Page 707

TITLE 26-INTERNAL REVENUE CODE erty, or in respect of any cost of acquiring the lease, the lease period shall be treated as in- cluding all renewal periods. For purposes of the preceding sentence- (A) the term "renewal period" means any period for which the lease may be renewed, extended, or continued pursuant to an option exercisable by the lessee, but (B) the inclusion of renewal periods shall not extend the period taken into account by more than % of the period on the basis of which the depreciation adjustments were allowed. (3) Depreciation adjustments The term "depreciation adjustments" means, in respect of any property, all adjust- ments attributable to periods after December 31, 1963, reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpay- er or to any other person for exhaustion, wear and tear, obsolescence, or amortization (other than amortization under section 168 (as in effect before its repeal by the Tax Reform Act of 1976), 169, 185, 188, 190 or 191). For purposes of the preceding sentence, if the taxpayer can establish by adequate re- cords or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed. (4) Additional depreciation attributable to rehabili- tation expenditures The term "additional depreciation" also means, in the case of section 1250 property with respect to which a depreciation deduc- tion for rehabilitation expenditures was al- lowed under section 167(k), the depreciation adjustments allowed under such section to the extent attributable to such property, except that, in the case of such property held for more than one year after the rehabilita- tion expenditures so allowed were incurred, it means such adjustments only to the extent that they exceed the amount of the depreci- ation adjustments which would have resulted if such adjustments had been determined under the straight line method of adjustment without regard to the useful life permitted under section 167(k). (c) Section 1250 property For purposes of this section, the term "sec- tion 1250 property" means any real property (other than section 1245 property, as defined in section 1245(a)(3)) which is or has been proper- ty of a character subject to the allowance for depreciation provided in section 167. (d) Exceptions and limitations (1) Gifts Subsection (a) shall not apply to a disposi- tion by gift. (2) Transfers at death Except as provided in section 691 (relating to income in respect of a decedent), subsec- tion (a) shall not apply to a transfer at death. (3) Certain tax-free transactions If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 371(a), 374(a), 721, or 731, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as pro- vided in paragraph (9), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter. (4) Like kind exchanges; involuntary conversions, etc. (A) Recognition limit If property is disposed of and gain (deter- mined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under sub- section (a) shall not exceed the greater of the following: (i) the amount of gain recognized on the disposition (determined without regard to this section), increased as provided in sub- paragraph (B), or (ii) the amount determined under sub- paragraph (C). (B) Increase for certain stock With respect to any transaction, the in- crease provided by this subparagraph is the amount equal to the fair market value of any stock purchased in a corporation which (but for this paragraph) would result in nonrecognition of gain under section 1033 (a)(2)(A). (C) Adjustment where insufficient section 1250 property Is acquired With respect to any transaction, the amount determined under this subpara- graph shall be the excess of- (t) the amount of gain which would (but for this paragraph) be taken into account under subsection (a), over (ii) the fair market value (or cost in the case of a transaction described in section 1033(a)(2)) of the section 1250 property acquired in the transaction. (D) Basis of property acquired In the case of property purchased by the taxpayer in a transaction described in sec- tion 1033(a)(2), in applying the last sen- tence of section 1033(b), such sentence shall be applied- (i) first solely to section 1250 properties and to the amount of gain not taken into account under subsection (a) by reason of this paragraph, and (ii) then to all purchased properties to which such sentence applies and to the re- maining gain not recognized on the trans- action as if the cost of the section 1250 properties were the basis of such proper- ties computed under clause (I). In the case of property acquired in any other transaction to which this paragraph Page 707 § 1250