Page 66

TITLE 26-INTERNAL REVENUE CODE useful life the period beginning with the time such property was placed in service by the taxpayer and ending with the time such prop- erty ceased to be section 38 property. (2) Property becomes public utility property If during any taxable year ary property taken into account in determining qualified investment becomes public utility property (within the meaning of section 46(c)(3)(B)), then the tax under this chapter for such tax- able year shall be increased by an amount equal to the aggregate decrease in the credits allowed under section 38 for all prior taxable years which would have resulted solely from treating the property, for purposes of deter- mining qualified investment, as public utility property (after giving due regard to the period before such change in use). If the ap- plication of this p.ragraph to any property is followed by the application of paragraph (1) to such property, proper adjustment shall be made in applying paragraph (1). (3) Property ceases to be progress expenditure property (A) In general If during any taxable year any property taken into account in determining qualified investment under section 46(d) ceases (by reason of sale or other disposition, cancella- tion or abandonment of contract, or other- wise) to be, with respect to the taxpayer, property which, when placed in service, will be new section 38 property, then the tax under this chapter for such taxable year shall be increased by an amount equal to the aggregate decrease in the credits al- lowed under section 38 for all prior taxable years which would have resulted solely from reducing to zero the qualified invest- ment taken into account with respect to such property. (B) Certain excess credit recaptured Any amount which would have been ap- plied as a reduction of the qualified invest- ment in property by reason of paragraph (4) of section 46(c) but for the fact that a reduction under such paragraph cannot reduce qualified investment below zero shall be treated as an amount required to be recaptured under subparagraph (A) for the taxable year in which the property is placed in service. (C) Certain sales and leasebacks Under regulations prescribed by the Sec- retary, a sale by, and leaseback to, a taxpay- er who, when the property is placed in ser- vice, will be a lessee to whom section 48(d) applies shall not be treated as a cessation described in subparagraph (A) to the extent that the qualified investment which will be passed through to the lessee under section 48(d) with respect to such property is not less than the qualified progress expendi- tures properly taken into account by the lessee with respect to such property. (D) Coordination with paragraph (1) If, after property is placed in service, there is a disposition or other cessation de- scribed in paragraph (1), paragraph (1) shall be applied as if any credit which was allowable by reason of section 46(d) and which has not been required to be recap- tured before such cessation were allowable for the taxable year the property was placed in service. (4) Carrybacks and carryovers adjusted In the case of any cessation described in paragraph (1) or (3) or any change in use de- scribed in paragraph (2), the carrybacks and carryovers under section 46(b) shall be adjust- ed by reason of such cessation (or change in use). (5) Certain property replaced after April 18, 1969 In any case in which- (A) section 38 property is disposed of, and (B) property which would be section 38 property but for section 49 is placed in ser- vice by the taxpayer to replace the property disposed of, the increase under paragraph (1) and the adjustment under paragraph (4) shall not be greater than the increase or ad- justment which would result if the qualified investment of the property described in sub- paragraph (B) (determined as if such prop- erty were section 38 property) were substi- tuted for the qualified investment of the property disposed of (as determined under paragraph (1)). Except in the case of a dis- position by reason of a casualty or theft oc- curring before April 19, 1969, the preceding sentence shall apply only if the section 38 property disposed of is replaced within 6 months after the date of such disposition. (6) Aircraft used outside the United States after April 18, 1969 (A) General rule Any aircraft which was new section 38 property for the taxable year in which it was placed in service and which is used out- side the United States under a qualifying lease or leases shall be treated as not ceas- ing to be section 38 property by reeson of such use until such aircraft has been so used for a period or periods exceeding 31/2 years in total. For purposes of the preced- ing sentence, the registration of such air- craft under the laws of a foreign country shall be treated as use outside the United States. (B) Computation of qualified investment If an aircraft described in subparagraph (A) is disposed of or otherwise ceases to be section 38 property, the increase under paragraph (1) and the adjustment under paragraph (4) shall not be greater than the increase or adjustment which would result if the qualified investment of such aircraft were based upon a useful life equal to the lesser of (I) the actual useful life of such aircraft with respect to the taxpayer, or (ii) twice the number of full calendar months during which such aircraft was registered by the Administrator of the Federal Avi- ation Agency and was used in the United States, operated to and from the United States, or operated under contract with the United States. For purposes of the preced- ing sentence, an aircraft shall be treated as used in the United States for any calendar Page 66