Internal Revenue Service
Revenue Ruling
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smRev. Rul. 77-76
1977-1 C.B. 4
Section 38
Section 47
Section 48
Section 169
IRS Headnote
Investment tax credit; pollution control facility subsequently amortized. A corporation that took a depreciation deduction and an investment tax credit in its 1973 taxable year return for a new certified pollution control facility, and in its 1974 tax return elected to take amortization deductions under section 169(a) of the Code, must correct its 1973 return so that no investment tax credit is claimed.
Full Text
Rev. Rul. 77-76
Advice has been requested whether the taxpayer, under the circumstances described below, is required under section 47(a)(1) of the Internal Revenue Code of 1954 to recapture investment tax credit taken on a pollution control facility amortized under section 169 in the year in which the section 169 election is made, or whether the taxpayer's return for the year in which the investment tax credit was orignally claimed is to be corrected, claiming no investment tax credit on the facility.
On January 30, 1973, corporation X, that uses the calendar year as its taxable year, completed the installation of a facility that was new section 38 property and all of which qualified as a certified pollution control facility within the meaning of section 1.169-2(a) of the Income Tax Regulations. The cost of the facility was 100x dollars, its salvage value was 8x dollars, and its useful life was 10 years. X did not elect under section 169(b) of the Code to take an amortization deduction with respect to such facility for 1973, but instead took a depreciation deduction under sections 167 and 179, of 11x dollars (the amount allowable, or which 2x dollars is for additional first-year depreciation under section 179). X also claimed an investment tax credit of 7x dollars under section 46 on its tax return for 1973.
However, in a statement attached to its tax return for 1974, X elected to take amortization deductions under section 169(a) of the Code with respect to the facility and to begin the 60-month amortization period with January 1, 1974. X eliminated the amortizable portion of the cost from the depreciable base, but made no correction for the investment tax credit taken in 1973.
Section 38 of the Code allows a credit against Federal income tax for qualified investment in "section 38 property".
Section 47(a)(1) of the Code states 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 credit under section 38, then the tax under this chapter for such taxable year shall be increased by an amount equal to the aggregate decrease in the credits allowed under section 38 for all prior taxable years that would have resulted solely from substituting, in determining qualified investment, for such useful life the period beginning with the time such property was placed in service by the taxpayer and ending with the time such property ceased to be section 38 property.
Section 48(a)(8) of the Code as in effect prior to amendment by the Tax Reform Act of 1976 provides, in part, that any property with respect to which an election under section 169 applies shall not be treated as section 38 property to the extent that the adjusted basis of the property constitutes the amortizable basis for purposes of section 169.
Section 1.169(a)(1) of the regulations provides that a taxpayer may elect to take an amortization deduction with respect to a certified pollution control facility. The taxpayer may begin the 60 month amortization period either with the month following the month in which the facility is completed or acquired, or with the first month of the taxable year succeeding the taxable year in which such facility is completed or acquired.
Section 1.169-4(a)(3) of the regulations provides, in part, that a taxpayer that does not elect in the prescribed manner to take amortization deductions with respect to a certified pollution control facility shall not be entitled to such deductions.
Congressional intent with regard to the situation described in the instant case is indicated in H.R. Rep. No. 92-533, 92nd Cong., 1st Sess. 21, (1971), 1972-1 C.B. 498, 509.
The report states that "[i]f the amortization election is made subsequent to the allowance of the credit, the credit is to be retroactively denied for the year in which it was previously allowed." This same phrase appears in S. Rep. No. 92-437, 92nd Cong., 1st Sess. 33, (1971), 1972-1 C.B. 559, 577.
On the tax return filed in 1973, X claimed the investment tax credit on the entire basis of the pollution control facility. However, the subsequent election to amortize the depreciable base beginning in the first month of the first taxable year after the property is placed in service requires that the property to which the election applies shall not be treated as section 38 property pursuant to section 48(a)(8) of the Code as in effect prior to amendment by the Tax Reform Act of 1976, and the investment tax credit is retroactively denied for 1973, the year in which it was previously allowed.
Accordingly, in the instant case, the taxpayer's Federal income tax return for the taxable year 1973 is to be corrected, so that no investment tax credit is claimed for the pollution control facility. The amended return for the taxable year 1973 will continue to show a depreciation deduction of 12x dollars.