REVENUE RULE 90-9

1990-1 C.B. 46, 1990-5 I.R.B. 5.

Internal Revenue Service
Revenue Ruling

ALTERNATIVE DEPRECIATION SYSTEM; CARGO CONTAINERS

Published: January 12, 1990

Section 168. - Accelerated Cost Recovery System

(See Also sections 38, 47, 48; 1.38-1, 1.47-1, 1.48-1)

Alternative depreciation system; cargo containers. A taxpayer must depreciate its cargo containers under the alternative depreciation system if the taxpayer cannot document that the containers were used substantially in the direct transportation of property to and from the U.S. during the taxable year.

ISSUE

If a taxpayer owns cargo containers used predominantly outside the United States during the taxable year but cannot document that the containers were used in the transportation of property to and from the United States, must the taxpayer depreciate the containers under the alternative system described in section 168(g) of the Internal Revenue Code?

FACTS

The taxpayer, a domestic corporation, owns intermodal cargo containers that it placed in service in 1989 for use in worldwide trade. The containers were certified as meeting the size and safety standards set forth in international agreements to which the United States is a party. The containers were physically located outside the United States more than 50 percent of the taxable year. A portion of the containers was leased to others by the taxpayer for a period not in excess of one year. The taxpayer has no records that show where or how its containers were used. The taxpayer has records that document the year the containers were placed in service, their original cost or other basis, and any retirement or other disposition of those containers.

LAW

Section 168(a) of the Code requires taxpayers to determine the depreciation deduction allowed by section 167(a) by using the applicable depreciation method, the applicable recovery period, and the applicable convention. Section 168(g)(1)(A), however, imposes an alternative depreciation system upon any tangible property that is used predominantly outside the United States during the taxable year. To determine whether property is used predominantly outside the United States, section 168(g)(4) applies rules similar to those under section 48(a)(2) (including the exceptions in section 48(a)(2)(B)).

Section 48(a)(2) of the Code generally denies the investment tax credit to property used predominantly outside the United States. Under section 1.48- 1(g)(1)(i) of the Income Tax Regulations, property is used predominantly outside the United States if it is located outside the United States during more than 50 percent of the taxable year. Section 48(a)(2)(B), however, lists certain kinds of property that qualify for the investment tax credit, even if the property is used predominantly outside the United States.

A cargo container used predominantly outside the United States qualifies for the credit under section 48(a)(2)(B)(v) of the Code if it is owned by a United States person and if it is used in the transportation of property to and from the United States. Section 1.48-1(g)(2)(v) of the regulations repeats the statutory language without further explanation.

Section 47 of the Code requires recapture of all or a portion of the investment tax credit if the property no longer qualified as section 38 property. Section 1.46-3(e)(6) of the regulations provides that the taxpayer must maintain sufficient records to determine whether section 47 applies with respect to any asset. Section 1.47- 1(e)(1) provides, in part, that in order to avoid recapture, the taxpayer must maintain records from which it can establish, each item of section 38 property, the following facts: (a) the date the property is disposed of or otherwise ceases to be eligible for the investment tax credit, (b) the estimated useful life of the property, (c) the month and the taxable year in which the property was placed in service and (d) the property's basis (or cost) as actually or reasonably determined. See also, section 1.6001-1.

The investment tax credit was added to the Code by the Revenue Act of 1962, Sec. 2(a), 1962-3 C.B. 111, 114. The House Ways and Means Committee stated that certain property could not qualify for the credit. Among the types of disqualified property is property used predominantly outside the United States. But the Committee noted:

[T]here are certain exceptions where this type of property is eligible for the credit, namely, in the case of domestically owned aircraft, rolling stock of railroads, vessels, and motor vehicles, where the use is partially WITHIN and partially without the United States. Similarly, an exception is made in the transportation of property to or from the United States. . . . Property used predominantly outside the United Sates (with the exceptions noted) is omitted, since the PRIMARY PURPOSE OF THE CREDIT IS TO ENCOURAGE INVESTMENT WITHIN THE UNITED STATES.

H.R. Rep. No. 1447, 87th Cong., 2d Sess. 12 (1962), 1962-3 C.B. 405, 416 (emphasis added). Essentially identical language appears at S. Rep. No. 1881, 1962-3 C.B. 703, 717, 723.

ANALYSIS

A taxpayer must depreciate property used predominantly outside the United States according to the alternative depreciation system if that use outside the United States would have disqualified the property for the investment tax credit for the taxable year. A cargo container used predominantly outside the United States cannot qualify for the investment tax credit unless the taxpayer can demonstrate that it satisfies the exception in section 48(a)(2)(B)(v) of the Code.

Rather than establishing standards applicable to all the asset types listed, section 48(a)(2)(B) of the Code and section 1.48- 1(g)(2) of the regulations set out different standards for each specific asset type. Determination of the eligibility of intermodal cargo containers by adopting portions of the standards of other exceptions set out in section 1.48-1(g)(2) of the regulations is not appropriate. For example, an intermodal cargo container is not eligible for the credit merely because it returned to the United States 'with some degree of frequency.' See section 1.48-1(g)(2)(i) and Rev. Rul. 73- 367, 1973-2 C.B. 8 (relating to the eligibility requirements of aircraft). Similarly, certification that a cargo container meets international standards is not equivalent to documentation for vessels and does not assure the container's eligibility. See section 1.48-1(g)(2)(iii) and Rev. Rul. 69-509, 1969-2 C.B. 3 (relating to the eligibility requirements for vessels). Thus, an intermodal cargo container used predominantly outside the United States can qualify for the investment tax credit only if it satisfies the standards of section 1.48-1(g)(2)(v).

The cargo containers in this case are owned by United States persons. The issue is the meaning of 'used in the transportation of property to and from the United States.' The legislative history of section 48(a)(2)(B) of the Code indicates that Congress intended that the investment tax credit be available for depreciable property used predominantly outside the United States only if the activity directly and particularly benefits the United States economy. That benefit is not assured unless a cargo container is used substantially in the activity described in section 1.48-1(g)(2)(v) of the regulations. Cf. Northville Dock Corp. v. Commissioner, 52 T.C. 68 (1969), (finding that a storage facility, a portion of which was substantially used in connection with a qualifying activity, is eligible for the investment tax credit), aff'd per curiam, 427 F.d 164 (2d Cir. 1970). Thus, a cargo container must be used substantially in the direct transportation of property to or from the United States during each taxable year of its recovery period. In view of the legislative history quoted above, the standard is expressed with the conjunction 'or' rather than 'and.'

For this purpose, direct transportation consists of the transportation of property by the container with the United States as the origin or terminus of the trip for the container and the property. Thus, a container is not engaged in the direct transportation of property to or from the United States merely because it transports property from one foreign country to another foreign country, even if the property inside the container may eventually come to the United States, whether in its original form or integrated into a new product.

In this case, the taxpayer has no records to document the annual activity of any of its intermodal cargo containers used predominantly outside the United States and is thus unable to determine whether any container is eligible for the credit under the exception. Under these facts, the taxpayer must use the alternative depreciation system of section 168(g) of the Code.

If the costs of a taxpayer's cargo containers were eligible under section 48(a)(2)(B)(v) of the Code when placed in service to be depreciated under the general depreciation system of section 168(a), they must be depreciated under the alternative depreciation system if in any subsequent taxable year of the recovery period no records were kept substantiating continued qualifying use. Such a failure to maintain records will be treated as a change in use under section 168(i)(5) for purposes of determining the subsequent depreciation deduction.

Taxpayers lacking adequate records to establish whether its cargo containers qualify, or continue to qualify under section 48(a)(2)(B)(v) of the Code for depreciation under section 168(a) may be eligible to make an irrevocable election to use 'safe harbor' percentages set out in Rev. Proc. 90-10, 1990-5 I.R.B. ___, to establish the level of qualification for certain intermodal cargo containers placed in service in the year of election.

HOLDING

A taxpayer must depreciate its cargo containers under the alternative depreciation system of section 168(g) of the Code if the taxpayer cannot document that the containers were used substantially in the direct transportation of property to or from the United States during the taxable year. However, the taxpayer may be eligible for the irrevocable election set out in Rev. Proc. 90-10.

DRAFTING INFORMATION

The principal author of this revenue ruling is Mr. Rick Robbins of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Mr. Robbins on (202) 566- 3553 (not a toll-free call).

Rev. Rul. 90-9, 1990-1 C.B. 46, 1990-5 I.R.B. 5.