Cal. Code Regs. Tit. 18, § 24356(c) - Definitions and Special Rules

The following definitions and special rules apply for purposes of Section 24356, Regs. 24356(a), 24356(b), 24356(d), and this regulation.

(1) Section 24356 Property. The term "Section 24356 property" means any tangible personal property, new or used, of a character subject to the allowance for depreciation under Sections 24349 through 24354, acquired by purchase after December 31, 1958, for use in the taxpayer's trade or business or in the production of its income, and which has an estimated useful life (determined at the time of acquisition) of 6 years or more. For purposes of determining the estimated useful life of Section 24356 property, the provisions of Reg. 24349(a)(2) shall be applied. For definition of the term "purchase," see subsection (3) of this regulation.

(2) Tangible Personal Property. Local law definitions will not be controlling for purposes of determining the meaning of the term "tangible personal property" as it is used in Section 24356 and the regulations thereunder. For purposes of Section 24356, the term "tangible personal property" includes any tangible property except land, and improvements thereto, such as buildings or other inherently permanent structures thereon (including items which are structural components of such buildings or structures). Assets accessory to the operation of a business, such as machinery, printing presses, transportation or office equipment, refrigerators, individual air conditioning units, grocery counters, etc., generally constitute tangible personal property for purposes of Section 24356, even though such assets may be termed fixtures under local law. The term does not include, for example, the wiring in a building, plumbing systems, nor central heating or central air conditioning machinery, pipes, or ducts or other items, which are structural components of a building or other permanent structure, nor does the term include trademarks, goodwill, or other intangibles.

(3) Purchase.

(A) The term "purchase" means any acquisition of property after December 31, 1958, but only if all the requirements of subparagraphs (i), (ii), and (iii) of this paragraph are satisfied.

(i) The property is not acquired by purchase if it is acquired from a taxpayer whose relationship to the taxpayer acquiring it would result in the disallowance of losses under Sections 24427 to 24430, inclusive. In applying the rules of Sections 24428 and 24429, subdivision (d) of Section 24429 shall be treated as providing that the family of an individual shall include only his spouse, ancestors, and lineal descendants. For example, a purchase of property by a corporation from a taxpayer who owns, directly or indirectly, more than 50 percent in value of the outstanding stock of such corporation does not qualify as a "purchase" under Section 24356(d)(2), nor does the purchase of property from the wife of such a shareholder qualify. However, the purchase of Section 24356 property by a corporation from a brother or sister of a more than 50% shareholder of the corporation does qualify as a purchase for purposes of Section 24356(d)(2).

(ii) The property is not acquired by purchase if acquired from any one member of an affiliated group (as defined in subsection (5) of this regulation) by another member of the same affiliated group.

(iii) The property is not acquired by purchase if the basis of the property in the hands of the taxpayer acquiring it is determined in whole or in part by reference to the adjusted basis of such property in the hands of the taxpayer from whom acquired. For example, property acquired by gift does not qualify as property acquired by purchase, for purposes of Section 24356(d)(2), nor does property received in a corporate distribution the basis of which is determined under Section 24454(b), nor property acquired by a corporation in a transaction to which Section 24521 applies.

(B) If property is in the process of construction, reconstruction, or erection on December 31, 1958, the term "purchase" will apply only to that part of the cost of such property which is attributable to such construction, reconstruction, or erection after December 31, 1958. The portion of the cost of such property attributable to construction, reconstruction, or erection after December 31, 1958, consists of all costs of the property allocable to the period after that date, including the cost or other basis of materials entering into such property. It is not necessary that such materials be acquired after December 31, 1958, or that their estimated useful lives independently determined be 6 years or more provided, however, that the property constructed, reconstructed, or erected has an estimated useful life of 6 years or more.

(4) Cost. The cost of Section 24356 property does not include so much of the basis of such property as is determined by reference to the basis of other property held at any time by the taxpayer. For example, Corporation N purchases a new drill press costing $9,000 in November 1960 which qualifies as Section 24356 property, and is granted a trade-in allowance of $2,000 on its old drill press. The old drill press had a basis of $1,200. Under the provisions of Sections 24912 and 24941(d), the basis of the new drill press is $8,200 ($1,200 basis of old drill press plus cash expended of $7,000). However, only $7,000 of the basis of the new drill press qualifies as cost for purposes of the allowance under Reg. 24356(a); the remaining $1,200 is not part of the cost because it is determined by reference to the basis of the old drill press.

(5) Affiliated Group. For purposes of Section 24356, the term "affiliated group" has the meaning assigned to it by Section 1504 of the Internal Revenue Code of 1954, except that the phrase "more than 50 percent" shall be substituted for the phrase "at least 80 percent" each place it appears in Section 1504(a) of the Internal Revenue Code of 1954.

(6) Adjustment to Basis. A taxpayer which elects the additional first-year depreciation allowance under Section 24356 must make the necessary adjustment to basis of the Section 24356 property, as required by Section 24356(d)(6), in the records it is required to keep under Reg. 24349(g), before any other deduction allowable by Section 24349 is computed. For example, Corporation M which makes its return on the basis of the calendar year and uses the straight-line method of depreciation, purchases a $15,000 machine on July 1, 1960, which qualifies as Section 24356 property, and elects to claim the additional first-year depreciation allowance. The machine has an estimated 10-year life and an estimated salvage value of $1,000. For 1960, Corporation M is entitled to an allowance of $2,000 (20 percent of $10,000) under Section 24356. The cost basis of $15,000 must be adjusted by the $2,000 allowance before any other deduction under Section 24349 is computed. The adjusted basis of $13,000, less $1,000 salvage, or $12,000 may then be depreciated over the 10-year useful life of the machine in accordance with the provisions of Section 24349 and the regulations thereunder. Since Corporation M uses the straight-line method of depreciation for the machine, it will be entitled to a total deduction of $2,600 in 1960; that is $2,000 for additional first-year depreciation plus $600 ($12,000 x 10 percent x 6 mos.) depreciation on the balance of $12,000.

Notes

Cal. Code Regs. Tit. 18, § 24356(c)

1. New section filed 3-31-70; effective thirtieth day thereafter (Register 70, No. 14).[FN*]
This regulation is based on Section 26 CFR 1.179-3.

Note: Authority cited: Section 26422, Revenue and Taxation Code.

1. New section filed 3-31-70; effective thirtieth day thereafter (Register 70, No. 14).