---
kind: "range"
citation: "26 C.F.R. §§ 1.47-3–1.47-6"
title: "26"
from: "1.47-3"
to: "1.47-6"
count: 4
url: "https://uscodex.org/cfr/26/1.47-3..1.47-6"
---

# §1.47-3. Exceptions to the application of § 1.47-1.

- (a) **In general.** Notwithstanding the provisions of [§ 1.47-2](/cfr/26/1.47-2.md), relating to “disposition” and “cessation,” [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 shall not apply if [paragraph (b)](#b) of this section (relating to transfers by reason of death), [paragraph (c)](#c) of this section (relating to property destroyed by casualty), [paragraph (d)](#d) of this section (relating to reselection of used [section 38](/cfr/26/38.md) property), [paragraph (e)](#e) of this section (relating to transactions to which [section 381(a)](/cfr/26/381.md?p=a) applies), [paragraph (f)](#f) of this section (relating to mere change in form of conducting a trade or business), [paragraph (g)](#g) of this section (relating to sale-and-leaseback transactions), or [paragraph (h)](#h) of this section (relating to certain property replaced after Apr. 18, 1969) applies with respect to such disposition or cessation.
- (b) **Transfers by reason of death—**
  - (1) **General rule.** Notwithstanding the provisions of [§ 1.47-2](/cfr/26/1.47-2.md), relating to “disposition” and “cessation”, [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 shall not apply to a transfer of [section 38](/cfr/26/38.md) property by reason of the death of the taxpayer. Thus, for example, with respect to [section 38](/cfr/26/38.md) property held in joint tenancy, [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 shall not apply to the transfer of the deceased taxpayer's interest to the surviving joint tenant. If, under [§ 1.48-4](/cfr/26/1.48-4.md), the lessor of new [section 38](/cfr/26/38.md) property made a valid election to treat the lessee as having purchased such property for purposes of the credit allowed by [section 38](/cfr/26/38.md), [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 does not apply if, by reason of the death of the lessee, there is a termination of the lease and transfer of the leased property to the lessor, or there is an assignment of the lease and transfer of the leased property to another person. Moreover, [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 does not apply to the transfer of a partner's interest in a partnership, a beneficiary's interest in an estate or trust, or shares of stock of a shareholder of an electing small business corporation (as defined in [section 1371(b)](/cfr/26/1371.md?p=b)) by reason of the death of such partner, beneficiary, or shareholder. [Paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 shall not apply to property prior to his death even if the value of such gift is included in his gross estate for estate tax purposes (such as, a gift in contemplation of death under [section 2035](/cfr/26/2035.md)). The effect of this subparagraph is that any [section 38](/cfr/26/38.md) property held by a taxpayer at the time of his death is deemed to have been held by him for its entire estimated useful life.
  - (2) **Examples.** [Subparagraph (1)](#b-1) of this paragraph may be illustrated by the following examples:
- (c) **Property destroyed by casualty—**
  - (1) **Dispositions after April 18, 1969.** Notwithstanding the provisions of [§ 1.47-2](/cfr/26/1.47-2.md), relating to “disposition” and “cessation”, [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 shall not apply to property which, after April 18, 1969, and before August 16, 1971, is disposed of or otherwise ceases to be [section 38](/cfr/26/38.md) property with respect to the taxpayer on account of its destruction or damage by fire, storm, shipwreck, or other casualty, or by reason of its theft.
  - (2) **Dispositions before April 19, 1969.**
    - (i) In the case of property which, before April 19, 1969, is disposed of or otherwise ceases to be [section 38](/cfr/26/38.md) property with respect to the taxpayer on account of its destruction or damage by fire, storm, shipwreck or other casualty, or by reason of its theft, [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 shall apply except to the extent provided in subdivisions (ii) and (iii) of this subparagraph.
    - (ii) [Paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 shall not apply if—

      (a) [Section 38](/cfr/26/38.md) property is placed in service by the taxpayer to replace (within the meaning of [paragraph (h)](/cfr/26/1.46-3.md?p=h) of § 1.46-3) the destroyed, damaged, or stolen property, and

      (b) The basis (or cost) of the [section 38](/cfr/26/38.md) property which is placed in service by the taxpayer to replace the destroyed, damaged, or stolen property is reduced under [paragraph (h)](/cfr/26/1.46-3.md?p=h) of § 1.46-3.

    - (iii) If property which would be [section 38](/cfr/26/38.md) property but for [section 49](/cfr/26/49.md) is placed in service by the taxpayer to replace the destroyed, damaged, or stolen property, then the provisions of [paragraph (h)](#h) of this section (other than the requirement that the replacement take place within 6 months after the disposition) shall apply.
  - (3) **Examples.** The provisions of [subparagraph (2)(ii)](#c-2-ii) of this paragraph may be illustrated by the following examples:
- (d) **Reselection of used section 38 property—**
  - (1) **Reselection.** If—
    - (i) Used [section 38](/cfr/26/38.md) property (as defined in [§ 1.48-3](/cfr/26/1.48-3.md)) the cost of which was taken into account in computing the taxpayer's qualified investment is disposed of, or otherwise ceases to be [section 38](/cfr/26/38.md) property with respect to the taxpayer, before the close of the estimated useful life which was taken into account in computing such qualified investment, and
    - (ii) For the taxable year in which the property described in subdivision (i) of this subparagraph was placed in service, the sum of (a) the cost of used [section 38](/cfr/26/38.md) property placed in service by the taxpayer, and (b) the cost of used [section 38](/cfr/26/38.md) property apportioned to such taxpayer exceeded $50,000,
  - (2) **Application of paragraph (a) of § 1.47-1.**
    - (i) If a taxpayer treats, under [subparagraph (1)](#d-1) of this paragraph, the cost of any used [section 38](/cfr/26/38.md) property which was not originally selected as having been selected in place of the cost of used [section 38](/cfr/26/38.md) property described in [subparagraph (1)(i)](#d-1-i) of this paragraph, then, not withstanding the provisions of [§ 1.47-2](/cfr/26/1.47-2.md) (relating to “disposition” and “cessation”), [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 shall not apply to the property described in [subparagraph (1)(i)](#d-1-i) of this paragraph to the extent of the cost of the newly selected used [section 38](/cfr/26/38.md) property.
    - (ii) If the cost of the used [section 38](/cfr/26/38.md) property described in [subparagraph (1)(i)](#d-1-i) of this paragraph exceeds the cost of the newly selected used [section 38](/cfr/26/38.md) property, then the property described in [subparagraph (1)(i)](#d-1-i) of this paragraph shall cease to be [section 38](/cfr/26/38.md) property with respect to the taxpayer to the extent of such excess.
    - (iii) If the newly selected used [section 38](/cfr/26/38.md) property is disposed of, or otherwise ceases to be [section 38](/cfr/26/38.md) property with respect to the taxpayer, before the close of the estimated useful life of the property described in [subparagraph (1)(i)](#d-1-i) of this paragraph, then, unless he reselects other used [section 38](/cfr/26/38.md) property, [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 shall apply with respect to such newly selected used [section 38](/cfr/26/38.md) property. For purposes of recomputing qualified investment with respect to such newly selected used [section 38](/cfr/26/38.md) property the actual useful life shall be deemed to be the period beginning with the date on which the property described in [subparagraph (1)(i)](#d-1-i) of this paragraph was placed in service by the taxpayer and ending with the date of the disposition or cessation with respect to such newly selected used [section 38](/cfr/26/38.md) property. See [paragraph (c)](/cfr/26/1.47-1.md?p=c) of § 1.47-1, relating to date placed in service and date of disposition or cessation.
  - (3) **Information requirement.**
    - (i) If in any taxable year this paragraph applies to a taxpayer, such taxpayer shall attach to his income tax return for such taxable year a statement containing the information required by subdivision (ii) of this subparagraph.
    - (ii) The statement referred to in subdivision (i) of this subparagraph shall contain the following information:

      (a) The taxpayer's name, address and taxpayer account number; and

      (b) With respect to the originally selected used [section 38](/cfr/26/38.md) property and the newly selected used [section 38](/cfr/26/38.md) property, the month and year placed in service, cost, and estimated useful life.

  - (4) **Examples.** This paragraph may be illustrated by the following examples:
- (e) **Transactions to which section 381(a) applies—**
  - (1) **General rule.** Notwithstanding the provisions of [§ 1.47-2](/cfr/26/1.47-2.md), relating to “disposition” and “cessation”, [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 shall not apply to a disposition of [section 38](/cfr/26/38.md) property in a transaction to which [section 381(a)](/cfr/26/381.md?p=a) (relating to carryovers in certain corporate acquisitions) applies. If the [section 38](/cfr/26/38.md) property described in the preceding sentence is disposed of, or otherwise ceases to be [section 38](/cfr/26/38.md) property with respect to the acquiring corporation, before the close of the estimated useful life which was taken into account in computing the transferor corporation's qualified investment, then [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 shall apply to the acquiring corporation with respect to such [section 38](/cfr/26/38.md) property. For purposes of recomputing qualified investment with respect to such property its actual useful life shall be the period beginning with the date on which it was placed in service by the transferor corporation and ending with the date of the disposition by, or cessation with respect to, the acquiring corporation.
  - (2) **Examples.** This paragraph may be illustrated by the following examples:
- (f) **Mere change in form of conducting a trade or business—**
  - (1) **General rule.**
    - (i) Notwithstanding the provisions of [§ 1.47-2](/cfr/26/1.47-2.md), relating to “disposition” and “cessation”, [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 shall not apply to [section 38](/cfr/26/38.md) property which is disposed of, or otherwise ceases to be [section 38](/cfr/26/38.md) property with respect to the taxpayer, before the close of the estimated useful life which was taken into account in computing the taxpayer's qualified investment by reason of a mere change in the form of conducting the trade or business in which such [section 38](/cfr/26/38.md) property is used provided that the conditions set forth in subdivision (ii) of this subparagraph are satisfied.
    - (ii) **The conditions referred to in subdivision (i) of this subparagraph are as follows—** (a) The [section 38](/cfr/26/38.md) property described in subdivision (i) of this subparagraph is retained as [section 38](/cfr/26/38.md) property in the same trade or business,

      (b) The transferor (or in a case where the transferor is a partnership, estate, trust, or electing small business corporation, the partner, beneficiary, or shareholder) of such [section 38](/cfr/26/38.md) property retains a substantial interest in such trade or business,

      (c) Substantially all the assets (whether or not [section 38](/cfr/26/38.md) property) necessary to operate such trade or business are transferred to the transferee to whom such [section 38](/cfr/26/38.md) property is transferred, and

      (d) The basis of such [section 38](/cfr/26/38.md) property in the hands of the transferee is determined in whole or in part by reference to the basis of such [section 38](/cfr/26/38.md) property in the hands of the transferor. This subparagraph shall not apply to the transfer of [section 38](/cfr/26/38.md) property if [paragraph (e)](#e) of this section, relating to transactions to which [section 381](/cfr/26/381.md) applies, applies with respect to such transfer.

  - (2) **Substantial interest.** For purposes of this paragraph, a transferor (or in a case where the transferor is a partnership, estate, trust, or electing small business corporation, the partner, beneficiary, or shareholder) shall be considered as having retained a substantial interest in the trade or business only if, after the change in form, his interest in such trade or business—
    - (i) Is substantial in relation to the total interest of all persons, or
    - (ii) **Is equal to or greater than his interest prior to the change in form.**
  - (3) **Property held for the production of income.** [Subparagraph (1)(i)](#f-1-i) of this paragraph applies to [section 38](/cfr/26/38.md) property held for the production of income (within the meaning of [section 167(a)(2)](/cfr/26/167.md?p=a-2)) as well as to [section 38](/cfr/26/38.md) property used in a trade or business.
  - (4) **Leased property.** In a case where a lessor of new [section 38](/cfr/26/38.md) property made a valid election, under [§ 1.48-4](/cfr/26/1.48-4.md), to treat the lessee as having purchased such property for purposes of the credit allowed by [section 38](/cfr/26/38.md), in determining whether [subparagraph (1)(i)](#f-1-i) of this paragraph applies to an assignment of the lease and transfer of possession of such property, the condition contained in subparagraph (1)(ii)(d) of this paragraph is not applicable.
  - (5) **Disposition or cessation.**
    - (i) If [section 38](/cfr/26/38.md) property described in [subparagraph (1)(i)](#f-1-i) of this paragraph is disposed of by the transferee, or otherwise ceases to be [section 38](/cfr/26/38.md) property with respect to the transferee, before the close of the estimated useful life which was taken into account in computing the qualified investment of the transferor (or in a case where the transferor is a partnership, estate, trust, or electing small business corporation, the qualified investment of the partners, beneficiaries, or shareholders) then under [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 such property ceases to be [section 38](/cfr/26/38.md) property with respect to the transferor (or such partners, beneficiaries, or shareholders), and a recapture determination shall be made with respect to such property. For purposes of recomputing qualified investment with respect to such property, the actual useful life shall be the period beginning with the date on which it was placed in service by the transferor and ending with the date of the disposition by, or cessation with respect to, the transferee.
    - (ii) If in any taxable year the transferor (or in a case where the transferor is a partnership, estate, trust, or electing small business corporation, the partner, beneficiary, or shareholder) of the [section 38](/cfr/26/38.md) property described in [subparagraph (1)(i)](#f-1-i) of this paragraph does not retain a substantial interest in the trade or business directly or indirectly (through ownership in other entities provided that such other entities' bases in such interest are determined in whole or in part by reference to the basis of such interest in the hands of the transferor) then, under [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1, such property ceases to be [section 38](/cfr/26/38.md) property with respect to the transferor and he (or the partner, beneficiary, or shareholder) shall make a recapture determination. For purposes of recomputing qualified investment with respect to property described in this subdivision, its actual useful life shall be the period beginning with the date on which it was placed in service by the transferor and ending with the first date on which the transferor (or the partner, beneficiary, or shareholder) does not retain a substantial interest in the trade or business. Any taxpayer who seeks to establish his interest in a trade or business under the rule of this subdivision shall maintain adequate records to demonstrate his indirect interest in such trade or business after any such transfer or transfers.
    - (iii) In making a recapture determination under this subparagraph there shall be taken into account any prior recapture determinations with respect to the transferor in connection with the same property.
    - (iv) Notwithstanding [subparagraph (1)](#f-1) of this paragraph and subdivision (ii) of this subparagraph in the case of a mere change in the form of a trade or business, if the interest of a taxpayer in the trade or business is reduced but such taxpayer has retained a substantial interest in such trade or business, [paragraph (a)(2)](/cfr/26/1.47-4.md?p=a-2) of § 1.47-4 (relating to electing small business corporations), [paragraph (a)(2)](/cfr/26/1.47-5.md?p=a-2) of § 1.47-5 (relating to estates or trusts) or [paragraph (a)(2)](/cfr/26/1.47-6.md?p=a-2) of § 1.47-6 (relating to partnerships) shall apply, as the case may be.
  - (6) **Examples.** This paragraph may be illustrated by the following examples in each of which it is assumed that the transfer satisfies the conditions of [subparagraphs (1)(ii)](#f-1-ii) (a), (c), and (d) of this paragraph.
- (g) **Sale-and-leaseback transactions—**
  - (1) **In general.** Notwithstanding the provisions of [§ 1.47-2](/cfr/26/1.47-2.md), relating to “disposition” and “cessation”, [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 shall not apply where [section 38](/cfr/26/38.md) property is disposed of and as part of the same transaction is leased back to the vendor even though gain or loss is recognized to the vendor-lessee and the property ceases to be subject to depreciation in his hands. If [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 applies with respect to such property subsequent to the transaction, the actual useful life shall begin with the date on which such property was first placed in service by the vendor-lessee as owner.
  - (2) **Special rule for progress expenditure property.** The sale and leaseback (or agreement or contract to leaseback) of progress expenditure property (including any contract rights to the property), in general, will be treated as a cessation described in [section 47(a)(3)(A)](/cfr/26/47.md?p=a-3-A) with respect to the seller-lessee. However, a sale and leaseback (or agreement or contract to leaseback) will not be treated as a cessation to the extent qualified investment passed through to the lessee under [section 48(d)](/cfr/26/48.md?p=d) in the year the property is placed in service equals or exceeds qualified progress expenditures for the property taken into account by the lessee. If a sale-leaseback transaction is treated as a cessation, qualified investment must be reduced and the credit recomputed, beginning with the most recent credit year (i.e., the most recent year property is taken into account in computing qualified investment under § [1.46-3](/cfr/26/1.46-3.md) or [1.46-5](/cfr/26/1.46-5.md)). The amount of the reduction is the amount, if any, by which qualified progress expenditures taken into account by the lessee in all prior years exceeds qualified investment passed through to the lessee under [section 48(d)](/cfr/26/48.md?p=d). This [paragraph (g)(2)](#g-2) does not apply to any progress expenditure property that has been placed in service by a vendor-lessee (as described in [paragraph (g)(1)](#g-1) of this section) prior to a sale-leaseback of that property in a transaction described in [paragraph (g)(1)](#g-1) of this section.
- (h) **Certain property replaced after April 18, 1969—**
  - (1) **In general.**
    - (i) If [section 38](/cfr/26/38.md) property is disposed of and property which is, for purposes of [section 1033](/cfr/26/1033.md) and the regulations thereunder, similar or related in service or use to the property disposed of and which would be [section 38](/cfr/26/38.md) property but for the application of [section 49](/cfr/26/49.md) is placed in service to replace the property disposed of, the increase in income tax and adjustment of investment credit carryovers and carrybacks resulting from the recomputation under [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1 shall be reduced (but not below zero) by the credit that would be allowed for the qualified investment of the replacement property (determined as if such property were [section 38](/cfr/26/38.md) property). The preceding sentence shall not apply unless the replacement takes place within 6 months after the disposition. If property otherwise qualifies as replacement property, it is immaterial that it is placed in service (for example, to undergo testing) before the replaced property is disposed of. The assignment by the taxpayer in his return of an estimated useful life to the replacement property in computing its qualified investment will be considered a representation by the taxpayer that he expects to retain the replacement property for its entire estimated useful life. If such property is disposed of before the end of such life, then the circumstances surrounding the replacement will be examined to determine whether the taxpayer's representation was in good faith and, if appropriate, the qualified investment of the replacement property will be recomputed for the year of replacement using the actual useful life of such property.
    - (ii) The provisions of subdivision (i) of this subparagraph may be illustrated by the following example:
  - (2) **Leased property.** Property disposed of may be replaced with property leased from another, provided (i) an election with respect to the newly leased property could be made under [section 48(d)](/cfr/26/48.md?p=d) but for section [49](/cfr/26/49.md), and [(ii)](/cfr/26/49.md?p=ii) the lessee obtains the lessor's written statement that he will not claim such property as replacement property under this paragraph. The statement of the lessor shall contain the information specified in subdivisions (i) through (vii) of [§ 1.48-4(f)(1)](/cfr/26/1.48-4.md?p=f-1) and the statement (or a copy thereof) shall be retained in the records of the lessor and the lessee for a period of at least 3 years after the property is transferred to the lessee.

# §1.47-4. Electing small business corporation.

- (a) **In general—**
  - (1) **Disposition or cessation in hands of corporation.** If an electing small business corporation (as defined in [section 1371(b)](/cfr/26/1371.md?p=b)) or a former electing small business corporation disposes of any [section 38](/cfr/26/38.md) property (or if any [section 38](/cfr/26/38.md) property otherwise ceases to be [section 38](/cfr/26/38.md) property in the hands of the corporation) before the close of the estimated useful life which was taken into account in computing qualified investment with respect to such property, a recapture determination shall be made with respect to each shareholder who is treated, under [§ 1.48-5](/cfr/26/1.48-5.md), as a taxpayer with respect to such property. Each such recapture determination shall be made with respect to the pro rata share of the basis (or cost) of such property taken into account by such shareholder in computing his qualified investment. For purposes of each such recapture determination the actual useful life of such property shall be the period beginning with the date on which it was placed in service by the electing small business corporation and ending with the date of the disposition or cessation. In making a recapture determination under this subparagraph there shall be taken into account any prior recapture determinations made with respect to the shareholder in connection with the same property. For definition of “recapture determination” see [paragraph (a)(1)](/cfr/26/1.47-1.md?p=a-1) of § 1.47-1.
  - (2) **Disposition of shareholder's interest.**
    - (i) **If—** (a) The basis (or cost) of [section 38](/cfr/26/38.md) property is apportioned, under [§ 1.48-5](/cfr/26/1.48-5.md), to a shareholder of an electing small business corporation who takes such basis (or cost) into account in computing his qualified investment, and

      (b) After the end of the shareholder's taxable year in which such apportionment was taken into account and before the close of the estimated useful life of the property, such shareholder's proportionate stock interest in such corporation is reduced (for example, by a sale or redemption, or by the issuance of additional shares) below the percentage specified in subdivision (ii) of this subparagraph,

    - (ii) The percentage referred to in subdivision (i)(b) of this subparagraph is 66 2/3 percent of the shareholder's proportionate stock interest in the corporation on the date of the apportionment under [§ 1.48-5](/cfr/26/1.48-5.md). However, once property has been treated under this subparagraph as having ceased to be [section 38](/cfr/26/38.md) property to any extent the percentage referred to shall be 33 1/3 percent of the shareholder's proportionate stock interest in the corporation on the date of the apportionment under [§ 1.48-5](/cfr/26/1.48-5.md).
    - (iii) In determining a shareholder's proportionate stock interest in a former electing small business corporation for purposes of this subparagraph, the shareholder shall be considered to own stock in such corporation which he owns directly or indirectly (through ownership in other entities provided such other entities' bases in such stock are determined in whole or in part by reference to the basis of such stock in the hands of the transferor). For example, if A, who owns all of the 100 shares of the outstanding stock of corporation X, a corporation which was formerly an electing small business corporation, transfers on November 1, 1966, 70 shares of X stock to corporation Y in exchange for 90 percent of the stock of Y in a transaction to which [section 351](/cfr/26/351.md) applies, then, for purposes of subdivision (i) of this subparagraph, A shall be considered to own 93 percent of the stock of X, 30 percent directly and 63 percent indirectly (i.e., 90 percent of 70). Any taxpayer who seeks to establish his interest in the stock of a former electing small business corporation under the rule of this subdivision shall maintain adequate records to demonstrate his indirect interest in the corporation after any such transfer or transfers.
- (b) **Election of a small business corporation under section 1372—**
  - (1) **General rule.** If a corporation makes a valid election under [section 1372](/cfr/26/1372.md) to be an electing small business corporation (as defined in [section 1371(b)](/cfr/26/1371.md?p=b)), then on the last day of the taxable year immediately preceding the first taxable year for which such election is effective, any [section 38](/cfr/26/38.md) property the basis (or cost) of which was taken into account in computing the corporation's qualified investment in taxable years prior to the first taxable year for which the election is effective (and which has not been disposed of or otherwise ceased to be [section 38](/cfr/26/38.md) property with respect to the corporation prior to such last day) shall be considered as having ceased to be [section 38](/cfr/26/38.md) property with respect to such corporation and [§ 1.47-1](/cfr/26/1.47-1.md) shall apply. However, if the corporation and each of the persons who are shareholders of the corporation on the first day of the first taxable year for which the election under [section 1372](/cfr/26/1372.md) is to be effective, or on the date of such election, whichever is later, execute the agreement specified in [subparagraph (2)](#b-2) of this paragraph, [§ 1.47-1](/cfr/26/1.47-1.md) shall not apply to any such [section 38](/cfr/26/38.md) property by reason of the election by the corporation under [section 1372](/cfr/26/1372.md).
  - (2) **Agreement of shareholders and corporation.**
    - (i) The agreement referred to in [subparagraph (1)](#b-1) of this paragraph shall be signed by the shareholders and the corporation, and shall recite that, in the event the [section 38](/cfr/26/38.md) property described in [subparagraph (1)](#b-1) of this paragraph is later disposed of by, or ceases to be [section 38](/cfr/26/38.md) property with respect to, the corporation during a taxable year of the corporation for which the election under [section 1372](/cfr/26/1372.md) is effective, each such signer agrees (a) to notify the district director of such disposition or cessation, and (b) to be jointly and severally liable to pay to the district director an amount equal to the increase in tax provided by [section 47](/cfr/26/47.md). The amount of such increase shall be determined as if such property had ceased to be [section 38](/cfr/26/38.md) property as of the last day of the taxable year immediately preceding the first taxable year for which the election under [section 1372](/cfr/26/1372.md) is effective, except that the actual useful life (within the meaning of [paragraph (a)](/cfr/26/1.47-1.md?p=a) of § 1.47-1) of the property shall be considered to have ended on the date of the actual disposition by, or cessation in the hands of, the electing small business corporation.
    - (ii) The agreement shall set forth the name, address, and taxpayer account number of each party and the internal revenue district in which each such party files his or its income tax return for the taxable year which includes the last day of the corporation's taxable year immediately preceding the first taxable year for which the election under [section 1372](/cfr/26/1372.md) is effective. The agreement may be signed on behalf of the corporation by any person who is duly authorized. The agreement shall be filed with the district director with whom the corporation files its income tax return for its taxable year immediately preceding the first taxable year for which the election under [section 1372](/cfr/26/1372.md) is effective and shall be filed on or before the due date (including extensions of time) of such return. However, if the due date (including extensions of time) of such income tax return is on or before September 1, 1967, the agreement may be filed on or before December 31, 1967. For purposes of the two preceding sentences, the district director may, if good cause is shown, permit the agreement to be filed on a later date.
- (c) **Examples.** This section may be illustrated by the following examples in each of which it is assumed that X Corporation, an electing small business corporation which makes its returns on the basis of the calendar year, acquired and placed in service on June 1, 1962, three items of [section 38](/cfr/26/38.md) property. The basis and estimated useful life of each item of [section 38](/cfr/26/38.md) property are as follows:
- (d) **Termination or revocation of an election under section 1372.** [Section 38](/cfr/26/38.md) property shall not be considered to be disposed of or to have ceased to be [section 38](/cfr/26/38.md) property solely by reason of a termination or revocation of a corporation's election under [section 1372](/cfr/26/1372.md).

# §1.47-5. Estates and trusts.

- (a) **In general—**
  - (1) **Disposition or cessation in hands of estate or trust.** If an estate or trust disposes of any [section 38](/cfr/26/38.md) property (or if any [section 38](/cfr/26/38.md) property otherwise ceases to be [section 38](/cfr/26/38.md) property in the hands of the estate or trust) before the close of the estimated useful life which was taken into account in computing qualified investment with respect to such property, a recapture determination shall be made with respect to the estate or trust, and each beneficiary who is treated, under [§ 1.48-6](/cfr/26/1.48-6.md), as a taxpayer with respect to such property. Each such recapture determination shall be made with respect to the share of the basis (or cost) of such property taken into account by such estate or trust and such beneficiary in computing its or his each such recapture determination the actual useful life of such property shall be the period beginning with the date on which it was placed in service by the estate or trust and ending with the date of the disposition or cessation. In making a recapture determination under this subparagraph with respect to a taxpayer there shall be taken into account any prior recapture determinations made with respect to such taxpayer in connection with the same property. For definition of “recapture determination” see [paragraph (a)(1)](/cfr/26/1.47-1.md?p=a-1) of § 1.47-1.
  - (2) **Disposition of interest.**
    - (i) **If—** (a) The basis (or cost) of [section 38](/cfr/26/38.md) property is apportioned, under [§ 1.48-6](/cfr/26/1.48-6.md), to an estate or trust which, or to a beneficiary of an estate or trust who, takes such basis (or cost) into account in computing his qualified investment, and

      (b) After the date on which such [section 38](/cfr/26/38.md) property was placed in service by the estate or trust and before the close of the estimated useful life of the property, such estate's, trust's, or such beneficiary's proportionate interest in the income of the estate or trust is reduced (for example, by a sale, or by the terms of the estate or trust instrument) below the percentage specified in subdivision (ii) of this subparagraph, then, on the date of such reduction, such [section 38](/cfr/26/38.md) property ceases to be [section 38](/cfr/26/38.md) property with respect to such estate, trust, or beneficiary to the extent of the actual reduction in such estate's, trust's, or beneficiary's proportionate interest in the income of the estate or trust. (For example, if $100 of the basis of [section 38](/cfr/26/38.md) property was apportioned to a beneficiary and if his proportionate interest in the income of the estate or trust is reduced from 60 percent to 30 percent (that is, 50 percent of his original interest), then such property shall be treated as having ceased to be [section 38](/cfr/26/38.md) property to the extent of $50). Accordingly, a recapture determination shall be made with respect to such estate, trust, or beneficiary. For purposes of such recapture determination the actual useful life of such property shall be the period beginning with the date on which it was placed in service by the estate or trust and ending with the date on which it is treated as having ceased to be [section 38](/cfr/26/38.md) property with respect to the estate, trust, or beneficiary. In making a recapture determination under this subparagraph there shall be taken into account any prior recapture determination made with respect to the estate, trust, or beneficiary in connection with the same property.

    - (ii) The percentage referred to in subdivision (i)(b) of this subparagraph is 66 2/3 percent of the estate's, trust's, or beneficiary's proportionate interest in the income of the estate or trust for the taxable year of the apportionment under [§ 1.48-6](/cfr/26/1.48-6.md). However, once property has been treated under this subparagraph as having ceased to be [section 38](/cfr/26/38.md) property to any extent the percentage referred to shall be 33 1/3 percent of the estate's, trust's, or beneficiary's proportionate interest in the income of the estate or trust for the taxable year of the apportionment under [§ 1.48-6](/cfr/26/1.48-6.md).
    - (iii) In determining a beneficiary's proportionate interest in the income of an estate or trust for purposes of this subparagraph, the beneficiary shall be considered to own any interest in such an estate or trust which he owns directly or indirectly (through ownership in other entities provided such other entities' bases in such interest are determined in whole or in part by reference to the basis of such interest in the hands of the beneficiary). For example, if A, whose proportionate interest in the income of trust X is 30 percent, transfers all of such interest to corporation Y in exchange for all of the stock of Y in a transaction to which [section 351](/cfr/26/351.md) applies, then, for purposes of subdivision (i) of this subparagraph, A shall be considered to own a 30-percent interest in trust X. Any taxpayer who seeks to establish his interest in an estate or trust under the rule of this subdivision shall maintain adequate records to demonstrate his indirect interest in the estate or trust after any such transfer or transfers.
- (b) **Examples.** [Paragraph (a)](#a) of this section may be illustrated by the following examples in each of which it is assumed that XYZ Trust, which makes its returns on the basis of the calendar year, acquired and placed in service on June 1, 1962, three items of [section 38](/cfr/26/38.md) property. The basis and estimated useful life of each item of [section 38](/cfr/26/38.md) property are as follows:

# §1.47-6. Partnerships.

- (a) **In general—**
  - (1) **Disposition or cessation in hands of partnership.** If a partnership disposes of any partnership [section 38](/cfr/26/38.md) property (or if any partnership [section 38](/cfr/26/38.md) property otherwise ceases to be [section 38](/cfr/26/38.md) property in the hands of the partnership) before the close of the estimated useful life which was taken into account in computing qualified investment with respect to such property, a recapture determination shall be made with respect to each partner who is treated, under [paragraph (f)](/cfr/26/1.46-3.md?p=f) of § 1.46-3, as a taxpayer with respect to such property. Each such recapture determination shall be made with respect to the share of the basis (or cost) of such property taken into account by such partner in computing his qualified investment. For purposes of each such recapture determination the actual useful life of such property shall be the period beginning with the date on which it was placed in service by the partnership and ending with the date of the disposition or cessation. In making a recapture determination under this subparagraph there shall be taken into account any prior recapture determinations made with respect to the partner in connection with the same property. For definition of “recapture determination” see [paragraph (a)(1)](/cfr/26/1.47-1.md?p=a-1) of § 1.47-1.
  - (2) **Disposition of partner's interest.**
    - (i) **If—** (a) The basis (or cost) of partnership [section 38](/cfr/26/38.md) property is taken into account by a partner in computing his qualified investment, and

      (b) After the date on which such partnership [section 38](/cfr/26/38.md) property was placed in service by the partnership and before the close of the estimated useful life of the property, such partner's proportionate interest in the general profits of the partnership (or in the particular item of property) is reduced (for example, by a sale, by a change in the partnership agreement, or by the admission of a new partner) below the percentage specified in subdivision (ii) of this subparagraph, then, on the date of such reduction such partnership [section 38](/cfr/26/38.md) property ceases to be [section 38](/cfr/26/38.md) property with respect to such partner to the extent of the actual reduction in such partner's proportionate interest in the general profits of the partnership (or in the particular item of property). (For example, if $100 of the basis of [section 38](/cfr/26/38.md) property was taken into account by a partner and if his proportionate interest in the general profits of the partnership is reduced from 60 percent to 30 percent (that is, 50 percent of his original interest), then such property shall be treated as having ceased to be [section 38](/cfr/26/38.md) property to the extent of $50.) Accordingly, a recapture determination shall be made with respect to such partner. For purposes of such recapture determination the actual useful life of such property shall be the period beginning with the date on which it was placed in service by the partnership and ending with the date on which it is treated as having ceased to be [section 38](/cfr/26/38.md) property with respect to the partner. In making a recapture determination under this subparagraph there shall be taken into account any prior recapture determination made with respect to the partner in connection with the same property.

    - (ii) The percentage referred to in subdivision (i)(b) of this subparagraph is 66 2/3 percent of the partner's proportionate interest in the general profits of the partnership (or in the particular item of property) for the year in which such property was placed in service. However, once property has been treated under this subparagraph as having ceased to be [section 38](/cfr/26/38.md) property to any extent the percentage referred to shall be 33 1/3 percent of the partner's proportionate interest in the general profits of the partnership (or in the particular item of property) for the year in which such property was placed in service.
    - (iii) In determining a partner's proportionate interest in the general profits of a partnership for purposes of this subparagraph, the partner shall be considered to own any interest in such a partnership which he owns directly or indirectly (through ownership in other entities provided the other entities' bases in such interest are determined in whole or in part by reference to the basis of such interest in the hands of the partner). For example, if A, whose proportionate interest in the general profits of partnership X is 20 percent, transfers all of such interest to corporation Y in exchange for all of the stock of Y in a transaction to which [section 351](/cfr/26/351.md) applies, then, for purposes of subdivision (i) of this subparagraph, A shall be considered to own a 20-percent interest in partnership X. Any taxpayer who seeks to establish his interest in a partnership under the rule of this subdivision shall maintain adequate records to demonstrate his indirect interest in the partnership after any such transfer or transfers.
- (b) **Examples.** [Paragraph (a)](#a) of this section may be illustrated by the following examples in each of which it is assumed that ABC Partnership, which makes its returns on the basis of the calendar year, acquired and placed in service on June 1, 1962, three items of [section 38](/cfr/26/38.md) property. The basis and estimated useful life of each item of [section 38](/cfr/26/38.md) property are as follows: