Par. 2. Sections 1.167(n)-0 through 1.167(n)-7 are added to read as follows:
(a) Computation of depreciation allowance. Generally, the depreciation allowance for an income forecast property for a given taxable year is computed by multiplying the depreciable or redetermined basis of the property (as defined in § 1.167(n)-2) by a fraction, the numerator of which is current year income (as defined in § 1.167(n)-3(a)) and the denominator of which is forecasted total income (as defined in § 1.167(n)-3(b)).
(b) Revised computation —(1) Change in estimated income. The depreciation allowance for an income forecast property for any taxable year following the year in which income forecast property is placed in service may be computed using the computation provided in this paragraph (b)(1) if revised forecasted total income differs from forecasted total income. Thus, for example, a taxpayer using the income forecast method for a motion picture may revise upward the forecast of total income from the motion picture (to arrive at revised forecasted total income) in a taxable year wherein the taxpayer discovers that the motion picture is more popular than originally expected, and may thereafter use the revised computation to compute the allowance for income forecast depreciation for the motion picture. Under the revised computation, the unrecovered depreciable basis of the income forecast property (as defined in § 1.167(n)-2(c)) is multiplied by a fraction, the numerator of which is current year income and the denominator of which is obtained by subtracting from revised forecasted total income the amounts of current year income from prior taxable years.
(2) Requirement to use the revised computation. The revised computation described in paragraph (b)(1) of this section must be used in any taxable year following the year in which income forecast property is placed in service if forecasted total income (as defined in § 1.167(n)-3(b)) (or, if applicable, revised forecasted total income (as defined in § 1.167(n)-3(c)) in the immediately preceding taxable year is either—
(i) Less than 90 percent of revised forecasted total income for the taxable year; or
(ii) Greater than 110 percent of revised forecasted total income for the taxable year.
(c) Basis redeterminations —(1) Calculation of depreciation allowance. An additional depreciation allowance is available under this paragraph in the taxable year that basis is redetermined under § 1.167(n)-2(b) when that taxable year is subsequent to the taxable year in which income forecast property is placed in service, but prior to the 10th taxable year following the taxable year in which the property is placed in service. The additional depreciation allowance is that portion of the basis redetermination amount that would have been recovered through depreciation allowances in prior taxable years if the basis redetermination amount had been included in depreciable basis in the taxable year that the property was placed in service. This § 1.167(n)-4(c) does not apply to property treated as a single income forecast property pursuant to § 1.167(n)-5(d)(1) through (4).
(2) Example. The provisions of paragraph (c)(1) of this section are illustrated by the following example:
Example.
D , an accrual basis movie producer, enters into a contract with E , an author, under which D will make a film based on E 's book. E performs no services for D , but merely permits D to use the book as a basis for D 's film. D pays E a fixed dollar amount upon entry into the agreement and promises to pay E a contingent payment of five percent of D 's income from the film, beginning after the film has earned $100,000 (net of distribution costs). D estimates that forecasted total income from the film will be $200,000. The film earns $65,000 of current year income in year one, $30,000 in year two, and $25,000 in year three. D takes allowances for depreciation in year one ($65,000 divided by $200,000, multiplied by the basis of the film) and year two ($30,000 divided by $200,000, multiplied by the basis of the film). In year three, D 's liability to E becomes fixed and D pays E $1,000. The $1,000 incurred by D is a basis redetermination amount that increases the basis of the film for purposes of computing D 's depreciation allowance for the film for year three. In addition to the year three allowance based on current year income ($25,000 divided by $200,000 multiplied by the basis of the film, which includes for year three the $1,000 basis redetermination amount), D is entitled to an additional allowance for depreciation for year three under paragraph (c)(1). This additional allowance is $475, the sum of the allowance of $325 that would have been allowed in year one ($65,000 divided by $200,000, multiplied by the $1,000 payment to E ) and the allowance of $150 that would have been allowed in year two ($30,000 divided by $200,000, multiplied by $1,000) if the $1,000 had been included in basis in the year that the film was placed in service.
(d) Special rules —(1) Final year depreciation. Except as provided in paragraphs (d)(2) and (3) of this section, a taxpayer may deduct as a depreciation allowance the remaining depreciable basis of income forecast property depreciated under the income forecast method in the earlier of—
(i) The year in which the taxpayer reasonably believes, based on the conditions known to exist at the end of the taxable year, that no income from the income forecast property will be included in current year income in any subsequent taxable year up to and including the 10th taxable year following the taxable year the income forecast property is placed in service; or
(ii) The 10th taxable year following the taxable year the income forecast property is placed in service.
(2) Certain basis redeterminations. A taxpayer may deduct as a depreciation allowance the amount of any basis redetermination that occurs in a taxable year in which the taxpayer reasonably believes, based on the conditions known to exist at the end of the taxable year, that no income from the income forecast property will be included in current year income in any subsequent taxable year. In addition, a taxpayer may deduct as a depreciation allowance the amount of any basis redetermination that occurs in a taxable year following a taxable year in which a deduction is allowable under paragraph (d)(1) of this section.
(3) Disposition of property. Paragraph (d)(1) of this section does not apply to income forecast property that is sold or otherwise disposed of before the end of the 10th taxable year following the taxable year that the property is placed in service. In the case of such a disposition, the allowance for depreciation in the year of disposition is calculated by multiplying the depreciable basis (or, if applicable, the redetermined basis) of the property by a fraction, the numerator of which is current year income and the denominator of which is the sum of the amount realized on the disposition of the property plus all amounts included in current year income in the year of disposition and in taxable years prior to the year of disposition.
(4) Separate property. The deductions provided in paragraphs (d)(1) and (2) of this section apply separately to property that is treated as separate property under § 1.167(n)-5(c).
(e) Examples. The provisions of this section are illustrated by the following examples:
Example 1.
F places in service income forecast property with a depreciable basis of $100x, and estimates that forecasted total income from the property will be $200x. In taxable year one, current year income is $80x. The depreciation allowance for year one is $40x, computed by multiplying the depreciable basis of the property of $100x by the fraction obtained by dividing current year income of $80x by forecasted total income of $200x.
Example 2.
Assume the same facts as in Example 1. In year two, F 's current year income is $40x. In addition, F computes revised forecasted total income to be $176x. F is required to compute its depreciation allowance for this property using the revised computation of paragraph (b)(1) of this section because forecasted total income in year one of $200x is greater than 110 percent of revised forecasted total income in year two (110 percent of $176x = $193.6x). The depreciation allowance for taxable year two computed under the revised computation is $25x, computed by multiplying the unrecovered depreciable basis of $60x by the fraction obtained by dividing current year income of $40x by $96x (revised forecasted total income of $176x less current year income from prior taxable years of $80x).
Example 3.
Assume the same facts as in Example 2. Because F used the revised computation in year two, the revised computation applies in year three. In year three, F 's current year income is $32x. The depreciation allowance for year three computed under the revised computation is $20x, computed by multiplying the unrecovered depreciable basis of $60x by the fraction obtained by dividing current year income of $32x by $96x (revised forecasted total income of $176x less current year income from taxable years prior to the change in estimate taxable year of $80x).