participations and residuals
(7) Treatment of participations and residuals (A) In general For purposes of determining the depreciation deduction allowable with respect to a property under this subsection, the taxpayer may include participations and residuals with respect to such property in the adjusted basis of such property for the taxable year in which the property is placed in service, but only to the extent that such participations and residuals relate to income estimated (for purposes of this subsection) to be earned in connection with the property before the close of the 10th taxable year referred to in paragraph (1)(A). (B) Participations and residuals For purposes of this paragraph, the term “participations and residuals” means, with respect to any property, costs the amount of which by contract varies with the amount of income earned in connection with such property. (C) Special rules relating to recomputation years If the adjusted basis of any property is determined under this paragraph, paragraph (4) shall be applied by substituting “for each taxable year in such period” for “for such period”. (D) Other special rules (i) Participations and residuals Notwithstanding subparagraph (A), the taxpayer may exclude participations and residuals from the adjusted basis of such property and deduct such participations and residuals in the taxable year that such participations and residuals are paid. (ii) Coordination with other rules Deductions computed in accordance with this paragraph shall be allowable notwithstanding paragraph (1)(B), section 263, 263A, 404, 419, or 461(h). (E) Authority to make adjustments The Secretary shall prescribe appropriate adjustments to the basis of property and to the look-back method for the additional amounts allowable as a deduction solely by reason of this paragraph.