Tax News

CCH (cch.taxgroup.com) reports:

  Temporary and proposed regulations provide guidance with respect to the election to expense qualified refinery property. The temporary regulations generally apply to tax years ending on or after July 9, 2008, and terminate on July 1, 2011. However, taxpayers may rely on the proposed regulations for tax years ending prior to July 9, 2008.

 
Code Sec. 179C allows taxpayers to elect to deduct 50 percent of the cost of qualified refinery property placed in service after August 8, 2005, and before January 1, 2012. The remaining 50 percent of the cost is recovered through depreciation (or, if applicable, deducted as Code Sec. 179B capital costs incurred to comply with sulfur regulations). All costs that are properly capitalized into qualified refinery property are included in the cost of qualified refinery property.

  The temporary regulations restate many of the statutory elements of the expense election, including the definition of eligible property, the description of a qualified refinery, compliance with applicable environmental laws, and the written binding contract requirement. The temporary regulations generally interpret the statute in a manner consistent with existing statutory and regulatory principles, and recognize that taxpayers have had to address issues related to the expense election for prior tax years in the absence of regulations.

  The regulations provide that, for purposes of the original-use requirement, original use is the first use of the property, regardless of whether that use is by the taxpayer. Capital expenditures to recondition or rebuild property acquired or owned by the taxpayer can meet the original use requirement, but reconditioned or rebuilt property acquired by a taxpayer does not. Sale-leaseback transactions can qualify for exceptions to the original-use requirement, as well as the placed-in-service rules. The regulations also provide tests for satisfying the production capacity requirements, and clarify that the expense election is available for qualified refinery property even if a portion of the refinery that was placed in service before August 8, 2005, fails to meet applicable environmental laws. Rules consistent with bonus depreciation principles apply to the application of the written binding contract rules applicable to self-constructed property.

  Most taxpayers must make the election by the due date (including extensions) for filing the federal income tax return for the tax year in which the qualified refinery property is placed in service. However, a taxpayer that did not claim the expense deduction on a return filed for a tax year ending prior to July 9, 2008, may do so by properly making the election on an amended return filed by December 31, 2008. The election is generally irrevocable, but the regulations permit a taxpayer to revoke the election before the revocation deadline, which is the later of December 31, 2008, or 24 months after the due date (including extensions) of the taxpayer's return for the tax year for which the election would apply.

  A cooperative that is at least partly owned by another cooperative may elect to allocate all or a portion of its expense deduction for the year to the cooperative's owner(s). The temporary regulations provide that this allocation is equal to the cooperative's owner's ratable share of the total amount allocated, determined on the basis of the owner's ownership interest in the cooperative taxpayer at the beginning of the cooperative taxpayer's tax year. The regulations also provide rules for making the election. The cooperative's election cannot be revoked.

  The temporary regulations also provide rules for the statement that must be attached to an electing taxpayer's return filed after July 23, 2008. The statement must identify the name and location of the qualified refinery property, affirm that the refinery property meets the production capacity requirements, and provide the total cost basis of the qualified refinery property and the depreciation treatment of the capitalized portion of the qualified refinery property. A taxpayer that claims the deduction on a return filed before July 23, 2008, must attach a statement to its next return for each tax year in which the taxpayer claimed the deduction but did not file a statement.

  The text of the temporary regulations also serves as the text of the proposed regulations. Written or electronic comments must be received by October 7, 2008. Outlines of the topics to be discussed at a public hearing scheduled for Thursday, November 20, 2008, at 10:00 a.m. must be received by Tuesday, October 14, 2008.

T.D. 9412, 2008FED ¶47,046

Proposed Regulations, NPRM REG-146895-05, 2008FED ¶49,815

Other References:

 
Code Sec. 179C

  CCH Reference - 2008FED ¶12,137B

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 18,900