# Prop. Treas. Reg. § 1.167(n)-2: Basis. Proposed regulation, not in force. REG-103823-99, 67 FR 38025, published 2002-05-31 . Interprets 26 U.S.C. § 167. Par. 2. Sections 1.167(n)-0 through 1.167(n)-7 are added to read as follows: (a) Depreciable basis —(1) In general. The basis upon which the allowance for depreciation is computed with respect to income forecast property is the basis of the income forecast property for purposes of section 1011 without regard to the adjustments described in section 1016(a)(2) and (3). (2) Timing of basis determinations and redeterminations. Costs paid or incurred in or after the taxable year in which the income forecast property is placed in service are taken into account in accordance with a taxpayer's method of accounting in redetermining the basis of income forecast property in the taxable year paid or incurred (i.e., when all events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability). See § 1.446-1(c)(1)(i) and (ii), 1.461-1(a)(1) and (2), and 1.263A-1(c). Accordingly, contingent payments may not be included in the basis of income forecast property when the property is placed in service, but are included in the basis of income forecast property in the taxable year in which they are paid or incurred, even if the forecasted total income used in the computation of income forecast depreciation allowances is sufficient to indicate that the contingency will be satisfied. (3) Separate property. Certain amounts paid or incurred in taxable years after income forecast property is placed in service are treated as separate property for purposes of computing depreciation allowances under the income forecast method. See § 1.167(n)-5(c). (b) Basis redeterminations. If an amount required to be capitalized into the basis of income forecast property is paid or incurred after the income forecast property is placed in service, and if the amount required to be capitalized is not treated as separate property in accordance with § 1.167(n)-5(c), the basis of the income forecast property is redetermined and the amount required to be capitalized is the basis redetermination amount. The redetermined basis of the income forecast property is the depreciable basis of the income forecast property increased by the basis redetermination amount. In the year basis is redetermined (and in subsequent taxable years), the redetermined basis must be used to determine depreciation under the income forecast method. An additional allowance for depreciation under the income forecast method is allowed in the taxable year the basis of certain income forecast property is redetermined. See § 1.167(n)-4(c). (c) Unrecovered depreciable basis. For any taxable year, the unrecovered depreciable basis of an income forecast property is the depreciable basis of the property less the adjustments described in section 1016(a)(2) and (3). (d) Example. The provisions of § 1.167(n)-2 are illustrated by the following example: (i) Studio contracts with Actor to star in a motion picture film to be produced by Studio. Both Studio and Actor are calendar year taxpayers; Studio is an accrual basis taxpayer and Actor is a cash basis taxpayer. As compensation for Actor's services, the contract guarantees Actor a payment of five percent of the gross income from the film, beginning after the film has earned a total gross income (net of distribution costs) of $100x. Studio estimates that the film will earn a total gross income of $160x by the end of the 10th taxable year following the taxable year that the film is placed in service. The film is placed in service and earns $65x of gross income in year one, $30x in year two, and $25x in year three. Because the income from the film does not exceed $100x in either year one or year two, Studio pays nothing under the contract to Actor in years one and two. In year three, the cumulative income from the film reaches $120x, which exceeds the $100x threshold by $20x. Based on this excess, Studio calculates that it owes Actor $1x, calculated by multiplying $20x by Actor 's contractual percentage of five percent. Studio pays $1x to Actor 20 days after the end of year three. (ii) Studio may not include the $1x paid to Actor in the basis of the film in years one or two because Studio does not have a fixed liability to pay Actor any amount under the contract in years one and two. Furthermore, while Studio does have a fixed liability to pay Actor $1x in year three, the requirements of section 404 are not met in year three and Studio thus may not include the $1x in the basis of the film in year three. In year four, when section 404 is satisfied, Studio incurs the $1x in accordance with § 1.263A-1(c) and increases its basis in the film. The $1x is treated as a basis redetermination amount under § 1.167(n)-2(b) in year four.