where the amount of depreciation which would have been allowable with respect to one item of section 1250 property if the taxpayer had originally used the straight line method exceeds the allowable depreciation or amortization with respect to such property, such excess may not be used to reduce the amount of the item of tax preference resulting from another item of section 1250 property.

(2) Separate items of section 1250 property. The determination of what constitutes a separate item of section 1250 property is to be made on the facts and circumstances of each individual case. In general, each building (or component thereof, if the taxpayer uses the component method of computing depreciation) is a separate item of section 1250 property. However, for purposes of this section, assets placed in a group, classified, or composite account are to be treated as a single item by a taxpayer, provided that such account contains only property placed in service during a single taxable year. In addition, two or more items may be treated as one item of section 1250 property for purposes of this paragraph where, with respect to each such item: (i) the period for which depreciation is taken begins on the same date, (ii) the same estimated useful life has con

tinually been used for purposes of taking depreciation or amortization, and (iii) the same method (and rate) of depreciation or amortization has continually been used. For example, assume a taxpayer constructed a 40-unit rental townhouse development and began taking declining balance depreciation on all 40 units as of January 1, 1970, at a uniform rate and has consistently taken depreciation on all 40 units on this same basis. Although each townhouse is a separate item of section 1250 property, all 40 townhouses may be treated as one item of section 1250 property for purposes of the minimum tax since the conditions of subdivisions (i), (ii), and (iii) of this subparagraph are met. This would be true

even if the 40 townhouses comprised two 20-unit developments located apart from each other. However, if the taxpayer constructed an additional development or new section on the existing development for which he began taking depreciation on July 1, 1970, at a uniform rate for all the additional units, the additional units and the original units may not be treated as one item of section 1250 property since the condition of subdivision (i) of this subparagraph is not met. Where a portion of an item of section 1250 property has been depreciated or amortized under a method (or rate) which is different from the method (or rate) under which the other portion or portions of such item have been depreciated or amortized, such portion is considered a separate item of section 1250 property for purposes of this paragraph.

(3) Allowable depreciation or amortization. The phrase "deduction allowable for the taxable year for exhaustion, wear and tear, obsolescence, or amortization" and references in this paragraph to "allowable depreciation or amortization" include deductions allowable for the taxable year under section 162, 167, 212, or 611 for the depreciation or amortization of section 1250 property. Such phrase does not include depreciation allowable in the year in which the section 1250 property is disposed of. For the determination of "allowable depreciation or amortization" for taxable years in which the taxpayer has taken no deduction see § 1.1016-3 (a) (2).

(4) Straight line depreciation. (i) For purposes of computing the depreciation which would have been allowable for the taxable year if the taxpayer had depreciated the property under the straight line method for each taxable year of its useful life, the taxpayer must use the same useful life and salvage value as was used for the first taxable year in which the taxpayer depreciated or amortized the property (subject to redeterminations made pursuant to § 1.167 (a) -1(b) and (c)).

If, however, for any taxable year, no useful life was used under the method of depreciation or amortization used or an artificial period was used, such as, for example, by application of section 167 (k), or salvage value was not taken into account in determining the annual allowances, such as, for example, under the declining balance method, then, for purposes of computing the depreciation which would have been allowable under the straight line method for the taxable year

(a) There is to be used the useful life and salvage value which would have been proper if depreciation had actually been determined under the straight line method (without reference to an artificial life) throughout the period the property was held, and

or

(b) Such useful life and such salvage value is to be determined by taking into account for each taxable year the same facts and circumstances as would have been taken into account if the taxpayer had used such method throughout the period the property was held. If an election under § 1.167 (a)-11(f), § 1.167 (a)-12(e), § 1.167 (a)-12(f) is applicable to the property, the salvage value of the property shall be determined in accordance with such election, and the asset depreciation period (or asset guideline period) applicable to the property pursuant to such election shall be considered to be the useful life of the property for the purposes of this section.

(ii) Where the taxpayer acquires property in a transaction to which section 381(a) applies or from another member of an affiliated group during a consolidated return year and an "accelerated" method of depreciation as described in section 167(b) (2), (3), or (4) or section 167 (j) (1) (B) or (C) is permitted (see § 1.381 (c) (6) -1 and § 1.1502-12(g)), the depreciation which would have been allowable under the straight line method is determined as if the property had been depreciated under the straight line method since depreciation was first taken on the property by the transferor of such property. In such cases, references in this paragraph to the period for which the property is held or useful life of the property are treated as including the period beginning with the commencement of the original use of the property.

(iii) For purposes of section 57(a) (2), the straight line method includes the method of depreciation described in § 1.167(b)-1 or any other method which provides for a uniform proration of the cost or other basis (less salvage value) of the property over the estimated useful life of the property to the taxpayer (in terms of years, hours of use, or other similar time units) or estimated number of units to be produced over the life of the property to the taxpayer. If a method other than the method described in § 1.167 (b)-1 is used, the estimated useful life or estimated units of production shall be determined in a manner consistent with subdivision (i) of this subparagraph.

(iv) In the case of property constructed by or improvements made by a lessee, the useful life is to be determined in accordance with § 1.167 (a)-4.

(5) Application for partial period. If an item is section 1250 property for less than the entire taxable year, the allowable depreciation or amortization incudes only the depreciation or amortization for that portion of the taxable year during which the item is section 1250 property and the amount of the depreciation which would have been allowable under the straight line method is determined only with regard to such portion of the taxable year.

(6) No Section 1250 and basis adjustment. No adjustment is to be made

as a result of the minimum tax either to the basis of section 1250 property or with respect to computations under

section 1250.

(7) Example. The principles of this paragraph may be illustrated by the following example:

Example. The taxpayer's only item of

(c) Accelerated depreciation on section 1245 property subject to a net lease -(1) In general. Section 57(a) (3) provides that, with respect to each item of section 1245 property (as defined in section 1245(a)(3)) which is the subject of a net lease for the taxable year, there is to be included as an item of tax preference the amount by which the deduction allowable for the taxable year for depreciation or amortization exceeds the deduction which would have been allowable for the taxable year if the taxpayer had depreciated the property under the straight line method for each year of its useful life for which the taxpayer has held the property. Except as provided in para

4,983

(3)

Straight

line

depreciation

$7,000

(4)

Excess of

6,000

(2) over (3)

3,800

$3,952

None

1,183

$5,135

graph (b) (1) (ii) of this section, the determination of the excess under section 57(a) (3) is made with respect to each separate item of section 1245 property. Accordingly, where the amount of depreciation which would have been allowable with respect to one item of section 1245 property if the taxpayer had originally used the straight line mthod exceeds the allowable depreciation or amortization with respect to such property, such excess may not be used to reduce the amount of the item of tax preference resulting from another item of section 1245 property.

(2) Separate items of property. The determination of what constitutes a separate item of section 1245 property must be made on the facts and circumstances of each individual case. Such determination shall be made in a man otherwise allowable under section 167 is made as if the taxpayer had depreciated the property under section 167 for each year of its useful life for which the property has been held. This amount may be determined under § 1.167 (a)-11 (c) if the property is eligible property (as defined in § 1.167 (a)-11(b)(2)) and, during the taxable year in which the property was first placed in service, the taxpayer

ner consistent with the principles expressed in paragraph (b) (2) of this section.

(3) Allowable depreciation or amortization. The phrase "deduction allowable for the taxable year for exhaustion, wear and tear, obsolescence, or amortization" and references in this paragraph to "allowable depreciation or amortization" include deductions allowable for the taxable year under section 162, 167 (including depreciation allowable under section 167 by reason of section 179), 169, 184, 185, 212, or 611 for the depreciation or amortization of section 1245 property. Such phrase does not include depreciation allowable in the year in which the section 1245 property is disposed of. Amortization of certified pollution control facilities under section 169, and amortization of railroad rolling stock under section 184 are not to be treated as amortization for purposes of section 57(a) (3) to the extent such amounts are treated as an item of tax preference under section 57 (a) (4) or (5) (see paragraphs (d) and (e) of this section). For the determination of "allow

able depreciation or amortization" for taxable years in which the taxpayer has taken no deduction see § 1.1016-3 (a) (2).

(4) Straight line method of depreciation. The determination of the depreciation which would have been allowable under the straight line method shall be made in a manner consistent with paragraph (b) (4) of this section. Such amount shall include any amount allowable under section 167 by reason of section 179 (relating to additional first-year depreciation for small business).

(5) Application for partial period. If an item is section 1245 property for less than the entire taxable year or subject to a net lease for less than the entire taxable year the allowable de

preciation or amortization includes only the depreciation or amortization for that portion of the taxable year during which the item was both section 1245 property and subject to a net lease and the amount of the depreciation which would have been allowable under the straight line method is to be determined only with regard to such portion of the taxable year.

(6) Net lease. Section 57(a) (3) applies only if the section 1245 property is the subject of a net lease for all of part of the taxable year. See § 1.57-3 for the determination of when an item is considered the subject of a net lease.

(7) No section 1245 and basis adjustment. No adjustment is to be made as a result of the minimum tax either to the basis of section 1245 property or with respect to computations under

section 1245.

(8) Nonapplicability to corporations. Section 57 (a) (3) does not apply to a corporation other than an electing small business corporation (as defined in section 1371(b)) and a personal holding company (as defined in section 542).

(d) Amortization of certified pollution control facilities (1) In general. Section 57 (a) (4) provides that, with respect to each certified pollution control facility for which an election is in effect under section 169, there is to be included as an item of tax preference the amount by which the deduction allowable for the taxable year under such section exceeds the depreciation deduction which would otherwise be allowable under section 167. The determination under section 57 (a) (4) is made with respect to each separate certified pollution control facility. Accordingly, where the amount of the depreciation deduction which would otherwise be allowable under section 167 with respect to one facility exceeds the allowable amortization deduction under section 169 with respect to such facility, such excess may not be used to offset an item of tax preference resulting from another facility.

(2) Separate facilities. The determination of what constitutes a separate facility must be made on the facts and circumstances of each individual case. Generally, each facility with respect to which a separate election is in effect under section 169 shall be treated as

a separate facility for purposes of this paragraph. However, if the depreciation or amortization which would have been allowable without regard to section 169 with respect to any part of a facility is based on a different useful life, date placed in service, or method of depreciation or amortization from the other part or parts of such facility, such part is considered a separate facility for purposes of this paragraph. For example, if a building constitutes a certified pollution control facility and various component parts of the building have different useful lives, each group of component parts with the same useful life would be treated as a separate facility for purposes of this paragraph. Two or more facilities may be treated as one facility for purposes of this paragraph where, with respect to each such facility: (i) the initial amortization under section 169 commences on the same date, (ii) the facil

ity is placed in service on the same date, (iii) the estimated useful life which would be the basis for depreciation or amortization other than under section 169 has continually been the same, and (iv) the method of depreciation or amortization which could have been used without regard to section 169 could have continually been the

(a) Has made an election under § 1.167(a)-11(f) with respect to eligible property first placed in service in such taxable year, or

(b) Has placed no eligible property in service other than property described in § 1.167 (a)-11(b) (5) (iii), (iv), or (v). The amount determined pursuant to the preceding sentence shall be determined as if the taxpayer had depreciated the property in accordance with § 1.167 (a)-11 for all years to which such section applies and during which the taxpayer held the property. This amount may be determined under § 1.167 (a)-12(a) (5) if the property is qualified property (as defined in § 1.167 (a)-12(a) (3)) and the taxpayer has made an election with respect to such property under § 1.167(a)-12(e). If the taxpayer has made an election under § 1.167(a)-12(f) (1) for a taxable year ending before January 1, 1971, this amount shall be determined for such year in accordance with such election. For purposes of this determination, any method selected by the taxpayer which would have been permissible under section 167 for such taxable year, including accelerated methods, may be used. Any additional amount which would have been allowable by reason of section 179 (relating to additional first-year depreciation for small business) may be included provided such amount is reflected in the determination made under this paragraph in subsequent years.

(ii) If a deduction for depreciation has not been taken by the taxpayer in any taxable year under section 167 with respect to the facility

(a) There is to be used the useful life and salvage value which would have been proper under section 167,

(b) Such useful life and salvage value is determined by taking into account for each taxable year the same facts and circumstances as would have been taken into account if the taxpayer had used such method throughout the period the property has been held, and

(c) The date the property is placed in service is, for purposes of this section, deemed to be the first day of the first month for which the amortization deduction is taken with respect to the facility under section 169.

If, prior to the date amortization begins under section 169, a deduction for depreciation has been taken by the taxpayer in any taxable year under section 167 with respect to the facility, the useful life, salvage value, etc., used for that purpose is deemed to be the appropriate useful life, salvage value, etc., for purposes of this paragraph, with such adjustments as are appropriate in light of the facts and circum

stances which would have been taken into account since the time the last

such depreciation deduction was taken, unless it is established by clear and convincing evidence that some other useful life, salvage value, or date the property is placed in service is more appropriate.

(iii) For purposes of section 57(a) (4) and this paragraph, if the deduction for amortization or depreciation which would have been allowable had no election been made under section 169 would have been

(a) An amortization deduction based on the term of a leasehold or

(b) A depreciation deduction determined by reference to section 611, such deduction is to be deemed to be a deduction allowable under section 167.

(iv) If a facility is subject to amortization under section 169 for less than the entire taxable year, the otherwise allowable depreciation deduction under section 167 shall be determined

only with regard to that portion of the taxable year during which the election under section 169 is in effect.

(v) If less than the entire adjusted basis of a facility is subject to amortization under section 169, the otherwise allowable depreciation deduction under section 167 shall be determined only with regard to that portion of the adjusted basis subject to amortization under section 169.

(5) No section 1245 and basis adjustment. No adjustment is to be made as a result of the minimum tax either to the basis of a certified pollution control facility or with respect to computations under section 1245.

(6) Relationship of section 57 (a) (3). See paragraph (c) (3) with respect to an adjustment in the amount treated as amortization under that

provision where both paragraphs (3) and (4) of section 57 (a) are applicable to the same item of property.

(7) Example. The principles of this paragraph may be illustrated by the following example:

a

Example. A calendar year taxpayer has certified pollution control facility on which an election is in effect under section 169 commencing with January 1, 1971. No part of the facility is section 1250 property. The original basis of the facility is $100,000 of which $75,000 constitutes amortizable basis. The useful life of the facility is 20 years. The taxpayer depreciates the $25,000 portion of the facility which is not amortizable basis under the double declining method and began taking depreciation on January 1, 1971.

(a) The taxpayer's 1971 item of tax preference under this paragraph would be

(e) Amortization of railroad rolling stock (1) In general. Section 57 (a) (5) provides that, with respect to each unit of railroad rolling stock for which an election is in effect under section 184, there is to be included as an item of tax preference the amount by which the deduction allowable for the taxable year under such section exceeds the depreciation deduction which would otherwise be allowable under section 167. The determination under section 57(a) (5) is made with respect to each separate unit of rolling stock. Accordingly, where the amount of the depreciation deduction which would otherwise be allowable under section 167 with respect to one unit exceeds the allowable amortization deduction under section 184 with respect to such unit, such excess may not be used to offset an item of tax preference resulting from another unit.

(2) Separate units of rolling stock. The determination of what constitutes a separate unit of rolling stock must be made on the facts and circumstances of each individual case. Such determination shall be made in a manner consistent with the manner in which the comparable determination is made. with respect to separate certified pollution control facilities under paragraph (d)(2) of this section.

(3) Amount allowable under section 184. For purposes of the determination of the amount of the deduction allowable under section 184, see section 184. Such amount, however, does

not include amortization allowable in the year in which rolling stock is disposed of.

(4) Otherwise allowable deduction. The determination of the amount of the depreciation deduction otherwise alowable under section 167 is to be

made in a manner consistent with the manner in which the comparable deduction with respect to certified pollution control facilities is determined under paragraph (d) (4) of this section.

(5) No section 1245 or basis adjustment. No adjustment is to be made as a result of the minimum tax either to the basis of a unit of railroad rolling stock or with respect to computations under section 1245.

(6) Relationship to section 57(a) (3). See paragraph (c) (3) of this section with respect to an adjustment in

the amount treated as amortization under that provision where both paragraphs (3) and (5) of section 57(a) are applicable to the same item.

(f) Stock options-(1) In general. Section 57 (a) (6) provides that with respect to each transfer of a share of stock pursuant to the exercise of a qualified stock option or a restricted stock option, there shall be included by the transferee as an item of tax preference the amount by which the fair market value of the share at the time of exercise exceeds the option price. The stock option item of tax preference is subject to tax under section 56 (a) in the taxable year of the transferee in which the transfer is made.

(2) Definitions. See generally § 1.421-7(e), (f), and (g) for the definitions of "option price," "exercise," and "transfer," respectively; however, in the case of a transfer of a share of stock pursuant to the exercise of a qualified stock option or a restricted stock option after the death of an employee by the estate of the decedent (or by a person who acquired the right to exercise such option by bequest or inheritance or by reason of the death of the decedent), the term "option price" shall, for purposes of this paragraph, include both the consideration paid by the estate (or such person) for such

share of stock and so much of the basis of the option as is attributable to such share of stock. For the definition of a qualified stock option see section 422 (b) and § 1.422-2. For the definition

of a restricted stock option see section 424 (b) and § 1.424.2. The definitions and special rules contained in section 425 and the regulations thereunder are applicable to this paragraph.

(3) Fair market value. In accordance with the principles of section 83 (a)(1), the fair market value of a share of stock received pursuant to the exercise of a qualified or restricted stock option is to be determined without regard to restrictions (other than nonlapse restrictions within the meaning of § 1.83-3 (h)). Notwithstanding any valuation date given in section 83(a)(1), for purposes of this section fair market value is determined as of the date the option is exercised.

(4) Foreign source options. In the case of an option attributable to sources within any foreign country or possession, see section 58(g) and § 1.58-8.

(5) Inapplicability in certain cases. (i) Section 57 (a) (6) is inapplicable if during the same taxable year in which stock is transferred pursuant to the exercise of an option, the transferee makes a disposition (within the meaning of section 425 (c)) of such stock. In the case of a nonresident alien, section 57(a) (6) is inapplicable to the extent the stock option is attributable (in accordance with the principles of sections 861 through 863 and the regulations thereunder) to sources without the United States.

(ii) Section 57 (a) (6) is inapplicable if, section 421 (a) does not apply to the transfer because of employment requirements of section 422 (a) (2) or section 424 (a) (2).