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Definition of Qualified Electric Vehicle, and Recapture Rules for Qualified Electric Vehicles, Qualified Clean-Fuel Vehicle Property, and Qualified Clean-Fuel Vehicle Refueling Property Publication: Federal Register Agency: Internal Revenue Service Byline: Margaret Milner Richardson Date: 14 October 1994 Subject: American Government  • Electric Vehicles
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[Federal Register Volume 59, Number 198 (Friday, October 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25415]
[[Page Unknown]]
[Federal Register: October 14, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[PS-72-92]
RIN 1545-AR23
Definition of Qualified Electric Vehicle, and Recapture Rules for
Qualified Electric Vehicles, Qualified Clean-Fuel Vehicle Property, and
Qualified Clean-Fuel Vehicle Refueling Property
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations on the definition
of a qualified electric vehicle, the recapture of any credit allowable
for a qualified electric vehicle, and the recapture of any deduction
allowable for qualified clean-fuel vehicle property or qualified clean-
fuel vehicle refueling property. The proposed regulations reflect
changes to the law made by the Energy Policy Act of 1992 and affect
taxpayers who are owners of qualified electric vehicles, clean-fuel
vehicles, and clean-fuel vehicle refueling property. This document also
provides notice of a public hearing on these proposed regulations.
DATES: Written comments and outlines of oral comments to be presented
at the public hearing scheduled for January 19, 1995, at 10 a.m., must
be received by December 16, 1994.
ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS-72-92), room 5228,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submissions may be hand delivered between
the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (PS-72-92),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW,
Washington, DC.
The public hearing will be held in the auditorium at 1111
Constitution Ave. NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Joanne E.
Johnson at (202) 622-3110; concerning submissions and the hearing,
Carol Savage, (202) 622-8452 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed regulations under sections 30 and
179A. These provisions were added to the Internal Revenue Code by
section 1913 of the Energy Policy Act of 1992 (1992 Act) and apply to
property placed in service after June 30, 1993.
The proposed regulations provide the definition of a qualified
electric vehicle under section 30(c) and also provide rules for the
recapture of the section 30 credit and section 179A deduction under
sections 30(d)(2) and 179A(e)(4), respectively. The regulations follow
the legislative history to the 1992 Act, which provides guidance on
when recapture occurs, how to determine the recapture amount, and how
to adjust the basis of the property upon recapture.
On June 9, 1993, the IRS published Notice 93-34 in the Federal
Register inviting comments from the public on any issues under sections
30 and 179A that should be addressed in proposed regulations. The IRS
is reviewing these comments and will issue additional proposed
regulations addressing certain issues raised in the comments.
Explanation of Provisions
Definition of Qualified Electric Vehicle
A qualified electric vehicle is a motor vehicle that meets the
requirements of section 30(c). Section 30(c) provides that the original
use of the motor vehicle qualifying for the section 30 credit must
commence with the taxpayer. Thus, under the proposed regulations, a
qualified electric vehicle does not include any motor vehicle that has
ever been used (for either personal or business use) as a non-electric
vehicle.
Recapture of Section 30 Credit
The proposed regulations incorporate rules under section 30(d) and
the legislative history to provide that recapture occurs if, at any
time within 3 years after the date the property is placed in service,
the motor vehicle is modified so that it may no longer be primarily
powered by electricity or is used in a manner described under section
50(b) (for example, used predominantly outside the United States).
Generally, no recapture occurs upon a sale or other disposition
(including a disposition by reason of an accident or other casualty) of
a qualified electric vehicle.
The proposed regulations provide that recapture occurs if, within 3
years from the date the vehicle is placed in service, the taxpayer
sells or disposes of the vehicle and the taxpayer knows or has reason
to know that the vehicle will be modified so that it may no longer be
primarily powered by electricity or will be used in a manner described
under section 50(b). This is necessary to prevent avoidance of
recapture by taxpayers who transfer property to be used in a manner
that would have triggered recapture if the taxpayers had so used the
property themselves.
The proposed regulations provide that the recapture amount equals
the benefit of the section 30 credit that reduced tax liability in
years prior to the taxable year of recapture multiplied by the
recapture percentage. For this purpose, the benefit of the section 30
credit includes the amount of any other credits, such as under sections
53 (minimum tax credit) and 469 (passive activity credit), attributable
to section 30 and allowed in years prior to the taxable year of
recapture. Also, any credit carryover amounts attributable to section
30 must be reduced by an amount equal to that credit carryover amount
multiplied by the recapture percentage for the taxable year of
recapture.
Consistent with the legislative history, the proposed regulations
provide that the recapture percentage is 100 percent if the recapture
date is within the first full year from the date the qualified electric
vehicle is placed in service, 66\2/3\ percent if the recapture date is
in the second full year, or 33\1/3\ percent if the recapture date is in
the third full year.
The recapture amount is added to the amount of tax due for the
taxable year in which a recapture event occurs. For this purpose, the
recapture amount is not treated as an income tax imposed on the
taxpayer by chapter 1 for purposes of computing alternative minimum tax
or determining the amount of any other allowable credits for the
taxable year of recapture.
The basis of the qualified electric vehicle must be increased by
the recapture amount and any amount that reduced other carryover
credits attributable to section 30 as of the first day of the taxable
year in which the recapture event occurs. For a vehicle that is
eligible for depreciation, any additional basis resulting from
recapture is recoverable over its remaining recovery period beginning
as of the first day of the taxable year of recapture.
Moreover, the rules of section 1245 are to apply upon a sale or
other disposition of a depreciable qualified electric vehicle. Thus,
the proposed regulations provide that section 1245 will apply to any
gain recognized upon a sale or other disposition of a depreciable
vehicle to the extent the basis of the vehicle was reduced, net of any
basis increase resulting from any recapture previously taken into
account.
Recapture of Section 179A Deduction
The proposed regulations provide that recapture for qualified
clean-fuel vehicle property occurs if, at any time within 3 years from
the date the property is placed in service, the vehicle containing the
qualified clean-fuel vehicle property (1) is modified so that it may no
longer be propelled by a clean-burning fuel, (2) is used in a manner
described in section 50(b) (for example, used predominantly outside the
United States), or (3) otherwise ceases to qualify as property defined
in section 179A(c). These rules are consistent with section 179A(e) and
the specific recapture rules set forth in the legislative history to
the 1992 Act.
Similarly, the proposed regulations provide that recapture for the
qualified clean-fuel vehicle refueling property occurs if, at any time
before the end of the recovery period, the property (1) is no longer
used predominantly in a trade or business, (2) ceases to qualify as
property described in section 179A(d), or (3) is used in a manner
described in section 50(b) (for example, used predominantly outside the
United States).
Generally, no recapture occurs upon a sale or other disposition
(including a disposition by reason of an accident or other casualty) of
a vehicle containing qualified clean-fuel vehicle property or of
qualified clean-fuel vehicle refueling property.
The proposed regulations provide that recapture occurs if the
taxpayer sells or disposes of the clean-fuel vehicle within 3 years
from the date the property is placed in service and the taxpayer knows
or has reason to know that the vehicle will be converted to non-clean-
fuel use, will be used in a manner described in section 50(b), or will
otherwise cease to qualify as property defined in section 179A(c). This
is necessary to prevent avoidance of recapture by taxpayers who
transfer property to be used in a manner that would have triggered
recapture if the taxpayers had so used the property themselves.
Similarly, the proposed regulations require recapture if the
taxpayer sells or disposes of its qualified clean-fuel vehicle
refueling property before the end of its recovery period, and the
taxpayer knows or has reason to know that the property will cease to
qualify as property described in section 179A(d), will not be used
predominantly in a trade or business, or will be used in a manner
described in section 50(b).
Consistent with the legislative history, the proposed regulations
provide that the recapture amount for qualified clean-fuel vehicle
property equals 100 percent of the benefit of the section 179A
deduction allowable if the recapture date is within the first full year
from the date the property is placed in service, 66\2/3\ percent if the
recapture date is in the second full year, or 33\1/3\ percent if the
recapture date is in the third full year.
However, for qualified clean-fuel vehicle refueling property, the
legislative history states that the amount of the deduction for the
property is to vest ratably over the recovery period for the property.
Thus, the proposed regulations provide that the recapture amount is
equal to the portion of the section 179A deduction attributable to the
remaining recovery period including the taxable year of recapture.
The legislative history indicates that the section 179A deduction
is allowed as an adjustment to gross income. Consequently, the proposed
regulations provide that the recapture amount for qualified clean-fuel
vehicle property and refueling property is includable in the gross
income for the taxable year in which the recapture event occurs.
The basis of the vehicle containing qualified clean-fuel vehicle
property or the basis of qualified clean-fuel vehicle refueling
property is increased by the recapture amount as of the first day of
the taxable year in which the recapture event occurs. For a depreciable
vehicle or refueling property, any additional basis resulting from
recapture is recoverable over the remaining recovery period for the
vehicle or refueling property, beginning as of the first day of the
taxable year of recapture.
Moreover, under section 179A(e)(6)(B), the rules of section 1245
are to apply upon a sale or other disposition of depreciable section
179A property. Thus, the proposed regulations provide that section 1245
will apply to any gain recognized upon a sale or other disposition to
the extent the basis was reduced, net of any basis increase resulting
from any recapture previously taken into account.
Proposed Effective Dates
The regulations are proposed to be effective on the date of
publication in the Federal Register. If the recapture date is before
the effective date of these regulations, a taxpayer may use any
reasonable method to recapture the benefit of any section 30 credit
allowable or section 179A deduction allowable consistent with sections
30 and 179A and their legislative history.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations, and, therefore, a Regulatory
Flexibility Analysis is not required. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) that are submitted timely to the IRS. All
comments will be available for public inspection and copying.
A public hearing has been scheduled for Thursday, January 19, 1995,
at 10 a.m. in the auditorium. Because of access restrictions, visitors
will not be admitted beyond the Internal Revenue Building lobby more
than 15 minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons that wish to present oral comments at the hearing must
submit written comments and outlines of the topics to be discussed and
the time to be devoted to each topic (signed original and eight (8)
copies) by December 16, 1994.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting Information
The principal author of these regulations is Joanne E. Johnson,
Office of Assistant Chief Counsel (Passthroughs and Special
Industries), IRS. 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.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * * Section 1.30-1 also issued under
26 U.S.C. 30(d)(2) * * * Section 1.179A-1 also issued under 26
U.S.C. 179A(e)(4) * * *
Par. 2. Section 1.30-1 is added under the heading ``Credits
allowable'' to read as follows:
Sec. 1.30-1 Definition of qualified electric vehicle and recapture of
credit for qualified electric vehicle.
(a) Definition of qualified electric vehicle. A qualified electric
vehicle is a motor vehicle that meets the requirements of section
30(c). Accordingly, a qualified electric vehicle does not include any
motor vehicle that has ever been used (for either personal or business
use) as a non-electric vehicle.
(b) Recapture of credit for qualified electric vehicle--(1) In
general--(i) Addition to tax. If a recapture event occurs with respect
to a taxpayer's qualified electric vehicle, the taxpayer must add the
recapture amount to the amount of tax due in the taxable year in which
the recapture event occurs. The recapture amount is not treated as
income tax imposed on the taxpayer by chapter 1 for purposes of
computing the alternative minimum tax or determining the amount of any
other allowable credits for the taxable year in which the recapture
event occurs.
(ii) Reduction of carryover. If a recapture event occurs with
respect to a taxpayer's qualified electric vehicle, and if a portion of
the section 30 credit for the cost of that vehicle was disallowed under
section 30(b)(3)(B) and consequently added to the taxpayer's minimum
tax credit pursuant to section 53(d)(1)(B)(iii), the taxpayer must
reduce its minimum tax credit carryover by an amount equal to the
portion of any minimum tax credit carryover attributable to the
disallowed section 30 credit, multiplied by the recapture percentage
for the taxable year of recapture. Similarly, the taxpayer must reduce
any other credit carryover amounts (such as under section 469) by the
portion of the carryover attributable to section 30, multiplied by the
recapture percentage.
(2) Recapture event--(i) In general. A recapture event occurs if,
within 3 full years from the date a qualified electric vehicle is
placed in service, the vehicle ceases to be a qualified electric
vehicle. A vehicle ceases to be a qualified electric vehicle if--
(A) The vehicle is modified so that it is no longer primarily
powered by electricity;
(B) The vehicle is used in a manner described in section 50(b); or
(C) The taxpayer receiving the credit under section 30 sells or
disposes of the vehicle and knows or has reason to know that the
vehicle will be used in a manner described in paragraph (b)(2)(i) (A)
or (B) of this section.
(ii) Exception for disposition. Except as provided in paragraph
(b)(2)(i)(C) of this section, a sale or other disposition (including a
disposition by reason of an accident or other casualty) of a qualified
electric vehicle is not a recapture event.
(3) Recapture amount. The recapture amount is equal to the
recapture percentage times the decrease in the credits allowed under
section 30 for all prior taxable years that would have resulted solely
from reducing to zero the cost taken into account under section 30 with
respect to such vehicle, including any credits allowed attributable to
section 30 (such as under sections 53 and 469).
(4) Recapture date. The recapture date is the actual date of the
recapture event unless a recapture event described in paragraph
(b)(2)(i)(B) of this section occurs, in which case the recapture date
is the first day of the recapture year.
(5) Recapture percentage. For purposes of this section, the
recapture percentage is:
(i) 100, if the recapture date is within the first full year after
the date the vehicle is placed in service;
(ii) 66\2/3\, if the recapture date is within the second full year
after the date the vehicle is placed in service; or
(iii) 33\1/3\, if the recapture date is within the third full year
after the date the vehicle is placed in service.
(6) Basis adjustment. As of the first day of the taxable year in
which the recapture event occurs, the basis of the qualified electric
vehicle is increased by the recapture amount and the carryover
reductions taken into account under paragraphs (b)(1) (i) and (ii) of
this section, respectively. For a vehicle that is of a character that
is subject to an allowance for depreciation, this increase in basis is
recoverable over the remaining recovery period for the vehicle
beginning as of the first day of the taxable year of recapture.
(7) Application of section 1245 for sales and other dispositions.
For purposes of section 1245, the amount of the credit allowable under
section 30(a) with respect to any qualified electric vehicle that is
(or has been) of a character subject to an allowance for depreciation
is treated as a deduction allowed for depreciation under section 167.
Therefore, upon a sale or other disposition of a depreciable qualified
electric vehicle, section 1245 will apply to any gain recognized to the
extent the basis of the depreciable vehicle was reduced under section
30(d)(1) net of any basis increase described in paragraph (b)(6) of
this section.
(8) Examples. The following examples illustrate the provisions of
this section:
Example 1. A, a calendar-year taxpayer, purchases and places in
service for personal use on January 1, 1995, a qualified electric
vehicle costing $25,000. On A's 1995 federal income tax return, A
claims a credit of $2,500. On January 2, 1996, A sells the vehicle
to an unrelated third party who subsequently converts the vehicle
into a non-electric vehicle on October 15, 1996. There is no
recapture upon the sale of the vehicle by A provided A did not know
or have reason to know that the purchaser intended to convert the
vehicle to non-electric use.
Example 2. B, a calendar-year taxpayer, purchases and places in
service for personal use on October 11, 1994, a qualified electric
vehicle costing $20,000. On B's 1994 federal income tax return, B
claims a credit of $2,000, which reduces B's tax by $2,000. The
basis of the vehicle is reduced to $18,000 ($20,000-$2,000). On
March 8, 1996, B sells the vehicle to a tax-exempt entity. Because B
knowingly sold the vehicle to a tax-exempt entity described in
section 50(b) in the second full year from the date the vehicle was
placed in service, B must recapture $1,333 ($2,000 x 66\2/3\
percent). This recapture amount increases B's tax by $1,333 on B's
1996 federal income tax return and is added to the basis of the
vehicle as of January 1, 1996, the beginning of the taxable year in
which the recapture event occurred.
Example 3. X, a calendar-year taxpayer, purchases and places in
service for business use on January 1, 1994, a qualified electric
vehicle costing $30,000. On X's 1994 federal income tax return, X
claims a credit of $3,000, which reduces X's tax by $3,000. The
basis of the vehicle is reduced to $27,000 ($30,000-$3,000) prior to
any adjustments for depreciation. On March 8, 1995, X converts the
qualified electric vehicle into a gasoline-propelled vehicle.
Because X modified the vehicle so that it is no longer primarily
powered by electricity in the second full year from the date the
vehicle was placed in service, X must recapture $2,000
($3,000 x 66\2/3\ percent). This recapture amount increases X's tax
by $2,000 on X's 1995 federal income tax return. The recapture
amount of $2,000 is added to the basis of the vehicle as of January
1, 1995, the beginning of the taxable year of recapture, and to the
extent the property remains depreciable, the adjusted basis is
recoverable over the remaining recovery period.
Example 4. The facts are the same as in Example 3. In 1996, X
sells the vehicle for $31,000, recognizing a gain from this sale.
Under paragraph (b)(7) of this section, section 1245 of the Internal
Revenue Code will apply to any gain recognized on the sale of a
depreciable vehicle to the extent the basis of the vehicle was
reduced by the section 30 credit net of any basis increase from
recapture of the section 30 credit. Accordingly, the gain from the
sale of the vehicle is subject to section 1245 to the extent of the
depreciation allowance for the vehicle plus the credit allowed under
section 30 ($3,000), less the previous recapture amount ($2,000).
Any remaining amount of gain may be subject to other applicable
provisions of the Internal Revenue Code.
(c) Effective date. This section is effective on October 14, 1994.
If the recapture date is before the effective date of this section, a
taxpayer may use any reasonable method to recapture the benefit of any
credit allowable under section 30(a) consistent with section 30 and its
legislative history. For this purpose, the recapture date is defined in
paragraph (b)(4) of this section.
Par. 3. Section 1.179A-1 is added to read as follows:
Sec. 1.179A-1 Recapture of deduction for qualified clean-fuel vehicle
property and qualified clean-fuel vehicle refueling property.
(a) In general. If a recapture event occurs with respect to a
taxpayer's qualified clean-fuel vehicle property or qualified clean-
fuel vehicle refueling property, the taxpayer must include the
recapture amount in taxable income for the taxable year in which the
recapture event occurs.
(b) Recapture event--(1) Qualified clean-fuel vehicle property--(i)
In general. A recapture event occurs if, within 3 full years from the
date a vehicle of which qualified clean-fuel vehicle property is a part
is placed in service, the property ceases to be qualified clean-fuel
vehicle property. Property ceases to be qualified clean- fuel vehicle
property if--
(A) The vehicle is modified by the taxpayer so that it may no
longer be propelled by a clean-burning fuel;
(B) The vehicle is used by the taxpayer in a manner described in
section 50(b);
(C) The vehicle otherwise ceases to qualify as property defined in
section 179A(c); or
(D) The taxpayer receiving the deduction under section 179A sells
or disposes of the vehicle and knows or has reason to know that the
vehicle will be used in a manner described in paragraph (b)(1)(i)(A),
(B), or (C) of this section.
(ii) Exception for disposition. Except as provided in paragraph
(b)(1)(i)(D) of this section, a sale or other disposition (including a
disposition by reason of an accident or other casualty) of qualified
clean-fuel vehicle property is not a recapture event.
(2) Qualified clean-fuel vehicle refueling property--(i) In
general. A recapture event occurs if, at any time before the end of its
recovery period, the property ceases to be qualified clean-fuel vehicle
refueling property. Property ceases to be qualified clean-fuel vehicle
refueling property if--
(A) The property no longer qualifies as property described in
section 179A(d);
(B) The property is no longer used predominantly in a trade or
business (property will be treated as no longer used predominantly in a
trade or business if 50 percent or more of the use of the property in a
taxable year is for use other than in a trade or business);
(C) The property is used by the taxpayer in a manner described in
section 50(b); or
(D) The taxpayer receiving the deduction under section 179A sells
or disposes of the property and knows or has reason to know that the
property will be used in a manner described in paragraph (b)(2)(i)(A),
(B), or (C) of this section.
(ii) Exception for disposition. Except as provided in paragraph
(b)(2)(i)(D) of this section, a sale or other disposition (including a
disposition by reason of an accident or other casualty) of qualified
clean-fuel vehicle refueling property is not a recapture event.
(c) Recapture date--(1) Qualified clean-fuel vehicle property. The
recapture date is the actual date of the recapture event unless an
event described in paragraph (b)(1)(i)(B) of this section occurs, in
which case the recapture date is the first day of the recapture year.
(2) Qualified clean-fuel vehicle refueling property. The recapture
date is the actual date of the recapture event unless the recapture
occurs as a result of an event described in paragraph (b)(2)(i)(B) or
(C) of this section, in which case the recapture date is the first day
of the recapture year.
(d) Recapture amount--(1) Qualified clean-fuel vehicle property.
The recapture amount is equal to the benefit of the section 179A
deduction allowable multiplied by the recapture percentage. The
recapture percentage is--
(i) 100, if the recapture date is within the first full year after
the date the vehicle is placed in service;
(ii) 66\2/3\, if the recapture date is within the second full year
after the date the vehicle is placed in service; or
(iii) 33\1/3\, if the recapture date is within the third full year
after the date the vehicle is placed in service.
(2) Qualified clean-fuel vehicle refueling property. The recapture
amount is equal to the benefit of the section 179A deduction allowable
multiplied by the following fraction. The numerator of the fraction
equals the total recovery period for the property minus the number of
recovery years prior to, but not including, the recapture year. The
denominator of the fraction equals the total recovery period.
(e) Basis adjustment. As of the first day of the taxable year in
which the recapture event occurs, the basis of the vehicle of which
qualified clean-fuel vehicle property is a part or the basis of
qualified clean-fuel vehicle refueling property is increased by the
recapture amount. For a vehicle or refueling property that is of a
character that is subject to an allowance for depreciation, this
increase in basis is recoverable over its remaining recovery period
beginning as of the first day of the taxable year in which the
recapture event occurs.
(f) Application of section 1245 for sales and other dispositions.
For purposes of section 1245, the amount of the deduction allowable
under section 179A(a) with respect to any property that is (or has
been) of a character subject to an allowance for depreciation is
treated as a deduction allowed for depreciation under section 167.
Therefore, upon a sale or other disposition of depreciable qualified
clean-fuel vehicle refueling property or a depreciable vehicle of which
qualified clean-fuel vehicle property is a part, section 1245 will
apply to any gain recognized to the extent the basis of the depreciable
property or vehicle was reduced under section 179A(e)(6) net of any
basis increase described in paragraph (e) of this section.
(g) Examples. The following examples illustrate the provisions of
this section:
Example 1. A, a calendar-year taxpayer, purchases and places in
service for personal use on January 1, 1995, a clean-fuel vehicle, a
portion of which is qualified clean-fuel vehicle property, costing
$25,000. The qualified clean-fuel vehicle property costs $11,000. On
A's 1995 federal income tax return, A claims a section 179A
deduction of $2,000. On January 2, 1996, A sells the vehicle to an
unrelated third party who subsequently converts the vehicle into a
gasoline-propelled vehicle on October 15, 1996. There is no
recapture upon the sale of the vehicle by A provided A did not know
or have reason to know that the purchaser intended to convert the
vehicle to a gasoline-propelled vehicle.
Example 2. B, a calendar-year taxpayer, purchases and places in
service for personal use on October 11, 1994, a clean-fuel vehicle
costing $20,000, a portion of which is qualified clean-fuel vehicle
property. The qualified clean-fuel vehicle property costs $10,000.
On B's 1994 federal income tax return, B claims a deduction of
$2,000, which reduces B's gross income by $2,000. The basis of the
vehicle is reduced to $18,000 ($20,000-$2,000). On January 31, 1996,
B sells the vehicle to a tax-exempt entity. Because B knowingly sold
the vehicle to a tax-exempt entity described in section 50(b) in the
second full year from the date the vehicle was placed in service, B
must recapture $1,333 ($2,000x66\2/3\ percent). This recapture
amount increases B's gross income by $1,333 on B's 1996 federal
income tax return and is added to the basis of the motor vehicle as
of January 1, 1996, the beginning of the taxable year of recapture.
Example 3. X, a calendar-year taxpayer, purchases and places in
service for its business use on January 1, 1994, qualified clean-
fuel vehicle refueling property costing $400,000. Assume this
property has a 5 year recovery period. On X's 1994 federal income
tax return, X claims a deduction of $100,000, which reduces X's
gross income by $100,000. The basis of the property is reduced to
$300,000 ($400,000-$100,000) prior to any adjustments for
depreciation. In 1996, more than 50 percent of the use of the
property is other than in X's trade or business. Because the
property is no longer used predominantly in X's business, X must
recapture three-fifths of the section 179A deduction or $60,000
($100,000x(5-2)/5=$60,000) and include that amount in gross income
on its 1996 federal income tax return. The recapture amount of
$60,000 is added to the basis of the property as of January 1, 1996,
the beginning of the taxable year of recapture, and to the extent
the property remains depreciable, the adjusted basis is recoverable
over the remaining recovery period.
Example 4. X, a calendar-year taxpayer, purchases and places in
service for business use on January 1, 1994, qualified clean-fuel
vehicle refueling property costing $350,000. Assume this property
has a 5 year recovery period. On X's 1994 federal income tax return,
X claims a deduction of $100,000, which reduces X's gross income by
$100,000. The basis of the property is reduced to $250,000
($350,000-$100,000) prior to any adjustments for depreciation. In
1995, X converts the property to store and dispense gasoline.
Because the property is no longer used as qualified clean-fuel
vehicle refueling property in 1995, X must recapture four-fifths of
the section 179A deduction or $80,000 ($100,000x(5-1)/5=$80,000) and
include that amount in gross income on its 1995 federal income tax
return. The recapture amount of $80,000 is added to the basis of the
property as of January 1, 1995, the beginning of the taxable year of
recapture, and to the extent the property remains depreciable, the
adjusted basis is recoverable over the remaining recovery period.
Example 5. The facts are the same as in Example 4. In 1996, X
sells the refueling property for $351,000, recognizing a gain from
this sale. Under paragraph (f) of this section, section 1245 of the
Code will apply to any gain recognized on the sale of depreciable
property to the extent the basis of the property was reduced by the
section 179A deduction net of any basis increase from recapture of
the section 179A deduction. Accordingly, the gain from the sale of
the property is subject to section 1245 to the extent of the
depreciation allowance for the property plus the deduction allowed
under section 179A ($100,000), less the previous recapture amount
($80,000). Any remaining amount of gain may be subject to other
applicable provisions of the Internal Revenue Code.
(h) Effective date. This section is effective on October 14, 1994.
If the recapture date is before the effective date of this section, a
taxpayer may use any reasonable method to recapture the benefit of any
deduction allowable under section 179A(a) consistent with section 179A
and its legislative history. For this purpose, the recapture date is
defined in paragraph (c) of this section.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 94-25415 Filed 10-13-94; 8:45 am]
BILLING CODE 4830-01-U