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T.D. 7875, 1983-1 CB 66

TD, T.D. 7875, Section 194.--Amortization of Reforestation Expenditures, 26 CFR 15b.194-1: Amortization of reforestation expenditures., (Jan. 01, 1983)

Section 194.--Amortization of Reforestation Expenditures
26 CFR 15b.194-1: Amortization of reforestation expenditures.
TITLE 26.--INTERNAL REVENUE.--CHAPTER I, SUBCHAPTER A, PART 15b--TEMPORARY REGULATIONS UNDER TITLE III OF THE
RECREATIONAL BOATING SAFETY AND FACILITIES IMPROVEMENT ACT OF 1980.

Amortization of Reforestation Expenditures.

AGENCY: Internal Revenue Service, Treasury.

ACTION: Temporary regulations.

SUMMARY: This document provides temporary regulations for an election under which taxpayers may amortize up to $10,000 of qualified reforestation expenditures over a seven-year period. Changes to the applicable tax law were made by the Recreational Boating Safety and Facilities Improvement Act of 1980 [Pub. L. 96-451, 1980-2 C.B. 485]. These regulations affect taxpayers who make expenditures to pay for planting or seeding areas for forestation or reforestation purposes. In addition, the text of the temporary regulations set forth in this document also serves as part of the text of the proposed regulations cross-referenced in the Notice of Proposed Rulemaking * * * [LR-189-90, page 975, this Bulletin].

DATE: The regulations apply to qualifying reforestation expenditures added to capital accounts after December 31, 1979.

FOR FURTHER INFORMATION CONTACT: Robert B. Coplan of the Legislation and Regulations Division, Office of the Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (Attention: CC: LR:T) 202-566-3287, not a toll-free call.

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains temporary regulations relating to an election to amortize certain reforestation expenditures under section 194 of the Internal Revenue Code of 1954, as added or amended by section 301 of the Recreational Boating Safety and Facilities Improvement Act of 1980 (Pub. L. 96-451, 94 Stat. 1983 [1980-2 C.B. 485, 486]). Further, a new Part 15b, Temporary Regulations under Title III of the Recreational Boating Safety and Facilities Improvement Act of 1980, is added by this document to Title 26 of the Code of Federal Regulations. The temporary regulations provided by this document will remain in effect until superseded by final regulations on this subject. By a separate document appearing * * * [page 975, this Bulletin], the regulations promulgated in this document are also proposed to be prescribed as final Income Tax Regulations (26 CFR Part 1) under section 194 of the Code.

IN GENERAL

This document contains temporary regulations under which a taxpayer may elect to amortize, over a seven-year period, up to $10,000 of qualifying reforestation expenditures incurred during a taxable year. The expenditures must have been made in connection with qualified timber property. Only reforestation expenditures which result in additions to capital account after December 31, 1979 are eligible for amortization under section 194. Section 15b.194-1(b) provides that the amortization period must begin on the first day of the first month of the last half of the taxable year in which the taxpayer incurs the amortizable expenditures.

AMOUNT OF DEDUCTION ALLOWABLE

Paragraph (a) of 15b.194-2 sets forth the general rule for determining the allowable monthly amortization deduction. A taxpayer may amortize a minimum of $10,000 of reforestation expenditures ($5,000 in the case of a married taxpayer filing a separate return) in any year under 15b.194-2(b)(1). Paragraph (b)(2) of 15b.194-2 permits a taxpayer who incurs more than $10,000 in qualifying expenditures in connection with more than one timber property to select the manner in which the $10,000 limit on amortizable basis is to be allocated among those properties.

CONTROLLED GROUPS

Rules for allocating the $10,000 limit on amortizable basis among component members of a controlled group are set forth in 15b. 194-2(b)(4). Generally, component members of a controlled group on a December 31 are treated as one taxpayer in applying the $10,000 limit. In addition, the $10,000 amount may be allocated among the members of the group by the common parent corporation if a consolidated return is filed, or if separate returns are filed, the amount is to be allocated in accordance with an agreement made by the members. The definition of the term "controlled group of corporations" in section 1563(a) is modified for purposes of section 194 by substituting "more than 50 percent" for the phrase "at least 80 percent" wherever it appears. See 15b.194-3(d).

PARTNERSHIPS

The election to amortize reforestation expenditures must be made by a partnership and the $10,000 limit on expenditures applies to the partnership as well as to each partner. In general, under 15b.194-2(b)(5)(iii), a partner's share of the partnership's amortizable reforestation expenditures is to be determined in accordance with section 704 and the regulations thereunder.

ESTATES

An estate may elect to amortize up to $10,000 of reforestation expenditures under 15b.194-2(b)(6). Any amortizable expenditures by an estate must be apportioned between the estate and the income beneficiary on the basis of the income allocable to each.

ADJUSTMENT TO BASIS

Section 15b.194-2(b)(3)(i) provides that when a taxpayer elects to amortize reforestation expenditures under section 194, such taxpayer's basis in the qualified timber property to which the expenditures relate must be adjusted to reflect the amount of the section 194 deduction allowable to the taxpayer. However, no adjustment is required for that portion of a deduction which is apportioned to a trust which may not deduct its share of a section 194 deduction.

TIME AND MANNER OF MAKING ELECTION

Section 15b.194-4(a) provides that the election under section 194 is generally made by entering the amount of the deduction at the appropriate place on the taxpayer's return for the year the expenditures were made, and by attaching a statement to the return. The regulations set forth the information to be included in the statement. A special rule is contained in 15b.194-4(b) which allows a taxpayer who was eligible to, but did not elect section 194 amortization on a return filed before June 13, 1983, to amend that return and elect to amortize reforestation expenditures.

DRAFTING INFORMATION

The principal author of these temporary regulations is Robert B. Coplan of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulation, both on matters of substance and style.

EXECUTIVE ORDER 12291 AND REGULATORY FLEXIBILITY ACT

The Commissioner of Internal Revenue has determined that this temporary rule is not a major rule as defined in Executive Order 12291. Accordingly, a Regulatory Impact Analysis is not required. For the reasons set forth in the following paragraphs no general notice of proposed rulemaking is required by 5 U.S.C. 553(b). Accordingly no Regulatory Flexibility Analysis is required for this rule.

The Treasury decision adds a temporary regulation to enable eligible taxpayers to make an election to amortize reforestation expenditures. Because this regulation is necessary to provide immediate guidance to taxpayers, it is impractical to issue this Treasury decision with notice and public procedure.

* * * * *

Adoption of regulations

Accordingly, a new part 15b, Temporary Regulations under Title III of the Recreational Boating Safety and Facilities Improvement Act of 1980, is added to Title 26 of the Code of Federal Regulations, and the following temporary regulations are hereby adopted:

PART 15b--TEMPORARY REGULATIONS UNDER TITLE III OF THE RECREATIONAL BOATING SAFETY AND FACILITIES IMPROVEMENT ACT OF 1980

Sec.

15b.194-1 Amortization of reforestation expenditures.

15b.194-2 Amount of deduction allowable.

15b.194-3 Definitions.

15b.194-4 Time and manner of making election.

Authority: Sections 194 and 7805, Internal Revenue Code of 1954 (94 Stat. 1983, 68A Stat. 917, 26 U.S.C. 194, 7805).

15b.194-1 Amortization of reforestation expenditures.

(a) In general. Section 194 allows a taxpayer to elect to amortize over an 84-month period, up to $10,000 of reforestation expenditures (as defined in 15b.194-3(c)) incurred by the taxpayer in a taxable year in connection with qualified timber property (as defined in 15b.194-3(a)). The election is not available to trusts. Only those reforestation expenditures which result in additions to capital accounts after December 31, 1979 are eligible for this special amortization.

(b) Determination of amortization period. The amortization period must begin on the first day of the first month of the last half of the taxable year during which the taxpayer incurs the reforestation expenditures. For example, the 84-month amortization period begins on July 1 of a taxable year for a calendar year taxpayer, regardless of whether the reforestation expenditures are incurred in January or December of that taxable year. Therefore, a taxpayer will be allowed to claim amortization deductions for only six months of each of the first and eighth taxable years of the period over which the reforestation expenditures will be amortized.

(c) Recapture. If a taxpayer disposes of qualified timber property within ten years of the year in which the amortizable basis was created and the taxpayer has claimed amortization deductions under section 194, part or all of any gain on the disposition may be recaptured as ordinary income. See section 1245.

15b.194-2 Amount of deduction allowable.

(a) General rule. The allowable monthly deduction with respect to reforestation expenditures made in a taxable year is determined by dividing the amount of reforestation expenditures made in such taxable year (after applying the limitations of paragraph (b) of this section) by 84. In order to determine the total allowable amortization deduction for a given month, a taxpayer should add the monthly amortization deductions computed under the preceding sentence for qualifying expenditures made by the taxpayer in the taxable year and the preceding seven taxable years.

(b) Dollar limitation--(1) Maximum amount subject to election. A taxpayer may elect to amortize up to $10,000 of qualifying reforestation expenditures each year under section 194. However, the maximum amortizable amount is$5,000 in the case of a married individual (as defined in section 143) filing a separate return. No carryover or carryback of expenditures in excess of $10,000 is permitted. The maximum annual amortization deduction for expenditures incurred in any taxable year is $1,428.57 ($10,000/7). The maximum deduction in the first and eighth taxable years of the amortization period is one-half that amount, or $714.29, because of the half-year convention provided in 15b.194-1(b). Total deductions for any one year under this section will reach $10,000 only if a taxpayer incurs and elects to amortize the maximum $10,000 of expenditures each year over an 8-year period.

(2) Allocation of amortizable basis among taxpayer's timber properties. The limit of $10,000 on amortizable reforestation expenditures apllies to expenditures paid or incurred during a taxable year on all of the taxpayer's timber properties. A taxpayer who incurs more than $10,000 in qualifying expenditures in connection with more than one qualified timber property during a taxable year may select the properties for which section 194 amortization will be elected as well as the manner in which the $10,000 limitation on amortizable basis is allocated among such properties. For example, A incurred $10,000 of qualifying reforestation expenditures on each of four properties in 1981. A may elect under section 194 to amortize $2,500 of the amount spent on each property, $5,000 of the amount spent on any two properties, the entire $10,000 spent on any one property, or A may allocate the $10,000 maximum amortizable basis among some or all of the properties in any other manner.

(3) Basis--(i) In general. Except as provided in paragraph (b)(3)(ii) of this section, the basis of a taxpayer's interest in qualified timber property for which an election is made under section 194 shall be adjusted to reflect the amount of the section 194 amortization deduction allowable to the taxpayer.

(ii) Special rule for trusts. Although a trust may be a partner of a partnership or an income beneficiary of an estate, it may not deduct its allocable share of a section 194 amortization deduction allowable to such partnership or estate. In addition, the basis of the interest held by the partnership or estate in the qualified timber property shall not be adjusted to reflect the portion of the section 194 amortization deduction that is allocable to the trust.

(4) Allocation of amortizable basis among component members of a controlled group. Component members of a controlled group (as defined in 15b.194-3(d)) on a December 31 shall be treated as one taxpayer in applying the $10,000 limitation of paragraph (b)(1) of this section. The amortizable basis may be allocated to any one such member or allocated (for the taxable year of each such member which includes such December 31) among the several members in any manner, provided that the amount of amortizable basis allocated to any member does not exceed the amount of amortizable basis actually acquired by the member of the taxable year. The allocation is to be made (1) by the common parent corporation if a consolidated return is filed for all component members of the group, or (2) in accordance with an agreement entered into by the members of the group if separate returns are filed. If a consolidated return is filed by some component members of the group and separate returns are filed by other component members, then the common parent of the group filing the consolidated return shall enter into an agreement with those members who do not join in filing the consolidated return allocating the amount between the group filing the return and the other component members of the controlled group who do not join in filing the consolidated return. If a consolidated return is filed, the common parent corporation shall filea separate statement attached to the income tax return on which an election is made to amortize reforestation costs under section 194. See 15b.194-4. If separate returns are filed by some or all component members of the group, each component member to which is allocated any part of the deduction under section 194 shall file a separate statement attached to the income tax return in which an election is made to amortize reforestation expenditures. See 15b.194-4. Such statement shall include the name, address, employer identification number, and the taxable year of each component member of the controlled group, a copy of the allocation agreement signed by persons duly authorized to act on behalf of those members who file separate returns, and a description of the manner in which the deduction under section 194 has been divided among them.

(5) Partnerships--(i) Election to be made by partnership. A partnership makes the election to amortize qualified reforestation expenditures of the partnership. See section 703(b).

(ii) Dollar limitations applicable to partnerships. The dollar limitations of section 194 apply to the partnership as well as to each partner. Thus, a partnership may not elect to amortize more than $10,000 of reforestation expenditures under section 194 in any taxable year.

(iii) Partner's share of amortizable basis. Section 704 and the regulations thereunder shall govern the determination of a partner's share of a partnership's amortizable reforestation expenditures for any taxable year.

(iv) Dollar limitation applicable to partners. A partner shall in no event be entitled in any taxable year to claim a deduction for amortization based on more than $10,000 ($5,000 in the case of a married taxpayer who files a separate return) of amortizable basis acquired in such taxable year regardless of the source of the amortizable basis. In the case of a partner who is a member of two or more partnerships that elect under section 194, the partner's aggregate share of partnership amortizable basis may not exceed $10,000 or $5,000, whichever is applicable. In the case of a member of a partnership that elects under section 194 who also has separately acquired qualified timber property, the aggregate of the member's partnership and non-partnership amortizable basis may not exceed $10,000 or $5,000, whichever is applicable.

(6) Estates. Estates may elect to amortize in each taxable year up to a minimum of $10,000 of qualifying reforestation expenditures under section 194. Any amortizable basis acquired by an estate shall be apportioned between the estate and the income beneficiary on the basis of the income of the estate allocable to each. The amount of amortizable basis apportioned from an estate to a beneficiary shall be taken into account in determining the $10,000 (or $5,000) amount of amortizable basis allowable to such beneficiary under this section.

(c) Life tenant and remainderman. If property is held by one person for life with remainder to another person, the life tenant is entitled to the full benefit of any amortization allowable under section 194 on qualifying expenditures he or she makes. Any remainder interest in the property is ignored for this purpose.

15b.194-3 Definitions.

(a) Qualified timber property. The term "qualified timber property" means property located in the United States which will contain trees in significant commercial quantities. The property may be a woodlot or other site but must consist of at least one acre which is planted with tree seedlings in the manner normally used in forestation or reforestation. The property must be held by the taxpayer for the growing and cutting of timber which will either be sold for use in, or used by the taxpayer in, the commercial production of timber products. A taxpayer does not have to own the property in order to be eligible to elect to amortize costs attributable to it under section 194. Thus, a taxpayer may elect to amortize qualifying reforestation expenditures incurred by such taxpayer on leased qualified timber property. Qualified timber property does not include property on which the taxpayer has planted shelter belts (for which current deductions are allowed under section 175) or ornamental trees, such as Christmas trees.

(b) Amortizable basis. The term "amortizable basis" means that portion of the basis of qualified timber property which is attributable to reforestation expenditures.

(c) Reforestation expenditures--(1) In general. The term "reforestation expenditures" means direct costs incurred to plant or seed for forestation or reforestation purposes. Qualifying expenditures include amounts spent for site preparation, seed or seedlings, and labor and tool costs, including depreciation on equipment used in planting or seeding. Only those costs which must be capitalized and are included in the adjusted basis of the property qualify as reforestation expenditures. Costs which are currently deductible do not qualify.

(2) Cost-sharing programs. Any expenditures for which the taxpayer has been reimbursed under any governmental reforestation cost-sharing program do not qualify as reforestation expenditures unless the amounts reimbursed have been included in the gross income of the taxpayer.

(d) Definitions of controlled group of corporations and component member of controlled group. For purposes of section 194, the terms "controlled group of corporations" and "component member" of a controlled group of corporations shall have the same meaning assigned to those terms in section 1563(a) and (b), except that the phrase "more than 50 percent" shall be substituted for the phrase "at least 80 percent" each place it appears in section 1563(a)(1).

15b.194-4 Time and manner of making election.

(a) In general. Except as provided in paragraph (b) of this section, an election to amortize reforestation expenditures under section 194 shall be made by entering the amortization deduction claimed at the appropriate place on the taxpayer's income tax return for the year in which the expenditures were incurred, and by attaching a statement to such return. The statement should state the amounts of the expenditures, describe the nature of the expenditures, and give the date on which each was incurred. The statement should also state the type of timber being grown and the purpose for which it is being grown. A separate statement must be included for each property for which reforestation expenditures are being amortized under section 194. The election may only be made on a timely return (taking into account extensions of the time for filing) for the taxable year in which the amortizable expenditures were made.

(b) Special rule. With respect to any return filed before June 13, 1983, on which a taxpayer was eligible to, but did not make an election under section 194, the election to amortize reforestation expenditures under section 194 may be made by a statement on, or attached to, the income tax return (or an amended return) for the taxable year, indicating that an election is being made under section 194 and setting forth the information required under paragraph (a) of this section. An election made under the provisions of this paragraph (b) must be made not later than,

(1) the time prescribed by law (including extensions thereof) for filing the income tax return for the year in which the reforestation expenditures were made, or

(2) June 13, 1983, whichever is later. Nothing in this paragraph shall be construed as extending the time specified in section 6511 within which a claim for credit or refund may be filed.

(c) Revocation. An application for consent to revoke an election under section 194 shall be in writing and shall be addressed to the Commissioner of Internal Revenue, Washington, D.C. 20224. The application shall set forth the name and address of the taxpayer, state the taxable years for which the election was in effect, and state the reason for revoking the election. The application shall be signed by the taxpayer or a duly authorized representative of the taxpayer and shall be filed at least 90 days prior to the time prescribed by law (without regard to extensions thereof) for filing the income tax return for the first taxable year for which the election is to terminate. Ordinarily, the request for consent to revoke the election will not be granted if it appears from all the facts and circumstances that the only reason for the desired change is to obtain a tax advantage.

There is a need for immediate guidance with respect to the provisions contained in this Treasury decision. For this reason, it is found impracticable to issue it with notice and public procedure under subsection (b) of section 553 of Title 5 of the United States Code or subject to the effective date limitation of subsection (d) of this section.

This Treasury decision is issued under the authority contained in sections 194 (94 Stat. 1983; 26 U.S.C. 194) and 7805 (68A Stat. 917; 26 U.S.C. 7805) of the Internal Revenue Code of 1954.

ROSCOE L. EGGER, JR.,
Commissioner of Internal Revenue.

Approved February 28, 1983.
John E. Chapoton,
Assistant Secretary of the Treasury.

Federal Register Cite: 48 F.R. 10816
Federal Register Publication Date: March 15, 1983
Federal Register Filing Date: March 14, 1983