PART 7—TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX REFORM ACT OF 1976 Authority: 26 U.S.C. 7805, unless otherwise stated. § 7.48-1 Election to have investment credit for movie and television films determined in accordance with previous litigation. (a) Generally. (b) Manner of making the election. (1) The taxpayer's name, address, and identification number; (2) The taxable years in which the films were placed in service with respect to which the election shall apply; and (3) The court in which the litigation was commenced and information adequate to identify the particular litigation, for example, the names of the litigants, the date the suit was commenced, and the court case or docket number of the litigation. The letter should be sent to the Deputy Commissioner of Internal Revenue, Attention: CC:RL:Br2, Room 4617, 1111 Constitution Avenue, N.W., Washington, DC 20224. (c) Time for making the election. (d) Revocation of election. [T.D. 7449, 41 FR 56629, Dec. 29, 1976] § 7.48-2 Election of forty-percent method of determining investment credit for movie and television films placed in service in a taxable year beginning before January 1, 1975. (a) General rule. (b) Time and manner of making an election Time for making the election. (2) Manner of making the election. The statement shall contain the following information: (i) The taxpayer's name and taxpayer identification number (under section 6109 of the Code). (ii) A statement that the taxpayer is making the election under section 804(c)(2) of the Act. (iii) A statement that the taxpayer agrees that the period for assessment and collection under section 6501 of the Code will remain open until December 31, 1978, solely with respect to adjustments of tax liability attributable to investment credit allowed on films and tapes placed in service in each year covered by the election. Unless the district director notifies the taxpayer within 7 days of receipt of the statement that such extension is denied, it will be presumed that the district director consents to such extension. Of course, the period covered by this statement may be extended beyond December 31, 1978 by mutual agreement. This statement does not shorten the regular statutory period for any year or take precedence over a previous or subsequent agreement with the Internal Revenue Service extending the statutory period for any year. (iv) A list of the addresses used by the taxpayer on each return filed during each taxable year subject to the election. (v) A statement that the taxpayer consents to join in judicial proceedings to determine the investment credit allowable and entitlement to investment credit on any film or tape subject to the election, which meets all of the requirements set forth in paragraph (b)(3) of this section. (vi) A statement as to whether an election has been made by the taxpayer under section 804(e)(2) of the Act for films and tapes which are property described in section 50(a) of the Code which were placed in service in taxable years beginning before January 1, 1975. (vii) A list by name of all films or tapes placed in service during the years to which the election relates. (viii) With respect to each film or tape listed in paragraph (b)(2)(vii) of this section, a list of all producers, distributors, and persons with a participation interest (with addresses where available). (ix) In the case of an election made by a partner, shareholder of an electing small business corporation (as defined in section 1371(b) of the Code), or beneficiary, a statement indicating the name, taxpayer identification number, and address for tax return purposes of the respective partnership, electing small business corporation, or trust or estate. (3) Consent to join in judicial proceedings. (i) Treat the determination of the investment credit allowable on each film or tape subject to an election as a separate cause of action; (ii) Make all reasonable efforts necessary to join in or intervene in any judicial proceeding in any court for determining the person entitled to, and the amount of, the investment credit allowable with respect to any film or tape covered by the election after receiving notice from the Commissioner of Internal Revenue or his delegate indicating that a conflicting claim to the investment credit for such film or tape is being asserted in such court by another person; and (iii) Consent to revocation of the election by the Commissioner of Internal Revenue or his delegate with respect to all films and tapes placed in service in taxable years for which the election applies, if the taxpayer fails to make all reasonable efforts necessary to join in or intervene in any judicial proceeding under paragraph (b)(3)(ii) of this section. (4) Who makes the election. (5) Additional time to perfect election. (c) Revocation of election Revocation by taxpayer. (ii) An election properly made under section 804(e)(2) of the Act, to have sections 48(k) and 47 (a)(7) of the Code apply to films and tapes which are property described in section 50(a) of the Code and which were placed in service in taxable years beginning before January 1, 1975, shall automatically revoke any election under section 804(c)(2) of the Act with respect to such films and tapes. Such revocation does not require the consent of the Commissioner of Internal Revenue or his delegate. (2) Revocation by Commissioner. (d) Furnishing of supplementary information required. ((68A Stat. 917; 26 U.S.C. 7804); sec. 804(c)(2) (C) and (D) of the Tax Reform Act of 1976 (90 Stat. 1595)) [T.D. 7474, 42 FR 17123, Mar. 31, 1977; T.D. 7480, 42 FR 19479, Apr. 14, 1977] § 7.48-3 Election to apply the amendments made by sections 804 (a) and (b) of the Tax Reform Act of 1976 to property described in section 50(a) of the Code. (a) General rule. (b) Time for and manner of making election Time for making election. (2) Manner of making election. (Sec. 804(e)(2), Tax Reform Act of 1976 (90 Stat. 1596)) [T.D. 7509, 42 FR 47828, Sept. 22, 1977] § 7.57(d)-1 Election with respect to straight line recovery of intangibles. (a) Purpose. (b) Election. (1) The election is made within the time prescribed by law (including extensions thereof) for filing the return for the taxable year in which the intangible drilling costs are paid or incurred or, if later, by July 25, 1978. (2) The election is made separately for each well. Thus, a taxpayer may make the election for only some of his or her wells. (3) The election is made by using, for the well or wells to which the election applies, cost depletion to compute straight line recovery of intangibles for purposes of determining the amount of the preference under section 57(a)(11). (4) The election may be made whether or not the taxpayer uses cost depletion in computing taxable income. (5) The election is made by a partnership rather than by each partner. (c) Computation of cost depletion. (Secs. 57(d) and 7805 of the Internal Revenue Code of 1954 (90 Stat. 1551; 68A Stat. 917; 26 U.S.C. 57(d), 7805)) [T.D. 7541, 43 FR 17816, Apr. 26, 1978; 43 FR 18993, May 3, 1978] § 7.465-1 Amounts at risk with respect to activities begun prior to effective date; in general. Section 465 provides that a taxpayer (other than a corporation which is not a subchapter S corporation or a personal holding company) engaged in certain activities may not deduct losses from such activity to the extent the losses exceed the amount the taxpayer is at risk with respect to the activity. For the types of activities to which section 465 applies and for determining what constitutes a separate activity, see section 465(c). Section 465 generally applies to losses attributable to amounts paid or incurred in taxable years beginning after December 31, 1975. For the purposes of applying the at risk limitation to activities begun before the effective date of the provision (and which were not excepted from application of the provision), it is necessary to determine the amount at risk as of the first day of the first taxable year beginning after December 31, 1975. The amount at risk in an activity as of the first day of the first taxable year of the taxpayer beginning after December 31, 1975, (for the purposes of § 7.465-1 through 7.465-5 such first day shall be referred to as the effective date) shall be determined according to the rules provided in §§ 7.465-2 through 7.465-5. [T.D. 7504, 42 FR 42197, Aug. 22, 1977] § 7.465-2 Determination of amount at risk. (a) Initial amount. (b) Succeeding adjustments. (c) Application of losses and withdrawals. (2) Therefore, if in a taxable year beginning prior to January 1, 1976 there is a loss described in section 465(d), it shall reduce the amount at risk only to the extent it exceeds the amount of the taxpayer's basis which is not at risk. For the purposes of this paragraph the taxpayer's basis which is not at risk is that portion of the taxpayer's basis in the activity (as of the close of the taxable year and prior to reduction for the loss) which is attributable to amounts described in section 465(b) (3) or (4). (d) Amount at risk shall not be less than zero. [T.D. 7504, 42 FR 42197, Aug. 22, 1977] § 7.465-3 Allocation of loss for different taxable years. If the taxable year of the entity conducting the activity differs from that of the taxpayer, the loss attributable to the activity for the first taxable year of the entity ending after the beginning of the first taxable year of the taxpayer beginning after December 31, 1975, shall be allocated in the following manner. That portion of the loss from the activity for such taxable year of the entity which bears the same ratio as the number of days in such taxable year before January 1, 1976, divided by the total number of days in the taxable year, shall be attributable to taxable years of the taxpayer beginning before January 1, 1976. Consequently, that portion shall be treated in accordance with § 7.465-2. [T.D. 7504, 42 FR 42198, Aug. 22, 1977] § 7.465-4 Insufficient records. If sufficient records do not exist to accurately determine under § 7.465-2 the amount which a taxpayer is at risk on the effective date, the amount at risk shall be the taxpayer's basis in the activity reduced (but not below zero) by the taxpayer's share of amounts described in section 465(b) (3) or (4) with respect to the activity on the day before the effective date. [T.D. 7504, 42 FR 42198, Aug. 22, 1977] § 7.465-5 Examples. The provisions of § 7.465-1 and § 7.465-2 may be illustrated by the following examples: Example (1). J and K, as equal partners, form partnership JK on January 1, 1975. Partnership JK is engaged solely in an activity described in section 465(c)(1). On January 1, 1975, each partner contributes $10,000 in cash from personal assets to JK. On July 1, 1975, JK borrows $40,000 (of which J's share is $20,000) from a bank under a nonrecourse financing arrangement secured only by the new equipment (for use in the activity) purchased with the $40,000. On September 1, 1975, JK reduces the amount due on the loan to $36,000 (of which J's share is $18,000). On October 1, 1975, JK distributes $3,000 to each partner. For taxable year 1975, JK has no income or loss. Although J's basis in the activity is $25,000 ($10,000 + $18,000—$3,000) J's amount at risk on the effective date is $7,000 determined as follows: Initial amount at risk $10,000 Plus: Items which increased basis other than amounts described in sec. 465(b) (3) or (4) 0 Total 10,000 Less: Distribution 3,000 J's amount at risk on effective date 7,000 Example (2). Assume the same facts as in Example (1) except that JK has a loss (as described in section 465(d) for 1975 of which J's share is $12,000. Although J's basis in the activity is $13,000 ($10,000 + $18,000—($3,000 + $12,000)) J's amount at risk on the effective date is $7,000 determined as follows: Initial amount at risk $10,000 Plus: Items which increased basis other than amounts described in sec. 465(b) (3) or (4) 0 Total 10,000 Less: Distribution 3,000 Portion of loss ($12,000) in excess of portion of basis not at risk ($18,000) 0 Total 3,000 J's amount at risk on effective date 7,000 Example (3). Assume the same facts as in Example (1) except that JK has a loss (as described in section 465(d) for 1975, and J's share is $23,000. J's basis in the activity is $2,000 ($10,000 + $18,000—($3,000 + $23,000)). The amount at risk on the effective date is determined as follows: Initial amount at risk $10,000 Plus: Items which increased basis other than amounts described in sec. 465(b) (3) or (4) 0 Total 10,000 Less: Distribution 3,000 Portion of loss ($23,000) in excess of portion of basis not at risk ($18,000) 5,000 Total 8,000 J's amount at risk on the effective date 2,000 [T.D. 7504, 42 FR 42198, Aug. 22, 1977] § 7.936-1 Qualified possession source investment income. For purposes of this section, interest earned after September 30, 1976 (less applicable deductions), by a domestic corporation, engaged in the active conduct of a trade or business in Puerto Rico, which elects the application of section 936 with respect to deposits with certain Puerto Rican financial institutions will be treated as qualified possession source investment income within the meaning of section 936(d)(2) if (1) the interest qualifies for exemption from Puerto Rican income tax under regulations issued by the Secretary of the Treasury of Puerto Rico, as in effect on September 28, 1976, under the authority of section 2(j) of the Puerto Rico Industrial Incentive Act of 1963, as amended, (2) the interest is from sources within Puerto Rico (within the meaning of section 936(d)(2)(A)), and (3) the funds with respect to which the interest is earned are derived from the active conduct of a trade or business in Puerto Rico or from investment of funds so derived. [T.D. 7452, 41 FR 56794, Dec. 30, 1976] § 7.999-1 Computation of the international boycott factor. (a) In general. (b) Definitions. (1) Boycotting country. (2) Participation in or cooperation with an international boycott. (3) Operations in or related to a boycotting country. (4) Clearly demonstrating clearly separate and identifiable operations. (5) Purchase made from a country. (i) Tangible personal property (including money) from a stock of goods located in that country, (ii) Intangible property (other than securities) in that country, (iii) Securities by a dealer to a beneficial owner that is a resident of that country (but only if the dealer knows or has reason to know the country of residence of the beneficial owner), (iv) Real property located in that country, or (v) Services performed in, and the end product of services performed in, that country (other than payroll paid to a person that is an officer or employee of the payor). (6) Sales made to a country. (i) Tangible personal property (including money) for direct use, consumption, or disposition in that country, (ii) Services performed in that country, (iii) The end product of services (wherever performed) for direct use, consumption, or disposition in that country, (iv) Intangible property (other than securities) in that country, (v) Securities by a dealer to a beneficial owner that is a resident of that country (but only if the dealer knows or has reason to know the country of residence of the beneficial owner), or (vi) Real property located in that country. To determine the country of direct use, consumption, or disposition of tangible personal property and the end product of services, see paragraph (b)(10) of this section. (7) Sales made from a country. (i) Tangible personal property (including money) from a stock of goods located in that country, (ii) Intangible property (other than securities) in that country, or (iii) Services performed in, and the end product of services performed in, that country. However, gross receipts from any such sale, exchange, other disposition, or use by a person that are included in the numerator of that person's international boycott factor by reason of paragraph (b)(6) of this section shall not again be included in the numerator by reason of this subparagraph. (8) Payroll paid or accrued for services performed in a country. (9) Services performed partly within and partly without a country In general. (A) The gross amount paid in connection with the purchase or use of, (B) The gross receipts from the sale, exchange, other disposition or use of, and (C) The payroll paid or accrued for services performed, or the end product of services performed, partly within and partly without that country, the amount paid, received, or accrued to be allocated to that country, unless the facts and circumstances of a particular case warrant a different amount, will be that amount that bears the same relation to the total amount paid, received, or accrued as the number of days of performance of the services within that country bears to the total number of days of performance of services for which the total amount is paid, received, or accrued. (ii) Transportation, telegraph, and cable services. (A) In the case of a purchase of such services performed from Country A to Country B, fifty percent of the gross amount paid is deemed to be a purchase made from Country A and the remaining fifty percent is deemed to be a purchase made from Country B. (B) In the case of a sale of such services performed from Country A to Country B, fifty percent of the gross receipts is deemed to be a sale made from Country R and the remaining fifty percent is deemed to be a sale made to Country B. (10) Country of use, consumption, or disposition. (11) Controlled group taxable year. (c) Computation of international boycott factor In general. (2) International boycott factor of a person that is not a member of a controlled group. (i) The numerator of the fraction is the sum of the— (A) Purchases made from all boycotting countries associated in carrying out a particular international boycott. (B) Sales made to or from all boycotting countries associated in carrying out a particular international boycott, and (C) Payroll paid or accrued for services performed in all boycotting countries associated in carrying out a particular international boycott by that person during that person's taxable year, minus the amount of such purchases, sales, and payroll that is clearly demonstrated to be attributable to clearly separate and identifiable operations in connection with which there was no participation in or cooperation with that international boycott. (ii) The denominator of the fraction is the sum of the— (A) Purchases made from any country other than the United States, (B) Sales made to or from any country other than the United States, and (C) Payroll paid or accrued for services performed in any country other than the United States by that person during that person's taxable year. (3) International boycott factor of a person that is a member of a controlled group. (d) Computation of the international boycott factor of a person that is a member of two or more controlled groups. (e) Transitional rules Pre-November 3, 1976 boycotting operations. (i) There shall be excluded from the numerators described in paragraphs (c)(2)(i) and (c)(3)(i) of this section purchases, sales, and payroll clearly demonstrated to be attributable to clearly separate and identifiable operations— (A) That were completed on or before November 3, 1976, or (B) In respect of which it is demonstrated that the agreements constituting participation in or cooperation with the international boycott were renounced, the renunciations were communicated on or before November 3, 1976, to the governments or persons with which the agreements were made and the agreements have not been reaffirmed after November 3, 1976, and (ii) The international boycott factor resulting after the numerator has been modified in accordance with paragraph (e)(1)(i) of this section shall be further modified by multiplying it by a fraction. The numerator of that fraction shall be the number of days in that person's taxable year (or, if applicable, in that person's controlled group taxable year) remaining after November 3, 1976, and the denominator shall be 366. The principles of this subparagraph are illustrated in the following example: Example. Corporation A, a calendar year taxpayer, is not a member of a controlled group. During the 1976 calendar year, Corporation DA had three operations in a boycotting country under three separate contracts, each of which contained agreements constituting participation in or cooperation with an international boycott. Each contract was entered into on or after September 2, 1976. Operation (1) was completed on November 1, 1976. The sales made to a boycotting country in connection with Operation (1) amounted to $10. Operation (2) was not completed during the taxable year, but on November 1, 1976, Corporation A communicated a renunciation of the boycott agreement covering that operation to the government of the boycotting country. The sales made to a boycotting country in connection with Operation (2) amounted to $40. Operation (3) was not completed during the taxable year, nor was any renunciation of the boycott agreement made. The sales made to a boycotting country in connection with Operation (3) amounted to $25. Corporation A had no purchases made from, sales made from, or payroll paid or accrued for services performed in, a boycotting country. Corporation A had $500 of purchases made from, sales made from, sales made to, and payroll paid or accrued for services performed in, countries other than the United States. Company A's boycott factor for 1976, computed under paragraph (c)(2) of this section (before the application of this subparagraph) would be: However, the $10 is eliminated from the numerator by reason of paragraph (e)(1)(i)(A) of this section, and the $40 is eliminated from the numerator by reason of paragraph (e)(1)(i)(B) of this section. Thus, before the application of paragraph (e)(1)(ii) of this section, Corporation A's international boycott factor is $25/$500. After the application of paragraph (e)(1)(ii), Corporation A's international boycott factor is: (2) Pre-December 31, 1977 boycotting operations. (i) There shall be excluded from the numerators described in paragraphs (c)(2)(i) and (c)(3)(i) of this section purchases, sales, and payroll clearly demonstrated to be attributable to clearly separate and identifiable operations that were carried out in accordance with the terms of binding contracts entered into before September 2, 1976, and— (A) That were completed on or before December 31, 1977, or (B) In respect of which it is demonstrated that the agreements constituting participation in or cooperation with the international boycott were renounced, the renunciations were communicated on or before December 31, 1977, to the governments or persons with which the agreements were made, and the agreements were not reaffirmed after December 31, 1977, and (ii) In the case of clearly separate and identifiable operations that are carried out in accordance with the terms of binding contracts entered into before September 2, 1976, but that do not meet the requirements of paragraph (e)(2)(i) of this section, the numerators described in paragraphs (c)(2)(i) and (c)(3)(i) of this section shall be adjusted by multiplying the purchases, sales, and payroll clearly demonstrated to be attributable to those operations by a fraction, the numerator of which is the number of days in such person's taxable year (or, if applicable, in such person's controlled group taxable year) remaining after December 31, 1977, and the denominator of which is 365. The principles of this subparagraph are illustrated in the following example: Example. Corporation A is not a member of a controlled group and reports on the basis of a July 1-June 30 fiscal year. During the 1977-1978 fiscal year, Corporation A had 2 operations carried out pursuant to the terms of separate contracts, each of which had a clause that constituted participation in or cooperation with an international boycott. Neither operation was completed during the fiscal year, nor were either of the boycotting clauses renounced. Operation (1) was carried out in accordance with the terms of a contract entered into on November 15, 1976. Operation (2) was carried out in accordance with the terms of a binding contract entered into before September 2, 1976. Corporation A had sales made to a boycotting country in connection with Operation (1) in the amount of $50, and in connection with Operation (2) in the amount of $100. Corporation A had sales made to countries other than the United States in the amount of $500. Corporation A had no purchases made from, sales made from, or payroll paid or accrued for services performed in, any country other than the United States. In the absence of this subparagraph, Corporation A's international boycott factor would be However, by reason of the application of this subparagraph, Corporation A's international boycott factor is reduced to (3) Incomplete controlled group taxable year. (f) Effective date. [T.D. 7467, 42 FR 11833, Mar. 1, 1977] § 7.6039A-1 Information regarding carryover basis property acquired from a decedent. (a) Information for Internal Revenue Service. (1) If an estate tax return is required to be filed under section 6018 of the Internal Revenue Code of 1954, as amended, and if the return form contains questions relating to carryover basis property, the executor must answer those questions. (2) If no estate tax return is required to be filed under section 6018 of the Internal Revenue Code of 1954, as amended, or if a return is required to be filed but the return form used does not contain questions relating to carryover basis property, the executor must file the form prescribed by the Commissioner. This form may be attached to the estate tax return or the decedent's final individual income tax return. If this form is not attached to the estate tax return or the decedent's final individual income tax return, it must be filed with the Internal Revenue Service office where the decedent's final income tax return would be filed if one were required within 9 months after the date of the decedent's death or by December 31, 1978, whichever is later. (b) Information to be furnished to beneficiaries. (1) A description of the property, (2) The adjusted basis of the property as computed under section 1023 (a), (c), and (d), (3) The amount of the increase in the basis of the property determined under section 1023(h), (4) The value of the property for Federal estate tax purposes, and (5) A notice that the beneficiary should keep this information as part of permanent records. (c) Time for furnishing information to beneficiaries. (1) The date the property is distributed to the beneficiary, (2)(i) In the case of an executor who is required to file an estate tax return, 6 months after the due date (including extensions) of such return, (ii) In the case of an executor who is not required to file an estate tax return, 15 months from the date of death of the decedent, or (3) December 31, 1978. (d) Subsequent adjustments to carryover basis. (e) Effective date. (Secs. 7805 and 6039A of the Internal Revenue Code of 1954 (68A Stat. 917, 90 Stat. 1878; 26 U.S.C. 7805, 6039A)) [T.D. 7540, 43 FR 16735, Apr. 20, 1978, as amended by T.D. 7559, 43 FR 36244, Aug. 16, 1978]