Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-76

1973-1 C.B. 31

Sec. 47
Sec. 48

IRS Headnote

On its final return as a taxable entity, a corporation whose status was changed to an exempt organization must recapture investment credit claimed on property that had a remaining useful life when the status change occurred.

Full Text

Rev. Rul. 73-76

Advice has been requested whether investment credit is "recaptured" under the circumstances described below.

M corporation was a taxable entity during its taxable year ending December 31, 1968. In 1968, M acquired and placed in service certain "new section 38 property" on which it properly claimed the seven percent investment credit in its 1968 Federal income tax return. In computing the allowable investment credit M determined that the property had a 10 year useful life. In 1970 the Internal Revenue Service determined that beginning on January 1, 1969, M was an organization exempt from tax within the meaning of section 501 of the Internal Revenue Code of 1954. During 1969, M did not conduct an "unrelated trade or business" within the meaning of section 513 of the Code, and, therefore, was not subject to tax under the provisions of section 511 of the Code.

Section 48(c)(4) of the Code and section 1.48-1(j) of the Income Tax Regulations provide that the term "section 38 property" does not include property used by an organization (other than a cooperative described in section 521 of the Code) that is exempt from the tax imposed by Chapter 1 of the Code unless such property is used predominantly in an unrelated trade or business the income from which is subject to tax under section 511 of the Code.

Section 47(a)(1) of the Code provides that if during any taxable year any property is disposed of, or otherwise ceases to be section 38 property with respect to the taxpayer, before the close of the useful life that was taken into account in computing the investment credit under section 38 of the Code, the amount of tax for such taxable year is to be increased by the amount of the investment credit that is "recaptured" in accordance with section 47 of the Code and the regulations thereunder.

Section 1.47-1(a)(1)(ii)(b) of the regulations provides that the term "recapture year" means the taxable year in which section 38 property is disposed of, or otherwise ceases to be section 38 property with respect to the taxpayer, if such event occurs before the close of the estimated useful life that was taken into account in computing the qualified investment.

Section 1.47-1(c)(1)(ii)(a) of the regulations provides, in part, that if during the taxable year property on which the investment credit was claimed ceases to be section 38 property because of the occurrence of an event on a specific date, such cessation shall be treated as having occurred on the actual date of such event.

At the time a corporation is transformed from a taxable entity to a tax exempt entity any property on which the investment credit was claimed while the corporation was taxable ceases to be section 38 property. Therefore, the recomputations required by section 47 of the Code and the regulations thereunder must be computed with respect to that point in time.

In Revenue Ruling 70-391, 1970-2 C.B. 3, it is held that when a corporation liquidates and ceases its business operations, any property distributed in the liquidation with regard to which the liquidated corporation was allowed the investment credit is, at the time of such distribution, subject to the recapture provisions of section 47 of the Code. The reason for this rule is that the taxpayer disposed of the property before the close of the useful life that was taken into account by it in computing the investment credit in prior taxable years. Similarly, where the property in question ceases to be "section 38 property" because the taxpayer's status has changed from taxable to tax exempt the computations relative to the investment credit recapture of the taxpayer must be made for the taxpayer's last year as a taxable entity even though the taxpayer has not liquidated and entirely ceased operations. Thus, because the final taxable year of a corporation ends on the date it becomes exempt from Federal income tax under the provisions of section 501 of the Code (see Economy Savings & Loan Co. v. Commissioner, 158 F.2d 472 (1946)), the recapture of the investment credit, necessitated because the property has ceased being "section 38 property", must be made for the taxpayer's last year as a taxable entity.

Accordingly, M, for its last year as a taxable entity, is subject to the recapture provisions of section 47 of the Code and the regulations thereunder. The recaptured amount is taken into account in determining the amount of tax due from M for its last taxable year, which year ends on the day before M became an exempt organization under section 501 of the Code.