calendar-year taxpayer, acquired and placed 

in service Canopy V, a gas station canopy. 

The purchase price of Canopy V was $60,000. 

On August 1, 2004, Canopy V was destroyed 

in a hurricane and was therefore no longer 

usable in E’s business. On October 1, 2004, 

as part of the involuntary conversion, E 

acquired and placed in service new Canopy 

W with the insurance proceeds E received 

due to the loss of Canopy V. E elected not 

to deduct the additional first year 

depreciation for 5-year property placed in 

service in 2004. E depreciates both canopies 

under the general depreciation system of 

section 168(a) by using the 200-percent 

declining balance method of depreciation, a 

5-year recovery period, and the half-year 

convention. No depreciation deduction is 

allowable for Canopy V. The depreciation 

deduction allowable for Canopy W for 2004 

is $12,000 ($60,000 × the annual depreciation 

rate of .40 × 1⁄2 year). For 2005, the 

depreciation deduction for Canopy W is 

$19,200 ($48,000 adjusted basis × the annual 

depreciation rate of .40). 

Example 7. The facts are the same as in 

Example 6, except that E did not make the 

election out of the additional first year 

depreciation for 5-year property placed in 

service in 2004. E depreciates both canopies 

under the general depreciation system of 

section 168(a) by using the 200-percent 

declining balance method of depreciation, a 

5-year recovery period, and the half-year 

convention. No depreciation deduction is 

allowable for Canopy V. For 2004, E is 

allowed a 50-percent additional first year 

depreciation deduction of $30,000 for 

Canopy W (the unadjusted depreciable basis 

of $60,000 multiplied by .50), and a regular 

MACRS depreciation deduction of $6,000 for 

Canopy W (the depreciable exchanged basis 

of $30,000 multiplied by the annual 

depreciation rate of .40 × 1⁄2 year). For 2005, 

E is allowed a regular MACRS depreciation 

deduction of $9,600 for Canopy W (the 

depreciable exchanged basis of $24,000 

($30,000 minus regular 2003 depreciation of 

$6,000) multiplied by the annual 

depreciation rate of .40). 

Example 8. In January 2001, F, a calendaryear taxpayer, places in service a paved 

parking lot, Lot W, and begins depreciating 

Lot W over its 15-year recovery period. F’s 

unadjusted depreciable basis in Lot W is 

$1,000x. On April 1, 2004, F disposes of Lot 

W in a like-kind exchange for Building X, 

which is nonresidential real property. Lot W 

is depreciated using the 150 percent 

declining balance method and the half-year 

convention. Building X is depreciated using 

the straight-line method with a 39-year 


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recovery period and using the mid-month 

convention. Both Lot W and Building X were 

in service at the time of the exchange. 

Because Lot W was depreciated using the 

half-year convention, it is deemed to have 

been placed in service on July 1, 2001, the 

first day of the second half of 2001, and to 

have been disposed of on July 1, 2004, the 

first day of the second half of 2004. To 

determine the remaining recovery period of 

Building X at the time of replacement, 

Building X is deemed to have been placed in 

service on July 1, 2001, and removed from 

service on July 1, 2004. Thus, Building X is 

deemed to have been in service, at the time 

of replacement, for 3 years (36 months = 5.5 

months in 2001 + 12 months in 2002 + 12 

months in 2003 + 6.5 months in 2004) and 

its remaining recovery period is 36 years (39 

¥ 3). Because Building X is deemed to be 

placed in service at the time of replacement, 

July 1, 2004, the first day of the second half 

of 2004, Building X is depreciated for 5.5 

months in 2004. However, at the beginning 

of the year of replacement the remaining 

recovery period for Building X is 36 years 

and 6.5 months (39 years ¥ 2 years and 5.5 

months (5.5 months in 2001 + 12 months in 

2002 + 12 months in 2003)). The depreciation 

rate for building X for 2004 is 0.02737 (= 1/ 

(39–2–5.5/12)). For 2005, the depreciation 

rate for Building X is 0.02814 (= 1/(39–3–5.5/ 

12)). 

Example 9. The facts are the same as in 

Example 8. F did not make the election 

under paragraph (i) of this section for 

Building Y in the initial exchange. In January 

2006, F exchanges Building Y for Building Z, 

an office building, in a like-kind exchange. F 

did not make any elections under section 168 

for either Building Y or Building Z. Since the 

recovery period prescribed for Building Y as 

a result of the initial exchange (39 years) is 

longer than that of Building Z (27.5 years), 

Building Z is depreciated over the remaining 

33 years of the recovery period of Building 

Y. The depreciation methods are the same for 

both Building Y and Building Z so F’s 

exchanged basis in Building Z is depreciated 

over 33 years, using the straight-line method 

and the mid-month convention, beginning in 

January 2006. Alternatively, F could have 

made the election under paragraph (i) of this 

section. If F makes such election, Building Z 

is treated as placed in service by F when 

acquired in January 2006 and F would 

recover its exchanged basis in Building Z 

over 27.5 years, using the straight line 

method and the mid-month convention, 

beginning in January 2006. 

(d) Special rules for determining 

depreciation allowances—(1) Excess 

basis—(i) In general. Any excess basis in 

the replacement MACRS property is 

treated as property that is placed in 

service by the acquiring taxpayer in the 

year of replacement. Thus, the 

depreciation allowances for the 

depreciable excess basis are determined 

by using the applicable recovery period, 

depreciation method, and convention 

prescribed under section 168 for the 

property at the time of replacement. 

However, if replacement MACRS 

property is disposed of during the same 

taxable year the relinquished MACRS 

property is placed in service by the 

acquiring taxpayer, no depreciation 

deduction is allowable for either 

MACRS property. See paragraph (g) of 

this section regarding the application of 

section 179. See paragraph (h) of this 

section regarding the application of 

section 168(k) or 1400L(b). 

(ii) Example. The application of this 

paragraph (d)(1) is illustrated by the 

following example: 

Example. In 1989, G placed in service a 

hospital. On January 16, 2004, G exchanges 

this hospital plus $2,000,000 cash for an 

office building in a like-kind exchange. On 

January 16, 2004, the hospital has an 

adjusted depreciable basis of $1,500,000. 

After the exchange, the basis of the office 

building is $3,500,000. Pursuant to paragraph 

(k)(2)(i) of this section, G decided to apply 

§ 1.168(i)–6 to the exchange of the hospital 

for the office building, the replacement 

MACRS property. The depreciable exchanged 

basis of the office building is depreciated in 

accordance with paragraph (c) of this section. 

The depreciable excess basis of $2,000,000 is 

treated as being placed in service by G in 

2004 and, as a result, is depreciated using the 

applicable depreciation method, recovery 

period, and convention prescribed for the 

office building under section 168 at the time 

of replacement. 

(2) Depreciable and nondepreciable 

property—(i) If land or other 

nondepreciable property is acquired in 

a like-kind exchange for, or as a result 

of an involuntary conversion of, 

depreciable property, the land or other 

nondepreciable property is not 

depreciated. If both MACRS and 

nondepreciable property are acquired in 

a like-kind exchange for, or as part of an 

involuntary conversion of, MACRS 

property, the basis allocated to the 

nondepreciable property (as determined 

under section 1031(d) and the 

regulations under section 1031(d) or 

section 1033(b) and the regulations 

under section 1033(b)) is not 

depreciated and the basis allocated to 

the replacement MACRS property (as 

determined under section 1031(d) and 

the regulations under section 1031(d) or 

section 1033(b) and the regulations 

under section 1033(b)) is depreciated in 

accordance with this section. 

(ii) If MACRS property is acquired, or 

if both MACRS and nondepreciable 

property are acquired, in a like-kind 

exchange for, or as part of an 

involuntary conversion of, land or other 

nondepreciable property, the basis in 

the replacement MACRS property that is 

attributable to the relinquished 

nondepreciable property is treated as 

though the replacement MACRS 

property is placed in service by the 

acquiring taxpayer in the year of 

replacement. Thus, the depreciation 

allowances for the replacement MACRS 

property are determined by using the 

applicable recovery period, depreciation 

method, and convention prescribed 

under section 168 for the replacement 

MACRS property at the time of 

replacement. See paragraph (g) of this 

section regarding the application of 

section 179. See paragraph (h) of this 

section regarding the application of 

section 168(k) or 1400L(b). 

(3) Depreciation limitations for 

automobiles—(i) In general. 

Depreciation allowances under section 

179 and section 167 (including 

allowances under sections 168 and 

1400L(b)) for a passenger automobile, as 

defined in section 280F(d)(5), are 

subject to the limitations of section 

280F(a). The depreciation allowances 

for a passenger automobile that is 

replacement MACRS property 

(replacement MACRS passenger 

automobile) generally are limited in any 

taxable year to the replacement 

automobile section 280F limit for the 

taxable year. The taxpayer’s basis in the 

replacement MACRS passenger 

automobile is treated as being 

comprised of two separate components. 

The first component is the exchanged 

basis and the second component is the 

excess basis, if any. The depreciation 

allowances for a passenger automobile 

that is relinquished MACRS property 

(relinquished MACRS passenger 

automobile) for the taxable year 

generally are limited to the relinquished 

automobile section 280F limit for that 

taxable year. In the year of disposition 

the sum of the depreciation deductions 

for the relinquished MACRS passenger 

automobile and the replacement 

MACRS passenger automobile may not 

exceed the replacement automobile 

section 280F limit unless the taxpayer 

makes the election under § 1.168(i)–6(i). 

For purposes of this paragraph (d)(3), 

the following definitions apply: 

(A) Replacement automobile section 

280F limit is the limit on depreciation 

deductions under section 280F(a) for the 

taxable year based on the time of 

replacement of the replacement MACRS 

passenger automobile (including the 

effect of any elections under section 

168(k) or section 1400L(b), as 

applicable). 

(B) Relinquished automobile section 

280F limit is the limit on depreciation 

deductions under section 280F(a) for the 

taxable year based on when the 

relinquished MACRS passenger 

automobile was placed in service by the 

taxpayer. 

(ii) Order in which limitations on 

depreciation under section 280F(a) are 

applied. Generally, depreciation 


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deductions allowable under section 

280F(a) reduce the basis in the 

relinquished MACRS passenger 

automobile and the exchanged basis of 

the replacement MACRS passenger 

automobile, before the excess basis of 

the replacement MACRS passenger 

automobile is reduced. The depreciation 

deductions for the relinquished MACRS 

passenger automobile in the year of 

disposition and the replacement 

MACRS passenger automobile in the 

year of replacement and each 

subsequent taxable year are allowable in 

the following order: 

(A) The depreciation deduction 

allowable for the relinquished MACRS 

passenger automobile as determined 

under paragraph (c)(5)(i) of this section 

for the year of disposition to the extent 

of the smaller of the replacement 

automobile section 280F limit and the 

relinquished automobile section 280F 

limit, if the year of disposition is the 

year of replacement. If the year of 

replacement is a taxable year 

subsequent to the year of disposition, 

the depreciation deduction allowable 

for the relinquished MACRS passenger 

automobile for the year of disposition is 

limited to the relinquished automobile 

section 280F limit. 

(B) The additional first year 

depreciation allowable on the remaining 

exchanged basis (remaining carryover 

basis as determined under § 1.168(k)–

1(f)(5) or § 1.1400L(b)–1(f)(5), as 

applicable) of the replacement MACRS 

passenger automobile, as determined 

under § 1.168(k)–1(f)(5) or § 1.1400L(b)–

1(f)(5), as applicable, to the extent of the 

excess of the replacement automobile 

section 280F limit over the amount 

allowable under paragraph (d)(3)(ii)(A) 

of this section. 

(C) The depreciation deduction 

allowable for the taxable year on the 

depreciable exchanged basis of the 

replacement MACRS passenger 

automobile determined under paragraph 

(c) of this section to the extent of any 

excess over the sum of the amounts 

allowable under paragraphs (d)(3)(ii)(A) 

and (B) of this section of the smaller of 

the replacement automobile section 

280F limit and the relinquished 

automobile section 280F limit. 

(D) Any section 179 deduction 

allowable in the year of replacement on 

the excess basis of the replacement 

MACRS passenger automobile to the 

extent of the excess of the replacement 

automobile section 280F limit over the 

sum of the amounts allowable under 

paragraphs (d)(3)(ii)(A), (B), and (C) of 

this section. 

(E) The additional first year 

depreciation allowable on the remaining 

excess basis of the replacement MACRS 

passenger automobile, as determined 

under § 1.168(k)–1(f)(5) or § 1.1400L(b)–

1(f)(5), as applicable, to the extent of the 

excess of the replacement automobile 

section 280F limit over the sum of the 

amounts allowable under paragraphs 

(d)(3)(ii)(A), (B), (C), and (D) of this 

section. 

(F) The depreciation deduction 

allowable under paragraph (d) of this 

section for the depreciable excess basis 

of the replacement MACRS passenger 

automobile to the extent of the excess of 

the replacement automobile section 

280F limit over the sum of the amounts 

allowable under paragraphs (d)(3)(ii)(A), 

(B), (C), (D), and (E) of this section. 

(iii) Examples. The application of this 

paragraph (d)(3) is illustrated by the 

following examples: 

Example 1. H, a calendar-year taxpayer, 

acquired and placed in service Automobile X 

in January 2000 for $30,000 to be used solely 

for H’s business. In December 2003, H 

exchanges, in a like-kind exchange, 

Automobile X plus $15,000 cash for new 

Automobile Y that will also be used solely 

in H’s business. Automobile Y is 50-percent 

bonus depreciation property for purposes of 

section 168(k)(4). Both automobiles are 

depreciated using the double declining 

balance method, the half-year convention, 

and a 5-year recovery period. Pursuant to 

§ 1.168(k)–1(g)(3)(ii) and paragraph (k)(2)(i) 

of this section, H decided to apply § 1.168(i)–

6 to the exchange of Automobile X for 

Automobile Y, the replacement MACRS 

property. The relinquished automobile 

section 280F limit for 2003 for Automobile X 

is $1,775. The replacement automobile 

section 280F limit for Automobile Y is 

$10,710. The exchanged basis for Automobile 

Y is $17,315 ($30,000 less total depreciation 

allowable of $12,685 (($3,060 for 2000, 

$4,900 for 2001, $2,950 for 2002, and $1,775 

for 2003)). Without taking section 280F into 

account, the additional first year depreciation 

deduction for the remaining exchanged basis 

is $8,658 ($17,315 × 0.5). Because this 

amount is less than $8,935 ($10,710 (the 

replacement automobile section 280F limit 

for 2003 for Automobile Y) ¥ $1,775 (the 

depreciation allowable for Automobile X for 

2003)), the additional first year depreciation 

deduction for the exchanged basis is $8,658. 

No depreciation deduction is allowable in 

2003 for the depreciable exchanged basis 

because the depreciation deductions taken 

for Automobile X and the remaining 

exchanged basis exceed the exchanged 

automobile section 280F limit. An additional 

first year depreciation deduction of $277 is 

allowable for the excess basis of $15,000 in 

Automobile Y. Thus, at the end of 2003 the 

adjusted depreciable basis in Automobile Y 

is $23,379 comprised of adjusted depreciable 

exchanged basis of $8,657 ($17,315 

(exchanged basis) ¥ $8,658 (additional first 

year depreciation for exchanged basis)) and 

of an adjusted depreciable excess basis of 

$14,723 ($15,000 (excess basis) ¥ $277 

(additional first year depreciation for 2003)). 

Example 2. The facts are the same as in 

Example 1, except that H used Automobile 

X only 75 percent for business use. As such, 

the total allowable depreciation for 

Automobile X is reduced to reflect that the 

automobile is only used 75 percent for 

business. The total allowable depreciation of 

Automobile X is $9,513.75 ($2,295 for 2000 

($3,060 limit × .75), $3,675 for 2001 ($4,900 

limit × .75), $2,212.50 for 2002 ($2,950 limit 

× .75), and $1,331.25 for 2003 ($1,775 limit 

× .75). However, under § 1.280F–

2T(g)(2)(ii)(A), the exchanged basis is 

reduced by the excess (if any) of the 

depreciation that would have been allowable 

if the exchanged automobile had been used 

solely for business over the depreciation that 

was allowable in those years. Thus, the 

exchanged basis, for purposes of computing 

depreciation, for Automobile Y is $17,315. 

Example 3. The facts are the same as in 

Example 1, except that H placed in service 

Automobile X in January 2002, and H elected 

not to claim the additional first year 

depreciation deduction for 5-year property 

placed in service in 2002 and 2003. The 

relinquished automobile section 280F limit 

for Automobile X for 2003 is $4,900. Because 

the replacement automobile section 280F 

limit for 2003 for Automobile Y ($3,060) is 

less than the relinquished automobile section 

280F limit for Automobile X for 2003 and is 

less than $5,388 (($30,000 (cost) ¥ $3,060 

(depreciation allowable for 2002)) × 0.4 × 6/ 

12), the depreciation that would be allowable 

for Automobile X (determined without regard 

to section 280F) in the year of disposition, 

the depreciation for Automobile X in the year 

of disposition is limited to $3,060. For 2003 

no depreciation is allowable for the excess 

basis and the exchanged basis in Automobile 

Y. 

Example 4. AB, a calendar-year taxpayer, 

purchased and placed in service Automobile 

X1 in February 2000 for $10,000. X1 is a 

passenger automobile subject to section 

280F(a) and is used solely for AB’s business. 

AB depreciated X1 using a 5-year recovery 

period, the double declining balance method, 

and the half-year convention. As of January 

1, 2003, the adjusted depreciable basis of X1 

was $2,880 ($10,000 original cost minus 

$2,000 depreciation deduction for 2000, 

minus $3,200 depreciation deduction for 

2001, and $1,920 depreciation deduction for 

2002). In November 2003, AB exchanges, in 

a like-kind exchange, Automobile X1 plus 

$14,000 cash for new Automobile Y1 that 

will be used solely in AB’s business. 

Automobile Y1 is 50-percent bonus 

depreciation property for purposes of section 

168(k)(4) and qualifies for the expensing 

election under section 179. Pursuant to 

paragraph § 1.168(k)–1(g)(3)(ii) and 

paragraph (k)(2)(i) of this section, AB decided 

to apply § 1.168(i)–6 to the exchange of 

Automobile X1 for Automobile Y1, the 

replacement MACRS property. AB also 

makes the election under section 179 for the 

excess basis of Automobile Y1. AB 

depreciates Y1 using a five-year recovery 

period, the double declining balance method 

and the half-year convention. For 2003, the 

relinquished automobile section 280F limit 

for Automobile X1 is $1,775 and the 

replacement automobile section 280F limit 

for 2003 for Automobile Y1 is $10,710. 

(i) The 2003 depreciation deduction for 

Automobile X1 is $576. The depreciation 


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deduction calculated for X1 is $576 (the 

adjusted depreciable basis of Automobile X1 

at the beginning of 2003 of $2,880 × 40% × 1⁄2 year), which is less than the relinquished 

automobile section 280F limit and the 

replacement automobile section 280F limit. 

(ii) The additional first year depreciation 

deduction for the exchanged basis is $1,152. 

The additional first year depreciation 

deduction of $1,152 (remaining exchanged 

basis of $2,304 ($2,880 adjusted basis of 

Automobile X1 at the beginning of 2003 

minus $576) ¥ 0.5)) is less than the 

replacement automobile section 280F limit 

minus $576. 

(iii) AB’s MACRS depreciation deduction 

allowable in 2003 for the remaining 

exchanged basis of $1,152 is $47 (the 

relinquished automobile section 280F limit 

of $1,775 less the depreciation deduction of 

$576 taken for Automobile X1 less the 

additional first year depreciation deduction 

of $1,152 taken for the exchanged basis) 

which is less than the depreciation deduction 

calculated for the depreciable exchanged 

basis. 

(iv) For 2003, AB takes a $1,400 section 

179 deduction for the excess basis of 

Automobile Y1. AB must reduce the excess 

basis of $14,000 by the section 179 deduction 

of $1,400 to determine the remaining excess 

basis of $12,600. 

(v) For 2003, AB is allowed a 50-percent 

additional first year depreciation deduction 

of $6,300 (the remaining excess basis of 

$12,600 multiplied by .50). 

(vi) For 2003, AB’s depreciation deduction 

for the depreciable excess basis is limited to 

$1,235. The depreciation deduction 

computed without regard to the replacement 

automobile section 280F limit is $1,260 

($6,300 depreciable excess basis × 0.4 × 6/ 

12). However the depreciation deduction for 

the depreciable excess basis is limited to 

$1,235 ($10,710 (replacement automobile 

section 280F limit) ¥ $576 (depreciation 

deduction for Automobile X1) ¥ $1,152 

(additional first year depreciation deduction 

for the exchanged basis) ¥ $47 (depreciation 

deduction for exchanged basis) ¥ 1,400 

(section 179 deduction) ¥ $6,300 (additional 

first year depreciation deduction for 

remaining excess basis)). 

(4) Involuntary conversion for which 

the replacement MACRS property is 

acquired and placed in service before 

disposition of relinquished MACRS 

property. If, in an involuntary 

conversion, a taxpayer acquires and 

places in service the replacement 

MACRS property before the date of 

disposition of the relinquished MACRS 

property, the taxpayer depreciates the 

unadjusted depreciable basis of the 

replacement MACRS property under 

section 168 beginning in the taxable 

year when the replacement MACRS 

property is placed in service by the 

taxpayer and by using the applicable 

depreciation method, recovery period, 

and convention prescribed under 

section 168 for the replacement MACRS 

property at the placed-in-service date. 

However, at the time of disposition of 

the relinquished MACRS property, the 

taxpayer determines the exchanged 

basis and the excess basis of the 

replacement MACRS property and 

begins to depreciate the depreciable 

exchanged basis of the replacement 

MACRS property in accordance with 

paragraph (c) of this section. The 

depreciable excess basis of the 

replacement MACRS property continues 

to be depreciated by the taxpayer in 

accordance with the first sentence of 

this paragraph (d)(4). Further, in the 

year of disposition of the relinquished 

MACRS property, the taxpayer must 

include in taxable income the excess of 

the depreciation deductions allowable 

on the unadjusted depreciable basis of 

the replacement MACRS property over 

the depreciation deductions that would 

have been allowable to the taxpayer on 

the depreciable excess basis of the 

replacement MACRS property from the 

date the replacement MACRS property 

was placed in service by the taxpayer 

(taking into account the applicable 

convention) to the time of disposition of 

the relinquished MACRS property. 

However, see § 1.168(k)–1(f)(5)(v) for 

replacement MACRS property that is 

qualified property or 50-percent bonus 

depreciation property and § 1.1400L(b)–

1(f)(5) for replacement MACRS property 

that is qualified New York Liberty Zone 

property. 

(e) Use of optional depreciation 

tables—(1) Taxpayer not bound by prior 

use of table. If a taxpayer used an 

optional depreciation table for the 

relinquished MACRS property, the 

taxpayer is not required to use an 

optional table for the depreciable 

exchanged basis of the replacement 

MACRS property. Conversely, if a 

taxpayer did not use an optional 

depreciation table for the relinquished 

MACRS property, the taxpayer may use 

the appropriate table for the depreciable 

exchanged basis of the replacement 

MACRS property. If a taxpayer decides 

not to use the table for the depreciable 

exchanged basis of the replacement 

MACRS property, the depreciation 

allowance for this property for the year 

of replacement and subsequent taxable 

years is determined under paragraph (c) 

of this section. If a taxpayer decides to 

use the optional depreciation tables, no 

depreciation deduction is allowable for 

MACRS property placed in service by 

the acquiring taxpayer and subsequently 

exchanged or involuntarily converted by 

such taxpayer in the same taxable year, 

and, if, during the same taxable year, 

MACRS property is placed in service by 

the acquiring taxpayer, exchanged or 

involuntarily converted by such 

taxpayer, and the replacement MACRS 

property is disposed of by such 

taxpayer, no depreciation deduction is 

allowable for either MACRS property. 

(2) Determination of the depreciation 

deduction—(i) Relinquished MACRS 

property. In the year of disposition, the 

depreciation allowance for the 

relinquished MACRS property is 

computed by multiplying the 

unadjusted depreciable basis (less the 

amount of the additional first year 

depreciation deduction allowed or 

allowable, whichever is greater, under 

section 168(k) or section 1400L(b), as 

applicable) of the relinquished MACRS 

property by the annual depreciation rate 

(expressed as a decimal equivalent) 

specified in the appropriate table for the 

recovery year corresponding to the year 

of disposition. This product is then 

multiplied by a fraction, the numerator 

of which is the number of months 

(including fractions of months) the 

property is deemed to be placed in 

service during the year of the exchange 

or involuntary conversion (taking into 

account the applicable convention) and 

the denominator of which is 12. 

However, if the year of disposition is 

less than 12 months, the depreciation 

allowance determined under this 

paragraph (e)(2)(i) must be adjusted for 

a short taxable year (for further 

guidance, for example, see Rev. Proc. 

89–15 (1989–1 CB 816) and 

§ 601.601(d)(2)(ii)(b) of this chapter). 

(ii) Replacement MACRS property—

(A) Determination of the appropriate 

optional depreciation table. If a taxpayer 

chooses to use the appropriate optional 

depreciation table for the depreciable 

exchanged basis, the depreciation 

allowances for the depreciable 

exchanged basis beginning in the year of 

replacement are determined by choosing 

the optional depreciation table that 

corresponds to the recovery period, 

depreciation method, and convention of 

the replacement MACRS property 

determined under paragraph (c) of this 

section. 

(B) Calculating the depreciation 

deduction for the replacement MACRS 

property. (1) The depreciation 

deduction for the taxable year is 

computed by first determining the 

appropriate recovery year in the table 

identified under paragraph (e)(2)(ii)(A) 

of this section. The appropriate recovery 

year for the year of replacement is the 

same as the recovery year for the year 

of disposition, regardless of the taxable 

year in which the replacement property 

is acquired. For example, if the recovery 

year for the year of disposition would 

have been year 4 in the table that 

applied before the disposition of the 

relinquished MACRS property, then the 

recovery year for the year of 


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replacement is Year 4 in the table 

identified under paragraph (e)(2)(ii)(A) 

of this section. 

(2) Next, the annual depreciation rate 

(expressed as a decimal equivalent) for 

each recovery year is multiplied by a 

transaction coefficient. The transaction 

coefficient is the formula (1 / (1 ¥ x)) 

where x equals the sum of the annual 

depreciation rates from the table 

identified under paragraph (e)(2)(ii)(A) 

of this section (expressed as a decimal 

equivalent) corresponding to the 

replacement MACRS property (as 

determined under paragraph (e)(2)(ii)(A) 

of this section) for the taxable years 

beginning with the placed-in-service 

year of the relinquished MACRS 

property through the taxable year 

immediately prior to the year of 

disposition. The product of the annual 

depreciation rate and the transaction 

coefficient is multiplied by the 

depreciable exchanged basis (taking into 

account paragraph (e)(2)(i) of this 

section). In the year of replacement, this 

product is then multiplied by a fraction, 

the numerator of which is the number 

of months (including fractions of 

months) the property is deemed to be 

placed in service by the acquiring 

taxpayer during the year of replacement 

(taking into account the applicable 

convention) and the denominator of 

which is 12. However, if the year of 

replacement is the year the relinquished 

MACRS property is placed in service by 

the acquiring taxpayer, the preceding 

sentence does not apply. In addition, if 

the year of replacement is less than 12 

months, the depreciation allowance 

determined under paragraph (e)(2)(ii) of 

this section must be adjusted for a short 

taxable year (for further guidance, for 

example, see Rev. Proc. 89–15 (1989–1 

CB 816) and § 601.601(d)(2)(ii)(b) of this 

chapter). 

(iii) Unrecovered basis. If the 

replacement MACRS property would 

have unrecovered depreciable basis after 

the final recovery year (for example, due 

to a deferred exchange), the unrecovered 

basis is an allowable depreciation 

deduction in the taxable year that 

corresponds to the final recovery year 

unless the unrecovered basis is subject 

to a depreciation limitation such as 

section 280F. 

(3) Excess basis. As provided in 

paragraph (d)(1) of this section, any 

excess basis in the replacement MACRS 

property is treated as property that is 

placed in service by the acquiring 

taxpayer at the time of replacement. 

Thus, if the taxpayer chooses to use the 

appropriate optional depreciation table 

for the depreciable excess basis in the 

replacement MACRS property, the 

depreciation allowances for the 

depreciable excess basis are determined 

by multiplying the depreciable excess 

basis by the annual depreciation rate 

(expressed as a decimal equivalent) 

specified in the appropriate table for 

each taxable year. The appropriate table 

for the depreciable excess basis is based 

on the depreciation method, recovery 

period, and convention applicable to the 

depreciable excess basis under section 

168 at the time of replacement. 

However, If the year of replacement is 

less than 12 months, the depreciation 

allowance determined under this 

paragraph (e)(3) must be adjusted for a 

short taxable year (for further guidance, 

for example, see Rev. Proc. 89–15 

(1989–1 CB 816) and 

§ 601.601(d)(2)(ii)(b) of this chapter). 

(4) Examples. The application of this 

paragraph (e) is illustrated by the 

following examples: 

Example 1. J, a calendar-year taxpayer, 

acquired 5-year property for $10,000 and 

placed it in service in January 2001. J uses 

the optional tables to depreciate the property. 

J uses the half-year convention and did not 

make any elections for the property. In 

December 2003, J exchanges the 5-year 

property for used 7-year property in a likekind exchange. Pursuant to paragraph 

(k)(2)(i) of this section, J decided to apply 

§ 1.168(i)–6 to the exchange of the 5-year 

property for the 7-year property, the 

replacement MACRS property. The 

depreciable exchanged basis of the 7-year 

property equals the adjusted depreciable 

basis of the 5-year property at the time of 

disposition of the relinquished MACRS 

property, namely $3,840 ($10,000 less $2,000 

depreciation in 2001, $3,200 depreciation in 

2002, and $960 depreciation in 2003). J must 

first determine the appropriate optional 

depreciation table pursuant to paragraph (c) 

of this section. Since the replacement 

MACRS property has a longer recovery 

period and the same depreciation method as 

the relinquished MACRS property, J uses the 

optional depreciation table corresponding to 

a 7-year recovery period, the 200% declining 

balance method, and the half-year 

convention (because the 5-year property was 

depreciated using a half-year convention). 

Had the replacement MACRS property been 

placed in service in the same taxable year as 

the placed-in-service year of the relinquished 

MACRS property, the depreciation allowance 

for the replacement MACRS property for the 

year of replacement would be determined 

using recovery year 3 of the optional table. 

The depreciation allowance equals the 

depreciable exchanged basis ($3,840) 

multiplied by the annual depreciation rate 

for the current taxable year (.1749 for 

recovery year 3) as modified by the 

transaction coefficient [1 / (1 ¥ (.1429 + 

.2449))] which equals 1.6335. Thus, J 

multiplies $3,840, its depreciable exchanged 

basis in the replacement MACRS property, by 

the product of .1749 and 1.6335, and then by 

one-half, to determine the depreciation 

allowance for 2003, $549. For 2004, J 

multiples its depreciable exchanged basis in 

the replacement MACRS property 

determined at the time of replacement of 

$3,840 by the product of the modified annual 

depreciation rate for the current taxable year 

(.1249 for recovery year 4) and the 

transaction coefficient (1.6335) to determine 

its depreciation allowance of $783. 

Example 2. K, a calendar-year taxpayer, 

acquired used Asset V for $100,000 and 

placed it in service in January 1999. K 

depreciated Asset V under the general 

depreciation system of section 168(a) by 

using a 5-year recovery period, the 200- 

percent declining balance method of 

depreciation, and the half-year convention. 

In December 2003, as part of the involuntary 

conversion, Asset V is involuntarily 

converted due to an earthquake. In October 

2005, K purchases used Asset W with the 

insurance proceeds from the destruction of 

Asset V and places Asset W in service to 

replace Asset V. Pursuant to paragraph 

(k)(2)(i) of this section, K decided to apply 

§ 1.168(i)–6 to the involuntary conversion of 

Asset V with the replacement of Asset W, the 

replacement MACRS property. If Asset W 

had been placed in service when Asset V was 

placed in service, it would have been 

depreciated using a 7-year recovery period, 

the 200-percent declining balance method, 

and the half-year convention. K uses the 

optional depreciation tables to depreciate 

Asset V and Asset W. For 2003 (recovery year 

5 on the optional table), the depreciation 

deduction for Asset V is $5,760 

((0.1152)($100,000)(1/2)). Thus, the adjusted 

depreciable basis of Asset V at the time of 

replacement is $11,520 ($100,000 less 

$20,000 depreciation in 1999, $32,000 

depreciation in 2000, $19,200 depreciation in 

2001, $11,520 depreciation in 2002, and 

$5,760 depreciation in 2003). Under the table 

that applied to Asset V, the year of 

disposition was recovery year 5 and the 

depreciation deduction was determined 

under the straight line method. The table that 

applies for Asset W is the table that applies 

the straight line depreciation method, the 

half-year convention, and a 7-year recovery 

period. The appropriate recovery year under 

this table is recovery year 5. The depreciation 

deduction for Asset W for 2005 is $1,646 

(($11,520)(0.1429)(1/(1¥0.5))(1/2)). Thus, the 

depreciation deduction for Asset W in 2006 

(recovery year 6) is $3,290 

($11,520)(0.1428)(1/(1¥0.5)). The 

depreciation deduction for 2007 (recovery 

year 7) is $3,292 (($11,520)(.1429)(1/(1¥.5))). 

The depreciation deduction for 2008 

(recovery year 8) is $3292 ($11,520 less 

allowable depreciation for Asset W for 2005 

through 2007 ($1,646 + $3,290 + $3,292)). 

Example 3. L, a calendar-year taxpayer, 

placed in service used Computer X in 

January 2002 for $5,000. L depreciated 

Computer X under the general depreciation 

system of section 168(a) by using the 200- 

percent declining balance method of 

depreciation, a 5-year recovery period, and 

the half-year convention. Computer X is 

destroyed in a fire in March 2004. For 2004, 

the depreciation deduction allowable for 

Computer X equals $480 ([($5,000)(.1920)] × 

(1/2)). Thus, the adjusted depreciable basis of 

Computer X was $1,920 when it was 

destroyed ($5,000 unadjusted depreciable 


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basis less $1,000 depreciation for 2002, 

$1,600 depreciation for 2003, and $480 

depreciation for 2004). In April 2004, as part 

of the involuntary conversion, L acquired 

and placed in service used Computer Y with 

insurance proceeds received due to the loss 

of Computer X. Computer Y will be 

depreciated using the same depreciation 

method, recovery period, and convention as 

Computer X. L elected to use the optional 

depreciation tables to compute the 

depreciation allowance for Computer X and 

Computer Y. The depreciation deduction 

allowable for 2004 for Computer Y equals 

$384 ([$1,920 × (.1920)(1/(1¥.52))] × (1/2)). 

(f) Mid-quarter convention. For 

purposes of applying the 40-percent test 

under section 168(d) and the regulations 

under section 168(d), the following 

rules apply: 

(1) Exchanged basis. If, in a taxable 

year, MACRS property is placed in 

service by the acquiring taxpayer (but 

not as a result of a like-kind exchange 

or involuntary conversion) and—

(i) In the same taxable year, is 

disposed of by the acquiring taxpayer in 

a like-kind exchange or an involuntary 

conversion and replaced by the 

acquiring taxpayer with replacement 

MACRS property, the exchanged basis 

(determined without any adjustments 

for depreciation deductions during the 

taxable year) of the replacement MACRS 

property is taken into account in the 

year of replacement in the quarter the 

relinquished MACRS property was 

placed in service by the acquiring 

taxpayer; or 

(ii) In the same taxable year, is 

disposed of by the acquiring taxpayer in 

a like-kind exchange or an involuntary 

conversion, and in a subsequent taxable 

year is replaced by the acquiring 

taxpayer with replacement MACRS 

property, the exchanged basis 

(determined without any adjustments 

for depreciation deductions during the 

taxable year) of the replacement MACRS 

property is taken into account in the 

year of replacement in the quarter the 

replacement MACRS property was 

placed in service by the acquiring 

taxpayer; or 

(iii) In a subsequent taxable year, 

disposed of by the acquiring taxpayer in 

a like-kind exchange or involuntary 

conversion, the exchanged basis of the 

replacement MACRS property is not 

taken into account in the year of 

replacement. 

(2) Excess basis. Any excess basis is 

taken into account in the quarter the 

replacement MACRS property is placed 

in service by the acquiring taxpayer. 

(3) Depreciable property acquired for 

nondepreciable property. Both the 

exchanged basis and excess basis of the 

replacement MACRS property described 

in paragraph (d)(2)(ii) of this section 

(depreciable property acquired for 

nondepreciable property), are taken into 

account for determining whether the 

mid-quarter convention applies in the 

year of replacement. 

(g) Section 179 election. In applying 

the section 179 election, only the excess 

basis, if any, in the replacement MACRS 

property is taken into account. If the 

replacement MACRS property is 

described in paragraph (d)(2)(ii) of this 

section (depreciable property acquired 

for nondepreciable property), only the 

excess basis in the replacement MACRS 

property is taken into account. 

(h) Additional first year depreciation 

deduction. See § 1.168(k)–1(f)(5) (for 

qualified property or 50-percent bonus 

depreciation property) and 

§ 1.1400L(b)–1(f)(5) (for qualified New 

York Liberty Zone property). 

(i) Elections—(1) Election not to apply 

this section. A taxpayer may elect not to 

apply this section for any MACRS 

property involved in a like-kind 

exchange or involuntary conversion. An 

election under this paragraph (i)(1) 

applies only to the taxpayer making the 

election and the election applies to both 

the relinquished MACRS property and 

the replacement MACRS property. If an 

election is made under this paragraph 

(i)(1), the depreciation allowances for 

the replacement MACRS property 

beginning in the year of replacement 

and for the relinquished MACRS 

property in the year of disposition are 

not determined under this section 

(except as otherwise provided in this 

paragraph). Instead, for depreciation 

purposes only, the sum of the 

exchanged basis and excess basis, if any, 

in the replacement MACRS property is 

treated as property placed in service by 

the taxpayer at the time of replacement 

and the adjusted depreciable basis of the 

relinquished MACRS property is treated 

as being disposed of by the taxpayer at 

the time of disposition. While the 

relinquished MACRS property is treated 

as being disposed of at the time of 

disposition for depreciation purposes, 

the election not to apply this section 

does not affect the application of 

sections 1031 and 1033 (for example, if 

a taxpayer does not make the election 

under this paragraph (i)(1) and does not 

recognize gain or loss under section 

1031, this result would not change if the 

taxpayer chose to make the election 

under this paragraph (i)(1)). In addition, 

the election not to apply this section 

does not affect the application of 

sections 1245 and 1250 to the 

relinquished MACRS property. 

Paragraphs (c)(5)(i) (determination of 

depreciation for relinquished MACRS 

property in the year of disposition), 

(c)(5)(iii) (rules for deferred 

transactions), (g) (section 179 election), 

and (h) (additional first year 

depreciation deduction) of this section 

apply to property to which this 

paragraph (i)(1) applies. See paragraph 

(j) of this section for the time and 

manner of making the election under 

this paragraph (i)(1). 

(2) Election to treat certain 

replacement property as MACRS 

property. If the tangible depreciable 

property acquired by a taxpayer in a 

like-kind exchange or involuntary 

conversion (the replacement property) 

replaces tangible depreciable property 

for which the taxpayer made a valid 

election under section 168(f)(1) to 

exclude it from the application of 

MACRS (the relinquished property), the 

taxpayer may elect to treat, for 

depreciation purposes only, the sum of 

the exchanged basis and excess basis, if 

any, of the replacement property as 

MACRS property that is placed in 

service by the taxpayer at the time of 

replacement. An election under this 

paragraph (i)(2) applies only to the 

taxpayer making the election and the 

election applies to both the relinquished 

property and the replacement property. 

If an election is made under this 

paragraph (i)(2), the adjusted 

depreciable basis of the relinquished 

property is treated as being disposed of 

by the taxpayer at the time of 

disposition. Rules similar to those 

provided in §§ 1.168(i)–6(b)(3) and (4) 

apply for purposes of determining the 

time of disposition and time of 

replacement under this paragraph (i)(2). 

While the relinquished property is 

treated as being disposed of at the time 

of disposition for depreciation purposes, 

the election under this paragraph (i)(2) 

does not affect the application of 

sections 1031 and 1033, and the 

application of sections 1245 and 1250 to 

the relinquished property. If an election 

is made under this paragraph (i)(2), 

rules similar to those provided in 

paragraphs (c)(5)(iii) (rules for deferred 

transactions), (g) (section 179 election), 

and (h) (additional first year 

depreciation deduction) of this section 

apply to property. Except as provided in 

paragraph (k)(3)(ii) of this section, a 

taxpayer makes the election under this 

paragraph (i)(2) by claiming the 

depreciation allowance as determined 

under MACRS for the replacement 

property on the taxpayer’s timely filed 

(including extensions) original Federal 

tax return for the placed-in-service year 

of the replacement property as 

determined under this paragraph (i)(2). 

(j) Time and manner of making 

election under paragraph (i)(1) of this 

section—(1) In general. The election 

provided in paragraph (i)(1) of this 


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Federal Register / Vol. 72, No. 40 / Thursday, March 1, 2007 / Rules and Regulations 9261 

section is made separately by each 

person acquiring replacement MACRS 

property. The election is made for each 

member of a consolidated group by the 

common parent of the group, by the 

partnership (and not by the partners 

separately) in the case of a partnership, 

or by the S corporation (and not by the 

shareholders separately) in the case of 

an S corporation. A separate election 

under paragraph (i)(1) of this section is 

required for each like-kind exchange or 

involuntary conversion. The election 

provided in paragraph (i)(1) of this 

section must be made within the time 

and manner provided in paragraph (j)(2) 

and (3) of this section and may not be 

made by the taxpayer in any other 

manner (for example, the election 

cannot be made through a request under 

section 446(e) to change the taxpayer’s 

method of accounting), except as 

provided in paragraph (k)(2) of this 

section. 

(2) Time for making election. The 

election provided in paragraph (i)(1) of 

this section must be made by the due 

date (including extensions) of the 

taxpayer’s Federal tax return for the year 

of replacement. 

(3) Manner of making election. The 

election provided in paragraph (i)(1) of 

this section is made in the manner 

provided for on Form 4562, 

Depreciation and Amortization, and its 

instructions. If Form 4562 is revised or 

renumbered, any reference in this 

section to that form is treated as a 

reference to the revised or renumbered 

form. 

(4) Revocation. The election provided 

in paragraph (i)(1) of this section, once 

made, may be revoked only with the 

consent of the Commissioner of Internal 

Revenue. Such consent will be granted 

only in extraordinary circumstances. 

Requests for consent are requests for a 

letter ruling and must be filed with the 

Commissioner of Internal Revenue, 

Washington, DC 20224. Requests for 

consent may not be made in any other 

manner (for example, through a request 

under section 446(e) to change the 

taxpayer’s method of accounting). 

(k) Effective date—(1) In general. 

Except as provided in paragraph (k)(3) 

of this section, this section applies to a 

like-kind exchange or an involuntary 

conversion of MACRS property for 

which the time of disposition and the 

time of replacement both occur after 

February 27, 2004. 

(2) Application to pre-effective date 

like-kind exchanges and involuntary 

conversions. For a like-kind exchange or 

an involuntary conversion of MACRS 

property for which the time of 

disposition, the time of replacement, or 

both occur on or before February 27, 

2004, a taxpayer may—

(i) Apply the provisions of this 

section. If a taxpayer’s applicable 

Federal tax return has been filed on or 

before February 27, 2004, and the 

taxpayer has treated the replacement 

MACRS property as acquired, and the 

relinquished MACRS property as 

disposed of, in a like-kind exchange or 

an involuntary conversion, the taxpayer 

changes its method of accounting for 

depreciation of the replacement MACRS 

property and relinquished MACRS 

property in accordance with this 

paragraph (k)(2)(i) by following the 

applicable administrative procedures 

issued under § 1.446–1(e)(3)(ii) for 

obtaining the Commissioner’s automatic 

consent to a change in method of 

accounting (for further guidance, see 

Rev. Proc. 2002–9 (2002–1 CB 327) and 

§ 601.601(d)(2)(ii)(b) of this chapter); or 

(ii) Rely on prior guidance issued by 

the Internal Revenue Service for 

determining the depreciation 

deductions of replacement MACRS 

property and relinquished MACRS 

property (for further guidance, for 

example, see Notice 2000–4 (2001–1 CB 

313) and § 601.601(d)(2)(ii)(b) of this 

chapter). In relying on such guidance, a 

taxpayer may use any reasonable, 

consistent method of determining 

depreciation in the year of disposition 

and the year of replacement. If a 

taxpayer’s applicable Federal tax return 

has been filed on or before February 27, 

2004, and the taxpayer has treated the 

replacement MACRS property as 

acquired, and the relinquished MACRS 

property as disposed of, in a like-kind 

exchange or an involuntary conversion, 

the taxpayer changes its method of 

accounting for depreciation of the 

replacement MACRS property and 

relinquished MACRS property in 

accordance with this paragraph (k)(2)(ii) 

by following the applicable 

administrative procedures issued under 

§ 1.446–1(e)(3)(ii) for obtaining the 

Commissioner’s automatic consent to a 

change in method of accounting (for 

further guidance, see Rev. Proc. 2002–9 

(2002–1 CB 327) and 

§ 601.601(d)(2)(ii)(b) of this chapter). 

(3) Like-kind exchanges and 

involuntary conversions where the 

taxpayer made the election under 

section 168(f)(1) for the relinquished 

property— (i) In general. If the tangible 

depreciable property acquired by a 

taxpayer in a like-kind exchange or 

involuntary conversion (the 

replacement property) replaces tangible 

depreciable property for which the 

taxpayer made a valid election under 

section 168(f)(1) to exclude it from the 

application of MACRS (the relinquished 

property), paragraph (i)(2) of this section 

applies to such relinquished property 

and replacement property for which the 

time of disposition and the time of 

replacement (both as determined under 

paragraph (i)(2) of this section) both 

occur after February 26, 2007. 

(ii) Application of paragraph (i)(2) of 

this section to pre-February 26, 2007 

like-kind exchanges and involuntary 

conversions. If the tangible depreciable 

property acquired by a taxpayer in a 

like-kind exchange or involuntary 

conversion (the replacement property) 

replaces tangible depreciable property 

for which the taxpayer made a valid 

election under section 168(f)(1) to 

exclude it from the application of 

MACRS (the relinquished property), the 

taxpayer may apply paragraph (i)(2) of 

this section to the relinquished property 

and the replacement property for which 

the time of disposition, the time of 

replacement (both as determined under 

paragraph (i)(2) of this section), or both 

occur on or before February 26, 2007. If 

the taxpayer wants to apply paragraph 

(i)(2) of this section and the taxpayer’s 

applicable Federal tax return has been 

filed on or before February 26, 2007, the 

taxpayer must change its method of 

accounting for depreciation of the 

replacement property and relinquished 

property in accordance with this 

paragraph (k)(3)(ii) by following the 

applicable administrative procedures 

issued under § 1.446–1(e)(3)(ii) for 

obtaining the Commissioner’s automatic 

consent to a change in method of 

accounting (for further guidance, see 

Rev. Proc. 2002–9 (2002–1 CB 327) and 

§ 601.601(d)(2)(ii)(b) of this chapter). 

§ 1.168(i)–6T [Removed] 

■ Par. 13. Section 1.168(i)–6T is 

removed. 

■ Par. 14. Section 1.168(k)–1 is 

amended as follows: 

■ 1. The second and third sentences in 

paragraph (f)(5)(v)(B) are revised. 

■ 2. The last sentences in Example 1(i), 

Example 3(i), Example 4(i), and 

Example 5(i) in paragraph (f)(5)(vi) are 

revised. 

■ 3. Paragraph (g)(3)(ii) is revised. 

The revisions read as follows: 

§ 1.168(k)–1 Additional first year 

depreciation. 

* * * * * 

(f) * * * 

(5) * * * 

(v) * * * 

(B) * * * However, at the time of 

disposition of the involuntarily 

converted MACRS property, the 

taxpayer determines the exchanged 

basis (as defined in § 1.168(i)–6(b)(7)) 

and the excess basis (as defined in 


rwilkins on PROD1PC63 with RULES
9262 Federal Register / Vol. 72, No. 40 / Thursday, March 1, 2007 / Rules and Regulations 

§ 1.168(i)–6(b)(8)) of the acquired 

MACRS property and begins to 

depreciate the depreciable exchanged 

basis (as defined in § 1.168(i)–6(b)(9) of 

the acquired MACRS property in 

accordance with § 1.168(i)–6(c). The 

depreciable excess basis (as defined in 

§ 1.168(i)–6(b)(10)) of the acquired 

MACRS property continues to be 

depreciated by the taxpayer in 

accordance with the first sentence of 

this paragraph (f)(5)(v)(B). 

* * * * * 

(vi) * * * 

Example 1. (i) * * * Pursuant to paragraph 

(g)(3)(ii) of this section and § 1.168(i)–

6(k)(2)(i), EE decided to apply § 1.168(i)–6 to 

the involuntary conversion of Canopy V1 

with the replacement of Canopy W1, the 

acquired MACRS property. 

* * * * * 

Example 3. (i) * * * Pursuant to paragraph 

(g)(3)(ii) of this section and § 1.168(i)–

6(k)(2)(i), FF decided to apply § 1.168(i)–6 to 

the exchange of Computer X2 for Computer 

Y2, the acquired MACRS property. 

* * * * * 

Example 4. (i) * * * Pursuant to 

paragraph (g)(3)(ii) of this section and 

§ 1.168(i)–6(k)(2)(i), GG decided to apply 

§ 1.168(i)–6 to the exchange of Equipment X3 

for Equipment Y3, the acquired MACRS 

property. 

* * * * * 

Example 5. (i) * * * Pursuant to paragraph 

(g)(3)(ii) of this section and § 1.168(i)–

6(k)(2)(i), GG decided to apply § 1.168(i)–6 to 

the exchange of Equipment Y3 for Equipment 

Z1, the acquired MACRS property. 

* * * * * 

(g) * * * 

(3) * * * 

(ii) Paragraphs (f)(5)(ii)(F)(2) and 

(f)(5)(v) of this section apply to a likekind exchange or an involuntary 

conversion of MACRS property and 

computer software for which the time of 

disposition and the time of replacement 

both occur after February 27, 2004. For 

a like-kind exchange or an involuntary 

conversion of MACRS property for 

which the time of disposition, the time 

of replacement, or both occur on or 

before February 27, 2004, see § 1.168(i)–

6(k)(2)(ii). For a like-kind exchange or 

involuntary conversion of computer 

software for which the time of 

disposition, the time of replacement, or 

both occur on or before February 27, 

2004, a taxpayer may rely on prior 

guidance issued by the Internal Revenue 

Service for determining the depreciation 

deductions of the acquired computer 

software and the exchanged or 

involuntarily converted computer 

software (for further guidance, see 

§ 1.168(k)–1T(f)(5) published in the 

Federal Register on September 8, 2003 

(68 FR 53000)). In relying on such 

guidance, a taxpayer may use any 

reasonable, consistent method of 

determining depreciation in the year of 

disposition and the year of replacement. 

* * * * * 

Kevin M. Brown, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: February 23, 2007. 

Eric Solomon, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. 07–922 Filed 2–26–07; 3:25 pm] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9313] 

RIN 1545–BG29 

Corporate Reorganizations; Additional 

Guidance on Distributions Under 

Sections 368(a)(1)(D) and 354(b)(1)(B) 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Temporary regulations. 

SUMMARY: This document contains 

temporary regulations amending 

§ 1.368–2T(l), which provides guidance 

regarding the qualification of certain 

transactions as reorganizations 

described in section 368(a)(1)(D) where 

no stock and/or securities of the 

acquiring corporation are issued and 

distributed in the transaction. These 

regulations clarify that the rules in 

§ 1.368–2T(l) are not intended to affect 

the qualification of related party 

triangular asset acquisitions as 

reorganizations described in section 

368. These regulations affect 

corporations engaging in such 

transactions and their shareholders. The 

text of the temporary regulations also 

serves as the text of the proposed 

regulations set forth in the notice of 

proposed rulemaking on this subject in 

the Proposed Rules section in this issue 

of the Federal Register. 

DATES: Effective Date: These regulations 

are effective on March 1, 2007. 

Applicability Date: For dates of 

applicability, see § 1.368–2T(l)(4)(i). 

FOR FURTHER INFORMATION CONTACT: 

Bruce A. Decker at (202) 622–7550 (not 

a toll-free number). 

SUPPLEMENTARY INFORMATION: 

Background 

On December 19, 2006, the IRS and 

Treasury Department published 

temporary regulations (TD 9303) under 

§ 1.368–2T(l) in the Federal Register (71 

FR 75879) providing guidance regarding 

the qualification of certain transactions 

as reorganizations described in section 

368(a)(1)(D) where no stock and/or 

securities of the acquiring corporation 

are issued and distributed in the 

transaction. Under the temporary 

regulations, in cases where it is 

determined that the same person or 

persons own, directly or indirectly, all 

of the stock of the transferor and 

transferee corporations in identical 

proportions, the distribution 

requirement under sections 368(a)(1)(D) 

and 354(b)(1)(B) will be treated as 

satisfied even though no stock is 

actually issued in the transaction. 

In each case where it is determined 

that the same person or persons own all 

of the stock of the transferor and 

transferee corporations in identical 

proportions, a nominal share of stock of 

the transferee corporation will be 

deemed issued in addition to the actual 

consideration exchanged in the 

transaction. The nominal share of stock 

in the transferee corporation will then 

be deemed distributed by the transferor 

corporation to its shareholders and, in 

appropriate circumstances, further 

transferred to the extent necessary to 

reflect the actual ownership of the 

transferor and transferee corporations. 

The IRS and Treasury Department 

have become aware that the temporary 

regulations may have unintended 

consequences regarding related party 

triangular asset acquisitions otherwise 

qualifying under section 368. 

Specifically, the temporary regulations 

may cause certain related party asset 

acquisitions that would otherwise 

qualify as tax-free triangular 

reorganizations to be treated as 

reorganizations described in section 

368(a)(1)(D) with boot. 

For example, the temporary 

regulations may cause a related party 

transaction that would otherwise qualify 

as a tax-free reorganization described in 

section 368(a)(1)(C) in which 

substantially all of the target 

corporation’s properties are acquired 

solely in exchange for voting stock of 

the corporation in control of the 

acquiring corporation to also be 

described in section 368(a)(1)(D). If so, 

section 368(a)(2)(A) would preclude the 

transaction from being treated as 

described in section 368(a)(1)(C). 

Accordingly, the transaction would be 

treated as described only in section 

368(a)(1)(D), and the voting stock of the 

corporation in control of the acquiring 

corporation would be treated as boot. 

Further, the temporary regulations may 

cause a related party transaction that 


rwilkins on PROD1PC63 with RULES