Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 69-1

1969-1 C.B. 24

Sec. 47

IRS Headnote

The use of an airplane solely within Europe for a three-month period by a sublessee does not result in a recapture of previously allowed investment credit to the owner-lessor.

Full Text

Rev. Rul. 69-1

Advice has been requested whether the provisions of section 47 of the Internal Revenue Code of 1954 result in a recapture of previously allowed investment credit under the circumstances described below.

The taxpayer, a United States citizen who files his income tax return on the basis of a calendar year, acquired an airplane on June 1, 1966, and immediately leased it for a period of 8 years to X. X used the airplane solely within the United States during the remainder of 1966. The airplane qualified as "section 38 property," and the taxpayer was allowed the investment credit against his 1966 Federal income taxes with respect to the airplane. For the first three months of 1967, X subleased the airplane to Y, a foreign corporation. Y used the airplane solely within Europe for the three-month period of its sublease. During the remainder of 1967, the airplane was used solely within the United States by X.

Section 47 of the Code provides for the "recapture" of previously allowed investment credit where property ceases to be "section 38 property." Section 1.47-2(a)(2) of the Income Tax Regulations provides general rules for determining when property ceases to be "section 38 property." Under these rules, the airplane in the instant case did not cease to be section 38 property in 1967 even though it was used by Y in Europe since such use was not of sufficient duration to result in the airplane being used "predominantly outside the United States" during 1967 (see section 1.48-1(g) of the regulations to which section 1.47-2(a)(2) of the regulations refers).

Section 1.47-2(b)(1) of the regulations states, in part, that leased "section 38 property" ceases to be "section 38 property" with respect to the lessor if, in any taxable year subsequent to the credit year, such property would not qualify as "section 38 property" (as defined in section 1.48-1 of the regulations) in the hands of the lessor, lessee, or any sublessee. Under section 1.48-1 of the regulations "section 38 property" means property with respect to which depreciation is allowable; however, for this purpose it is required only that the property be used in a trade or business or held for the production of income. Section 1.47-2(b)(1) of the regulations thus requires that the lessor, the lessee, and any sublessee use the property in a trade or business or hold it for the production of income. The fact that a lessee or sublessee is a foreign corporation and may not pay taxes in the United States is not determinative under section 1.47-2(b)(1) of the regulations. Furthermore, section 1.47-2(b)(1) of the regulations requires that the uses described in sections 1.48-1(g), 1.48-1(h), 1.48-1(j), and 1.48-1(k) of the regulations to which property is put by the lessor, the lessee or any sublessee be attributed to the taxpayer. For example, if a sublessee uses the property predominantly outside the United States, such use is attributed to the lessor-taxpayer.

In the instant case neither the taxpayer, X, nor Y used the property other than in a trade or business nor was the property used predominantly outside the United States in 1967 under section 1.48-(g) of the regulations. Accordingly, the provisions of section 1.47-2(b)(1) of the regulations do not result in a recapture of previously allowed investment credit to the taxpayer, the owner-lessor, in 1967.