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Electronic Code of Federal Regulations

e-CFR Data is current as of October 17, 2014

Title 26Chapter ISubchapter APart 1 → §1.9001-3


Title 26: Internal Revenue
PART 1—INCOME TAXES (CONTINUED)


§1.9001-3   Basis adjustments for taxable years between changeover date and 1956 adjustment date.

(a) In general. (1) Subsection (e) of the Act provides the adjustments required to be made in determining the adjusted basis of any retirement-straight line property as of any time on or after the changeover date and before the taxpayer's 1956 adjustment date. This adjusted basis shall be used for all purposes of the Internal Revenue Code of 1939 and the Internal Revenue Code of 1954 for taxable years beginning on or after the changeover date and before the taxpayer's 1956 adjustment date, except as provided in subparagraph (4) of this paragraph. The adjustments so required, which are set forth in paragraphs (b) and (c) of this section, shall not be used in determining the adjusted basis of property for taxable years beginning before the changeover date or on or after the taxpayer's 1956 adjustment date.

(2) In order to arrive at the adjusted basis as of any specific date occurring on or after the changeover date and before the 1956 adjustment date, the taxpayer shall start with the unadjusted basis of all retirement-straight line property held on the changeover date by the taxpayer or its predecessor and shall, as of that specific date and with respect to both the asset and reserve accounts, (i) make the adjustments prescribed by this section and subsection (e) of the Act and (ii) also make those adjustments required, in accordance with the method of accounting regularly used, for additions, retirements, and other dispositions of property. For an illustration of adjustments required in accordance with the method of accounting regularly used, see the example in paragraph (d) of this section.

(3) The adjustments required by subsection (e) of the Act shall be made in lieu of the adjustments for depreciation otherwise required by section 1016(a) (2) and (3) of the Code and by the corresponding provisions of prior revenue laws.

(4) Although this section, and subsection (e) of the Act, shall apply in determining the excess-profits tax, they shall not apply in determining adjusted basis for the purpose of computing equity capital for any day under section 437(c) (relating to the Excess Profits Tax Act of 1950) (64 Stat. 1137) of the Internal Revenue Code of 1939. For the adjustments to be made in computing equity capital under such section, see paragraph (c) of §1.9001-4.

(b) Adjustment for terms-letter reserve. Pursuant to subsection (e)(1) of the Act, the basis of any retirement-straight line property shall be adjusted, as of any specific applicable date occurring on or after the changeover date and before the 1956 adjustment date, for the amount of the terms-letter reserve applicable to such property.

(c) Adjustment for depreciation allowable under the terms-letter. Pursuant to subsection (e)(2) of the Act, the basis of any retirement-straight line property shall be adjusted, as of any specific applicable date occurring on or after the changeover date and before the 1956 adjustment date, for depreciation applicable to such property and allowable under the terms-letter.

(d) Illustration of basis adjustments required for taxable years beginning on or after the changeover date and before the 1956 adjustment date. The application of this section may be illustrated by the following example, which is based upon the assumption that multiple asset accounts are used:

Example. (1) The facts are assumed to be the same as those in the example under paragraph (e) of §1.9001-2, except that the adjusted basis of retirement-straight line property is determined as of January 1, 1955, and the depreciation allowable under the terms-letter from the changeover date to December 31, 1954, is $2,100.

(2) The adjusted basis on January 1, 1955, of the retirement-straight line property held by the taxpayer on that date is $4,195, determined as follows and in accordance with this section:

(i) Asset account:
Unadjusted cost on January 1, 1943$10,000
Less:
Adjustment for abnormal retirement$1,500
Adjustment for normal retirement1,000
   2,500
Balance as of January 1, 19557,500
(ii) Credits to reserve for depreciation:
Entire terms-letter reserve as of January 1, 19433,000
Depreciation allowable under terms-letter from January 1, 1943, to December 31, 19542,100
Total credits5,100
(iii) Charges to reserve for depreciation:
Part of terms-letter reserve applicable to property abnormally retired on December 31, 1954450
Depreciation applicable to property abnormally retired and allowable from January 1, 1943, to December 31, 1954345
Adjustment for normal retirement1,000
Total charges1,795
(iv) Balance in reserve for depreciation:
Total credits5,100
Total charges1,795
Balance as of January 1, 19553,305
(v) Adjusted basis of property:
Balance in asset account7,500
Balance in reserve for depreciation3,305
Adjusted basis as of January 1, 19554,195


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