Rev. Rul. 84-99

1984-2 C.B. 5, 1984-28 I.R.B. 4.

                       Internal Revenue Service
                                 Revenue Ruling

        INVESTMENT CREDIT;  RECAPTURE;  QUALIFIED PROGRESS EXPENDITURES

                            Published: July 9, 1984

Section 47. - -Certain Dispositions, Etc., of Section 38 Property, 26 CFR 1.47- 1:  Recomputation of credit allowed by section 39

(Also Section 168;  5c.168(f)(8)-6.)

  Investment credit;  recapture;  qualified progress expenditures.  A taxpayer is required to recapture in the year of sale any investment tax credits previously claimed on qualified progress expenditures on property sold.

ISSUE

  Is a corporation that has properly elected to take the investment credit on qualified progress expenditures pursuant to section 46(d) of the Internal Revenue Code subject to recapture when in a subsequent taxable year the property is sold?

FACTS

  Taxpayer is a corporation that began construction in 1978 on property that would qualify for the investment credit upon its completion.  Taxpayer, in 1978, elected to claim the investment tax credit on qualified progress expenditures pursuant to section 46(d) of the Code.  Taxpayer also claimed the investment tax credit on qualified progress expenditures in both 1979 and 1980.

  In August of 1981, taxpayer entered into a sale-leaseback transaction that qualified under section 168(f)(8) of the Code with respect to the property upon which it had made the section 46(d) election.

LAW AND ANALYSIS

  Section 168(f)(8) of the Code was enacted to permit a taxpayer to transfer certain tax benefits it is unable to use to another taxpayer.  If the property is qualified leased property pursuant to section 168(f)(8)(D), the agreement will be characterized as a lease for federal income tax purposes, the lessor shall be treated as the owner of the property, and the lessee shall be treated as

the lessee.

  Section 5c.168(f)(8)-6(a)(2)(i) of the Temporary Income Tax Regulations defines "qualified leased property" for sale and leaseback transactions as new section 38 property of the lessee that was purchased and leased no later than 3 months after the date that the property was placed in service by the lessee (or prior to November 14, 1981 if the property was placed in service by the lessee after December 31, 1980, and before August 14, 1981).

  Section 5(c).168(f)(8)-6(b)(2)(ii) of the temporary regulations provides that for purposes other than determining whether property is qualified leased property, property subject to a lease under section 168(f)(8) will be deemed to have been placed in service no earlier than the date such property is used under the lease.  If the lessee claims any investment tax credit or ACRS deductions with respect to property placed in service under a lease, the lessee must file an amended return within three months following the execution of the lease agreement in which the lessee foregoes its claim to the investment tax credit and ACRS deductions with respect to the leased property or the election under section 168(f)(8) will be void.

  Section 5(c).168(f)(8)-6(b)(1)(ii) (example 2)) of the temporary regulations is as follows:  P Corp is constructing progress expenditure property as defined in section 46(d)(2) for R Corp. Progress expenditure property is property which it is reasonable to believe will be section 38 property in the hands of the taxpayer when it is placed in service.  Before the date that the property is placed in service (as defined in section 5(c).168(f)(8)-6(b)(2)(i)) the property is not new section 38 property.  Accordingly, progress expenditure property cannot be qualified leased property.

  Section 47(a)(3) of the Code states that if during any taxable year any property taken into account in determining qualified investment under section 46(d) ceases (by reason of sale or other disposition, cancellation or abandonment of contract, or otherwise) to be, with respect to the taxpayer, property which, when placed in service, will be new section 38 property, 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 which would have resulted solely from reducing to zero the qualified investment taken into account with respect to such property.

  Property, upon which the election to take the investment credit on qualified progress expenditures has been made, cannot be section 38 property until construction is complete and the property is placed in service.  At that time, assuming that the requirements under section 48 of the Code are met, the property will be section 38 property and will be eligible to be sold and leased back under section 168(f)(8) of the Code.

  Because the investment tax credit was claimed by the taxpayer with respect to property that was not section 38 property at the

time the credit was claimed, section 5(c).168(f)(8)-6(b)(2)(ii) of the temporary regulations does not apply.

HOLDING

  Pursuant to section 47(a)(3) of the Code, taxpayer is required to recapture, in the year of sale, any investment tax credit previously claimed on the qualified progress expenditures for the property sold.

Rev. Rul. 84-99, 1984-2 C.B. 5, 1984-28 I.R.B. 4.