Td 8566

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Treasury Decisions
Copyright 2007 LexisNexis Group, All Rights Reserved
Rules and Regulations
DEPARTMENT OF THE TREASURY
Internal Revenue Service (IRS)
26 CFR Parts 1 and 602
59 FR 51369; RIN 1545-AN82
General Asset Accounts Under the Accelerated Cost Recovery System
T.D. 8566
DATE: October 11, 1994
ACTION: Final regulations.
SUMMARY: This document contains final regulations on the election to maintain general asset accounts for
depreciable assets to which section 168 of the Internal Revenue Code applies. These regulations reflect changes to the
law made by the Tax Reform Act of 1986. The regulations will simplify certain depreciation calculations.
EFFECTIVE DATE: October 11, 1994.
For dates of applicability of these regulations, see Dates under SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT: Kathleen Reed at (202) 622-3110 (not a toll-free number).

SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been reviewed and approved by the Office of
Management and Budget in accordance with the requirements of the Paperwork Reduction Act (44 U.S.C 3504(h))
under control number 1545-1331. The estimated annual burden per respondent or recordkeeper varies from .20 to .30
hours, depending on individual circumstances, with an estimated average of .25 hours.
Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent
to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC 20224, and to the Office
of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and

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Regulatory Affairs, Washington, DC 20503.
Background
On August 31, 1992, the IRS published a notice of proposed rulemaking in the Federal Register (57 FR 39374
[PS-55-89, 1992-2 C.B. 870]) proposing amendments to the Income Tax Regulations (26 CFR part 1) under section
168(i)(4). These amendments were proposed to reflect the amendments made by section 201 of the Tax Reform Act of
1986. The preamble to the notice contains an explanation of the proposed regulations.
Written comments responding to the notice were received, and a public hearing was held on November 4, 1992.
After considering all written and oral comments, the proposed regulations under section 168(i)(4) are adopted as revised
by this Treasury decision.
Explanation of Provisions
In General
The final regulations would simplify the computation of depreciation by allowing taxpayers an election to group
assets into one or more general asset accounts under section 168(i)(4). The assets in any particular general asset account
are depreciated as a single asset. Unlike the rules under section 168 as in existence before enactment of the Tax Reform
Act of 1986, general asset account treatment is not limited to "mass assets."
As required by section 168(i)(4), the final regulations provide generally that the amount realized upon the
disposition of an asset from a general asset account is recognized as ordinary income. In addition, special rules are
provided for terminating general asset account treatment upon certain dispositions. For transactions described in section
168(i)(7)(B), the transferee generally is bound by the transferor's general asset account election.
Changes to the Proposed Regulations
This Treasury decision generally adopts the rules in the proposed regulations. Certain changes to the proposed
regulations have been made, however, in response to comments. These changes and the comments that were not
adopted in the final regulations are discussed below.
Assets Subject to Recapture. One commentator recommended that the proposed regulations be amended to allow
general asset account treatment for assets qualifying for the credit under section 47 or 48. After considering this
comment, the IRS and Treasury Department have concluded that it is appropriate to allow taxpayers greater flexibility
in determining what assets will be included in a general asset account. Therefore, the proposed rule that prohibits
general asset account treatment for investment credit property has been deleted. Accordingly, under the final
regulations, a general asset account may include any depreciable asset for which a credit or deduction is allowable.
A new rule, however, has been added in the final regulations to account for any basis increase upon recapture. The
final regulations provide that upon recapture, the asset is removed from the general asset account as of the first day of
the taxable year in which the recapture event occurs. In addition, corresponding adjustments to the unadjusted
depreciable basis and depreciation reserve of the account must be made. This rule was formulated in view of the limited
types of property currently eligible for the investment credit. The IRS, however, may consider other alternatives to take
into account the basis increase upon recapture if the scope of property that qualifies for the investment credit is
expanded.
Assets Used in a Personal Activity. The final regulations retain the rule of the proposed regulations that a general
asset account may not include an asset if a taxpayer uses the asset both in a trade or business (or for the production of
income) and in a personal activity at any time during the taxable year in which the asset is first placed in service by the

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taxpayer. Consistent with the retention of this rule in the final regulations, a new rule has been added providing that an
asset in a general asset account becomes ineligible for general asset account treatment if a taxpayer uses the asset in a
personal activity in a taxable year after the taxable year the asset is placed in service. If this change in use occurs, the
final regulations provide that the taxpayer must use the method provided in § 1.168(i)-1(e)(3)(iii)(C) for adjusting a
general asset account when an asset becomes ineligible for general asset account treatment.
Assets that Generate Foreign Source Income. A commentator suggested that the proposed regulations be amended
to allow general asset account treatment for assets generating foreign source income.
In response to this comment, the final regulations allow general asset account treatment for assets generating
foreign source income. If, however, the inclusion of these assets in a general asset account results in a substantial
distortion of income, the Commissioner may disregard the general asset account election and make reallocations of
income or expense as necessary to clearly reflect income.
The final regulations provide a rule coordinating the general asset account rules with the rules in § 1.8611-9T(g)(3)
relating to allocation and apportionment of interest expense under the asset method. A general asset account will be
treated as a single asset for purposes of applying the rules in § 1.861-9T(g)(3). If the general asset account generates
income in more than one separate grouping (statutory and residual), then the account is a multiple category asset, as
defined in § 1.861-9T(g)(3)(ii), and the income yield from the general asset account must be computed as if the account
were a single multiple category asset.
The final regulations also provide rules for determining the source of income from a disposition of an asset in a
general asset account. If the general asset account includes assets generating both United States and foreign source
income, any amount of ordinary income, gain, or loss recognized on the disposition must be apportioned between
United States and foreign sources based on the allocation and apportionment of depreciation allowed for the general
asset account or for the disposed asset, as applicable. If the general asset account includes assets that generate foreign
source income in more than one separate category under section 904(d)(1) or another section of the Internal Revenue
Code, or under a United States income tax treaty that requires the foreign tax credit limitation to be determined
separately for specified types of income, then the amount of ordinary income, gain, or loss recognized on the disposition
that is treated as foreign source income must be allocated and apportioned to the applicable separate category or
categories.
Disposition of All Assets or the Last Asset. One commentator questioned whether the rule under the proposed
regulations that provided that a general asset account terminates on the disposition of all of the assets in the account or
the last asset in the account was mandatory. In response to this comment, the final regulations clarify that this rule is an
optional rule for taxpayers that maintain records showing the disposition of assets in a general asset account. The final
regulations also provide that a taxpayer adopts the rule by reporting the gain or loss on the taxpayer's income tax return
for the taxable year in which the disposition of all of the assets, or the last asset, in the general asset account occurs.
Qualifying Dispositions. Under the proposed regulations, a qualifying disposition of an asset in a general asset
account occurs when the asset is disposed of as a direct result of a cessation, termination, curtailment, or disposition of a
business, manufacturing or other income producing process, operation, facility, plant, or other unit (other than by
transfer to a supplies, scrap, or similar account). One commentator recommended that the final regulations should
provide an example showing that the sale of an undivided interest in mineral property, along with the related operating
equipment, is a curtailment of a taxpayer's business and, thus, constitutes a qualifying disposition. A curtailment was
intended to be limited to a genuine business contraction and not to include transactions involving the sale of an
undivided interest, other than the taxpayer's entire interest in assets. To avoid any further misinterpretation, the final
regulations delete the term "curtailment." The final regulations also clarify that a taxpayer adopts the rule to terminate
general asset account treatment for an asset in a qualifying disposition by reporting the gain, loss, or other deduction on
the taxpayer's income tax return for the taxable year in which the qualifying disposition occurs.

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Anti-abuse rule. The final regulations add examples of transactions subject to the anti-abuse rule.
Election. Some commentators noted that the proposed regulations do not address whether the election is made by
the common parent corporation or each member of an affiliated group, by a partnership or its partners, or by an S
corporation or the S corporation shareholders. The final regulations clarify that the election is made by each member of
an affiliated group, by the partnership, or by the S corporation, respectively.
The proposed regulations provide that the election to apply the regulations generally is binding on the taxpayer for
computing taxable income as well as computing alternative minimum taxable income. A commentator suggested that
the final regulations should allow taxpayers the option to make the election for either the regular income tax, the
alternative minimum tax, or both. This rule was not adopted because of the separate and parallel nature of the regular
tax and alternative minimum tax systems. Except as otherwise provided by statute or regulations, all Code provisions
that apply in determining the regular taxable income of a taxpayer also apply in determining the alternative minimum
taxable income of the taxpayer. The final regulations have not been expanded to include any exceptions. Consequently,
an election to apply section 168(i)(4) for determining regular taxable income also applies for determining alternative
minimum taxable income. Therefore, the language "as well as alternative minimum taxable income" in the proposed
rule is redundant and has been deleted from the final regulations.
Effective Date. For assets placed in service after December 31, 1986, in taxable years ending before the effective
date of the final regulations, one commentator recommended that the final regulations should provide a retroactive
election or, alternatively, a prospective election. Another commentator also requested a provision allowing a
prospective election. The final regulations retain the rule of the proposed regulations that, for prior periods, a taxpayer
may use any reasonable method that is consistently applied to the taxpayer's general asset accounts.
Dates
The final regulations are effective for property placed in service in taxable years ending on or after October 11,
1994. For property placed in service after December 31, 1986, in taxable years ending before October 11, 1994, the IRS
will allow any reasonable method that is consistently applied to the taxpayer's general asset accounts.
Special Analyses
It has been determined that this Treasury decision 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, the notice of proposed rulemaking preceding these regulations was submitted to the Small Business
Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is Kathleen Reed, 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
26 CFR Part 1

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Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1-INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.168(i)-1 also issued under 26 U.S.C. 168(i)(4). * * *
Par. 2. Section 1.56(g)-1 is amended by adding a sentence at the end of paragraph (b), introductory text, to read as
follows:
§ 1.56(g)-1 -- Adjusted current earnings.
*****
(b) * * * See § 1.168(i)-1(k) for an election to use general asset accounts.
*****
Par. 3. Sections 1.168(i)-0 and 1.168(i)-1 are added to read as follows:
§ 1.168(i)-0 -- Table of contents for the general asset account rules.
This section lists the major paragraphs contained in § 1.168(i)-1.
§ 1.168(i)-1 -- General asset accounts.
(a) Scope.
(b) Definitions.
(1) Unadjusted depreciable basis.
(2) Unadjusted depreciable basis of the general asset account.
(3) Adjusted depreciable basis of the general asset account.
(4) Expensed cost.
(c) Establishment of general asset accounts.
(1) Assets eligible for general asset accounts.

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(i) General rules.
(ii) Special rules for assets generating foreign source income.
(2) Grouping assets in general asset accounts.
(i) General rules.
(ii) Special rules.
(d) Determination of depreciation allowance.
(1) In general.
(2) Special rule for passenger automobiles.
(e) Disposition of an asset from a general asset account.
(1) Scope.
(2) General rules for a disposition.
(i) No immediate recovery of basis.
(ii) Treatment of amount realized.
(iii) Effect of disposition on a general asset account.
(iv) Coordination with nonrecognition provisions.
(v) Examples.
(3) Special rules.
(i) In general.
(ii) Disposition of all assets remaining in a general asset account.
(iii) Disposition of an asset in a qualifying disposition.
(iv) Transactions subject to section 168(i)(7).
(v) 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.
(ii) Formula for determining foreign source income, gain, or loss.
(3) Section 904(d) separate categories.

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(g) Assets subject to recapture.
(h) Changes in use.
(1) Conversion to personal use.
(2) Other changes in use.
(i) Identification of disposed or converted asset.
(j) Effect of adjustments on prior dispositions.
(k) Election.
(1) Irrevocable election.
(2) Time for making election.
(3) Manner of making election.
(l) Effective date.
§ 1.168(i)-1 -- General asset accounts.
(a) Scope. This section provides rules for general asset accounts under section 168(i)(4). The provisions of this
section apply only to assets for which an election has been made under paragraph (k) of this section.
(b) Definitions. For purposes of this section, the following definitions apply:
(1) Unadjusted depreciable basis is the basis of an asset for purposes of section 1011 without regard to any
adjustments described in sections 1016(a)(2) and (3).
(2) Unadjusted depreciable basis of the general asset account is the sum of the unadjusted depreciable bases of all
assets included in the general asset account.
(3) Adjusted depreciable basis of the general asset account is the unadjusted depreciable basis of the general asset
account less the adjustments to basis described in sections 1016(a)(2) and (3).
(4) Expensed cost is the amount of any allowable credit or deduction treated as a deduction allowable for
depreciation or amortization for purposes of section 1245 (for example, a credit allowable under section 30 or a
deduction allowable under section 179, 179A, or 190).
(c) Establishment of general asset accounts-(1) Assets eligible for general asset accounts-(i) General rules. Assets
that are subject to either the general depreciation system of section 168(a) or the alternative depreciation system of
section 168(g) may be accounted for in one or more general asset accounts. An asset may be included in a general asset
account only to the extent of the asset's unadjusted depreciable basis (for example, if, in 1995, a taxpayer places in
service an asset that costs $ 20,000 and elects under section 179 to expense $ 17,500 of that asset's cost, the unadjusted
depreciable basis of the asset is $ 2,500 and, therefore, only $ 2,500 of the asset's cost may be included in a general
asset account). However, an asset is not to be included in a general asset account if the asset is used both in a trade or
business (or for the production of income) and in a personal activity at any time during the taxable year in which the
asset is first placed in service by the taxpayer.

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(ii) Special rules for assets generating foreign source income-(A) Assets that generate foreign source income, both
United States and foreign source income, or combined gross income of a FSC (as defined in section 922), DISC (as
defined in section 992(a)), or possessions corporation (as defined in section 936) and its related supplier, may be
included in a general asset account if the requirements of paragraph (c)(2)(i) of this section are satisfied. If, however,
the inclusion of these assets in a general asset account results in a substantial distortion of income, the Commissioner
may disregard the general asset account election and make any reallocations of income or expense necessary to clearly
reflect income.
(B) A general asset account shall be treated as a single asset for purposes of applying the rules in § 1.861- 9T(g)(3)
(relating to allocation and apportionment of interest expense under the asset method). A general asset account that
generates income in more than one grouping of income (statutory and residual) is a multiple category asset (as defined
in § 1.861-9T(g)(3)(ii)), and the income yield from the general asset account must be determined by applying the rules
for multiple category assets as if the general asset account were a single asset.
(2) Grouping assets in general asset accounts-(i) General rules. If a taxpayer makes the election under paragraph
(k) of this section, assets that are subject to the election are grouped into one or more general asset accounts. Assets that
are eligible to be grouped into a single general asset account may be divided into more than one general asset account.
Each general asset account must include only assets that(A) Have the same asset class (for further guidance, see Rev. Proc. 87-56, 1987-2 C.B. 674, and §
601.601(d)(2)(ii)(b) of this chapter);
(B) Have the same applicable depreciation method;
(C) Have the same applicable recovery period;
(D) Have the same applicable convention; and
(E) Are placed in service by the taxpayer in the same taxable year.
(ii) Special rules. In addition to the general rules in paragraph (c)(2)(i) of this section, the following rules apply
when establishing general asset accounts(A) Assets without an asset class, but with the same characteristics described in paragraphs (c)(2)(i)(B), (C), (D),
and (E) of this section, may be grouped into a general asset account;
(B) Assets subject to the mid-quarter convention may only be grouped into a general asset account with assets that
are placed in service in the same quarter of the taxable year;
(C) Assets subject to the mid-month convention may only be grouped into a general asset account with assets that
are placed in service in the same month of the taxable year; and
(D) Passenger automobiles for which the depreciation allowance is limited under section 280F(a) must be grouped
into a separate general asset account.
(d) Determination of depreciation allowance-(1) In general. Depreciation allowances are determined for each
general asset account by using the applicable depreciation method, recovery period, and convention for the assets in the
account. The depreciation allowances are recorded in a depreciation reserve account for each general asset account. The
allowance for depreciation under this section constitutes the amount of depreciation allowable under section 167(a).
(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

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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) (anti-abuse rule), (g) (assets subject to recapture), or (h)(1) (conversion to personal use) of
this section.
(e) Disposition of an asset from a general asset account-(1) Scope. This paragraph (e) provides rules applicable to
dispositions of assets included in a general asset account. For purposes of this paragraph (e), an asset in a general asset
account is disposed of when ownership of the asset is transferred or when the asset is permanently withdrawn from use
either in the taxpayer's trade or business or in the production of income. A disposition includes the sale, exchange,
retirement, physical abandonment, or destruction of an asset. A disposition also occurs when an asset is transferred to a
supplies, scrap, or similar account. A disposition does not include, however, the retirement of a structural component of
real property.
(2) General rules for a disposition-(i) No immediate recovery of basis. Immediately before a disposition of any
asset in a general asset account, the asset is treated as having an adjusted basis of zero for purposes of section 1011.
Therefore, no loss is realized upon the disposition of an asset from the general asset account. Similarly, where an asset
is disposed of by transfer to a supplies, scrap, or similar account, the basis of the asset in the supplies, scrap, or similar
account will be zero.
(ii) Treatment of amount realized. Any amount realized on a disposition is recognized as ordinary income
(notwithstanding any other provision of subtitle A of the Internal Revenue Code (Code)) to the extent the sum of the
unadjusted depreciable basis of the general asset account and any expensed cost (as defined in paragraph (b)(4) of this
section) for assets in the account exceeds any amounts previously recognized as ordinary income upon the disposition
of other assets in the account. The recognition and character of any excess amount realized are determined under other
applicable provisions of the Code (other than sections 1245 and 1250 or provisions of the Code that treat gain on a
disposition as subject to section 1245 or 1250).
(iii) Effect of disposition on a general asset account. The unadjusted depreciable basis and the depreciation reserve
of the general asset account are not affected as a result of a disposition of an asset from the general asset account.
(iv) Coordination with nonrecognition provisions. For purposes of determining the basis of an asset acquired in a
transaction described in paragraph (e)(3)(iii)(B)(4) of this section (relating to certain nonrecognition provisions), the
amount of ordinary income recognized under this paragraph (e)(2) is treated as the amount of gain recognized on the
disposition.
(v) Examples. The following examples illustrate the application of this paragraph (e)(2).
Example 1. (i) R, a calendar-year corporation, maintains one general asset account for ten machines. The machines
cost a total of $ 10,000 and were placed in service in June 1995. Of the ten machines, one machine costs $ 8,200 and
nine machines cost a total of $ 1,800. Assume this general asset account has a depreciation method of 200 percent
declining balance, a recovery period of 5 years, and a half-year convention. R does not make a section 179 election for
any of the machines. As of January 1, 1996, the depreciation reserve of the account is $ 2,000 [(($ 10,000-$ 0) x
40%)/2].
(ii) On February 8, 1996, R sells the machine that cost $ 8,200 to an unrelated party for $ 9,000. Under paragraph
(e)(2)(i) of this section, this machine has an adjusted basis of zero.
(iii) On its 1996 tax return, R recognizes the amount realized of $ 9,000 as ordinary income because such amount
does not exceed the unadjusted depreciable basis of the general asset account ($ 10,000), plus any expensed cost for
assets in the account ($ 0), less amounts previously recognized as ordinary income ($ 0). Moreover, the unadjusted
depreciable basis and depreciation reserve of the account are not affected by the disposition of the machine. Thus, the
depreciation allowance for the account in 1996 is $ 3,200 (($ 10,000-$ 2,000)x40%).

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Example 2. (i) The facts are the same as in Example 1. In addition, on June 4, 1997, R sells seven machines to an
unrelated party for a total of $ 1,100. In accordance with paragraph (e)(2)(i) of this section, these machines have an
adjusted basis of zero.
(ii) On its 1997 tax return, R recognizes $ 1,000 as ordinary income (the unadjusted depreciable basis of $ 10,000,
plus the expensed cost of $ 0, less the amount of $ 9,000 previously recognized as ordinary income). The recognition
and character of the excess amount realized of $ 100 ($ 1,100-$ 1,000) are determined under applicable provisions of
the Code other than section 1245 (such as section 1231). Moreover, the unadjusted depreciable basis and depreciation
reserve of the account are not affected by the disposition of the machines. Thus, the depreciation allowance for the
account in 1997 is $ 1,920 (($ 10,000-$ 5,200)x40%).
(3) Special rules-(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) and (v) 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 (including
extensions) income tax return for the taxable year in which the disposition occurs. For purposes of applying paragraph
(e)(3)(iii) through (v) of this section, see paragraph (i) of this section for identifying the unadjusted depreciable basis of
a disposed asset.
(ii) Disposition of all assets remaining in a general asset account-(A) Optional termination of a general asset
account. Upon the disposition of all of the assets, or the last asset, in a general asset account, a taxpayer may apply this
paragraph (e)(3)(ii) to recover the adjusted depreciable basis of the general asset account (rather than having paragraph
(e)(2) of this section apply). Under this paragraph (e)(3)(ii), the general asset account terminates and 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 the disposition. The recognition and character of the gain or loss are
determined under other applicable provisions of the Code, except that the amount of gain subject to section 1245 (or
section 1250) is limited to the excess of the depreciation allowed or allowable for the general asset account, including
any expensed cost (or the excess of the additional depreciation allowed or allowable for the general asset account), over
any amounts previously recognized as ordinary income under paragraph (e)(2) of this section.
(B) Example. The following example illustrates the application of this paragraph (e)(3)(ii).
Example. (i) T, a calendar-year corporation, maintains a general asset account for 1,000 calculators. The
calculators cost a total of $ 60,000 and were placed in service in 1995. Assume this general asset account has a
depreciation method of 200 percent declining balance, a recovery period of 5 years, and a half-year convention. T does
not make a section 179 election for any of the calculators. In 1996, T sells 200 of the calculators to an unrelated party
for a total of $ 10,000 and recognizes the $ 10,000 as ordinary income in accordance with paragraph (e)(2) of this
section.
(ii) On March 26, 1997, T sells the remaining calculators in the general asset account to an unrelated party for $
35,000. T chooses to apply paragraph (e)(3)(ii) of this section. As a result, the account terminates and gain or loss is
determined for the account.
(iii) On the date of disposition, the adjusted depreciable basis of the account is $ 23,040 (unadjusted depreciable
basis of $ 60,000 less the depreciation allowed or allowable of $ 36,960). Thus, in 1997, T recognizes gain of $ 11,960
(amount realized of $ 35,000 less the adjusted depreciable basis of $ 23,040). The gain of $ 11,960 is subject to section
1245 to the extent of the depreciation allowed or allowable for the account (plus the expensed cost for assets in the
account) less the amounts previously recognized as ordinary income ($ 36,960 + $ 0 - $ 10,000 = $ 26,960). As a result,
the entire gain of $ 11,960 is subject to section 1245.
(iii) Disposition of an asset in a qualifying disposition-(A) Optional determination of the amount of gain, loss, or

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other deduction. In the case of a qualifying disposition of an asset (described in paragraph (e)(3)(iii)(B) of this section),
a taxpayer may apply this paragraph (e)(3)(iii) (rather than having paragraph (e)(2) of this section apply). Under this
paragraph (e)(3)(iii), general asset account treatment for the asset terminates as of the first day of the taxable year in
which the qualifying disposition occurs, and the amount of gain, loss, or other deduction for the asset is determined by
taking into account the asset's adjusted basis. The adjusted basis of the asset at the time of the 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 recognition and character of the gain, loss, or other deduction are determined under other applicable
provisions of the Code, except that the amount of gain subject to section 1245 (or section 1250) is limited to the lesser
of(1) The depreciation allowed or allowable for the asset, including any expensed cost (or the additional depreciation
allowed or allowable for the asset); or
(2) The excess of(i) The original unadjusted depreciable basis of the general asset account plus, in the case of section 1245 property
originally included in the general asset account, any expensed cost; over
(ii) The cumulative amounts of gain previously recognized as ordinary income under either paragraph (e)(2) of this
section or section 1245 (or section 1250).
(B) Qualifying dispositions. A qualifying disposition is a disposition that does not involve all the assets, or the last
asset, remaining in a general asset account and that is(1) A direct result of a fire, storm, shipwreck, or other casualty, or from theft;
(2) A charitable contribution for which a deduction is allowable under section 170;
(3) A direct result of a cessation, termination, or disposition of a business, manufacturing or other income
producing process, operation, facility, plant, or other unit (other than by transfer to a supplies, scrap, or similar account);
or
(4) A transaction, other than a transaction described in paragraph (e)(3)(iv) of this section (pertaining to
transactions subject to section 168(i)(7)), to which a nonrecognition section of the Code applies (determined without
regard to this section), such as section 1031 or 1033.
(C) Effect of a qualifying disposition on a general asset account. If the taxpayer applies this paragraph (e)(3)(iii) to
a qualifying disposition of an asset, then(1) The asset is removed from the general asset account as of the first day of the taxable year in which the
qualifying disposition occurs;
(2) The unadjusted depreciable basis of the general asset account is reduced by the unadjusted depreciable basis of
the asset as of the first day of the taxable year in which the disposition occurs;
(3) The depreciation reserve of the general asset account is reduced by the depreciation allowed or allowable for the
asset as of the end of the taxable year immediately preceding the year of disposition, computed by using the
depreciation method, recovery period, and convention applicable to the general asset account in which the asset was
included; and
(4) For purposes of determining the amount of gain realized on subsequent dispositions that is subject to ordinary
income treatment under paragraph (e)(2)(ii) of this section, the amount of any expensed cost with respect to the asset is

Page 12
T.D. 8566

disregarded.
(D) Example. The provisions of this paragraph (e)(3)(iii) are illustrated by the following example.
Example. (i) Z, a calendar-year corporation, maintains one general asset account for 12 machines. Each machine
costs $ 15,000 and was placed in service in 1995. Of the 12 machines, nine machines that cost a total of $ 135,000 are
used in Z's Kentucky plant, and three machines that cost a total of $ 45,000 are used in Z's Ohio plant. Assume this
general asset account has a depreciation method of 200 percent declining balance, a recovery period of 5 years, and a
half-year convention. Z does not make a section 179 election for any of the machines. As of January 1, 1997, the
depreciation reserve for the account is $ 93,600.
(ii) On May 27, 1997, Z sells its entire manufacturing plant in Ohio to an unrelated party. The sales proceeds
allocated to each of the three machines at the Ohio plant is $ 5,000. Because this transaction is a qualifying disposition
under paragraph (e)(3)(iii)(B)(3) of this section, Z chooses to apply paragraph (e)(3)(iii) of this section.
(iii) For Z's 1997 return, the depreciation allowance for the account is computed as follows. As of December 31,
1996, the depreciation allowed or allowable for the three machines at the Ohio plant is $ 23,400. Thus, as of January 1,
1997, the unadjusted depreciable basis of the account is reduced from $ 180,000 to $ 135,000 ($ 180,000 less the
unadjusted depreciable basis of $ 45,000 for the three machines), and the depreciation reserve of the account is
decreased from $ 93,600 to $ 70,200 ($ 93,600 less the depreciation allowed or allowable of $ 23,400 for the three
machines as of December 31, 1996). Consequently, the depreciation allowance for the account in 1997 is $ 25,920 (($
135,000 - $ 70,200) x 40%).
(iv) For Z's 1997 return, gain or loss for each of the three machines at the Ohio plant is determined as follows. The
depreciation allowed or allowable in 1997 for each machine is $ 1,440 [(($ 15,000 - $ 7,800) x 40%) / 2]. Thus, the
adjusted basis of each machine under section 1011 is $ 5,760 (the adjusted depreciable basis of $ 7,200 removed from
the account less the depreciation allowed or allowable of $ 1,440 in 1997). As a result, the loss recognized in 1997 for
each machine is $ 760 ($ 5,000 - $ 5,760), which is subject to section 1231.
(iv) Transactions subject to section 168(i)(7). If an asset in a general asset account is transferred in a transaction
described in section 168(i)(7)(B) (pertaining to treatment of transferees in certain nonrecognition transactions), the
transferor must remove the transferred asset from the general asset account as of the first day of the taxable year in
which the transaction occurs. In addition, the adjustments to the general asset account described in paragraph
(e)(3)(iii)(C)(2) through (4) of this section must be made. The transferee is bound by the transferor's election under
paragraph (k) of this section with respect to so much of the asset's basis in the hands of the transferee as does not exceed
the asset's adjusted basis in the hands of the transferor. If all of the assets, or the last asset, in a general asset account are
transferred, the transferee's basis in the assets or asset transferred is equal to the adjusted depreciable basis of the
general asset account as of the beginning of the transferor's taxable year in which the transaction occurs, decreased by
the amount of depreciation allocable to the transferor for the year of the transfer.
(v) 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)(v)(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)(v)(B) if the transaction is not described
in paragraph (e)(3)(iv) 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-

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T.D. 8566

(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)(v)(B).
(f) Assets generating foreign source income-(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), or (e)(3)(v) (anti-abuse rule) of this section applies.
(2) Source of ordinary income, gain, or loss-(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 the disposition if the taxpayer applies
paragraph (e)(3)(ii) of this section to the disposition of all of the assets, or the last asset, in the general asset account; 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) to the disposition of the asset in a qualifying disposition or if the asset is disposed
in a transaction described in paragraph (e)(3)(v) (anti-abuse rule) of this section.
(ii) Formula for determining foreign source income, gain, or loss. The amount of ordinary income, gain, or loss
recognized on the disposition that shall be treated as foreign source income, gain, or loss must be determined under the
formula in this paragraph (f)(2)(ii). For purposes of this formula, the allowed depreciation deductions are determined for
the applicable time period provided in paragraph (f)(2)(i) of this section. The formula is:

Foreign

=

Total

x

Allowed

Source

Ordinary

Depreciation

Income, Gain,

Income,

Deductions

or Loss from

Gain, or

Allocated and

the

Loss from

Apportioned to

Disposition

Disposition

Foreign Source

of an Asset

of an Asset

Income Total
Allowed
Depreciation

Page 14
T.D. 8566

Deductions for
the General
Asset Account
or for the
Disposed Asset
(as applicable)

(3) Section 904(d) separate categories. If the assets in the general asset account generate foreign source income in
more than one separate category under section 904(d)(1) or another section of the Code (for example, income treated as
foreign source income under section 904(g)(10)), or under a United States income tax treaty that requires the foreign tax
credit limitation to be determined separately for specified types of income, the amount of "foreign source income, gain,
or loss from the disposition of an asset" (as determined under the formula in paragraph (f)(2)(ii) of this section) must be
allocated and apportioned to the applicable separate category or categories under the formula in this paragraph (f)(3).
For purposes of this formula, the allowed depreciation deductions are determined for the applicable time period
provided in paragraph (f)(2)(i) of this section. The formula is:

Foreign

=

Forign

x

Allowed

Source

Source

Depreciation

Income, Gain,

Income,

Deductions

or Loss In a

Gain, or

Allocated and

Separate

Loss from

Apportioned to

Category

the

a Separate

Disposition

Category Total

of an Asset

Allowed
Depreciation
Deductions and
Apportioned to
Foreign Source
Income

(g) Assets subject to recapture. If the basis of an asset in a general asset account is increased as a result of the
recapture of any allowable credit or deduction (for example, the basis adjustment for the recapture amount under section
30(d)(2), 50(c)(2), 179(d)(10), or 179A(e)(4)), general asset account treatment for the asset terminates as of the first day
of the taxable year in which the recapture event occurs. Consequently, the taxpayer must remove the asset from the
general asset account as of that day and must make the adjustments to the general asset account described in paragraph
(e)(3)(iii)(C)(2) through (4) of this section.
(h) Changes in use-(1) Conversion to personal use. An asset in a general asset account becomes ineligible for
general asset account treatment if a taxpayer uses the asset in a personal activity during a taxable year. Upon a
conversion to personal use, the taxpayer must remove the asset from the general asset account as of the first day of the
taxable year in which the change in use occurs and must make the adjustments to the general asset account described in

Page 15
T.D. 8566

paragraph (e)(3)(iii)(C)(2) through (4) of this section.
(2) Other changes in use. [Reserved].
(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) (anti-abuse 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), (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.
(k) Election-(1) Irrevocable election. If a taxpayer makes an election under this paragraph (k), the taxpayer
consents to, and agrees to apply, all of the provisions of this section to the assets included in a general asset account.
Except as provided in paragraph (c)(1)(ii)(A), (e)(3), (g), or (h)(1) of this section, an election made under this section is
irrevocable and will be binding on the taxpayer for computing taxable income for the taxable year for which the election
is made and for all subsequent taxable years. An election under this paragraph (k) is made separately by each person
owning an asset to which this section applies (for example, by each member of a consolidated group, at the partnership
level (and not by the partner separately), or at the S corporation level (and not by the shareholder separately)).
(2) Time for making election. The election to apply this section shall be made on the taxpayer's timely filed
(including extensions) income tax return for the taxable year in which the assets included in the general asset account
are placed in service by the taxpayer.
(3) Manner of making election. In the year of election, a taxpayer makes the election under this section by typing or
legibly printing at the top of the Form 4562, "GENERAL ASSET ACCOUNT ELECTION MADE UNDER SECTION
168(i)(4)," or in the manner provided for on Form 4562 and its instructions. The taxpayer shall maintain records (for
example, "General Asset Account # 1 - all 1995 additions in asset class 00.11 for Salt Lake City, Utah facility") that
identify the assets included in each general asset account, that establish the unadjusted depreciable basis and
depreciation reserve of the general asset account, and that reflect the amount realized during the taxable year upon
dispositions from each general asset account. (But see section 179(c) and § 1.179-5 for the recordkeeping requirements
for section 179 property.) The taxpayer's recordkeeping practices should be consistently applied to the general asset
accounts. If Form 4562 is revised or renumbered, any reference in this section to that form shall be treated as a reference
to the revised or renumbered form.
(l) Effective date. 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.
PART 602-OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part 602 continues to read as follows:
Authority: 26 U.S.C. 7805.
§ 602.101(c) -- [Amended]
Par. 5. Section 602.101(c) is amended by adding the entry "1.168(i)-1....1545-1331" in numerical order to the
table.

Page 16
T.D. 8566

Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: September 9, 1994
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-24949 Filed 10-7-94; 8:45 am]
BILLING CODE 4830-01-U