[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.169-2]

[Page 1115-1119]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.169-2  Definitions.

    (a) Certified pollution control facility--(1) In general. Under 
section 169 (d), the term ``certified pollution control facility'' means 
a facility which--
    (i) The Federal certifying authority certifies, in accordance with 
the rules prescribed in paragraph (c) of this section, is a ``treatment 
facility'' described in subparagraph (2) of this paragraph, and
    (ii) Is ``a new identifiable facility'' (as defined in paragraph (b) 
of this section).

For profitmaking abatement works limitation, see paragraph (d) of this 
section.
    (2) Treatment facility. For purposes of subparagraph (1)(i) of this 
paragraph, a ``treatment facility'' is a facility which (i) is used to 
abate or control water or atmospheric pollution or contamination by 
removing, altering, disposing, or storing of pollutants, contaminants, 
wastes, or heat and (ii) is used in connection with a plant or other 
property in operation before January 1, 1969. Determinations under 
subdivision (i) of this subparagraph shall be made solely by the Federal 
certifying authority. See subparagraph (3) of this paragraph. For 
meaning of the phrases ``plant or other property'' and ``in operation 
before January 1, 1969,'' see subparagraphs (4) and (5), respectively, 
of this paragraph.
    (3) Facilities performing multiple functions or used in connection 
with several plants, etc. (i) If a facility is designed to perform or 
does perform a function in addition to abating or controlling water or 
atmospheric pollution or contamination by removing, altering, disposing 
or storing pollutants, contaminants, wastes, or heat, such facility 
shall be a treatment facility only with respect to that part of the cost 
thereof which is certified by the Federal certifying authority as 
attributable to abating of controlling water or atmospheric pollution or 
contamination. For example, if a machine which performs a function in 
addition to abating water pollution is installed at a cost of $100,000 
in, and is used only in connection with, a plant which was in operation 
before January 1, 1969, and if the Federal certifying authority 
certifies that $30,000 of the cost of such machine is allocable to its 
function of abating water pollution, such $30,000 will be deemed to be 
the adjusted basis for purposes of determining gain for purposes of 
paragraph (a) of Sec. 1.169-3.
    (ii) If a facility is used in connection with more than one plant or 
other property, and at least one such plant or other property was not in 
operation before January 1, 1969, such facility shall be a treatment 
facility only to the extent of that part of the cost thereof certified 
by the Federal certifying authority as attributable to abating or 
controlling water or atmospheric pollution in connection with plants or 
other property in operation before January 1, 1969. For example, if a 
machine is constructed after December 31, 1968, at a cost of $100,000 
and is used in connection with a number of plants only some of which 
were in operation before January 1, 1969, and if the Federal certifying 
authority certifies that $20,000 of the cost of such machine is 
allocable to its function of abating or controlling water pollution in 
connection with the plants or other property in operation before January 
1, 1969, such $20,000 will be deemed to be the adjusted basis for 
purposes of determining gain for purposes of paragraph (a) of Sec. 
1.169-3. In a case in which the Federal certifying authority certifies 
the percentage of a facility which is used in connection with plants or 
other property in operation before January 1, 1969, the adjusted basis 
for the purposes of determining gain for purposes of paragraph (a) of 
Sec. 1.169-3 of the portion of the facility so used shall be the 
adjusted basis for determining gain of the entire facility multiplied by 
such percentage.
    (4) Plant or other property. As used in subparagraph (2) of this 
paragraph, the phrase ``plant or other property'' means any tangible 
property whether or not such property is used in the trade or business 
or held for the production of income. Such term includes,

[[Page 1116]]

for example, a papermill, a motor vehicle, or a furnace in an apartment 
house.
    (5) In operation before January 1, 1969. (i) For purposes of 
subparagraph (2) of this paragraph and section 169 (d), a plant or other 
property will be considered to be in operation before January 1, 1969, 
if prior to that date such plant or other property was actually 
performing the function for which it was constructed or acquired. For 
example, a papermill which is completed in July 1968, but which is not 
actually used to produce paper until 1969 would not be considered to be 
in operation before January 1, 1969. The fact that such plant or other 
property was only operating at partial capacity prior to January 1, 
1969, or was being used as a standby facility prior to such date, shall 
not prevent its being considered to be in operation before such date.
    (ii)(a) A piece of machinery which replaces one which was in 
operation prior to January 1, 1969, and which was a part of the 
manufacturing operation carried on by the plant but which does not 
substantially increase the capacity of the plant will be considered to 
be in operation prior to January 1, 1969. However, an additional machine 
that is added to a plant which was in operation before January 1, 1969, 
and which represents a substantial increase in the plant's capacity will 
not be considered to have been in operation before such date. There 
shall be deemed to be a substantial increase in the capacity of a plant 
or other property as of the time its capacity exceeds by more than 20 
percent its capacity on December 31, 1968.
    (b) In addition, if the total replacements of equipment in any 
single taxable year beginning after December 31, 1968, represents the 
replacement of a substantial portion of a manufacturing plant which had 
been in operation before such date, such replacement shall be considered 
to result in a new plant which was not in operation before such date. 
Thus, if a substantial portion of a plant which was in existence before 
January 1, 1969, is subsequently destroyed by fire and such substantial 
portion is replaced in a taxable year beginning after that date, such 
replacement property shall not be considered to have been in operation 
before January 1, 1969. The replacement of a substantial portion of a 
plant or other property shall be deemed to have occurred if, during a 
single taxable year, the taxpayer replaces manufacturing or production 
facilities or equipment which comprises such plant or other property and 
which has an adjusted basis (determined without regard to the 
adjustments provided in section 1016(a) (2) and (3)) in excess of 20 
percent of the adjusted basis (so determined) of such plant or other 
property determined as of the first day of such taxable year.
    (6) Useful life. For purposes of section 169 and the regulations 
thereunder, the terms ``useful life'' and ``actual useful life'' shall 
mean the shortest period authorized under section 167 and the 
regulations thereunder if an election were not made under section 169.
    (b) New identifiable facility--(1) In general. For purposes of 
paragraph (a)(1)(ii) of this section, the term ``new identifiable 
facility'' includes only tangible property (not including a building and 
its structural components referred to in subparagraph (2) (i) of this 
paragraph, other than a building and its structural components which 
under subparagraph (2) (ii) of this paragraph is exclusively a treatment 
facility) which--
    (i) Is of a character subject to the allowance for depreciation 
provided in section 167,
    (ii)(a) Is property the construction, reconstruction, or erection 
(as defined in subparagraph (2) (iii) of this paragraph) of which is 
completed by the taxpayer after December 31, 1968, or
    (b) Is property acquired by the taxpayer after December 31, 1968, if 
the original use of the property commences with the taxpayer and 
commences after such date (see subparagraph (2) (iii) of this 
paragraph), and
    (iii) Is placed in service (as defined in subparagraph (2) (v) of 
this paragraph) prior to January 1, 1975.
    (2) Meaning of terms. (i) For purposes of subparagraph (1) of this 
paragraph, the terms ``building'' and ``structural component'' shall be 
construed in a manner consistent with the principles set forth in 
paragraph (e) of Sec. 1.48-1.

[[Page 1117]]

Thus, for example, the following rules are applicable:
    (a) The term ``building'' generally means any structure or edifice 
enclosing a space within its walls, and usually covered by a roof, the 
purpose of which is, for example, to provide shelter or housing, or to 
provide working, office, parking, display, or sales space. The term 
includes, for example, structures such as apartment houses, factory and 
office buildings, warehouses, barns, garages, railway or bus stations, 
and stores. Such term includes any such structure constructed by, or 
for, a lessee even if such structure must be removed, or ownership of 
such structure reverts to the lessor, at the termination of the lease. 
Such term does not include (1) a structure which is essentially an item 
of machinery or equipment, or (2) an enclosure which is so closely 
combined with the machinery or equipment which it supports, houses, or 
serves that it must be replaced, retired, or abandoned contemporaneously 
with such machinery or equipment, and which is depreciated over the life 
of such machinery or equipment. Thus, the term ``building'' does not 
include such structures as oil and gas storage tanks, grain storage 
bins, silos, fractioning towers, blast furnaces, coke ovens, brick 
kilns, and coal tipples.
    (b) The term ``structural components'' includes, for example, 
chimneys, and other components relating to the operating or maintenance 
of a building. However, the term ``structural components'' does not 
include machinery or a device which serves no function other than the 
abatement or control of water or atmospheric pollution.
    (ii) For purposes of subparagraph (1) of this paragraph, a building 
and its structural components will be considered to be exclusively a 
treatment facility if its only function is the abatement or control of 
air or water pollution. However, the incidental recovery of profits from 
wastes or otherwise shall not be deemed to be a function other than the 
abatement or control of air or water pollution. A building and its 
structural components which serve no function other than the treatment 
of wastes will be considered to be exclusively a treatment facility even 
if it contains areas for employees to operate the treatment facility, 
rest rooms for such workers, and an office for the management of such 
treatment facility. However, for example, if a portion of a building is 
used for the treatment of sewage and another portion of the building is 
used for the manufacture of machinery, the building is not exclusively a 
treatment facility. The Federal certifying authority will not certify as 
to what is a building and its structural components within the meaning 
of subdivision (i) of this subparagraph.
    (iii) For purposes of subparagraph (1)(ii) (a) and (b) of this 
paragraph (relating to construction, reconstruction, or erection after 
December 31, 1968, and original use after December 31, 1968) and 
paragraph (b)(1) of Sec. 1.169-3 (relating to definition of amortizable 
basis), the principles set forth in paragraph (a) (1) and (2) of Sec. 
1.167(c)-1 and in paragraphs (b) and (c) of Sec. 1.48-2 shall be 
applied. Thus, for example, the following rules are applicable:
    (a) Property is considered as constructed, reconstructed, or erected 
by the taxpayer if the work is done for him in accordance with his 
specifications.
    (b) The portion of the basis of property attributable to 
construction, reconstruction, or erection after December 31, 1968, 
consists of all costs of construction, reconstruction, or erection 
allocable to the period after December 31, 1968, including the cost or 
other basis of materials entering into such work (but not including, in 
the case of reconstruction of property, the adjusted basis of the 
property as of the time such reconstruction is commenced).
    (c) It is not necessary that materials entering into construction, 
reconstruction or erection be acquired after December 31, 1968, or that 
they be new in use.
    (d) If construction or erection by the taxpayer began after December 
31, 1968, the entire cost or other basis of such construction or 
erection may be taken into account for purposes of determining the 
amortizable basis under section 169.

[[Page 1118]]

    (e) Construction, reconstruction, or erection by the taxpayer begins 
when physical work is started on such construction, reconstruction, or 
erection.
    (f) Property shall be deemed to be acquired when reduced to physical 
possession or control.
    (g) The term ``original use'' means the first use to which the 
property is put, whether or not such use corresponds to the use of such 
property by the taxpayer. For example, a reconditioned or rebuilt 
machine acquired by the taxpayer after December 31, 1968, for pollution 
control purposes will not be treated as being put to original use by the 
taxpayer regardless of whether it was used for purposes other than 
pollution control by its previous owner. Whether property is 
reconditioned or rebuilt property is a question of fact. Property will 
not be treated as reconditioned or rebuilt merely because it contains 
some used parts.
    (iv) For purposes of subparagraph (1)(iii) of this paragraph 
(relating to property placed in service prior to January 1, 1975), the 
principles set forth in paragraph (d) of Sec. 1.46-3 are applicable. 
Thus, property shall be considered placed in service in the earlier of 
the following taxable years:
    (a) The taxable year in which, under the taxpayer's depreciation 
practice, the period for depreciation with respect to such property 
begins or would have begun; or
    (b) The taxable year in which the property is placed in a condition 
or state of readiness and availability for the abatement or control of 
water or atmospheric pollution.

Thus, if property meets the conditions of (b) of this subdivision in a 
taxable year, it shall be considered placed in service in such year 
notwithstanding that the period for depreciation with respect to such 
property begins or would have begun in a succeeding taxable year 
because, for example, under the taxpayer's depreciation practice such 
property is or would have been accounted for in a multiple asset account 
and depreciation is or would have been computed under an ``averaging 
convention'' (Sec. 1.167(a)-10), or depreciation with respect to 
suchproperty would have been computed under the completed contract 
method, the unit of production method, or the retirement method. In the 
case of property acquired by a taxpayer for use in his trade or business 
(or in the production of income), property shall be considered in a 
condition or state of readiness and availability for the abatement or 
control of water or atmospheric pollution if, for example, equipment is 
acquired for the abatement or control of water or atmospheric pollution 
and is operational but is undergoing testing to eliminate any defects. 
However, materials and parts acquired to be used in the construction of 
an item of equipment shall not be considered in a condition or state of 
readiness and availability for the abatement or control of water or 
atmospheric pollution.
    (c) Certification--(1) In general. For purposes of paragraph (a)(1) 
of this section, a facility is certified in accordance with the rules 
prescribed in this paragraph if--
    (i) The State certifying authority (as defined in subparagraph (2) 
of this paragraph) having jurisdiction with respect to such facility has 
certified to the Federal certifying authority (as defined in 
subparagraph (3) of this paragraph) that the facility was constructed, 
reconstructed, erected, or acquired in conformity with the State program 
or requirements for the abatement or control of water or atmospheric 
pollution or contamination applicable at the time of such certification, 
and
    (ii) The Federal certifying authority has certified such facility to 
the Secretary or his delegate as (a) being in compliance with the 
applicable regulations of Federal agencies (such as, for example, the 
Atomic Energy Commission's regulations pertaining to radiological 
discharge (10 CFR Part 20)) and (b) being in furtherance of the general 
policy of the United States for cooperation with the States in the 
prevention and abatement of water pollution under the Federal Water 
Pollution Control Act, as amended (33 U.S.C. 1151-1175) or in the 
prevention and abatement of atmospheric pollution and contamination 
under the Clean Air Act, as amended (42 U.S.C. 1857 et seq.).
    (2) State certifying authority. The term ``state certifying 
authority'' means--

[[Page 1119]]

    (i) In the case of water pollution, the State water pollution 
control agency as defined in section 23(a) of the Federal Water 
Pollution Control Act, as amended (33 U.S.C. 1173(a)),
    (ii) In the case of air pollution, the air pollution control agency 
designated pursuant to section 302(b)(1) of the Clean Air Act, as 
amended (42 U.S.C. 1857h(b)), and
    (iii) Any interstate agency authorized to act in place of a 
certifying authority of a State. See section 23(a) of the Federal Water 
Pollution Control Act, as amended (33 U.S.C. 1173(b)) and section 302(c) 
of the Clean Air Act, as amended (42 U.S.C. 1857h(c)).
    (3) Federal certifying authority. The term ``Federal certifying 
authority'' means the Administrator of the Environmental Protection 
Agency (see Reorganization Plan No. 3 of 1970, 35 FR 15623).
    (d) Profitmaking abatement works, etc.--(1) In general. Section 
169(e) provides that the Federal certifying authority shall not certify 
any property to the extent it appears that by reason of estimated 
profits to be derived through the recovery of wastes or otherwise in the 
operation of such property its costs will be recovered over the period 
referred to in paragraph (a) (6) of this section for such property. The 
Federal certifying authority need not certify the amount of estimated 
profits to be derived from such recovery of wastes or otherwise with 
respect to such facility. Such estimated profits shall be determined 
pursuant to subparagraph (2) of this paragraph. However, the Federal 
certifying authority shall certify--
    (i) Whether, in connection with any treatment facility so certified, 
there is potential cost recovery through the recovery of wastes or 
otherwise, and
    (ii) A specific description of the wastes which will be recovered, 
or the nature of such cost recovery if otherwise than through the 
recovery of wastes.

For effect on computation of amortizable basis, see paragraph (c) of 
Sec. 1.169-3.
    (2) Estimated profits. For purpose of this paragraph, the term 
``estimated profits'' means the estimated gross receipts from the sale 
of recovered wastes reduced by the sum of the (i) estimated average 
annual maintenance and operating expenses, including utilities and 
labor, allocable to that portion of the facility which is certified as a 
treatment facility pursuant to paragraph (a)(1)(i) of this section which 
produces the recovered waste from which the gross receipts are derived, 
and (ii) estimated selling expenses. However, in determining expenses to 
be subtracted neither depreciation nor amortization of the facility is 
to be taken into account. Estimated profits shall not include any 
estimated savings to the taxpayer by reason of the taxpayer's reuse or 
recycling of wastes or other items recovered in connection with the 
operation of the plant or other property served by the treatment 
facility.
    (3) Special rules. The estimates of cost recovery required by 
subparagraph (2) of this paragraph shall be based on the period referred 
to in paragraph (a)(6) of this section. Such estimates shall be made at 
the time the election provided for by section 169 is made and shall also 
be set out in the application for certification made to the Federal 
certifying authority. There shall be no redetermination of estimated 
profits due to unanticipated fluctuations in the market price for wastes 
or other items, to an unanticipated increase or decrease in the costs of 
extracting them from the gas or liquid released, or to other 
unanticipated factors or events occurring after certification.

[T.D. 7116, 36 FR 9013, May 18, 1971; 36 FR 9770, May 28, 1971]