Rev. Rul. 81-1

1981-1 C.B. 18, 1981-1 I.R.B. 9.

                       Internal Revenue Service
                                 Revenue Ruling

        INVESTMENT CREDIT; SELF-CONSTRUCTED PROPERTY; CONSTRUCTION-RELATED
                                  DEPRECIATION

                           Published: January 5, 1981

SECTION 48.--DEFINITIONS; SPECIAL RULES, 26 CFR 1.48-1: Definitions of section 38 property

  Investment credit; self-constructed property; construction-related depreciation. The basis of self-constructed section 38 property includes depreciation sustained on construction assets for which no investment credit was allowable and excludes depreciation sustained on construction assets for which investment credit was allowable;  Rev. Rul. 69-228 revoked.

ISSUE

  Does the basis of self-constructed "section 38 property" include depreciation sustained with respect to any other property used in the construction of such self-constructed property for purposes of the investment tax credit?

FACTS

  The taxpayer, a corporation, uses its own motor vehicles and other equipment in the construction of new plant facilities that qualify for the investment tax credit.  Depreciation attributable to the use of the construction assets was capitalized and properly included in the basis of the new self-constructed plant facilities for depreciation purposes.

LAW AND ANALYSIS

  Section 38 of the Internal Revenue Code provides a credit against federal income tax for investment in section 38 property.  The determination of what property qualifies as section 38 property is made under rules provided in section 48.

  Section 46 of the Code provides for the determination of the amount of the investment tax credit to be allowed by section 38 for qualified investment.

  Section 1.46-3(c)(1) of the Income Tax Regulations provides that the basis of any new section 38 property shall be determined in accordance with the general rules for determining the basis of property.  Thus, the basis of property would generally be its cost, unreduced by the adjustment to basis provided by section 48(g)(1) of the Code with respect to property placed in service before January 1, 1964, and any other allowable adjustments to basis, such as depreciation, and would include all items properly includable in the depreciable basis of the property, such as the costs of installation and freight.  However, for purposes of determining qualified investment, the basis of new section 38 property constructed by the taxpayer shall not include any depreciation sustained with respect to any other property used in construction of such new section 38 property Section 1.46-3(c)(1) is cross-referenced to section 1.48-1(b)(4).

  Section 48 of the Code provides that the term "section 38 property" means property with respect to which depreciation is allowable and having a useful life of three years or more.

  Section 1.48-1 of the regulations discusses this requirement for property to qualify as "section 38 property."  Section 1.48-1(b)(4) provides that if depreciation sustained on property is not an allowable deduction for the taxable year but is added to the basis of property being constructed, for investment credit purposes, a deduction for depreciation shall be treated as allowable for the taxable year with respect to the property on which depreciation is sustained.  For example, if $1,000 of depreciation sustained with respect to property No. 1, which is placed in service in 1964 by taxpayer A, is not allowable to A as deduction for 1964 but is added to the basis of property being constructed by A (property No. 2), a deduction for depreciation shall be treated as allowable to A for 1964 with respect to property No. 1. However, the $1,000 amount is not includable in the basis of property No. 2 for purposes of determining A's qualified investment with respect to property No. 2.  Section 1.48-1(b)(4) cross-references paragraph (c)(1) of section 1.46-3.

  For purposes of qualifying the construction assets of section 38 property, section 1.48-1(b)(4) of the regulations recognizes that depreciation of the construction assets is treated as allowable for the taxable year even though that depreciation is capitalized as part of the cost of self-constructed assets.  The construction assets, if otherwise qualified as section 38 property will qualify for the investment tax credit in the year they are placed in service.   In addition, the investment credit will not be subject to recapture under section 47 of the Code merely because these assets are used in constructing other assets.  However, for purposes of computing the investment tax credit for the self-constructed assets, sections 1.46-3(c)(1) and 1.48- 1(b)(4) exclude from basis any depreciation attributable to these construction assets.  The exclusion of depreciation is necessary to prevent the cost of the construction assets from being used twice for investment tax credit purposes, once when that asset was placed in

service and again as part of the basis of the new self-constructed section 38 property when that asset is placed in service.

  Section 1.46-3(c)(1) of the regulations contains the rule that for purposes of determining qualified investment, the basis of self-constructed section 38 property shall not include any depreciation with respect to any other property used in its construction and refers to section 1.48-1(b)(4).  Section 1.48- 1(b)(4) governs the year in which depreciation of construction assets is considered allowable for investment credit purposes and illustrates the section 1.46-3(c)(1) rule with an example in which depreciation of a construction asset is excluded from the basis of a self-constructed asset.

  Since these regulations deal in part with the same subject matter, they should be construed together.  Section 1.48-1(b)(4) of the regulations, which applies the principle in section 1.48-1(b)(1) governing when depreciation is allowable, is addressed only to construction assets that are section 38 property.  Therefore, because section 1.48-1(b)(4) deals in part with section 1.46-3(c)(1) and should be construed in conjunction with that regulation, section 1.46-3(c)(1) likewise refers only to construction assets that are section 38 property.  See concurring opinion in United Telecommunications, Inc. v. Commissioner, 65 T.C. 278 (1975), acq. in result, 1980-1 C.B. 1, supplemented by 67 T.C. 760 (1977), aff'd 589 F.2d 1383 (10th Cir. 1978).

HOLDING

  For investment tax credit purposes, the basis of self-constructed assets includes depreciation sustained on construction assets for which no investment tax credit was allowable and excludes depreciation sustained on construction assets for which investment tax credit was allowable.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 69-228, 1969-1 C.B. 29, concerns capitalized depreciation on construction equipment acquired by the taxpayer prior to January 1, 1962 (non- section 38 property) used to construct new plant facilities that qualify as section 38 property.  It concludes that such depreciation is not includable in the basis of the plant facilities for purposes of determining qualified investment.  Since that conclusion is inconsistent with the above ruling, Rev. Rul. 69-228 is revoked.

Rev. Rul. 81-1, 1981-1 C.B. 18, 1981-1 I.R.B. 9.