Temporary and Proposed Regs Provide Rules for Making OBRA '93 Intangibles Elections

 ACTION: Temporary regulations.

 SUMMARY: This document contains temporary regulations relating to the procedures for making elections under the intangibles provisions of the Omnibus Budget Reconciliation Act of 1993 (OBRA '93). The regulations affect electing taxpayers that acquired intangible property after July 25, 1991, or acquired intangibles under a written, binding contract that was in effect on August 10, 1993. The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.

 EFFECTIVE DATE: These regulations are effective March 15, 1994.

 FOR FURTHER INFORMATION CONTACT: John Huffman, (202) 622-3110 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

 These regulations are being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information contained in these regulations has been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget under control number 1545-1425. The estimated annual burden per respondent varies from 30 minutes to 75 minutes, depending on individual circumstances, with an estimated average of 1 hour.

 For further information concerning this collection of information, and where to submit comments on this collection of information, the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross- referencing notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register.

BACKGROUND

 This document contains amendments to the Income Tax Regulations (26 CFR part 1) under sections 197 and 167(f). The amendments reflect changes made by section 13261 of OBRA '93.

EXPLANATION OF PROVISIONS

 Section 13261 of OBRA '93 contains provisions affecting the tax treatment of intangible property acquired after August 10, 1993 (the date of enactment of OBRA '93). The temporary regulations provide guidance on how to make the section 13261(g)(2) election to apply the intangibles provisions of OBRA '93 to property acquired after July 25, 1991, and on or before August 10, 1993 (retroactive election). Once made, the election applies to all property acquired during this period by the taxpayer or a taxpayer under common control with the electing taxpayer. Common control exists if the two taxpayers are treated as a single taxpayer under section 41(f)(1)(A) or (B) at any time after August 2, 1993, and on or before the election date as defined under these regulations.

 If a corporation is a former member of a consolidated group and the common parent of that group makes the retroactive election, the intangibles provisions of OBRA '93 will apply to property that was acquired by the former member after July 25, 1991, while it was a member of the consolidated group.

 The regulations provide special rules for partnerships for which a section 754 election was in effect. In these situations, a partner that obtains an increased basis in intangibles held through the partnership as a result of either section 734(b) or 743(b) will be treated as if the increased basis were attributable to the partner's acquisition of a new intangible asset on the date of the transaction that results in the basis increase.

 The regulations also provide guidance on how a taxpayer may make the section 13261(g)(3) election to apply prior law to intangibles acquired after August 10, 1993, pursuant to a written binding contract in effect on August 10, 1993, and at all times thereafter before the acquisition (binding contract election). Only taxpayers that have not elected the retroactive election may make the binding contract election.

 The elections provided for in these regulations generally must be made on the taxpayer's timely filed (including extensions) income tax return for the taxable year that includes August 10, 1993. Transition rules are provided, however for taxpayers that have filed tax returns for the taxable year that includes August 10, 1993, prior to April 14, 1994. The taxpayer must make the desired election by following the election requirements under the regulations. An attempted election made other than at the time and in the manner prescribed by the regulations is not valid.

 Taxpayers making the retroactive election must conform all affected prior years' returns to reflect the application of the intangibles provisions of OBRA '93.

 The regulations also provide special rules for transfers of intangibles in certain tax-free transactions. Under these rules, a transferee is bound by a transferor's retroactive election with respect to any transferred intangibles. In cases where the transferor does not make the retroactive election, the transferee may make the election. In these cases, the transferor is not required to apply the intangibles provisions of OBRA '93 to the transferred intangibles (unless those provisions are otherwise applicable), and the transferee must take into account an adjustment with respect to the transferred intangibles on account of any interim period during which the intangibles provisions of OBRA '93 did not apply to the transferred intangibles. The adjustment, which is taken into account in the taxable year of the acquisition, is equal to the difference, as of the date of the transfer, between the sum of the depreciation, amortization, or other cost recovery deductions that would have been permitted for the transferred intangibles had the intangibles provisions of OBRA '93 applied to the property during the interim period, and the sum of the depreciation, amortization, or other cost recovery deductions claimed with respect to the intangibles during the interim period. The transferee must also make any corresponding basis adjustments to the transferred intangibles.

 Principles and adjustments similar to those described in the preceding paragraph (in the case of a retroactive election by the transferee where no election is made by the transferor) are also applied in certain circumstances with respect to an electing former member of a non-electing consolidated group.

 Finally, in order for the retroactive or binding contract elections to be valid, the regulations prescribe certain notice requirements and require that certain information be included in a written election statement filed with the election year return and any affected amended returns.

SPECIAL ANALYSES

 It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is John Huffman, Office of Assistant Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

LIST OF SUBJECTS

26 CFR Part 1

 Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

 Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART I -- INCOME TAXES

Paragraph 1. The authority citation for part I is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.197-1T also issued under 26 U.S.C. 197(g).

Par. 2. Section 1.167(a)-13T is added to read as follows:

SECTION 1.167(a)-13T CERTAIN ELECTIONS FOR INTANGIBLE PROPERTY (TEMPORARY).

For rules applying the elections under section 13261(g)(2) and (3) of the Omnibus Budget Reconciliation Act of 1993 to intangible property described in section 167(f), see section 1.197-1T.

Par. 3. Section 1.197-1T is added under the heading "Itemized Deductions for Individuals and Corporations" to read as follows:

SECTION 1.197-1T CERTAIN ELECTIONS FOR INTANGIBLE PROPERTY (TEMPORARY).

(a) IN GENERAL. This section provides rules for making the two elections under section 13261 of the Omnibus Budget Reconciliation Act of 1993 (OBRA '93). Paragraph (c) of this section provides rules for making the section 13261(g)(2) election (the retroactive election) to apply the intangibles provisions of OBRA '93 to property acquired after July 25, 1991, and on or before August 10, 1993 (the date of enactment of OBRA '93). Paragraph (d) of this section provides rules for making the section 13261(g)(3) election (binding contract election) to apply prior law to property acquired pursuant to a written binding contract in effect on August 10, 1993, and at all times thereafter before the date of acquisition. The provisions of this section apply only to property for which an election is made under paragraph (c) or (d) of this section.

(b) DEFINITIONS AND SPECIAL RULES -- (1) INTANGIBLES PROVISIONS OF OBRA '93. The intangibles provisions of OBRA '93 are sections 167(f) and 197 of the Internal Revenue Code (Code) and all other pertinent provisions of section 13261 of OBRA '93 (e.g., the amendment of section 1253 in the case of a franchise, trademark, or trade name).

(2) TRANSITION PERIOD PROPERTY. The transition period property of a taxpayer is any property that was acquired by the taxpayer after July 25, 1991, and on or before August 10, 1993.

(3) ELIGIBLE SECTION 197 INTANGIBLES. The eligible section 197 intangibles of a taxpayer are any section 197 intangibles that --

(i) Are transition period property; and

(ii) Qualify as amortizable section 197 intangibles (within the meaning of section 197(c)) if an election under section 13261 (g)(2) of OBRA '93 applies.

(4) ELECTION DATE. The election date is the date (determined after application of section 7502(a)) on which the taxpayer files the original or amended return to which the election statement described in paragraph (e) of this section is attached.

(5) ELECTION YEAR. The election year is the taxable year of the taxpayer that includes August 10, 1993.

(6) COMMON CONTROL. A taxpayer is under common control with the electing taxpayer if, at any time after August 2, 1993, and on or before the election date (as defined in paragraph (b)(4) of this section), the two taxpayers would be treated as a single taxpayer under section 41(f)(1)(A) or (B).

(7) APPLICABLE CONVENTION FOR SECTIONS 197 AND 167(F] INTANGIBLES. For purposes of computing the depreciation or amortization deduction allowable with respect to transition period property described in section 167(f)(1) or (3) or with respect to eligible section 197 intangibles --

(i) Property acquired at any time during the month is treated as acquired as of the first day of the month and is eligible for depreciation or amortization during the month; and

(ii) Property is not eligible for depreciation or amortization in the month of disposition.

(8) APPLICATION TO ADJUSTMENT TO BASIS OF PARTNERSHIP PROPERTY UNDER SECTION 734(b) OR 743(b). Any increase in the basis of partnership property under section 734(b) (relating to the optional adjustment to basis of undistributed partnership property) or section 743(b) (relating to the optional adjustment to the basis of partnership property) will be taken into account under this section by a partner as if the increased portion of the basis were attributable to the partner's acquisition of the underlying partnership property on the date the distribution or transfer occurs. For example, if a section 754 election is in effect and, as a result of its acquisition of a partnership interest, a taxpayer obtains an increased basis in an intangible held through the partnership, the increased portion of the basis in the intangible will be treated as an intangible asset newly acquired by that taxpayer on the date of the transaction.

(9) FORMER MEMBER. A former member of a consolidated group is a corporation that was a member of the consolidated group at any time after July 25, 1991, and on or before August 2, 1993, but that is not under common control with the common parent of the group for purposes of paragraph (c)(1)(ii) of this section.

(c) RETROACTIVE ELECTION -- (1) EFFECT OF ELECTION -- (i) ON TAXPAYER. Except as provided in paragraph (c)(1)(v) of this section, if a taxpayer makes the retroactive election, the intangibles provisions of OBRA '93 will apply to all the taxpayer's transition period property. Thus, for example, section 197 will apply to all the taxpayer's eligible section 197 intangibles.

(ii) ON TAXPAYERS UNDER COMMON CONTROL. If a taxpayer makes the retroactive election, the election applies to each taxpayer that is under common control with the electing taxpayer. If the retroactive election applies to a taxpayer under common control, the intangibles provisions of OBRA '93 apply to that taxpayer's transition period property in the same manner as if that taxpayer had itself made the retroactive election. However, a retroactive election that applies to a non-electing taxpayer under common control is not treated as an election by that taxpayer for purposes of re-applying the rule of this paragraph (c)(1)(ii) to any other taxpayer.

(iii) ON FORMER MEMBERS OF CONSOLIDATED GROUP. A retroactive election by the common parent of a consolidated group applies to transition period property acquired by a former member while it was a member of the consolidated group and continues to apply to that property in each subsequent consolidated or separate return year of the former member.

(iv) ON TRANSFERRED ASSETS -- (A) IN GENERAL. If property is transferred in a transaction described in paragraph (c)(1)(iv)(C) of this section and the intangibles provisions of OBRA '93 applied to such property in the hands of the transferor, the property remains subject to the intangibles provisions of OBRA '93 with respect to so much of its adjusted basis in the hands of the transferee as does not exceed its adjusted basis in the hands of the transferor. The transferee is not required to apply the intangibles provisions of OBRA '93 to any other transition period property that it owns, however, unless such provisions are otherwise applicable under the rules of this paragraph (c)(1).

(B) TRANSFEREE ELECTION. If property is transferred in a transaction described in paragraph (c)(1)(iv)(C)(1) of this section and the transferee makes the retroactive election, the transferor is not required to apply the intangibles provisions of OBRA '93 to any of its transition period property (including the property transferred to the transferee in the transaction described in paragraph (c)(1)(iv)(C)(1) of this section), unless such provisions are otherwise applicable under the rules of this paragraph (c)(l).

(C) TRANSACTIONS COVERED. This paragraph (c)(1)(iv) applies to --

(1) Any transaction described in section 332, 351, 361, 721, 731, 1031, or 1033; and

(2) Any transaction between corporations that are members of the same consolidated group immediately after the transaction.

(D) EXCHANGED BASIS PROPERTY. In the case of a transaction involving exchanged basis property (e.g., a transaction subject to section 1031 or 1033) --

(1) Paragraph (c)(1)(iv)(A) of this section shall not apply; and

(2) If the intangibles provisions of OBRA '93 applied to the property by reference to which the exchanged basis is determined (the predecessor property), the exchanged basis property becomes subject to the intangibles provisions of OBRA '93 with respect to so much of its basis as does not exceed the predecessor property's basis.

(E) ACQUISITION DATE. For purposes of paragraph (b)(2) of this section (definition of transition period property), property (other than exchanged basis property) acquired in a transaction described in paragraph (c)(1)(iv)(C)(1) of this section generally is treated as acquired when the transferor acquired (or was treated as acquiring) the property (or predecessor property). However, if the adjusted basis of the property in the hands of the transferee exceeds the adjusted basis of the property in the hands of the transferor, the property, with respect to that excess basis, is treated as acquired at the time of the transfer. The time at which exchanged basis property is considered acquired is determined by applying similar principles to the transferee's acquisition of predecessor property.

(v) SPECIAL RULE FOR PROPERTY OF FORMER MEMBER OF CONSOLIDATED GROUP -- (A) INTANGIBLES PROVISIONS INAPPLICABLE FOR CERTAIN PERIODS. If a former member of a consolidated group makes a retroactive election pursuant to paragraph (c)(1)(i) of this section or if an election applies to the former member under the common control rule of paragraph (c)(1)(ii) of this section, the intangibles provisions of OBRA '93 generally apply to all transition period property of the former member. The intangibles provisions of OBRA '93 do not apply, however, to the transition period property of a former member (including a former member that makes or is bound by a retroactive election) during the period beginning immediately after July 25, 1991, and ending immediately before the earlier of --

(1) The first day after July 25, 1991, that the former member was not a member of a consolidated group; or

(2) The first day after July 25, 1991, that the former member was a member of a consolidated group that is otherwise required to apply the intangibles provisions of OBRA '93 to its transition period property (e.g., because the common control election under paragraph (c)(1)(ii) of this section applies to the group).

(B) SUBSEQUENT ADJUSTMENTS. See paragraph (c)(5) of this section for adjustments when the intangibles provisions of OBRA '93 first apply to the transition period property of the former member after the property is acquired.

(2) MAKING THE ELECTION -- (i) PARTNERSHIPS, S CORPORATIONS, ESTATES, AND TRUSTS. Except as provided in paragraph (c)(2)(ii) of this section, in the case of transition period property of a partnership, S corporation, estate, or trust, only the entity may make the retroactive election for purposes of paragraph (c)(1)(i) of this section.

(ii) PARTNERSHIPS FOR WHICH A SECTION 754 ELECTION IS IN EFFECT. In the case of increased basis that is treated as transition period property of a partner under paragraph (b)(8) of this section, only that partner may make the retroactive election for purposes of paragraph (c)(1)(i) of this section.

(iii) CONSOLIDATED GROUPS. An election by the common parent of a consolidated group applies to members and former members as described in paragraphs (c)(1)(ii) and (iii) of this section. Further, for purposes of paragraph (c)(1)(ii) of this section, an election by the common parent is not treated as an election by any subsidiary member. A retroactive election cannot be made by a corporation that is a subsidiary member of a consolidated group on August 10, 1993, but an election can be made on behalf of the subsidiary member under paragraph (c)(1)(ii) of this section (e.g., by the common parent of the group). See paragraph (c)(1)(iii) of this section for rules concerning the effect of the common parent's election on transition period property of a former member.

(3) TIME AND MANNER OF ELECTION -- (i) TIME. In general, the retroactive election must be made by the due date (including extensions of time) of the electing taxpayer's Federal income tax return for the election year. If, however, the taxpayer's original Federal income tax return for the election year is filed before [INSERT THE DATE THAT IS 30 DAYS AFTER PUBLICATION OF THESE REGULATIONS IN THE FEDERAL REGISTER], the election may be made by amending that return no later than [INSERT THE DATE THAT IS 180 DAYS AFTER PUBLICATION OF THESE REGULATIONS IN THE FEDERAL REGISTER].

(ii) MANNER. The retroactive election is made by attaching the election statement described in paragraph (e) of this section to the taxpayer's original or amended income tax return for the election year. In addition, the taxpayer must --

(A) Amend any previously filed return when required to do so under paragraph (c)(4) of this section; and

(B) Satisfy the notification requirements of paragraph (c)(6) of this section.

(iii) EFFECT OF NONCONFORMING ELECTIONS. An attempted election that does not satisfy the requirements of this paragraph (c)(3) (including an attempted election made on a return for a taxable year prior to the election year) is not valid.

(4) AMENDED RETURN REQUIREMENTS -- (i) REQUIREMENTS. A taxpayer subject to this paragraph (c)(4) must amend all previously filed income tax returns as necessary to conform the taxpayer's treatment of transition period property to the treatment required under the intangibles provisions of OBRA '93. See paragraph (c)(5) of this section for certain adjustments that may be required on the amended returns required under this paragraph (c)(4) in the case of certain consolidated group member dispositions and tax-free transactions.

(ii) APPLICABILITY. This paragraph (c)(4) applies to a taxpayer if --

(A) The taxpayer makes the retroactive election; or

(B) Another person's retroactive election applies to the taxpayer or to any property acquired by the taxpayer.

(5) ADJUSTMENT REQUIRED WITH RESPECT TO CERTAIN CONSOLIDATED GROUP MEMBER DISPOSITIONS AND TAX-FREE TRANSACTIONS -- (i) APPLICATION. This paragraph (c)(5) applies to transition period property if the intangibles provisions of OBRA '93 first apply to the property while it is held by the taxpayer but do not apply to the property for some period (the "interim period") after the property is acquired (or considered acquired) by the taxpayer. For example, this paragraph (c)(5) may apply to transition period property held by a former member of a consolidated group if a retroactive election is made by or on behalf of the former member but is not made by the consolidated group. See paragraph (c)(1)(v) of this section.

(ii) REQUIRED ADJUSTMENT TO INCOME. If this paragraph (c)(5) applies, an adjustment must be taken into account in computing taxable income of the taxpayer for the taxable year in which the intangibles provisions of OBRA '93 first apply to the property. The amount of the adjustment is equal to the difference for the transition period property between --

(A) The sum of the depreciation, amortization, or other cost recovery deductions that the taxpayer (and its predecessors) would have been permitted if the intangibles provisions of OBRA '93 applied to the property during the interim period; and

(B) The sum of the depreciation, amortization, or other cost recovery deductions that the taxpayer (and its predecessors) claimed during that interim period.

(iii) REQUIRED ADJUSTMENT TO BASIS. The taxpayer also must make a corresponding adjustment to the basis of its transition period property to reflect any adjustment to taxable income with respect to the property under this paragraph (c)(5).

(6) NOTIFICATION REQUIREMENTS -- (i) NOTIFICATION OF COMMONLY CONTROLLED TAXPAYERS. A taxpayer that makes the retroactive election must provide written notification of the retroactive election (on or before the election date) to each taxpayer that is under common control with the electing taxpayer.

(ii) NOTIFICATION OF CERTAIN FORMER MEMBERS, FORMER CONSOLIDATED GROUPS, AND TRANSFEREES. This paragraph (c)(6)(ii) applies to a common parent of a consolidated group that makes or is notified of a retroactive election that applies to transition period property of a former member, a corporation that makes or is notified of a retroactive election that affects any consolidated group of which the corporation is a former member, or a taxpayer that makes or is notified of a retroactive election that applies to transition period property the taxpayer transfers in a transaction described in paragraph (c)(1)(iv)(C) of this section. Such common parent, former member, or transferor must provide written notification of the retroactive election to any affected former member, consolidated group, or transferee. The written notification must be provided on or before the election date in the case of an election by the common parent, former member, or transferor, and within 30 days of the election date in the case of an election by a person other than the common parent, former member, or transferor.

(7) REVOCATION. Once made, the retroactive election may be revoked only with the consent of the Commissioner.

(8) EXAMPLES. The following examples illustrate the application of this paragraph (c).

EXAMPLE 1. (i) X is a partnership with 5 equal partners, A through E. X acquires in 1989, as its sole asset, intangible asset M. X has a section 754 election in effect for all relevant years. F, an unrelated individual, purchases A's entire interest in the X partnership in January 1993 for $700. At the time of F's purchase, X's inside basis for M is $2,000, and its fair market value is $3,500.

(ii) Under section 743(b), X makes an adjustment to increase F's basis in asset M by $300, the difference between the allocated purchase price and M's inside basis ($700 - $400 - $300). Under paragraphs (b)(8) and (c)(2)(ii) of this section, if F makes the retroactive election, the section 743(b) basis increase of $300 in M is an amortizable section 197 intangible even though asset M is not an amortizable section 197 intangible in the hands of X. F's increase in the basis of asset M is amortizable over 15 years beginning with the month of F's acquisition of the partnership interest. With respect to the remaining $400 of basis, F is treated as stepping into A's shoes and continues A's amortization (if any) in asset M. F's retroactive election applies to all other intangibles acquired by F or a taxpayer under common control with F.

EXAMPLE 2. A, a calendar year taxpayer, is under common control with B, a June 30 fiscal year taxpayer. A files its original election year Federal income tax return on March 15, 1994, and does not make either the retroactive election or the binding contract election. B files its election year tax return on September 15, 1994, and makes the retroactive election. B is required by paragraph (c)(6)(i) of this section to notify A of its election. Even though A had already filed its election year return, A is bound by B's retroactive election under the common control rules. Additionally, if A had made a binding contract election, it would have been negated by B's retroactive election. Because of B's retroactive election, A must comply with the requirements of this paragraph (c), and file amended returns for the election year and any affected prior years as necessary to conform the treatment of transition period property to the treatment required under the intangibles provisions of OBRA '93.

EXAMPLE 3. (i) P and Y, calendar year taxpayers, are the common parents of unrelated calendar year consolidated groups. On August 15, 1991, S, a subsidiary member of the P group, acquires a section 197 intangible with an unadjusted basis of $180. Under prior law, no amortization or depreciation was allowed with respect to the acquired intangible. On November 1, 1992, a member of the Y group acquires the S stock in a taxable transaction. On the P group's 1993 consolidated return, P makes the retroactive election. The P group also files amended returns for its affected prior years. Y does not make the retroactive election for the Y group.

(ii) Under paragraph (c)(1)(iii) of this section, a retroactive election by the common parent of a consolidated group applies to all transition period property acquired by a former member while it was a member of the group. The section 197 intangible acquired by S is transition period property that S, a former member of the P group, acquired while a member of the P group. Thus P's election applies to the acquired asset. P must notify S of the election pursuant to paragraph (c)(6)(ii) of this section.

(iii) S amortizes the unadjusted basis of its eligible section 197 intangible ($180) over the 15-year amortization period using the applicable convention beginning as of the first day of the month of acquisition (August 1, 1991). Thus, the P group amends its 1991 consolidated tax return to take into account $5 of amortization ($180/15 years x 5/12 year = $5) for S.

(iv) For 1992, S is entitled to $12 of amortization ($180/15). Assume that under section 1.1502-76, $10 of S's amortization for 1992 is allocated to the P group's consolidated return and $2 is allocated to the Y group's return. The P group amends its 1992 consolidated tax return to reflect the $10 deduction for S. The Y group must amend its 1992 return to reflect the $2 deduction for S.

EXAMPLE 4. (i) The facts are the same as in Example 3, except that the retroactive election is made for the Y group, not for the P group.

(ii) The Y group amends its 1992 consolidated return to claim a section 197 deduction of $2 ($180/15 years x 2/12 year = $2) for S.

(iii) Under paragraph (c)(1)(ii) of this section, the retroactive election by Y applies to all transition period property acquired by S. However, under paragraph (c)(1)(v)(A) of this section, the intangibles provisions of OBRA '93 do not apply to S's transition period property during the period when it held such property as a member of P group. Instead, these provisions become applicable to S's transition period property beginning on November 1, 1992, when S becomes a member of Y group.

(iv) Because the P group did not make the retroactive election, there is an interim period during which the intangibles provisions of OBRA '93 do not apply to the asset acquired by S. Thus, under paragraph (c)(5) of this section the Y group must take into account in computing taxable income in 1992 an adjustment equal to the difference between the section 197 deduction that would have been permitted if the intangibles provisions of OBRA '93 applied to the property for the interim period (i.e., the period for which S was included in the P group's 1991 and 1992 consolidated returns) and any amortization or depreciation deductions claimed by S for the transferred intangible for that period. The retroactive election does not affect the P group, and the P group is not required to amend its returns.

EXAMPLE 5. The facts are the same as in Example 3, except that both P and Y make the retroactive election. P must notify S of its election pursuant to paragraph (c)(6)(ii) of this section. Further, both the P and Y groups must file amended returns for affected prior years. Because there is no period of time during which the intangibles provisions of OBRA '93 do not apply to the asset acquired by S, the Y group is permitted no adjustment under paragraph (c)(5) of this section for the asset.

(d) BINDING CONTRACT ELECTION -- (1) GENERAL RULE -- (i) EFFECT OF ELECTION. If a taxpayer acquires property pursuant to a written binding contract in effect on August 10, 1993, and at all times thereafter before the acquisition (an eligible acquisition) and makes the binding contract election with respect to the contract, the law in effect prior to the enactment of OBRA '93 will apply to all property acquired pursuant to the contract. A separate binding contract election must be made with respect to each eligible acquisition to which the law in effect prior to the enactment of OBRA '93 is to apply.

(ii) TAXPAYERS SUBJECT TO RETROACTIVE ELECTION. A taxpayer may not make the binding contract election if the taxpayer or a person under common control with the taxpayer makes the retroactive election under paragraph (c) of this section.

(iii) REVOCATION. A binding contract election, once made, may be revoked only with the consent of the Commissioner.

(2) TIME AND MANNER OF ELECTION -- (i) TIME. In general, the binding contract election must be made by the due date (including extensions of time) of the electing taxpayer's Federal income tax return for the election year. If, however, the taxpayer's original Federal income tax return for the election year is filed before [INSERT THE DATE THAT IS 30 DAYS AFTER PUBLICATION OF THESE REGULATIONS IN THE FEDERAL REGISTER], the election may be made by amending that return no later than [INSERT THE DATE THAT IS 180 DAYS AFTER PUBLICATION OF THESE REGULATIONS IN THE FEDERAL REGISTER].

(ii) MANNER. The binding contract election is made by attaching the election statement described in paragraph (e) of this section to the taxpayer's original or amended income tax return for the election year.

(iii) EFFECT OF NONCONFORMING ELECTION. An attempted election that does not satisfy the requirements of this paragraph (d)(2) is not valid.

(e) ELECTION STATEMENT -- (1) FILING REQUIREMENTS. For an election under paragraph (c) or (d) of this section to be valid, the electing taxpayer must:

(i) File (with its Federal income tax return for the election year and with any affected amended returns required under paragraph (c)(4) of this section) a written election statement, as an attachment to Form 4562 (Depreciation and Amortization), that satisfies the requirements of paragraph (e)(2) of this section; and

(ii) Forward a copy of the election statement to the Statistics Branch (QAM:S:6111), IRS Ogden Service Center, ATTN: Chief, Statistics Branch, P.O. Box 9941, Ogden, UT 84409.

(2) CONTENT OF THE ELECTION STATEMENT. The written election statement must include the information in paragraphs (e)(2)(i) through (vi) and (ix) of this section in the case of a retroactive election, and the information in paragraphs (e)(2)(i) and (vii) through (ix) of this section in the case of a binding contract election. The required information should be arranged and identified in accordance with the following order and numbering system --

(i) The name, address and taxpayer identification number (TIN) of the electing taxpayer (and the common parent if a consolidated return is filed).

(ii) A statement that the taxpayer is making the retroactive election.

(iii) Identification of the transition period property affected by the retroactive election, the name and TIN of the person from which the property was acquired, the manner and date of acquisition, the basis at which the property was acquired, and the amount of depreciation, amortization, or other cost recovery under section 167 or any other provision of the Code claimed with respect to the property.

(iv) Identification of each taxpayer under common control (as defined in paragraph (b)(6) of this section) with the electing taxpayer by name, TIN, and Internal Revenue Service Center where the taxpayer's income tax return is filed.

(v) If any persons are required to be notified of the retroactive election under paragraph (c)(6) of this section, identification of such persons and certification that written notification of the election has been provided to such persons.

(vi) A statement that the transition period property being amortized under section 197 is not subject to the anti-churning rules of section 197(f)(9).

(vii) A statement that the taxpayer is making the binding contract election.

(viii) Identification of the property affected by the binding contract election, the name and TIN of the person from which the property was acquired, the manner and date of acquisition, the basis at which the property was acquired, and whether any of the property is subject to depreciation under section 167 or to amortization or other cost recovery under any other provision of the Code.

(ix) The signature of the taxpayer or an individual authorized to sign the taxpayer's Federal income tax return.

(f) EFFECTIVE DATE. These regulations are effective [INSERT THE DATE OF PUBLICATION OF THESE TEMPORARY REGULATIONS IN THE FEDERAL REGISTER].

PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

SECTION 602.101(c) [Amended]

Par. 5. Section 602.101(c) is amended by adding an entry numerical order to the table to read as follows:

"1.197-1T . . . . 1545-1425".