[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: 26CFR1.169-3] [Page 1119-1121] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) PART 1_INCOME TAXES--Table of Contents Sec. 1.169-3 Amortizable basis. (a) [Reserved]. For further guidance, see Sec. 1.169-3T(a). (b) Limitation to post-1968 construction, reconstruction, or erection. (1) If the construction, reconstruction, or erection was begun before January 1, 1969, there shall be included in the amortizable basis only so much of the adjusted basis of such facility for purposes of determining gain (referred to in paragraph (a) of this section) as is properly attributable under the rules set forth in paragraph (b)(2)(iii) of Sec. 1.169-2 to construction, reconstruction, or erection after December 31, 1968. See section 169 (d)(4). For example, assume a certified pollution control facility for which the shortest period authorized [[Page 1120]] under section 167 is 10 years has a cost of $500,000, of which $450,000 is attributable to construction after December 31, 1968. Further, assume such facility does not perform a function in addition to pollution control and is used only in connection with a plant in operation before January 1, 1969. The facility would have an amortizable basis of $450,000 (computed without regard to paragraphs (c) and (d) of this section). For depreciation of the remaining portion ($50,000) of the cost, see section 169(g) and paragraph (a)(3)(ii) of Sec. 1.169-1. For the definition of the term ``certified pollution control facility'' see paragraph (a) of Sec. 1.169-2. (2) [Reserved]. For further guidance, see Sec. 1.169-3T(b)(2). (c) Modification for profitmaking abatement works, etc. If it appears that by reason of estimated profits to be derived through the recovery of wastes or otherwise (as determined by applying the rules prescribed in paragraph (d) of Sec. 1.169-2) a portion or all of the total costs of the certified pollution control facility will be recovered over the period referred to in paragraph (a)(b) of Sec. 1.169-2, its amortizable basis (computed without regard to this paragraph and paragraph (d) of this section) shall be reduced by an amount equal to (1) its amortizable basis (so computed) multiplied by (2) a fraction the numerator of which is such estimated profits and the denominator of which is its adjusted basis for purposes of determining gain. See section 169(e). (d) Cases in which the period referred to in paragraph (a)(6) of Sec. 1.169-2 exceeds 15 years. If as to a certified pollution control facility the period referred to in paragraph (a)(6) of Sec. 1.169-2 exceeds 15 years (determined as of the first day of the first month for which a deduction is allowable under the election made under the section 169(b) and paragraph (a) of Sec. 1.169-4), the amortizable basis of such facility shall be an amount equal to (1) its amortizable basis (computed without regard to this paragraph) multiplied by (2) a fraction the numerator of which is 15 years and the denominator of which is the number of years of such period. See section 169(f) (2)(A). (e) Examples. This section may be illustrated by the following example: Example (1). The X Corporation, which uses the calendar year as its taxable year, began the installation of a facility on November 1, 1968, and completed the installation on June 30, 1970, at a cost of $400,000. All of the facility qualifies as a certified pollution control facility within the meaning of paragraph (a) of Sec. 1.169-2. $40,000 of such cost is attributable to construction prior to January 1, 1969. The X Corporation elects to take amortization deductions under section 169(a) with respect to the facility and to begin the 60-month amortization period with January 1, 1971. The corporation takes a depreciation deduction under sections 167 and 179 of $10,000 (the amount allowable, of which $2,000 is for additional first year depreciation under section 179) for the last 6 months of 1970. It is estimated that over the period referred to in paragraph (a) (6) of Sec. 1.169-2 (20 years) as to such facility, $80,000 in profits will be realized from the sale of wastes recovered in its operation. The amortizable basis of the facility for purposes of computing the amortization deduction as of January 1, 1971, is $210,600, computed as follows: (1) Portion of $400,000 cost attributable to post-1968 $360,000 construction, reconstruction, or erection................... (2) Reduction for portion of depreciation deduction taken for the taxable year in which the facility was completed: (a) $10,000 depreciation deduction taken for $10,000 last 6 months of 1970 including $2,000 for additional first year depreciation under section 179.................................... (b) Multiplied by the amount in line (1) and 0.9 $9,000 divided by the total cost of the facility ($360,000/ $400,000)........................... --------------------- (3) Subtotal................................................. $351,000 (4) Modification for profitmaking abatement works: Multiply line (3) by estimated profits through waste recovery ($80,000) and divide by the adjusted basis for determining gain of the facility ($400,000). (5) Reduction................................................ $70,200 ------------ (6) Subtotal................................................. $280,800 (7) Modification for period referred to in paragraph (a)(6) 0.75 of Sec. 1.169-2 exceeding 15 years: Multiply by 15 years and divide by such period (determined in accordance with paragraph (d) of this section) (20 years)................... ------------ (8) Amortizable basis........................................ $210,600 Example (2). Assume the same facts as in example (1) except that the facility is used in connection with a number of separate plants some of which were in operation before January 1, 1969, that the Federal certifying authority certifies that 80 percent of the capacity of the facility is allocable to the plants which were in operation before such date, and that all of the waste recovery is allocable to the portion of the facility used in [[Page 1121]] connection with the plants in operation before January 1, 1969. The amortizable basis of such facility, for purposes of computing the amortization deduction as of January 1, 1971, is $157,950 computed as follows: (1) Adjusted basis for purposes of determining gain: Multiply $320,000 percent certified as allocable to plants in operation before January 1, 1969 (80 percent) by cost of entire facility ($400,000).................................................. ============ (2) Portion of adjusted basis for determining gain $288,000 attributable to post-1968 construction, reconstruction, or rection: Multiply line (1) by portion of total cost of facility attributable to post-1968 construction, reconstruction, or erection ($360,000) and divide by the total cost of the facility ($400,000)....................... (3) Reduction for portion of depreciation deduction taken for the taxable year in which the facility was completed: (a) $10,000 depreciation deduction taken for $10,000 last 6 months of 1970 including $2,000 for additional first year depreciation under section 170.................................... (b) Multiplied by the amount in line (2) and 0.72 $7,200 divided by the total cost of the facility ($288,000/$400,000)............................ --------------------- (4) Subtotal................................................. $280,800 (5) Modification for profitmaking abatement works; Multiply line (4) by estimated profits through waste recovery ($80,000) and divide by the amount in line (1) ($320,000). (6) Reduction................................................ $70,200 ------------ (7) Subtotal................................................. $210,600 (8) Modification for period referred to in paragraph (a)(6) 0.75 of Sec. 1.169-2 exceeding 15 years: Multiply by 15 years and divide by such period (determined in accordance with paragraph (d) of this section) (20 years)................... ------------ (9) Amortizable basis........................................ $157,950 (f) Additions or improvements. (1) If after the completion or acquisition of a certified pollution control facility further expenditures are made for additional construction, reconstruction, or improvements, the cost of such additions or improvements made prior to the beginning of the amortization period shall increase the amortizable basis of such facility, but the cost of additions or improvements made after the amortization period has begun, shall not increase the amortizable basis. See section 169(f)(2)(B). (2) If expenditures for such additional construction, reconstruction, or improvements result in a facility which is new and is separately certified as a certified pollution control facility as defined in section 169(d)(1) and paragraph (a) of Sec. 1.169-2, and, if proper election is made, such expenditures shall be taken into account in computing under paragraph (a) of this section the amortizable basis of such new and separately certified pollution control facility. (g) Effective date for qualified property, 50-percent bonus depreciation property, and qualified New York Liberty Zone property. [Reserved]. For further guidance, see Sec. 1.169-3T(g). [T.D. 7116, 36 FR 9015, May 18, 1971; 36 FR 9770, May 28, 1971, as amended by T.D. 9091, 68 FR 53004, Sept. 8, 2003]