Bulletin No. 2007-14 HIGHLIGHTS OF THIS ISSUE · 2007–14 I.R.B. April 2, 2007. The IRS Mission Provide America’s taxpayers top quality service by helping them understand and meet

Bulletin No. 2007-14April 2, 2007

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2007–19, page 843.Frivolous tax returns; wages not taxable income. This rul-ing discusses and refutes the frivolous position taken by sometaxpayers that wages are not taxable income.

Rev. Rul. 2007–20, page 863.Frivolous tax returns; voluntary compliance. This rulingdiscusses and refutes the frivolous position taken by some tax-payers that complying with the internal revenue laws is purelyvoluntary and that taxpayers are not legally required to file fed-eral tax returns or pay federal tax because the filing of a taxreturn or the payment of tax is a matter of choice.

Rev. Rul. 2007–21, page 865.Frivolous tax returns; summary record of assessment.This ruling discusses and refutes the frivolous position taken bysome taxpayers that before the IRS may collect overdue taxes,the IRS must provide taxpayers with a summary record of as-sessment made on a Form 23C, Assessment Certificate-Sum-mary Record of Assessments, or on another particular form.These taxpayers claim that if a Form 23C is not provided, theassessment is invalid and the IRS may not collect any taxesdue.

Rev. Rul. 2007–22, page 866.Frivolous tax returns; citizens of a state. This ruling dis-cusses and refutes the frivolous position taken by some taxpay-ers that they are not subject to federal income tax, or that theirincome is excluded from taxation, because either (1) they claimto have rejected or renounced United States citizenship and arecitizens exclusively of a state (sometimes characterized as a“natural-born citizen” of a “sovereign state”), or (2) they are notpersons as identified by the Internal Revenue Code.

T.D. 9314, page 845.Final regulations under section 168 of the Code relate to the de-preciation of property subject to the accelerated cost recoverysystem (MACRS property). The regulations provide guidanceon how to depreciate MACRS property acquired in a like-kindexchange under section 1031 or as a result of an involuntaryconversion under section 1033 when both the acquired and re-linquished property are subject to MACRS in the hands of theacquiring taxpayer.

Notice 2007–26, page 870.This notice solicits applications for allocation of the availablevolume cap for clean renewable energy bonds (CREBs) un-der section 54 of the Code. The notice also provides guid-ance on the CREB program requirements, volume cap alloca-tion method, and certain aspects of applicable law regardingCREBs. Notice 2005–98 modified and superseded.

Notice 2007–29, page 881.Request for comments and interim guidance regardingallocation of costs under the simplified methods ofaccounting under section 263A. This notice invites publiccomment on changes to the simplified production method un-der regulations section 1.263A–2(b) and the simplified resalemethod under regulations section 1.263A–3(d). Pending theissuance of additional published guidance, the Service willnot challenge the inclusion of negative amounts in comput-ing additional costs under section 263A of the Code or thepermissibility of aggregate negative additional section 263Acosts.

Notice 2007–30, page 883.This notice lists positions identified as frivolous for purposesof section 6702(c) of the Code.

(Continued on the next page)

Finding Lists begin on page ii.

EMPLOYEE PLANS

Notice 2007–28, page 880.Deductibility; contributions; sections 801 and 803 of thePension Protection Act of 2006. This notice addresses, inquestion and answer format, the deductibility of certain contri-butions to qualified defined benefit pension plans under section404(a)(1) of the Code and the deductibility of certain contribu-tions to a combination of plans under section 404(a)(7).

EXEMPT ORGANIZATIONS


Rev. Proc. 2007–27, page 887.This procedure sets forth the elements of a safe harbor undersection 527(1) of the Code for waiver of amounts due for failureto comply with certain reporting requirements due to reason-able cause but not willful neglect.

ESTATE TAX



GIFT TAX



EMPLOYMENT TAX





SELF-EMPLOYMENT TAX



EXCISE TAX


(Continued on the next page)

April 2, 2007 2007–14 I.R.B.


ADMINISTRATIVE



Rev. Rul. 2007–21, page 865.Frivolous tax returns; summary record of assessment.This ruling discusses and refutes the frivolous position taken bysome taxpayers that before the IRS may collect overdue taxes,the IRS must provide taxpayers with a summary record of as-sessment made on a Form 23C, Assessment Certificate-Sum-mary Record of Assessments, or on another particular form.These taxpayers claim that if a Form 23C is not provided, theassessment is invalid and the IRS may not collect any taxesdue.


Notice 2007–26, page 870.This notice solicits applications for allocation of the availablevolume cap for clean renewable energy bonds (CREBs) un-der section 54 of the Code. The notice also provides guid-ance on the CREB program requirements, volume cap alloca-tion method, and certain aspects of applicable law regardingCREBs. Notice 2005–98 modified and superseded.


2007–14 I.R.B. April 2, 2007

The IRS MissionProvide America’s taxpayers top quality service by helpingthem understand and meet their tax responsibilities and by

applying the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Sec-retary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

April 2, 2007 2007–14 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 61.—Gross IncomeDefined26 CFR 1.61–2: Compensation for services, includ-ing fees, commissions, and similar items.

Frivolous tax returns; wages not tax-able income. This ruling discusses and re-futes the frivolous position taken by sometaxpayers that wages are not taxable in-come.

Rev. Rul. 2007–19

PURPOSE

The Internal Revenue Service (Ser-vice) is aware that some taxpayers areattempting to reduce or eliminate theirfederal income tax liability by claimingthat compensation received in exchangefor personal services is not taxable in-come. These taxpayers often attempt toavoid their federal income tax liability byfailing to file federal income tax returns orby failing to report all income from wagesor other compensation on their federal in-come tax return. They often furnish FormsW–4, Employee’s Withholding AllowanceCertificate, on which they claim excessivewithholding allowances or claim completeexemption from withholding. In addition,they often claim deductions from grossincome for personal, living and familyexpenditures in order to reduce the taxliability related to wages or other compen-sation.

The Service is aware that some pro-moters and return preparers are advisingor recommending that taxpayers take theseor other meritless positions. This revenueruling emphasizes to taxpayers, promot-ers and return preparers that wages andother compensation received in exchangefor personal services are taxable incomesubject to federal income tax. Any argu-ment that such compensation is not taxableincome has no merit and is frivolous.

The Service is committed to identify-ing taxpayers who attempt to avoid theirfederal tax obligations by taking frivolouspositions. The Service will take vigorousenforcement action against these tax-payers and against promoters and returnpreparers who assist taxpayers in taking

these frivolous positions. Frivolous re-turns and other similar documents submit-ted to the Service are processed throughthe Service’s Frivolous Return Program.As part of this program, the Service de-termines whether taxpayers who havetaken frivolous positions have filed allrequired tax returns; computes the correctamount of tax and interest due; and deter-mines whether civil or criminal penaltiesshould apply. The Service also deter-mines whether civil or criminal penaltiesshould apply to return preparers, promot-ers and others who assist taxpayers in tak-ing frivolous positions and recommendswhether an injunction should be soughtto halt these activities. Other informationabout frivolous tax positions is availableon the Service website at www.irs.gov.

ISSUE

Whether Taxpayer A may avoid federalincome tax liability by maintaining thatthe Internal Revenue Code does not taxwages or other compensation received inexchange for personal services.

FACTS

Taxpayer A receives wages in exchangefor personal services. Taxpayer A thendoes one or more of the following: (1)furnishes a Form W–4 to the employer onwhich Taxpayer A claims excessive with-holding allowances or claims complete ex-emption from withholding; (2) fails to filea federal income tax return; (3) fails to re-port the wages on the federal income taxreturn; (4) claims a refund for any withheldincome tax; or (5) claims deductions forpersonal, living and family expenditures tooffset the wages reported on the federal in-come tax return. Taxpayer A claims thatcompensation received for personal ser-vices is not subject to federal income tax.

Arguments that wages are not subjectto federal income tax take many forms in-cluding, but not limited to, the following:

1. A tax on wages is a direct tax subjectto the provision in Article I, Section2, Clause 3 of the Constitution that re-quires that direct taxes be apportionedamong the states by population.

2. Money received in exchange for per-sonal labor constitutes an equal, non-taxable exchange of property.

3. Taxable income from wages or othercompensation for personal servicescan only be determined after deduc-tion of the cost of providing the labor.

LAW AND ANALYSIS

1. Article 1, Section 2, Clause 3 ofthe United States Constitution states that“direct Taxes shall be apportioned amongthe several States which may be includedwithin this Union, according to their re-spective Numbers . . . .” This statementhas been used to support the argumentthat there is a constitutional impedimentto the imposition of a direct tax on an in-dividual’s wages. The Sixteenth Amend-ment to the Constitution, ratified in 1913,provides that “[t]he Congress shall havepower to lay and collect taxes on incomes,from whatever source derived, without ap-portionment among the several States, andwithout regard to any census or enumera-tion.” The Sixteenth Amendment has beenreviewed by the Supreme Court and up-held. Brushaber v. Union Pacific Rail-road Co., 240 U.S. 1 (1916). Thus, the im-position of income tax on wages, withoutapportionment among the states, is autho-rized. See, e.g., Funk v. Commissioner,687 F.2d 264 (8th Cir. 1982); Abrams v.Commissioner, 82 T.C. 403 (1984).

Section 61(a) of the Internal RevenueCode defines gross income as income fromwhatever source derived, including (butnot limited to) “compensation for services,including fees, commissions, fringe bene-fits, and similar items.” I.R.C. § 61(a)(1).Courts consistently have upheld the de-termination that wages fall within section61(a)(1)’s definition of compensation and,accordingly, constitute taxable income.See, e.g., Ledford v. United States, 297F.3d 1378 (Fed. Cir. 2002); United Statesv. Connor, 898 F.2d 942 (3d Cir. 1990);Casper v. Commissioner, 805 F.2d 902(10th Cir. 1986); Connor v. Commis-sioner, 770 F.2d 17 (2d Cir. 1985); Lovellv. United States, 755 F.2d 517 (7th Cir.1984); Perkins v. Commissioner, 746 F.2d1187 (6th Cir. 1984); Funk v. Commis-

2007–14 I.R.B. 843 April 2, 2007

sioner, 687 F.2d 264 (8th Cir. 1982);Lonsdale v. Commissioner, 661 F.2d 71(5th Cir. 1981); Rowlee v. Commissioner,80 T.C. 1111 (1983).

In United States v. Connor, 898 F.2d at943, the Third Circuit noted that “[e]verycourt which has ever considered the issuehas unequivocally rejected the argumentthat wages are not income.” All income re-ceived by a taxpayer is income under sec-tion 61 unless it is specifically exempted orexcluded. See Commissioner v. GlenshawGlass Co., 348 U.S. 426, 429–30 (1955)(“Congress applied no limitations as to thesource of taxable receipts, nor restrictivelabels as to the intention of Congress totax all gains except those specifically ex-empted.”).

2. Some taxpayers claim that the pay-ment of wages or other compensation inexchange for personal labor is a nontax-able exchange of property. These taxpay-ers sometimes rely on sections 83 or 1001of the Internal Revenue Code to supportthis argument. Section 83 provides for thedetermination of the amount to be includedin gross income and the timing of the inclu-sion when property is transferred to an em-ployee or independent contractor in con-nection with the performance of services.Section 1001 provides for the determina-tion of the amount and timing of the recog-nition of gain or loss from the sale or otherdisposition of property.

Courts have universally rejected theargument that labor is property that canbe exchanged for wages or other compen-sation in a nontaxable transaction. SeeCasper v. Commissioner, 805 F.2d at 905;Funk v. Commissioner, 687 F.2d at 265.Courts recognize a distinction betweenselling labor and selling or exchangingproperty. See Reading v. Commissioner,70 T.C. 730, 733–34 (1978), aff’d, 614F.2d 159 (8th Cir. 1980). Further, thecourts have concluded that a taxpayer hasno tax basis in one’s labor and, therefore,the full amount of the wages or other com-pensation received represents gain whichmay be taxed as income. See, e.g., Casper,805 F.2d at 905; Abrams, 82 T.C. at 407;Reading, 70 T.C. at 733–34.

3. A related argument is that incomefrom the sale of labor cannot be deter-mined until the taxpayer’s investment inthat labor has been recovered. This ar-gument has been repeatedly rejected. SeeRowlee, 80 T.C. at 1120; Reading, 70 T.C.

at 733–34. In Reading, the Tax Court ex-amined the contention that gain must berealized for there to be income, analyz-ing the distinction recognized under fed-eral tax law between producing a physicalproduct and providing services. The courtflatly rejected the idea that living expensesconstitute the cost of “goods” sold for pro-viding labor or services. Reading, 70 T.C.at 733–34. Thus, the court concluded thatthe gain from the sale of labor is the en-tire amount received and upheld the disal-lowance of deductions for personal livingexpenses.

Courts have uniformly rejected argu-ments that wages and other compensationfor personal services are not taxable in-come. Accordingly, raising these argu-ments justifies the imposition of sanctions.See Ledford v. United States, 297 F.3dat 1381–82 (Fed. Cir. 2002); Casper v.Commissioner, 805 F.2d at 906; Connor v.Commissioner, 770 F.2d at 20.

HOLDING

1. Wages fall within the definition of in-come set forth in section 61(a)(1) ofthe Internal Revenue Code. TaxpayerA’s wages and other compensation forservices are income subject to federalincome tax and must be reported onTaxpayer A’s federal income tax re-turn.

2. The payment of wages and other com-pensation for personal services is notan equal exchange of property. Thefull amount of wages received by Tax-payer A is subject to federal incometax and must be reported on TaxpayerA’s federal income tax return.

3. Wages and other compensation re-ceived by Taxpayer A in exchangefor personal services are subject tofederal income tax without reductionof Taxpayer A’s personal living ex-penses.

CIVIL AND CRIMINAL PENALTIES

The Service will challenge the claimsof individuals who improperly attempt toavoid or evade their federal tax liability.In addition to liability for the tax due plusstatutory interest, taxpayers who fail to filevalid returns or pay tax based on arguments

that wages and other compensation for per-sonal services are exempt from federal in-come tax face substantial civil and crimi-nal penalties. Potentially applicable civilpenalties include: (1) the section 6662 ac-curacy-related penalties, which are gen-erally equal to 20 percent of the amountof tax the taxpayer should have paid; (2)the section 6663 penalty for civil fraud,which is equal to 75 percent of the amountof tax the taxpayer should have paid; (3)the section 6702(a) penalty of $5,000 fora “frivolous tax return”; (4) the section6702(b) penalty of $5,000 for submittinga “specified frivolous submission”; (5) thesection 6651 additions to tax for failure tofile a return, failure to pay the tax owed,and fraudulent failure to file a return; (6)the section 6673 penalty of up to $25,000if the taxpayer makes frivolous argumentsin the United States Tax Court; and (7) thesection 6682 penalty of $500 for providingfalse information with respect to withhold-ing.

Taxpayers relying on these frivolouspositions also may face criminal prosecu-tion under: (1) section 7201 for attempt-ing to evade or defeat tax, the penaltyfor which is a significant fine and im-prisonment for up to 5 years; (2) section7203 for willful failure to file a return,the penalty for which is a significant fineand imprisonment for up to one year; (3)section 7206 for making false statementson a return, statement, or other document,the penalty for which is a significant fineand imprisonment for up to 3 years; or (4)other provisions of federal law.

Persons, including return preparers,who promote these frivolous positions andthose who assist taxpayers in claiming taxbenefits based on frivolous positions mayface civil and criminal penalties and alsomay be enjoined by a court pursuant tosections 7407 and 7408. Potential penal-ties include: (1) a $250 penalty undersection 6694 for each return or claim forrefund prepared by an income tax returnpreparer who knew or should have knownthat the taxpayer’s position was frivolous(or $1,000 for each return or claim forrefund if the return preparer’s actionswere willful, intentional or reckless); (2) apenalty under section 6700 for promotingabusive tax shelters; (3) a $1,000 penaltyunder section 6701 for aiding and abettingthe understatement of tax; and (4) criminalprosecution under section 7206, for which

April 2, 2007 844 2007–14 I.R.B.

the penalty is a significant fine and impris-onment for up to 3 years, for assisting oradvising about the preparation of a falsereturn, statement or other document underthe internal revenue laws.

DRAFTING INFORMATION

This revenue ruling was authored by theOffice of Associate Chief Counsel (Pro-cedure & Administration), AdministrativeProvisions and Judicial Practice Division.For further information regarding this rev-enue ruling, contact that office at (202)622–7950 (not a toll-free call).

Section 168.—AcceleratedCost Recovery System26 CFR 1.168(a)–1: Modified accelerated cost re-covery system.

T.D. 9314

DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Part 1

Depreciation of MACRSProperty That is Acquired ina Like-Kind Exchange or Asa Result of an InvoluntaryConversion

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains fi-nal regulations relating to the deprecia-tion of property subject to the acceleratedcost recovery system under section 168of the Internal Revenue Code (MACRSproperty). Specifically, these final regu-lations provide guidance on how to de-preciate MACRS property acquired in alike-kind exchange under section 1031 oras a result of an involuntary conversion un-der section 1033 when both the acquiredand relinquished property are subject toMACRS in the hands of the acquiring tax-payer. These final regulations will af-fect taxpayers involved in a like-kind ex-

change under section 1031 or an involun-tary conversion under section 1033. Thecorresponding temporary regulations areremoved.

DATES: Effective Dates: These regula-tions are effective on February 26, 2007.

Applicability Dates: For dates ofapplicability, see §§1.168(a)–1(b),1.168(b)–1(b), 1.168(d)–1(d)(3),1.168(i)–1(l), 1.168(i)–6(k), and1.168(k)–1(g)(3)(ii).

FOR FURTHER INFORMATIONCONTACT: Patrick S. Kirwan, (202)622–3110 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to26 CFR part 1 under section 168 of theInternal Revenue Code (Code). Section168 provides the depreciation deductionfor tangible property generally placed inservice after December 31, 1986.

On March 1, 2004, the IRS and theTreasury Department published in theFederal Register (69 FR 9529) tempo-rary regulations (T.D. 9115, 2004–1 C.B.680) relating to the depreciation allow-able for tangible property of a charactersubject to the allowance for depreciationprovided in section 167(a) that is generallyplaced in service after December 31, 1986,and is subject to section 168 (MACRSproperty) that is acquired in a like-kindexchange or as a result of involuntaryconversion. On the same date the IRSpublished a notice of proposed rulemakingrelated to this topic in the Federal Regis-ter (REG–106590–00, REG–138499–02,2004–1 C.B. 704 [69 FR 9560]). Nopublic hearing on the regulations was re-quested or held. Several written commentsto the notice of proposed rulemaking werereceived. After consideration of all thecomments received, the proposed regu-lations are adopted as amended by thisTreasury decision, and the correspondingtemporary regulations are removed. Therevisions to the proposed regulations arediscussed in this preamble. Unless other-wise specifically stated, references to thetemporary regulations are to T.D. 9115.

General Overview

Section 167 allows as a depreciation de-duction a reasonable allowance for the ex-haustion, wear, and tear of property usedin a trade or business or held for the pro-duction of income. The depreciation al-lowable for depreciable tangible propertyplaced in service after 1986 generally isdetermined under section 168. Section1001 generally provides for the recogni-tion of gain or loss on the sale or exchangeof property. Under section 1031(a)(1), nogain or loss is recognized on an exchangeof property held for productive use in atrade or business or for investment if theproperty is exchanged solely for propertyof like kind that is to be held either forproductive use in a trade or business orfor investment. Section 1031(b) providesthat if an exchange would be within theprovision of section 1031(a) were it notfor the fact that the property received inthe exchange consists not only of prop-erty permitted to be received in such anexchange, but also of other property ormoney, then the gain, if any, to the recip-ient shall be recognized, but in an amountnot in excess of the sum of such money andthe fair market value of such other prop-erty. Under section 1031(c), no loss froma transaction that also involves other prop-erty or money is recognized. Under sec-tion 1031(d), the basis of property acquiredin an exchange described in section 1031 isthe same as that of the property exchanged,decreased by the amount of any money re-ceived by the taxpayer and increased bythe amount of gain (or decreased by theamount of loss) that was recognized onsuch exchange.

Section 1033(a)(1) provides that ifproperty (as a result of its destruction inwhole or in part, theft, seizure, or req-uisition or condemnation or threat orimminence thereof) is compulsorily or in-voluntarily converted into property similaror related in service or use to the prop-erty so converted, no gain is recognized.Under section 1033(b)(1), the basis ofproperty acquired by the taxpayer in sucha transaction is the basis of the convertedproperty. Under section 1033(a)(2)(A), ifproperty is compulsorily or involuntarilyconverted into money or into property notsimilar or related in service or use to theconverted property, and, within the timeframe described in section 1033(a)(2)(B),

2007–14 I.R.B. 845 April 2, 2007

the taxpayer purchases other property thatis related in service or use to the convertedproperty or purchases stock in the acqui-sition of control of a corporation owningsuch property, then the taxpayer may electto recognize gain only to the extent thatthe amount realized upon such conversionexceeds the cost of such other propertyor stock. Under section 1033(b)(2), ifsuch an election is made, the basis of thereplacement property acquired by the tax-payer generally is the cost of that propertydecreased by any gain not recognized byreason of section 1033(a)(2).

Summary of Comments andExplanation of Provisions

Scope

In general, the final regulations adoptthe rules outlined in the proposed andtemporary regulations with the addition ofsome clarifying language and examplesprovided in response to comments. Thetemporary regulations provided guidanceas to how to determine the annual de-preciation allowance under section 168for replacement property acquired in alike-kind exchange or involuntary conver-sion. However, the temporary regulationsdid not apply to a like-kind exchange orinvoluntary conversion if the allowancefor depreciation of either the relinquishedor replacement property is computedunder a depreciation system other thansection 168 (MACRS), or for which a tax-payer made a valid election under section168(f)(1) to exclude it from the applica-tion of MACRS. A commentator requestedthat the final regulations apply to all prop-erty acquired in a like-kind exchange orinvoluntary conversion. However, it is an-ticipated that the vast majority of like-kindexchanges and involuntary conversionsoccurring after the effective date of thefinal regulations will involve the exchangeof MACRS property. In addition, there aredifferences between MACRS and otherdepreciation systems which would requirethe creation of additional rules whichwould only apply in a limited number ofcircumstances. Furthermore, certain typesof property are statutorily excluded frombeing treated as MACRS property. There-fore, the final regulations do not adopt thecommentator’s suggestion. However, thefinal regulations allow a taxpayer to elect

to treat the sum of the exchanged basisand excess basis of the replacement prop-erty as MACRS property that is placedin service at the time of replacement ifthe tangible depreciable property acquiredby a taxpayer in a like-kind exchange orinvoluntary conversion replaces tangibledepreciable property for which the tax-payer made a valid election under section168(f)(1) to exclude it from the applicationof MACRS. For example, a taxpayer thatexchanges a machine depreciated underthe unit of production method for a usedmachine may depreciate under MACRSthe sum of the exchanged basis and excessbasis of the used machine (replacementproperty) as a machine placed in serviceat the time of replacement.

Optional Depreciation Tables

For taxpayers who wish to use the op-tional depreciation tables to determine thedepreciation allowances for the replace-ment MACRS property instead of theformulas (for example, see section 6 ofRev. Proc. 87–57, 1987–2 C.B. 687, 692),the final regulations provide guidance onchoosing the applicable optional table aswell as how to modify the calculation forcomputing the depreciation allowancesfor the replacement MACRS property. Acommentator noted that under the tem-porary regulations depreciation computedusing the optional tables could be differ-ent than the depreciation computed usingthe formulas and suggested adopting adifferent transaction coefficient. The IRSand Treasury recognize that use of theoptional depreciation tables may result ina different computation of depreciation.Nonetheless, the optional depreciationtables are intended to provide an alterna-tive method of calculating depreciationfor taxpayers. Furthermore, the transac-tion coefficient formula provided in thetemporary regulations is consistent withtransaction coefficient formulas providedin other depreciation guidance. Therefore,the final regulations retain the rules pro-vided in the temporary regulations.

Depreciation Convention Provisions

Several comments were received aboutthe application of the depreciation conven-tion provisions under the temporary reg-ulations. In response to these comments,

several changes were made in the final reg-ulations. Section 1.168(i)–6(c)(5)(ii)(A)was added in order to provide an expla-nation of the applicable convention sepa-rate from the explanation of the rule fordetermining the remaining recovery pe-riod for the replacement MACRS prop-erty. Section 1.168(i)–6(c)(4)(v) specifi-cally addresses the convention that appliesto the exchanged basis when the year ofreplacement is after the year of disposi-tion and the relinquished MACRS prop-erty was placed in service in the year ofdisposition. Section 1.168(i)–6(c)(5)(i)(B)of the final regulations contains a new rulethat provides that if, using the conventionthat applies to the relinquished MACRSproperty, the remaining recovery period ofthe relinquished MACRS property at thebeginning of the year of disposition is lessthan the number of months between thefirst of that year and the time of dispo-sition, the entire basis in the relinquishedMACRS property is deductible in the yearof disposition and the exchanged basis iszero. In light of this new rule, Example4 of §1.168(i)–6T(c)(6) of the temporaryregulations has been replaced by Example5 of §1.168(i)–6(c)(6).

Deferred Exchanges

The temporary regulations did not per-mit a taxpayer to take depreciation on re-linquished MACRS property during theperiod between the disposition of the relin-quished MACRS property and the acquisi-tion of the replacement MACRS property.A comment was received which noted thatunder the half-year convention if relin-quished MACRS property is disposed ofin year 1 and the replacement MACRSproperty is not acquired until year 2, thetaxpayer would only be entitled to deducta half-year of depreciation in each year.The IRS and Treasury Department recog-nize that this result could occur under theconvention rules. However, similar re-sults occur when property is disposed ofand replaced in a transaction to which sec-tion 1031 or section 1033 do not apply.In addition, the IRS and Treasury Depart-ment believe that a taxpayer cannot de-preciate property the taxpayer does notown. Therefore, the final regulations re-tain the rule provided in the temporary reg-ulations with respect to this issue. The fi-nal regulations reserve on providing spe-

April 2, 2007 846 2007–14 I.R.B.

cific guidance as to whether an intermedi-ary (such as an exchange accommodationtitleholder) is entitled to depreciation.

Acquisition Prior to Disposition for anInvoluntary Conversion

The temporary regulations allowedtaxpayers to begin depreciating replace-ment property upon acquisition even if theacquisition occurs prior the dispositionof the relinquished property if the re-placement property is acquired to meet therequirements of section 1033(a)(2)(B) (ac-quisition under threat of condemnation).However, the temporary regulations alsorequired taxpayers to include in taxableincome any excess depreciation allowableon the unadjusted depreciable basis of thereplacement MACRS property over thedepreciation allowable on the excess basisof the replacement MACRS property fromthe date the replacement MACRS prop-erty was placed in service by the taxpayerto the time of disposition of the relin-quished MACRS property. A commentwas received suggesting that taxpayers bepermitted to reduce the exchanged basis ofthe replacement property by the excess de-preciation rather than requiring a taxpayerto recognize the excess depreciation astaxable income. This suggestion was notadopted in the final regulations because itwould have the effect of inappropriatelyaccelerating depreciation deductions forthe replacement property.

Exchanges of Multiple Properties

The determination of the basis of prop-erty acquired in a like-kind exchange in-volving multiple properties is described in§1.1031(j)–1 and the determination of thebasis of multiple properties acquired as aresult of an involuntary conversion is de-scribed in §1.1033(b)–1. Commentatorsrequested examples to show how the tem-porary regulations apply to the deprecia-tion treatment of a like-kind exchange oran involuntary conversion involving mul-tiple properties. Other commentators sug-gested that taxpayers be permitted to useany reasonable, consistent method of al-locating basis among the properties. TheIRS and Treasury Department believe thatthese comments concern the allocation ofbasis principles under sections 1031 and1033, rather than the depreciation rulesunder section 168. Once basis in prop-

erty is determined or allocated under sec-tion 1031 or section 1033, these final reg-ulations would then apply for determin-ing the depreciation allowable with respectto such basis. The IRS and Treasury De-partment believe that issues related to al-location of basis among multiple proper-ties involved in like-kind exchanges or in-voluntary conversions for purposes of de-preciation are beyond the scope of the fi-nal regulations. Therefore the final regu-lations do not address these issues. How-ever, the IRS and Treasury Department in-tend to invite interested parties to submitwritten comments regarding whether ad-ditional published guidance is needed inthis area, and to invite written commentsthat specifically propose or address possi-ble resolutions to these issues.

Transactions Involving NondepreciableProperty

A commentator requested guidance asto how depreciation is calculated if therelinquished property was only partiallyused for business purposes. In responseto this comment, the final regulations pro-vide an example to show how depreciationis calculated on replacement property re-ceived in exchange for property that wasused only partially for business purposes(see Example 2 in §1.168(i)–6(d)(3)(iii)).

General Asset Accounts

Under the temporary regulations, gen-eral asset account treatment terminatesfor the relinquished MACRS property asof the first day of the year of disposition.Because this rule would require taxpayersto track each property in a general assetaccount, the IRS and Treasury Departmentrequested comments on alternative meth-ods to account for a like-kind exchange orinvoluntary conversion involving MACRSproperty contained in a general asset ac-count when the replacement MACRSproperty has a longer recovery periodor less accelerated depreciation methodthan the relinquished MACRS property orwhen the basis of the general asset accountwould change as a result of the like-kindexchange or involuntary conversion. Nocomments were received on this rule andno alternatives were suggested. Therefore,the regulations are adopted as proposed.

Effective Date

These final regulations generally applyto a like-kind exchange or an involuntaryconversion of MACRS property for whichthe time of disposition and the time of re-placement both occur after February 27,2004. For a like-kind exchange or an in-voluntary conversion of MACRS propertyfor which the time of disposition, the timeof replacement, or both occur on or be-fore February 27, 2004, a taxpayer may ap-ply these final regulations or rely on priorguidance issued by the IRS.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations and,because these regulations do not impose acollection of information requirement onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Therefore, a Regulatory Flexibility Anal-ysis is not required. Pursuant to section7805(f) of the Code, the notice of proposedrulemaking preceding these final regula-tions was submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business.

Drafting Information

The principal author of these regula-tions is Patrick S. Kirwan, Office of theAssociate Chief Counsel (Passthroughsand Special Industries). However, otherpersonnel from the IRS and TreasuryDepartment participated in their develop-ment.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

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

2007–14 I.R.B. 847 April 2, 2007

Par. 2. Sections 1.168(a)–1 and1.168(b)–1 are added to read as follows:

§1.168(a)–1 Modified accelerated costrecovery system.

(a) Section 168 determines the depreci-ation allowance for tangible property thatis of a character subject to the allowancefor depreciation provided in section 167(a)and that is placed in service after Decem-ber 31, 1986 (or after July 31, 1986, ifthe taxpayer made an election under sec-tion 203(a)(1)(B) of the Tax Reform Actof 1986; 100 Stat. 2143). Except for prop-erty excluded from the application of sec-tion 168 as a result of section 168(f) oras a result of a transitional rule, the pro-visions of section 168 are mandatory forall eligible property. The allowance fordepreciation under section 168 constitutesthe amount of depreciation allowable un-der section 167(a). The determination ofwhether tangible property is property of acharacter subject to the allowance for de-preciation is made under section 167 andthe regulations under section 167.

(b) This section is applicable on andafter February 27, 2004.

§1.168(b)–1 Definitions.

(a) Definitions. For purposes of section168 and the regulations under section 168,the following definitions apply:

(1) Depreciable property is propertythat is of a character subject to the al-lowance for depreciation as determinedunder section 167 and the regulations un-der section 167.

(2) MACRS property is tangible, depre-ciable property that is placed in service af-ter December 31, 1986 (or after July 31,1986, if the taxpayer made an election un-der section 203(a)(1)(B) of the Tax ReformAct of 1986; 100 Stat. 2143) and subject tosection 168, except for property excludedfrom the application of section 168 as a re-sult of section 168(f) or as a result of a tran-sitional rule.

(3) Unadjusted depreciable basis is thebasis of property for purposes of section1011 without regard to any adjustments de-scribed in section 1016(a)(2) and (3). Thisbasis reflects the reduction in basis for thepercentage of the taxpayer’s use of prop-erty for the taxable year other than in thetaxpayer’s trade or business (or for the pro-duction of income), for any portion of the

basis the taxpayer properly elects to treatas an expense under section 179, section179C, or any similar provision, and for anyadjustments to basis provided by other pro-visions of the Internal Revenue Code andthe regulations under the Code (other thansection 1016(a)(2) and (3)) (for example,a reduction in basis by the amount of thedisabled access credit pursuant to section44(d)(7)). For property subject to a lease,see section 167(c)(2).

(4) Adjusted depreciable basis is theunadjusted depreciable basis of the prop-erty, as defined in §1.168(b)–1(a)(3),less the adjustments described in section1016(a)(2) and (3).

(b) Effective date. This section is appli-cable on or after February 27, 2004.

§§1.168(a)–1T and 1.168(b)–1T[Removed]

Par. 3. Sections 1.168(a)–1T and1.168(b)–1T are removed.

Par. 4. Section 1.168(d)–1 is amendedby revising the section heading and para-graphs (b)(3) and (d)(3) to read as follows:

§1.168(d)–1 Applicableconventions—half-year and mid-quarterconventions.

* * * * *(b) * * *(3) Property placed in service and dis-

posed of in the same taxable year. (i) Un-der section 168(d)(3)(B)(ii), the deprecia-ble basis of property placed in service anddisposed of in the same taxable year is nottaken into account in determining whetherthe 40-percent test is satisfied. However,the depreciable basis of property placedin service, disposed of, subsequently reac-quired, and again placed in service, by thetaxpayer in the same taxable year must betaken into account in applying the 40-per-cent test, but the basis of the property isonly taken into account on the later of thedates that the property is placed in serviceby the taxpayer during the taxable year.Further, see §§1.168(i)–6(c)(4)(v)(B) and1.168(i)–6(f) for rules relating to propertyplaced in service and exchanged or invol-untarily converted during the same taxableyear.

(ii) The applicable convention, as de-termined under this section, applies toall depreciable property (except nonres-idential real property, residential rental

property, and any railroad grading ortunnel bore) placed in service by thetaxpayer during the taxable year, ex-cluding property placed in service anddisposed of in the same taxable year.However, see §§1.168(i)–6(c)(4)(v)(A)and 1.168(i)–6(f) for rules relating toMACRS property that has a basis deter-mined under section 1031(d) or section1033(b). No depreciation deduction isallowed for property placed in serviceand disposed of during the same taxableyear. However, see §1.168(k)–1(f)(1)for rules relating to qualified propertyor 50-percent bonus depreciation prop-erty, and §1.1400L(b)–1(f)(1) for rulesrelating to qualified New York LibertyZone property, that is placed in service bythe taxpayer in the same taxable year inwhich either a partnership is terminated asa result of a technical termination undersection 708(b)(1)(B) or the property istransferred in a transaction described insection 168(i)(7).

* * * * *(d) * * *(3) Like-kind exchanges and involun-

tary conversions. The last sentence inparagraph (b)(3)(i) and the second sen-tence in paragraph (b)(3)(ii) of this sec-tion apply to exchanges to which section1031 applies, and involuntary conversionsto which section 1033 applies, of MACRSproperty for which the time of dispositionand the time of replacement both occur af-ter February 27, 2004.

§1.168(d)–1T [Removed]

Par. 5. Section 1.168(d)–1T is re-moved.

Par. 6. Section 1.168(i)–0 is amendedas follows:

1. The entries for §1.168(i)–1(d)(2),(e)(3)(i), (e)(3)(v), (e)(3)(vi), (f), (f)(1),(f)(2), (f)(2)(i), (i), (j), and (l) are revised.

2. The entries for §1.168(i)–1(l)(1),(l)(2), and (l)(3) are added.

The revisions and additions read as fol-lows:

§1.168(i)–0 Table of contents for thegeneral asset account rules.

* * * * *

§1.168(i)–1 General asset accounts.

* * * * *

April 2, 2007 848 2007–14 I.R.B.

(d) * * *(2) Special rule for passenger automo-

biles.

* * * * *(e) * * *(3) * * *(i) In general.

* * * * *(v) Transactions subject to section 1031

or 1033.(vi) Anti-abuse rule.

* * * * *(f) Assets generating foreign source in-

come.(1) In general.(2) Source of ordinary income, gain, or

loss.(i) Source determined by allocation and

apportionment of depreciation allowed.

* * * * *(i) Identification of disposed or con-

verted asset.(j) Effect of adjustments on prior dispo-

sitions.

* * * * *(l) Effective date.(1) In general.(2) Exceptions.(3) Like-kind exchanges and involun-

tary conversions.

§1.168(i)–0T [Removed]

Par. 7. Section 1.168(i)–0T is removed.Par. 8. Section 1.168(i)–1 is amended

as follows:1. Paragraphs (d)(2), (e)(3)(i),

(e)(3)(iii)(B)(4), (e)(3)(v), (e)(3)(vi),(f)(1), (f)(2)(i), (i), (j), (l)(1), and (l)(3) arerevised.

2. The first sentence in paragraph(l)(2)(ii)(B) is amended by removing thelanguage “as modified by Rev. Proc.2004–11, 2004–1 C.B. 311”.

The revisions read as follows:

§1.168(i)–1 General asset accounts.

* * * * *(d) * * *(2) Special rule for passenger automo-

biles. For purposes of applying section280F(a), the depreciation allowance fora general asset account established forpassenger automobiles is limited for eachtaxable year to the amount prescribed insection 280F(a) multiplied by the excess

of the number of automobiles originallyincluded in the account over the number ofautomobiles disposed of during the taxableyear or in any prior taxable year in a trans-action described in paragraph (e)(3)(iii)(disposition of an asset in a qualifying dis-position), (e)(3)(iv) (transactions subjectto section 168(i)(7)), (e)(3)(v) (transac-tions subject to section 1031 or 1033),(e)(3)(vi) (anti-abuse rule), (g) (assetssubject to recapture), or (h)(1) (conversionto personal use) of this section.

(e) * * *(3) * * *(i) In general. This paragraph (e)(3)

provides the rules for terminating generalasset account treatment upon certain dis-positions. While the rules under para-graphs (e)(3)(ii) and (iii) of this section areoptional rules, the rules under paragraphs(e)(3)(iv), (v), and (vi) of this section aremandatory rules. A taxpayer applies para-graph (e)(3)(ii) or (iii) of this section by re-porting the gain, loss, or other deductionon the taxpayer’s timely filed Federal in-come tax return (including extensions) forthe taxable year in which the dispositionoccurs. For purposes of applying para-graph (e)(3)(iii) through (vi) of this sec-tion, see paragraph (i) of this section foridentifying the unadjusted depreciable ba-sis of a disposed asset.

* * * * *(iii) * * *(B) * * *(4) A transaction, other than a trans-

action described in paragraphs (e)(3)(iv)(pertaining to transactions subject to sec-tion 168(i)(7)) and (e)(3)(v) (pertainingto transactions subject to section 1031or 1033) of this section, to which a non-recognition section of the Code applies(determined without regard to this sec-tion).

* * * * *(v) Transactions subject to section

1031 or section 1033—(A) Like-kind ex-change or involuntary conversion of allassets remaining in a general asset ac-count. If all the assets, or the last asset,in a general asset account are transferredby a taxpayer in a like-kind exchange (asdefined under §1.168–6(b)(11)) or in aninvoluntary conversion (as defined under§1.168–6(b)(12)), the taxpayer must ap-ply this paragraph (e)(3)(v)(A) (insteadof applying paragraph (e)(2), (e)(3)(ii),

or (e)(3)(iii) of this section). Under thisparagraph (e)(3)(v)(A), the general as-set account terminates as of the first dayof the year of disposition (as defined in§1.168(i)–6(b)(5)) and—

(1) The amount of gain or loss for thegeneral asset account is determined undersection 1001(a) by taking into account theadjusted depreciable basis of the generalasset account at the time of disposition(as defined in §1.168(i)–6(b)(3)). Thedepreciation allowance for the generalasset account in the year of dispositionis determined in the same manner asthe depreciation allowance for the relin-quished MACRS property (as defined in§1.168(i)–6(b)(2)) in the year of dispo-sition is determined under §1.168(i)–6.The recognition and character of gain orloss are determined in accordance withparagraph (e)(3)(ii)(A) of this section(notwithstanding that paragraph (e)(3)(ii)of this section is an optional rule); and

(2) The adjusted depreciable basis ofthe general asset account at the time of dis-position is treated as the adjusted depre-ciable basis of the relinquished MACRSproperty.

(B) Like-kind exchange or involuntaryconversion of less than all assets remain-ing in a general asset account. If an assetin a general asset account is transferredby a taxpayer in a like-kind exchange orin an involuntary conversion and if para-graph (e)(3)(v)(A) of this section doesnot apply to this asset, the taxpayer mustapply this paragraph (e)(3)(v)(B) (insteadof applying paragraph (e)(2), (e)(3)(ii), or(e)(3)(iii) of this section). Under this para-graph (e)(3)(v)(B), general asset accounttreatment for the asset terminates as ofthe first day of the year of disposition (asdefined in §1.168(i)–6(b)(5)), and—

(1) The amount of gain or loss for theasset is determined by taking into accountthe asset’s adjusted basis at the time of dis-position (as defined in §1.168(i)–6(b)(3)).The adjusted basis of the asset at thetime of disposition equals the unadjusteddepreciable basis of the asset less the de-preciation allowed or allowable for theasset, computed by using the depreciationmethod, recovery period, and conventionapplicable to the general asset account inwhich the asset was included. The depreci-ation allowance for the asset in the year ofdisposition is determined in the same man-ner as the depreciation allowance for the

2007–14 I.R.B. 849 April 2, 2007

relinquished MACRS property (as definedin §1.168(i)–6(b)(2)) in the year of dis-position is determined under §1.168(i)–6.The recognition and character of the gainor loss are determined in accordance withparagraph (e)(3)(iii)(A) of this section(notwithstanding that paragraph (e)(3)(iii)of this section is an optional rule); and

(2) As of the first day of the year of dis-position, the taxpayer must remove the re-linquished asset from the general asset ac-count and make the adjustments to the gen-eral asset account described in paragraph(e)(3)(iii)(C)(2) through (4) of this section.

(vi) Anti-abuse rule—(A) In general.If an asset in a general asset account isdisposed of by a taxpayer in a transactiondescribed in paragraph (e)(3)(vi)(B) ofthis section, general asset account treat-ment for the asset terminates as of thefirst day of the taxable year in which thedisposition occurs. Consequently, thetaxpayer must determine the amount ofgain, loss, or other deduction attribut-able to the disposition in the manner de-scribed in paragraph (e)(3)(iii)(A) of thissection (notwithstanding that paragraph(e)(3)(iii)(A) of this section is an optionalrule) and must make the adjustments to thegeneral asset account described in para-graph (e)(3)(iii)(C)(1) through (4) of thissection.

(B) Abusive transactions. A transactionis described in this paragraph (e)(3)(vi)(B)if the transaction is not described in para-graph (e)(3)(iv) or (e)(3)(v) of this sec-tion and the transaction is entered into, ormade, with a principal purpose of achiev-ing a tax benefit or result that would notbe available absent an election under thissection. Examples of these types of trans-actions include—

(1) A transaction entered into with aprincipal purpose of shifting income or de-ductions among taxpayers in a manner thatwould not be possible absent an electionunder this section in order to take advan-tage of differing effective tax rates amongthe taxpayers; or

(2) An election made under this sectionwith a principal purpose of disposing of anasset from a general asset account in or-der to utilize an expiring net operating lossor credit. The fact that a taxpayer with anet operating loss carryover or a credit car-ryover transfers an asset to a related per-son or transfers an asset pursuant to an ar-rangement where the asset continues to be

used (or is available for use) by the tax-payer pursuant to a lease (or otherwise) in-dicates, absent strong evidence to the con-trary, that the transaction is described inthis paragraph (e)(3)(vi)(B).

(f) * * *(1) In general. This paragraph (f) pro-

vides the rules for determining the sourceof any income, gain, or loss recognized,and the appropriate section 904(d) separatelimitation category or categories for anyforeign source income, gain, or loss recog-nized, on a disposition (within the meaningof paragraph (e)(1) of this section) of an as-set in a general asset account that consistsof assets generating both United States andforeign source income. These rules applyonly to a disposition to which paragraph(e)(2) (general disposition rules), (e)(3)(ii)(disposition of all assets remaining in ageneral asset account), (e)(3)(iii) (disposi-tion of an asset in a qualifying disposition),(e)(3)(v) (transactions subject to section1031 or 1033), or (e)(3)(vi) (anti-abuserule) of this section applies.

(2) * * *(i) Source determined by allocation and

apportionment of depreciation allowed.The amount of any ordinary income, gain,or loss that is recognized on the dispositionof an asset in a general asset account mustbe apportioned between United States andforeign sources based on the allocationand apportionment of the—

(A) Depreciation allowed for the gen-eral asset account as of the end of the tax-able year in which the disposition occursif paragraph (e)(2) of this section appliesto the disposition;

(B) Depreciation allowed for the gen-eral asset account as of the time of dis-position if the taxpayer applies paragraph(e)(3)(ii) of this section to the dispositionof all assets, or the last asset, in the generalasset account, or if all the assets, or the lastasset, in the general asset account are dis-posed of in a transaction described in para-graph (e)(3)(v)(A) of this section; or

(C) Depreciation allowed for the dis-posed asset for only the taxable year inwhich the disposition occurs if the tax-payer applies paragraph (e)(3)(iii) of thissection to the disposition of the asset in aqualifying disposition, if the asset is dis-posed of in a transaction described in para-graph (e)(3)(v)(B) of this section (like-kind exchange or involuntary conversion),or if the asset is disposed in a transaction

described in paragraph (e)(3)(vi) of thissection (anti-abuse rule).

* * * * *(i) * * * A taxpayer may use any rea-

sonable method that is consistently appliedto the taxpayer’s general asset accountsfor purposes of determining the unadjusteddepreciable basis of a disposed or con-verted asset in a transaction described inparagraph (e)(3)(iii) (disposition of an as-set in a qualifying disposition), (e)(3)(iv)(transactions subject to section 168(i)(7)),(e)(3)(v) (transactions subject to section1031 or 1033), (e)(3)(vi) (anti-abuse rule),(g) (assets subject to recapture), or (h)(1)(conversion to personal use) of this sec-tion.

(j) Effect of adjustments on prior dis-positions. The adjustments to a generalasset account under paragraph (e)(3)(iii),(e)(3)(iv), (e)(3)(v), (e)(3)(vi), (g), or(h)(1) of this section have no effect on therecognition and character of prior dispo-sitions subject to paragraph (e)(2) of thissection.

* * * * *(l) * * *(1) In general. Except as provided in

paragraphs (l)(2) and (l)(3) of this section,this section applies to depreciable assetsplaced in service in taxable years endingon or after October 11, 1994. For depre-ciable assets placed in service after De-cember 31, 1986, in taxable years end-ing before October 11, 1994, the InternalRevenue Service will allow any reasonablemethod that is consistently applied to thetaxpayer’s general asset accounts.

* * * * *(3) Like-kind exchanges and invol-

untary conversions. This section ap-plies for an asset transferred by a tax-payer in a like-kind exchange (as de-fined under §1.168–6(b)(11)) or in aninvoluntary conversion (as defined under§1.168–6(b)(12)) for which the time of dis-position (as defined in §1.168(i)–6(b)(3))and the time of replacement (as defined in§1.168(i)–6(b)(4)) both occur after Febru-ary 27, 2004. For an asset transferred by ataxpayer in a like-kind exchange or in aninvoluntary conversion for which the timeof disposition, the time of replacement, orboth occur on or before February 27, 2004,see §1.168(i)–1 in effect prior to Febru-ary 27, 2004 (§1.168(i)–1 as contained in

April 2, 2007 850 2007–14 I.R.B.

26 CFR part 1 edition revised as of April1, 2003).


Par. 9. Section 1.168(i)–1T is removed.Par. 10. Section 1.168(i)–5 is added to

read as follows:

§1.168(i)–5 Table of contents.

This section lists the major paragraphscontained in §1.168(i)–6.

§1.168(i)–6 Like-kind exchanges andinvoluntary conversions.

(a) Scope.(b) Definitions.(1) Replacement MACRS property.(2) Relinquished MACRS property.(3) Time of disposition.(4) Time of replacement.(5) Year of disposition.(6) Year of replacement.(7) Exchanged basis.(8) Excess basis.(9) Depreciable exchanged basis.(10) Depreciable excess basis.(11) Like-kind exchange.(12) Involuntary conversion.(c) Determination of depreciation al-

lowance.(1) Computation of the depreciation al-

lowance for depreciable exchanged basisbeginning in the year of replacement.

(i) In general.(ii) Applicable recovery period, depre-

ciation method, and convention.(2) Effect of depreciation treatment of

the replacement MACRS property by pre-vious owners of the acquired property.

(3) Recovery period and/or deprecia-tion method of the properties are the same,or both are not the same.

(i) In general.(ii) Both the recovery period and the

depreciation method are the same.(iii) Either the recovery period or the

depreciation method is the same, or bothare not the same.

(4) Recovery period or depreciationmethod of the properties is not the same.

(i) Longer recovery period.(ii) Shorter recovery period.(iii) Less accelerated depreciation

method.(iv) More accelerated depreciation

method.

(v) Convention.(A) Either the relinquished MACRS

property or the replacement MACRSproperty is mid-month property.

(B) Neither the relinquished MACRSproperty nor the replacement MACRSproperty is mid-month property.

(5) Year of disposition and year of re-placement.

(i) Relinquished MACRS property.(A) General rule.(B) Special rule.(ii) Replacement MACRS property.(A) Remaining recovery period of the

replacement MACRS property.(B) Year of replacement is 12 months.(iii) Year of disposition or year of re-

placement is less than 12 months.(iv) Deferred transactions.(A) In general.(B) Allowable depreciation for a quali-

fied intermediary.(v) Remaining recovery period.(6) Examples.(d) Special rules for determining depre-

ciation allowances.(1) Excess basis.(i) In general.(ii) Example.(2) Depreciable and nondepreciable

property.(3) Depreciation limitations for auto-

mobiles.(i) In general.(ii) Order in which limitations on depre-

ciation under section 280F(a) are applied.(iii) Examples.(4) Involuntary conversion for which

the replacement MACRS property is ac-quired and placed in service before dispo-sition of relinquished MACRS property.

(e) Use of optional depreciation tables.(1) Taxpayer not bound by prior use of

table.(2) Determination of the depreciation

deduction.(i) Relinquished MACRS property.(ii) Replacement MACRS property.(A) Determination of the appropriate

optional depreciation table.(B) Calculating the depreciation deduc-

tion for the replacement MACRS property.(iii) Unrecovered basis.(3) Excess basis.(4) Examples.(f) Mid-quarter convention.(1) Exchanged basis.(2) Excess basis.

(3) Depreciable property acquired fornondepreciable property.

(g) Section 179 election.(h) Additional first year depreciation

deduction.(i) Elections.(1) Election not to apply this section.(2) Election to treat certain replacement

property as MACRS property.(j) Time and manner of making election

under paragraph (i)(1) of this section.(1) In general.(2) Time for making election.(3) Manner of making election.(4) Revocation.(k) Effective date.(1) In general.(2) Application to pre-effective date

like-kind exchanges and involuntary con-versions.

(3) Like-kind exchanges and involun-tary conversions where the taxpayer madethe election under section 168(f)(1) for therelinquished property.


Par. 11. Section 1.168(i)–5T is re-moved.

Par. 12. Section 1.168(i)–6 is added toread as follows:

§1.168(i)–6 Like-kind exchanges andinvoluntary conversions.

(a) Scope. This section provides therules for determining the depreciation al-lowance for MACRS property acquiredin a like-kind exchange or an involun-tary conversion, including a like-kindexchange or an involuntary conversionof MACRS property that is exchanged orreplaced with other MACRS property in atransaction between members of the sameaffiliated group. The allowance for depre-ciation under this section constitutes theamount of depreciation allowable undersection 167(a) for the year of replacementand any subsequent taxable year for thereplacement MACRS property and forthe year of disposition of the relinquishedMACRS property. The provisions of thissection apply only to MACRS property towhich §1.168(h)–1 (like-kind exchangesof tax-exempt use property) does not ap-ply. Additionally, paragraphs (c) through(f) of this section apply only to MACRSproperty for which an election under para-graph (i) of this section has not been made.

2007–14 I.R.B. 851 April 2, 2007

(b) Definitions. For purposes of thissection, the following definitions apply:

(1) Replacement MACRS propertyis MACRS property (as defined in§1.168(b)–1(a)(2)) in the hands of theacquiring taxpayer that is acquired forother MACRS property in a like-kind ex-change or an involuntary conversion.

(2) Relinquished MACRS property isMACRS property that is transferred by thetaxpayer in a like-kind exchange, or in aninvoluntary conversion.

(3) Time of disposition is when thedisposition of the relinquished MACRSproperty takes place under the convention,as determined under §1.168(d)–1, that ap-plies to the relinquished MACRS property.

(4) Time of replacement is the later of—(i) When the replacement MACRS

property is placed in service under theconvention, as determined under thissection, that applies to the replacementMACRS property; or

(ii) The time of disposition of the ex-changed or involuntarily converted prop-erty.

(5) Year of disposition is the taxableyear that includes the time of disposition.

(6) Year of replacement is the taxableyear that includes the time of replacement.

(7) Exchanged basis is determined af-ter the depreciation deductions for the yearof disposition are determined under para-graph (c)(5)(i) of this section and is thelesser of—

(i) The basis in the replacementMACRS property, as determined undersection 1031(d) and the regulations undersection 1031(d) or section 1033(b) and theregulations under section 1033(b); or

(ii) The adjusted depreciable basis (asdefined in §1.168(b)–1(a)(4)) of the relin-quished MACRS property.

(8) Excess basis is any excess of thebasis in the replacement MACRS property,as determined under section 1031(d) andthe regulations under section 1031(d) orsection 1033(b) and the regulations undersection 1033(b), over the exchanged basisas determined under paragraph (b)(7) ofthis section.

(9) Depreciable exchanged basis is theexchanged basis as determined under para-graph (b)(7) of this section reduced by—

(i) The percentage of such basis attrib-utable to the taxpayer’s use of propertyfor the taxable year other than in the tax-

payer’s trade or business (or for the pro-duction of income); and

(ii) Any adjustments to basis providedby other provisions of the Internal Rev-enue Code (Code) and the regulations un-der the Code (including section 1016(a)(2)and (3), for example, depreciation deduc-tions in the year of replacement allowableunder section 168(k) or 1400L(b)).

(10) Depreciable excess basis is the ex-cess basis as determined under paragraph(b)(8) of this section reduced by—

(i) The percentage of such basis attrib-utable to the taxpayer’s use of propertyfor the taxable year other than in the tax-payer’s trade or business (or for the pro-duction of income);

(ii) Any portion of the basis the tax-payer properly elects to treat as an expenseunder section 179; and

(iii) Any adjustments to basis providedby other provisions of the Code and theregulations under the Code (including sec-tion 1016(a)(2) and (3), for example, de-preciation deductions in the year of re-placement allowable under section 168(k)or 1400L(b)).

(11) Like-kind exchange is an exchangeof property in a transaction to which sec-tion 1031(a)(1), (b), or (c) applies.

(12) Involuntary conversion is a trans-action described in section 1033(a)(1) or(2) that resulted in the nonrecognition ofany part of the gain realized as the resultof the conversion.

(c) Determination of depreciation al-lowance—(1) Computation of the de-preciation allowance for depreciable ex-changed basis beginning in the year ofreplacement—(i) In general. This para-graph (c) provides rules for determiningthe applicable recovery period, the ap-plicable depreciation method, and theapplicable convention used to determinethe depreciation allowances for the depre-ciable exchanged basis beginning in theyear of replacement. See paragraph (c)(5)of this section for rules relating to the com-putation of the depreciation allowance forthe year of disposition and for the yearof replacement. See paragraph (d)(1) ofthis section for rules relating to the com-putation of the depreciation allowance fordepreciable excess basis. See paragraph(d)(4) of this section if the replacementMACRS property is acquired before dis-position of the relinquished MACRS prop-erty in a transaction to which section 1033

applies. See paragraph (e) of this sectionfor rules relating to the computation of thedepreciation allowance using the optionaldepreciation tables.

(ii) Applicable recovery period, de-preciation method, and convention. Therecovery period, depreciation method, andconvention determined under this para-graph (c) are the only permissible methodsof accounting for MACRS property withinthe scope of this section unless the tax-payer makes the election under paragraph(i) of this section not to apply this section.

(2) Effect of depreciation treatmentof the replacement MACRS property byprevious owners of the acquired prop-erty. If replacement MACRS property isacquired by a taxpayer in a like-kind ex-change or an involuntary conversion, thedepreciation treatment of the replacementMACRS property by previous ownershas no effect on the determination ofdepreciation allowances for the replace-ment MACRS property in the hands ofthe acquiring taxpayer. For example, ataxpayer exchanging, in a like-kind ex-change, MACRS property for propertythat was depreciated under section 168of the Internal Revenue Code of 1954(ACRS) by the previous owner must usethis section because the replacement prop-erty will become MACRS property in thehands of the acquiring taxpayer. In addi-tion, elections made by previous ownersin determining depreciation allowancesfor the replacement MACRS propertyhave no effect on the acquiring taxpayer.For example, a taxpayer exchanging, in alike-kind exchange, MACRS property thatthe taxpayer depreciates under the generaldepreciation system of section 168(a) forother MACRS property that the previousowner elected to depreciate under the al-ternative depreciation system pursuant tosection 168(g)(7) does not have to con-tinue using the alternative depreciationsystem for the replacement MACRS prop-erty.

(3) Recovery period and/or depreci-ation method of the properties are thesame, or both are not the same—(i) Ingeneral. For purposes of paragraphs (c)(3)and (c)(4) of this section in determiningwhether the recovery period and the depre-ciation method prescribed under section168 for the replacement MACRS propertyare the same as the recovery period andthe depreciation method prescribed under

April 2, 2007 852 2007–14 I.R.B.

section 168 for the relinquished MACRSproperty, the recovery period and the de-preciation method for the replacementMACRS property are considered to bethe recovery period and the depreciationmethod that would have applied under sec-tion 168, taking into account any electionsmade by the acquiring taxpayer undersection 168(b)(5) or 168(g)(7), had the re-placement MACRS property been placedin service by the acquiring taxpayer at thesame time as the relinquished MACRSproperty.

(ii) Both the recovery period and the de-preciation method are the same. If boththe recovery period and the depreciationmethod prescribed under section 168 forthe replacement MACRS property are thesame as the recovery period and the depre-ciation method prescribed under section168 for the relinquished MACRS prop-erty, the depreciation allowances for thereplacement MACRS property beginningin the year of replacement are determinedby using the same recovery period anddepreciation method that were used forthe relinquished MACRS property. Thus,the replacement MACRS property is de-preciated over the remaining recovery pe-riod (taking into account the applicableconvention), and by using the deprecia-tion method, of the relinquished MACRSproperty. Except as provided in paragraph(c)(5) of this section, the depreciation al-lowances for the depreciable exchangedbasis for any 12-month taxable year be-ginning with the year of replacement aredetermined by multiplying the depreciableexchanged basis by the applicable depre-ciation rate for each taxable year (for fur-ther guidance, for example, see section 6 ofRev. Proc. 87–57, 1987–2 C.B. 687, 692,and §601.601(d)(2)(ii)(b) of this chapter).

(iii) Either the recovery period or thedepreciation method is the same, or bothare not the same. If either the recov-ery period or the depreciation methodprescribed under section 168 for the re-placement MACRS property is the sameas the recovery period or the depreciationmethod prescribed under section 168 forthe relinquished MACRS property, thedepreciation allowances for the depre-ciable exchanged basis beginning in theyear of replacement are determined us-ing the recovery period or the depreciationmethod that is the same as the relinquishedMACRS property. See paragraph (c)(4) of

this section to determine the depreciationallowances when the recovery period orthe depreciation method of the replace-ment MACRS property is not the same asthat of the relinquished MACRS property.

(4) Recovery period or depreciationmethod of the properties is not the same.If the recovery period prescribed undersection 168 for the replacement MACRSproperty (as determined under paragraph(c)(3)(i) of this section) is not the sameas the recovery period prescribed undersection 168 for the relinquished MACRSproperty, the depreciation allowances forthe depreciable exchanged basis beginningin the year of replacement are determinedunder this paragraph (c)(4). Similarly, ifthe depreciation method prescribed undersection 168 for the replacement MACRSproperty (as determined under paragraph(c)(3)(i) of this section) is not the same asthe depreciation method prescribed undersection 168 for the relinquished MACRSproperty, the depreciation method used todetermine the depreciation allowances forthe depreciable exchanged basis beginningin the year of replacement is determinedunder this paragraph (c)(4).

(i) Longer recovery period. If the re-covery period prescribed under section168 for the replacement MACRS property(as determined under paragraph (c)(3)(i) ofthis section) is longer than that prescribedfor the relinquished MACRS property, thedepreciation allowances for the deprecia-ble exchanged basis beginning in the yearof replacement are determined as thoughthe replacement MACRS property hadoriginally been placed in service by theacquiring taxpayer in the same taxableyear the relinquished MACRS propertywas placed in service by the acquiring tax-payer, but using the longer recovery periodof the replacement MACRS property (asdetermined under paragraph (c)(3)(i) ofthis section) and the convention deter-mined under paragraph (c)(4)(v) of thissection. Thus, the depreciable exchangedbasis is depreciated over the remainingrecovery period (taking into account theapplicable convention) of the replacementMACRS property.

(ii) Shorter recovery period. If therecovery period prescribed under section168 for the replacement MACRS property(as determined under paragraph (c)(3)(i)of this section) is shorter than that of therelinquished MACRS property, the de-

preciation allowances for the depreciableexchanged basis beginning in the yearof replacement are determined using thesame recovery period as that of the re-linquished MACRS property. Thus, thedepreciable exchanged basis is depreciatedover the remaining recovery period (takinginto account the applicable convention) ofthe relinquished MACRS property.

(iii) Less accelerated depreciationmethod—(A) If the depreciation methodprescribed under section 168 for the re-placement MACRS property (as deter-mined under paragraph (c)(3)(i) of thissection) is less accelerated than that of therelinquished MACRS property at the timeof disposition, the depreciation allowancesfor the depreciable exchanged basis begin-ning in the year of replacement are deter-mined as though the replacement MACRSproperty had originally been placed in ser-vice by the acquiring taxpayer at the sametime the relinquished MACRS propertywas placed in service by the acquiringtaxpayer, but using the less accelerated de-preciation method. Thus, the depreciableexchanged basis is depreciated using theless accelerated depreciation method.

(B) Except as provided in paragraph(c)(5) of this section, the depreciation al-lowances for the depreciable exchangedbasis for any 12-month taxable year be-ginning in the year of replacement aredetermined by multiplying the adjusteddepreciable basis by the applicable de-preciation rate for each taxable year. If,for example, the depreciation method ofthe replacement MACRS property in theyear of replacement is the 150-percentdeclining balance method and the depreci-ation method of the relinquished MACRSproperty in the year of replacement is the200-percent declining balance method,and neither method had been switchedto the straight line method in the year ofreplacement or any prior taxable year, theapplicable depreciation rate for the year ofreplacement and subsequent taxable yearsis determined by using the depreciationrate of the replacement MACRS propertyas if the replacement MACRS propertywas placed in service by the acquiringtaxpayer at the same time the relinquishedMACRS property was placed in service bythe acquiring taxpayer, until the 150-per-cent declining balance method has beenswitched to the straight line method. If,for example, the depreciation method of

2007–14 I.R.B. 853 April 2, 2007

the replacement MACRS property is thestraight line method, the applicable de-preciation rate for the year of replacementis determined by using the remaining re-covery period at the beginning of the yearof disposition (as determined under thisparagraph (c)(4) and taking into accountthe applicable convention).

(iv) More accelerated depreciationmethod—(A) If the depreciation methodprescribed under section 168 for the re-placement MACRS property (as deter-mined under paragraph (c)(3)(i) of thissection) is more accelerated than that ofthe relinquished MACRS property at thetime of disposition, the depreciation al-lowances for the replacement MACRSproperty beginning in the year of re-placement are determined using the samedepreciation method as the relinquishedMACRS property.

(B) Except as provided in paragraph(c)(5) of this section, the depreciation al-lowances for the depreciable exchangedbasis for any 12-month taxable year be-ginning in the year of replacement aredetermined by multiplying the adjusteddepreciable basis by the applicable de-preciation rate for each taxable year. If,for example, the depreciation method ofthe relinquished MACRS property in theyear of replacement is the 150-percentdeclining balance method and the depreci-ation method of the replacement MACRSproperty in the year of replacement is the200-percent declining balance method,and neither method had been switchedto the straight line method in the year ofreplacement or any prior taxable year, theapplicable depreciation rate for the year ofreplacement and subsequent taxable yearsis the same depreciation rate that appliedto the relinquished MACRS property inthe year of replacement, until the 150-per-cent declining balance method has beenswitched to the straight line method. If,for example, the depreciation method isthe straight line method, the applicable de-preciation rate for the year of replacementis determined by using the remaining re-covery period at the beginning of the yearof disposition (as determined under thisparagraph (c)(4) and taking into accountthe applicable convention).

(v) Convention. The applicable con-vention for the exchanged basis is deter-mined under this paragraph (c)(4)(v).

(A) Either the relinquished MACRSproperty or the replacement MACRSproperty is mid-month property. If ei-ther the relinquished MACRS propertyor the replacement MACRS property isproperty for which the applicable conven-tion (as determined under section 168(d))is the mid-month convention, the ex-changed basis must be depreciated usingthe mid-month convention.

(B) Neither the relinquished MACRSproperty nor the replacement MACRSproperty is mid-month property. If neitherthe relinquished MACRS property nor thereplacement MACRS property is prop-erty for which the applicable convention(as determined under section 168(d)) isthe mid-month convention, the applica-ble convention for the exchanged basis isthe same convention that applied to therelinquished MACRS property. If the re-linquished MACRS property is placed inservice in the year of disposition, and thetime of replacement is also in the year ofdisposition, the convention that appliesto the relinquished MACRS property isdetermined under paragraph (f)(1)(i) ofthis section. If, however, relinquishedMACRS property was placed in service inthe year of disposition and the time of re-placement is in a taxable year subsequentto the year of disposition, the conventionthat applies to the exchanged basis is theconvention that applies in that subsequenttaxable year (see paragraph (f)(1)(ii) ofthis section).

(5) Year of disposition and year of re-placement. No depreciation deduction isallowable for MACRS property disposedof by a taxpayer in a like-kind exchangeor involuntary conversion in the same tax-able year that such property was placedin service by the taxpayer. If replacementMACRS property is disposed of by a tax-payer during the same taxable year that therelinquished MACRS property is placed inservice by the taxpayer, no depreciationdeduction is allowable for either MACRSproperty. Otherwise, the depreciation al-lowances for the year of disposition and forthe year of replacement are determined asfollows:

(i) Relinquished MACRS property—(A)General rule. Except as provided in para-graphs (c)(5)(i)(B), (c)(5)(iii), (e), and (i)of this section, the depreciation allowancein the year of disposition for the relin-quished MACRS property is computed

by multiplying the allowable depreciationdeduction for the property for that yearby a fraction, the numerator of which isthe number of months (including frac-tions of months) the property is deemedto be placed in service during the year ofdisposition (taking into account the ap-plicable convention of the relinquishedMACRS property), and the denominatorof which is 12. In the case of termina-tion under §1.168(i)–1(e)(3)(v) of generalasset account treatment of an asset, orof all the assets remaining, in a generalasset account, the allowable depreciationdeduction in the year of disposition forthe asset or assets for which general assetaccount treatment is terminated is de-termined using the depreciation method,recovery period, and convention of thegeneral asset account. This allowable de-preciation deduction is adjusted to accountfor the period the asset or assets is deemedto be in service in accordance with thisparagraph (c)(5)(i).

(B) Special rule. If, at the beginningof the year of disposition, the remain-ing recovery period of the relinquishedMACRS property, taking into accountthe applicable convention of such prop-erty, is less than the period between thebeginning of the year of disposition andthe time of disposition, the depreciationdeduction for the relinquished MACRSproperty for the year of disposition isequal to the adjusted depreciable basis ofthe relinquished MACRS property at thebeginning of the year of disposition. If thisparagraph applies, the exchanged basis iszero and no depreciation is allowable forthe exchanged basis in the replacementMACRS property.

(ii) Replacement MACRS prop-erty—(A) Remaining recovery periodof the replacement MACRS property. Thereplacement MACRS property is treatedas placed in service at the time of replace-ment under the convention that appliesto the replacement MACRS property asdetermined under this paragraph (c)(5)(ii).The remaining recovery period of the re-placement MACRS property at the timeof replacement is the excess of the recov-ery period for the replacement MACRSproperty, as determined under paragraph(c) of this section, over the period of timethat the replacement MACRS propertywould have been in service if it had beenplaced in service when the relinquished

April 2, 2007 854 2007–14 I.R.B.

MACRS property was placed in serviceand removed from service at the time ofdisposition of the relinquished MACRSproperty. This period is determined byusing the convention that applied to the re-linquished MACRS property to determinethe date that the relinquished MACRSproperty is deemed to have been placedin service and the date that it is deemedto have been disposed of. The length oftime the replacement MACRS propertywould have been in service is determinedby using these dates and the conventionthat applies to the replacement MACRSproperty.

(B) Year of replacement is 12 months.Except as provided in paragraphs(c)(5)(iii), (e), and (i) of this section, thedepreciation allowance in the year of re-placement for the depreciable exchangedbasis is determined by—

(1) Calculating the applicable depre-ciation rate for the replacement MACRSproperty as of the beginning of the year ofreplacement taking into account the depre-ciation method prescribed for the replace-ment MACRS property under paragraph(c)(3) of this section and the remaining re-covery period of the replacement MACRSproperty as of the beginning of the year ofdisposition as determined under this para-graph (c)(5)(ii);

(2) Calculating the depreciable ex-changed basis of the replacement MACRSproperty, and adding to that amount theamount determined under paragraph(c)(5)(i) of this section for the year ofdisposition; and

(3) Multiplying the product of theamounts determined under paragraphs(c)(5)(ii)(B)(1) and (B)(2) of this sectionby a fraction, the numerator of which isthe number of months (including fractionsof months) the property is deemed to be inservice during the year of replacement (inthe year of replacement the replacementMACRS property is deemed to be placedin service by the acquiring taxpayer at thetime of replacement under the conven-tion determined under paragraph (c)(4)(v)of this section), and the denominator ofwhich is 12.

(iii) Year of disposition or year of re-placement is less than 12 months. Ifthe year of disposition or the year of re-placement is less than 12 months, thedepreciation allowance determined un-der paragraph (c)(5)(ii)(A) of this section

must be adjusted for a short taxable year(for further guidance, for example, seeRev. Proc. 89–15, 1989–1 C.B. 816, and§601.601(d)(2)(ii)(b) of this chapter).

(iv) Deferred transactions—(A) In gen-eral. If the replacement MACRS propertyis not acquired until after the disposition ofthe relinquished MACRS property, takinginto account the applicable convention ofthe relinquished MACRS property and re-placement MACRS property, depreciationis not allowable during the period be-tween the disposition of the relinquishedMACRS property and the acquisitionof the replacement MACRS property.The recovery period for the replacementMACRS property is suspended duringthis period. For purposes of paragraph(c)(5)(ii) of this section, only the depre-ciable exchanged basis of the replacementMACRS property is taken into accountfor calculating the amount in paragraph(c)(5)(ii)(B)(2) of this section if the year ofreplacement is a taxable year subsequentto the year of disposition.

(B) Allowable depreciation for a quali-fied intermediary. [Reserved].

(v) Remaining recovery period. Theremaining recovery period of the replace-ment MACRS property is determined asof the beginning of the year of dispositionof the relinquished MACRS property. Forpurposes of determining the remaining re-covery period of the replacement MACRSproperty, the replacement MACRS prop-erty is deemed to have been originallyplaced in service under the conventiondetermined under paragraph (c)(4)(v)of this section but at the time the relin-quished MACRS property was deemed tobe placed in service under the conventionthat applied to it when it was placed inservice.

(6) Examples. The application of thisparagraph (c) is illustrated by the follow-ing examples:

Example 1. A1, a calendar-year taxpayer, ex-changes Building M, an office building, for BuildingN, a warehouse in a like-kind exchange. BuildingM is relinquished in July 2004 and Building N is ac-quired and placed in service in October 2004. A1 didnot make any elections under section 168 for eitherBuilding M or Building N. The unadjusted deprecia-ble basis of Building M was $4,680,000 when placedin service in July 1997. Since the recovery periodand depreciation method prescribed under section168 for Building N (39 years, straight line method)are the same as the recovery period and depreciationmethod prescribed under section 168 for BuildingM (39 years, straight line method), Building N is

depreciated over the remaining recovery period of,and using the same depreciation method and conven-tion as that of, Building M. Applying the applicableconvention, Building M is deemed disposed of onJuly 15, 2004, and Building N is placed in service onOctober 15, 2004. Thus, Building N will be depreci-ated using the straight line method over a remainingrecovery period of 32 years beginning in October2004 (the remaining recovery period of 32 years and6.5 months at the beginning of 2004, less the 6.5months of depreciation taken prior to the dispositionof the exchanged MACRS property (Building M) in2004). For 2004, the year in which the transactiontakes place, the depreciation allowance for BuildingM is ($120,000)(6.5/12) which equals $65,000. Thedepreciation allowance for Building N for 2004 is($120,000)(2.5/12) which equals $25,000. For 2005and subsequent years, Building N is depreciatedover the remaining recovery period of, and using thesame depreciation method and convention as thatof, Building M. Thus, the depreciation allowancefor Building N is the same as Building M, namely$10,000 per month.

Example 2. B, a calendar-year taxpayer, placedin service Bridge P in January 1998. Bridge P is de-preciated using the half-year convention. In January2004, B exchanges Bridge P for Building Q, an apart-ment building, in a like-kind exchange. Pursuant toparagraph (k)(2)(i) of this section, B decided to apply§1.168(i)–6 to the exchange of Bridge P for BuildingQ, the replacement MACRS property. B did not makeany elections under section 168 for either Bridge P orBuilding Q. Since the recovery period prescribed un-der section 168 for Building Q (27.5 years) is longerthan that of Bridge P (15 years), Building Q is de-preciated as if it had originally been placed in ser-vice in July 1998 and disposed of in July 2004 usinga 27.5 year recovery period. Additionally, since thedepreciation method prescribed under section 168 forBuilding Q (straight line method) is less acceleratedthan that of Bridge P (150-percent declining balancemethod), then the depreciation allowance for Build-ing Q is computed using the straight line method.Thus, when Building Q is acquired and placed in ser-vice in 2004, its basis is depreciated over the remain-ing 21.5 year recovery period using the straight linemethod of depreciation and the mid-month conven-tion beginning in July 2004.

Example 3. C, a calendar-year taxpayer, placed inservice Building R, a restaurant, in January 1996. InJanuary 2004, C exchanges Building R for Tower S,a radio transmitting tower, in a like-kind exchange.Pursuant to paragraph (k)(2)(i) of this section, Cdecided to apply §1.168(i)–6 to the exchange ofBuilding R for Tower S, the replacement MACRSproperty. C did not make any elections under section168 for either Building R or Tower S. Since therecovery period prescribed under section 168 forTower S (15 years) is shorter than that of Building R(39 years), Tower S is depreciated over the remainingrecovery period of Building R. Additionally, sincethe depreciation method prescribed under section168 for Tower S (150% declining balance method) ismore accelerated than that of Building R (straight linemethod), then the depreciation allowance for Tower Sis also computed using the same depreciation methodas Building R. Thus, Tower S is depreciated overthe remaining 31 year recovery period of Building Rusing the straight line method of depreciation and the

2007–14 I.R.B. 855 April 2, 2007

mid-month convention. Alternatively, C may electunder paragraph (i) of this section to treat Tower Sas though it is placed in service in January 2004. Insuch case, C uses the applicable recovery period, de-preciation method, and convention prescribed undersection 168 for Tower S.

Example 4. (i) In February 2002, D, a calen-dar-year taxpayer and manufacturer of rubber prod-ucts, acquired for $60,000 and placed in service AssetT (a special tool) and depreciated Asset T using thestraight line method election under section 168(b)(5)and the mid-quarter convention over its 3-year recov-ery period. D elected not to deduct the additionalfirst year depreciation for 3-year property placed inservice in 2002. In June 2004, D exchanges AssetT for Asset U (not a special tool) in a like-kind ex-change. D elected not to deduct the additional firstyear depreciation for 7-year property placed in ser-vice in 2004. Since the recovery period prescribedunder section 168 for Asset U (7 years) is longer thanthat of Asset T (3 years), Asset U is depreciated asif it had originally been placed in service in Febru-ary 2002 using a 7-year recovery period. Addition-ally, since the depreciation method prescribed undersection 168 for Asset U (200-percent declining bal-ance method) is more accelerated than that of AssetT (straight line method) at the time of disposition, thedepreciation allowance for Asset U is computed us-ing the straight line method. Asset U is depreciatedover its remaining recovery period of 4.75 years us-ing the straight line method of depreciation and themid-quarter convention.

(ii) The 2004 depreciation allowance for Asset Tis $7,500 ($20,000 allowable depreciation deductionfor 2004) × 4.5 months ÷ 12).

(iii) The depreciation rate in 2004 for Asset U is0.1951 (1 ÷ 5.125 years (the length of the applica-ble recovery period remaining as of the beginning of2004)). Therefore, the depreciation allowance for As-set U in 2004 is $2,744 (0.1951 × $22,500 (the sumof the $15,000 depreciable exchanged basis of AssetU ($22,500 adjusted depreciable basis at the begin-ning of 2004 for Asset T, less the $7,500 depreciationallowable for Asset T for 2004) and the $7,500 depre-ciation allowable for Asset T for 2004) × 7.5 months÷ 12).

Example 5. The facts are the same as in Example4 except that D exchanges Asset T for Asset U in June2005, in a like-kind exchange. Under these facts, theremaining recovery period of Asset T at the beginningof 2005 is 1.5 months and, as a result, is less thanthe 5-month period between the beginning of 2005(year of disposition) and June 2005 (time of disposi-tion). Accordingly, pursuant to paragraph (c)(5)(i)(B)of this section, the 2005 depreciation allowance forAsset T is $2,500 ($2,500 adjusted depreciable ba-sis at the beginning of 2005 ($60,000 original basisminus $17,500 depreciation deduction for 2002 mi-nus $20,000 depreciation deduction for 2003 minus$20,000 depreciation deduction for 2004)). Becausethe exchanged basis of asset U is $0.00 no deprecia-tion is allowable for asset U.

Example 6. On January 1, 2004, E, a calendar-year taxpayer, acquired and placed in service CanopyV, a gas station canopy. The purchase price of CanopyV was $60,000. On August 1, 2004, Canopy V wasdestroyed in a hurricane and was therefore no longerusable in E’s business. On October 1, 2004, as part ofthe involuntary conversion, E acquired and placed in

service new Canopy W with the insurance proceedsE received due to the loss of Canopy V. E electednot to deduct the additional first year depreciation for5-year property placed in service in 2004. E depre-ciates both canopies under the general depreciationsystem of section 168(a) by using the 200-percent de-clining balance method of depreciation, a 5-year re-covery period, and the half-year convention. No de-preciation deduction is allowable for Canopy V. Thedepreciation deduction allowable for Canopy W for2004 is $12,000 ($60,000 × the annual depreciationrate of .40 × ½ year). For 2005, the depreciation de-duction for Canopy W is $19,200 ($48,000 adjustedbasis x the annual depreciation rate of .40).

Example 7. The facts are the same as in Exam-ple 6, except that E did not make the election out ofthe additional first year depreciation for 5-year prop-erty placed in service in 2004. E depreciates bothcanopies under the general depreciation system ofsection 168(a) by using the 200-percent declining bal-ance method of depreciation, a 5-year recovery pe-riod, and the half-year convention. No depreciationdeduction is allowable for Canopy V. For 2004, Eis allowed a 50-percent additional first year depreci-ation deduction of $30,000 for Canopy W (the un-adjusted depreciable basis of $60,000 multiplied by.50), and a regular MACRS depreciation deductionof $6,000 for Canopy W (the depreciable exchangedbasis of $30,000 multiplied by the annual deprecia-tion rate of .40 × ½ year). For 2005, E is alloweda regular MACRS depreciation deduction of $9,600for Canopy W (the depreciable exchanged basis of$24,000 ($30,000 minus regular 2003 depreciation of$6,000) multiplied by the annual depreciation rate of.40).

Example 8. In January 2001, F, a calendar-yeartaxpayer, places in service a paved parking lot, LotW, and begins depreciating Lot W over its 15-yearrecovery period. F’s unadjusted depreciable basis inLot W is $1,000x. On April 1, 2004, F disposes ofLot W in a like-kind exchange for Building X, whichis nonresidential real property. Lot W is depreciatedusing the 150 percent declining balance method andthe half-year convention. Building X is depreciatedusing the straight-line method with a 39-year recov-ery period and using the mid-month convention. BothLot W and Building X were in service at the time ofthe exchange. Because Lot W was depreciated usingthe half-year convention, it is deemed to have beenplaced in service on July 1, 2001, the first day ofthe second half of 2001, and to have been disposedof on July 1, 2004, the first day of the second halfof 2004. To determine the remaining recovery pe-riod of Building X at the time of replacement, Build-ing X is deemed to have been placed in service onJuly 1, 2001, and removed from service on July 1,2004. Thus, Building X is deemed to have been inservice, at the time of replacement, for 3 years (36months=5.5 months in 2001 + 12 months in 2002 +12 months in 2003 + 6.5 months in 2004) and its re-maining recovery period is 36 years (39 - 3). BecauseBuilding X is deemed to be placed in service at thetime of replacement, July 1, 2004, the first day of thesecond half of 2004, Building X is depreciated for5.5 months in 2004. However, at the beginning ofthe year of replacement the remaining recovery pe-riod for Building X is 36 years and 6.5 months (39years - 2 years and 5.5 months (5.5 months in 2001+ 12 months in 2002 + 12 months in 2003)). The

depreciation rate for building X for 2004 is 0.02737(= 1/(39-2-5.5/12)). For 2005, the depreciation ratefor Building X is 0.02814 (= 1/(39-3-5.5/12)).

Example 9. The facts are the same as in Exam-ple 8. F did not make the election under paragraph(i) of this section for Building Y in the initial ex-change. In January 2006, F exchanges Building Yfor Building Z, an office building, in a like-kind ex-change. F did not make any elections under section168 for either Building Y or Building Z. Since the re-covery period prescribed for Building Y as a resultof the initial exchange (39 years) is longer than thatof Building Z (27.5 years), Building Z is depreciatedover the remaining 33 years of the recovery period ofBuilding Y. The depreciation methods are the samefor both Building Y and Building Z so F’s exchangedbasis in Building Z is depreciated over 33 years, us-ing the straight-line method and the mid-month con-vention, beginning in January 2006. Alternatively, Fcould have made the election under paragraph (i) ofthis section. If F makes such election, Building Z istreated as placed in service by F when acquired in Jan-uary 2006 and F would recover its exchanged basisin Building Z over 27.5 years, using the straight linemethod and the mid-month convention, beginning inJanuary 2006.

(d) Special rules for determining depre-ciation allowances—(1) Excess basis—(i)In general. Any excess basis in the re-placement MACRS property is treated asproperty that is placed in service by theacquiring taxpayer in the year of replace-ment. Thus, the depreciation allowancesfor the depreciable excess basis are deter-mined by using the applicable recovery pe-riod, depreciation method, and conventionprescribed under section 168 for the prop-erty at the time of replacement. However,if replacement MACRS property is dis-posed of during the same taxable year therelinquished MACRS property is placed inservice by the acquiring taxpayer, no de-preciation deduction is allowable for ei-ther MACRS property. See paragraph (g)of this section regarding the application ofsection 179. See paragraph (h) of this sec-tion regarding the application of section168(k) or 1400L(b).

(ii) Example. The application of thisparagraph (d)(1) is illustrated by the fol-lowing example:

Example. In 1989, G placed in service a hospi-tal. On January 16, 2004, G exchanges this hospi-tal plus $2,000,000 cash for an office building in alike-kind exchange. On January 16, 2004, the hospi-tal has an adjusted depreciable basis of $1,500,000.After the exchange, the basis of the office building is$3,500,000. Pursuant to paragraph (k)(2)(i) of thissection, G decided to apply §1.168(i)–6 to the ex-change of the hospital for the office building, the re-placement MACRS property. The depreciable ex-changed basis of the office building is depreciated inaccordance with paragraph (c) of this section. Thedepreciable excess basis of $2,000,000 is treated as

April 2, 2007 856 2007–14 I.R.B.

being placed in service by G in 2004 and, as a re-sult, is depreciated using the applicable depreciationmethod, recovery period, and convention prescribedfor the office building under section 168 at the timeof replacement.

(2) Depreciable and nondepreciableproperty—(i) If land or other nondepre-ciable property is acquired in a like-kindexchange for, or as a result of an involun-tary conversion of, depreciable property,the land or other nondepreciable propertyis not depreciated. If both MACRS andnondepreciable property are acquired ina like-kind exchange for, or as part ofan involuntary conversion of, MACRSproperty, the basis allocated to the nonde-preciable property (as determined undersection 1031(d) and the regulations undersection 1031(d) or section 1033(b) andthe regulations under section 1033(b)) isnot depreciated and the basis allocatedto the replacement MACRS property (asdetermined under section 1031(d) andthe regulations under section 1031(d) orsection 1033(b) and the regulations undersection 1033(b)) is depreciated in accor-dance with this section.

(ii) If MACRS property is acquired, orif both MACRS and nondepreciable prop-erty are acquired, in a like-kind exchangefor, or as part of an involuntary conver-sion of, land or other nondepreciable prop-erty, the basis in the replacement MACRSproperty that is attributable to the relin-quished nondepreciable property is treatedas though the replacement MACRS prop-erty is placed in service by the acquir-ing taxpayer in the year of replacement.Thus, the depreciation allowances for thereplacement MACRS property are deter-mined by using the applicable recovery pe-riod, depreciation method, and conventionprescribed under section 168 for the re-placement MACRS property at the timeof replacement. See paragraph (g) of thissection regarding the application of section179. See paragraph (h) of this section re-garding the application of section 168(k)or 1400L(b).

(3) Depreciation limitations for auto-mobiles—(i) In general. Depreciation al-lowances under section 179 and section167 (including allowances under sections168 and 1400L(b)) for a passenger auto-mobile, as defined in section 280F(d)(5),are subject to the limitations of section280F(a). The depreciation allowances fora passenger automobile that is replacement

MACRS property (replacement MACRSpassenger automobile) generally are lim-ited in any taxable year to the replacementautomobile section 280F limit for the tax-able year. The taxpayer’s basis in the re-placement MACRS passenger automobileis treated as being comprised of two sep-arate components. The first component isthe exchanged basis and the second com-ponent is the excess basis, if any. Thedepreciation allowances for a passengerautomobile that is relinquished MACRSproperty (relinquished MACRS passengerautomobile) for the taxable year generallyare limited to the relinquished automobilesection 280F limit for that taxable year. Inthe year of disposition the sum of the de-preciation deductions for the relinquishedMACRS passenger automobile and the re-placement MACRS passenger automobilemay not exceed the replacement automo-bile section 280F limit unless the taxpayermakes the election under §1.168(i)–6(i).For purposes of this paragraph (d)(3), thefollowing definitions apply:

(A) Replacement automobile section280F limit is the limit on depreciationdeductions under section 280F(a) for thetaxable year based on the time of re-placement of the replacement MACRSpassenger automobile (including the effectof any elections under section 168(k) orsection 1400L(b), as applicable).

(B) Relinquished automobile section280F limit is the limit on depreciationdeductions under section 280F(a) for thetaxable year based on when the relin-quished MACRS passenger automobilewas placed in service by the taxpayer.

(ii) Order in which limitations on depre-ciation under section 280F(a) are applied.Generally, depreciation deductions allow-able under section 280F(a) reduce the basisin the relinquished MACRS passenger au-tomobile and the exchanged basis of the re-placement MACRS passenger automobile,before the excess basis of the replacementMACRS passenger automobile is reduced.The depreciation deductions for the relin-quished MACRS passenger automobile inthe year of disposition and the replacementMACRS passenger automobile in the yearof replacement and each subsequent tax-able year are allowable in the following or-der:

(A) The depreciation deduction allow-able for the relinquished MACRS passen-ger automobile as determined under para-

graph (c)(5)(i) of this section for the yearof disposition to the extent of the smaller ofthe replacement automobile section 280Flimit and the relinquished automobile sec-tion 280F limit, if the year of dispositionis the year of replacement. If the yearof replacement is a taxable year subse-quent to the year of disposition, the de-preciation deduction allowable for the re-linquished MACRS passenger automobilefor the year of disposition is limited tothe relinquished automobile section 280Flimit.

(B) The additional first year depre-ciation allowable on the remaining ex-changed basis (remaining carryover basisas determined under §1.168(k)–1(f)(5)or §1.1400L(b)–1(f)(5), as applicable)of the replacement MACRS passen-ger automobile, as determined under§1.168(k)–1(f)(5) or §1.1400L(b)–1(f)(5),as applicable, to the extent of the excess ofthe replacement automobile section 280Flimit over the amount allowable underparagraph (d)(3)(ii)(A) of this section.

(C) The depreciation deduction allow-able for the taxable year on the deprecia-ble exchanged basis of the replacementMACRS passenger automobile deter-mined under paragraph (c) of this sectionto the extent of any excess over the sum ofthe amounts allowable under paragraphs(d)(3)(ii)(A) and (B) of this section of thesmaller of the replacement automobilesection 280F limit and the relinquishedautomobile section 280F limit.

(D) Any section 179 deduction allow-able in the year of replacement on the ex-cess basis of the replacement MACRS pas-senger automobile to the extent of the ex-cess of the replacement automobile section280F limit over the sum of the amountsallowable under paragraphs (d)(3)(ii)(A),(B), and (C) of this section.

(E) The additional first year depreci-ation allowable on the remaining excessbasis of the replacement MACRS pas-senger automobile, as determined under§1.168(k)–1(f)(5) or §1.1400L(b)–1(f)(5),as applicable, to the extent of the excess ofthe replacement automobile section 280Flimit over the sum of the amounts allow-able under paragraphs (d)(3)(ii)(A), (B),(C), and (D) of this section.

(F) The depreciation deduction allow-able under paragraph (d) of this section forthe depreciable excess basis of the replace-ment MACRS passenger automobile to the

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extent of the excess of the replacement au-tomobile section 280F limit over the sumof the amounts allowable under paragraphs(d)(3)(ii)(A), (B), (C), (D), and (E) of thissection.

(iii) Examples. The application of thisparagraph (d)(3) is illustrated by the fol-lowing examples:

Example 1. H, a calendar-year taxpayer, acquiredand placed in service Automobile X in January 2000for $30,000 to be used solely for H’s business. In De-cember 2003, H exchanges, in a like-kind exchange,Automobile X plus $15,000 cash for new Automo-bile Y that will also be used solely in H’s business.Automobile Y is 50-percent bonus depreciation prop-erty for purposes of section 168(k)(4). Both automo-biles are depreciated using the double declining bal-ance method, the half-year convention, and a 5-yearrecovery period. Pursuant to §1.168(k)–1(g)(3)(ii)and paragraph (k)(2)(i) of this section, H decided toapply §1.168(i)–6 to the exchange of Automobile Xfor Automobile Y, the replacement MACRS property.The relinquished automobile section 280F limit for2003 for Automobile X is $1,775. The replacementautomobile section 280F limit for Automobile Y is$10,710. The exchanged basis for Automobile Y is$17,315 ($30,000 less total depreciation allowable of$12,685 (($3,060 for 2000, $4,900 for 2001, $2,950for 2002, and $1,775 for 2003)). Without taking sec-tion 280F into account, the additional first year depre-ciation deduction for the remaining exchanged basisis $8,658 ($17,315 x 0.5). Because this amount isless than $8,935 ($10,710 (the replacement automo-bile section 280F limit for 2003 for Automobile Y) -$1,775 (the depreciation allowable for Automobile Xfor 2003)), the additional first year depreciation de-duction for the exchanged basis is $8,658. No de-preciation deduction is allowable in 2003 for the de-preciable exchanged basis because the depreciationdeductions taken for Automobile X and the remain-ing exchanged basis exceed the exchanged automo-bile section 280F limit. An additional first year de-preciation deduction of $277 is allowable for the ex-cess basis of $15,000 in Automobile Y. Thus, at theend of 2003 the adjusted depreciable basis in Auto-mobile Y is $23,379 comprised of adjusted deprecia-ble exchanged basis of $8,657 ($17,315 (exchangedbasis) – $8,658 (additional first year depreciation forexchanged basis)) and of an adjusted depreciable ex-cess basis of $14,723 ($15,000 (excess basis) - $277(additional first year depreciation for 2003)).

Example 2. The facts are the same as in Ex-ample 1, except that H used Automobile X only75 percent for business use. As such, the total al-lowable depreciation for Automobile X is reducedto reflect that the automobile is only used 75 per-cent for business. The total allowable depreciationof Automobile X is $9,513.75 ($2,295 for 2000($3,060 limit x .75), $3,675 for 2001 ($4,900 limitx .75), $2,212.50 for 2002 ($2,950 limit x .75), and$1,331.25 for 2003 ($1,775 limit x .75). However,under §1.280F–2T(g)(2)(ii)(A), the exchanged basisis reduced by the excess (if any) of the depreciationthat would have been allowable if the exchangedautomobile had been used solely for business overthe depreciation that was allowable in those years.Thus, the exchanged basis, for purposes of comput-ing depreciation, for Automobile Y is $17,315.

Example 3. The facts are the same as in Exam-ple 1, except that H placed in service Automobile Xin January 2002, and H elected not to claim the ad-ditional first year depreciation deduction for 5-yearproperty placed in service in 2002 and 2003. The re-linquished automobile section 280F limit for Auto-mobile X for 2003 is $4,900. Because the replace-ment automobile section 280F limit for 2003 for Au-tomobile Y ($3,060) is less than the relinquished au-tomobile section 280F limit for Automobile X for2003 and is less than $5,388 (($30,000 (cost) - $3,060(depreciation allowable for 2002)) x 0.4 x 6/12), thedepreciation that would be allowable for AutomobileX (determined without regard to section 280F) in theyear of disposition, the depreciation for AutomobileX in the year of disposition is limited to $3,060. For2003 no depreciation is allowable for the excess basisand the exchanged basis in Automobile Y.

Example 4. AB, a calendar-year taxpayer, pur-chased and placed in service Automobile X1 in Feb-ruary 2000 for $10,000. X1 is a passenger auto-mobile subject to section 280F(a) and is used solelyfor AB’s business. AB depreciated X1 using a 5-year recovery period, the double declining balancemethod, and the half-year convention. As of Jan-uary 1, 2003, the adjusted depreciable basis of X1was $2,880 ($10,000 original cost minus $2,000 de-preciation deduction for 2000, minus $3,200 depre-ciation deduction for 2001, and $1,920 depreciationdeduction for 2002). In November 2003, AB ex-changes, in a like-kind exchange, Automobile X1plus $14,000 cash for new Automobile Y1 that willbe used solely in AB’s business. Automobile Y1 is50-percent bonus depreciation property for purposesof section 168(k)(4) and qualifies for the expensingelection under section 179. Pursuant to paragraph§1.168(k)–1(g)(3)(ii) and paragraph (k)(2)(i) of thissection, AB decided to apply §1.168(i)–6 to the ex-change of Automobile X1 for Automobile Y1, thereplacement MACRS property. AB also makes theelection under section 179 for the excess basis of Au-tomobile Y1. AB depreciates Y1 using a five-year re-covery period, the double declining balance methodand the half-year convention. For 2003, the relin-quished automobile section 280F limit for Automo-bile X1 is $1,775 and the replacement automobilesection 280F limit for 2003 for Automobile Y1 is$10,710.

(i) The 2003 depreciation deduction for Automo-bile X1 is $576. The depreciation deduction calcu-lated for X1 is $576 (the adjusted depreciable basis ofAutomobile X1 at the beginning of 2003 of $2,880 ×40% × ½ year), which is less than the relinquished au-tomobile section 280F limit and the replacement au-tomobile section 280F limit.

(ii) The additional first year depreciation deduc-tion for the exchanged basis is $1,152. The additionalfirst year depreciation deduction of $1,152 (remain-ing exchanged basis of $2,304 ($2,880 adjusted ba-sis of Automobile X1 at the beginning of 2003 minus$576) × 0.5)) is less than the replacement automobilesection 280F limit minus $576.

(iii) AB’s MACRS depreciation deduction allow-able in 2003 for the remaining exchanged basis of$1,152 is $47 (the relinquished automobile section280F limit of $1,775 less the depreciation deductionof $576 taken for Automobile X1 less the additionalfirst year depreciation deduction of $1,152 taken forthe exchanged basis) which is less than the depre-

ciation deduction calculated for the depreciable ex-changed basis.

(iv) For 2003, AB takes a $1,400 section 179 de-duction for the excess basis of Automobile Y1. ABmust reduce the excess basis of $14,000 by the section179 deduction of $1,400 to determine the remainingexcess basis of $12,600.

(v) For 2003, AB is allowed a 50-percent addi-tional first year depreciation deduction of $6,300 (theremaining excess basis of $12,600 multiplied by .50).

(vi) For 2003, AB’s depreciation deduction forthe depreciable excess basis is limited to $1,235.The depreciation deduction computed without regardto the replacement automobile section 280F limitis $1,260 ($6,300 depreciable excess basis x 0.4 x6/12). However the depreciation deduction for thedepreciable excess basis is limited to $1,235 ($10,710(replacement automobile section 280F limit) - $576(depreciation deduction for Automobile X1) - $1,152(additional first year depreciation deduction for theexchanged basis) - $47 (depreciation deduction forexchanged basis) $1,400 (section 179 deduction) -$6,300 (additional first year depreciation deductionfor remaining excess basis)).

(4) Involuntary conversion for whichthe replacement MACRS property is ac-quired and placed in service before dis-position of relinquished MACRS property.If, in an involuntary conversion, a tax-payer acquires and places in service thereplacement MACRS property before thedate of disposition of the relinquishedMACRS property, the taxpayer depreci-ates the unadjusted depreciable basis ofthe replacement MACRS property un-der section 168 beginning in the taxableyear when the replacement MACRS prop-erty is placed in service by the taxpayerand by using the applicable depreciationmethod, recovery period, and conven-tion prescribed under section 168 forthe replacement MACRS property at theplaced-in-service date. However, at thetime of disposition of the relinquishedMACRS property, the taxpayer deter-mines the exchanged basis and the excessbasis of the replacement MACRS propertyand begins to depreciate the deprecia-ble exchanged basis of the replacementMACRS property in accordance withparagraph (c) of this section. The depre-ciable excess basis of the replacementMACRS property continues to be de-preciated by the taxpayer in accordancewith the first sentence of this paragraph(d)(4). Further, in the year of dispositionof the relinquished MACRS property, thetaxpayer must include in taxable incomethe excess of the depreciation deductionsallowable on the unadjusted depreciablebasis of the replacement MACRS prop-erty over the depreciation deductions that

April 2, 2007 858 2007–14 I.R.B.

would have been allowable to the tax-payer on the depreciable excess basis ofthe replacement MACRS property fromthe date the replacement MACRS prop-erty was placed in service by the taxpayer(taking into account the applicable con-vention) to the time of disposition of therelinquished MACRS property. However,see §1.168(k)–1(f)(5)(v) for replacementMACRS property that is qualified propertyor 50-percent bonus depreciation propertyand §1.1400L(b)–1(f)(5) for replacementMACRS property that is qualified NewYork Liberty Zone property.

(e) Use of optional depreciation ta-bles—(1) Taxpayer not bound by prior useof table. If a taxpayer used an optionaldepreciation table for the relinquishedMACRS property, the taxpayer is not re-quired to use an optional table for thedepreciable exchanged basis of the re-placement MACRS property. Conversely,if a taxpayer did not use an optional depre-ciation table for the relinquished MACRSproperty, the taxpayer may use the appro-priate table for the depreciable exchangedbasis of the replacement MACRS property.If a taxpayer decides not to use the tablefor the depreciable exchanged basis of thereplacement MACRS property, the depre-ciation allowance for this property for theyear of replacement and subsequent tax-able years is determined under paragraph(c) of this section. If a taxpayer decidesto use the optional depreciation tables, nodepreciation deduction is allowable forMACRS property placed in service bythe acquiring taxpayer and subsequentlyexchanged or involuntarily converted bysuch taxpayer in the same taxable year,and, if, during the same taxable year,MACRS property is placed in service bythe acquiring taxpayer, exchanged or in-voluntarily converted by such taxpayer,and the replacement MACRS property isdisposed of by such taxpayer, no depre-ciation deduction is allowable for eitherMACRS property.

(2) Determination of the deprecia-tion deduction—(i) Relinquished MACRSproperty. In the year of disposition, the de-preciation allowance for the relinquishedMACRS property is computed by mul-tiplying the unadjusted depreciable basis(less the amount of the additional first yeardepreciation deduction allowed or allow-able, whichever is greater, under section168(k) or section 1400L(b), as applicable)

of the relinquished MACRS property bythe annual depreciation rate (expressedas a decimal equivalent) specified in theappropriate table for the recovery yearcorresponding to the year of disposition.This product is then multiplied by a frac-tion, the numerator of which is the numberof months (including fractions of months)the property is deemed to be placed inservice during the year of the exchangeor involuntary conversion (taking into ac-count the applicable convention) and thedenominator of which is 12. However,if the year of disposition is less than 12months, the depreciation allowance de-termined under this paragraph (e)(2)(i)must be adjusted for a short taxable year(for further guidance, for example, seeRev. Proc. 89–15, 1989–1 C.B. 816, and§601.601(d)(2)(ii)(b) of this chapter).

(ii) Replacement MACRS prop-erty—(A) Determination of the appro-priate optional depreciation table. If ataxpayer chooses to use the appropriateoptional depreciation table for the depre-ciable exchanged basis, the depreciationallowances for the depreciable exchangedbasis beginning in the year of replacementare determined by choosing the optionaldepreciation table that corresponds to therecovery period, depreciation method, andconvention of the replacement MACRSproperty determined under paragraph (c)of this section.

(B) Calculating the depreciation de-duction for the replacement MACRSproperty. (1) The depreciation deduc-tion for the taxable year is computed byfirst determining the appropriate recoveryyear in the table identified under para-graph (e)(2)(ii)(A) of this section. Theappropriate recovery year for the year ofreplacement is the same as the recoveryyear for the year of disposition, regardlessof the taxable year in which the replace-ment property is acquired. For example,if the recovery year for the year of dispo-sition would have been year 4 in the tablethat applied before the disposition of therelinquished MACRS property, then therecovery year for the year of replacementis Year 4 in the table identified under para-graph (e)(2)(ii)(A) of this section.

(2) Next, the annual depreciation rate(expressed as a decimal equivalent) foreach recovery year is multiplied by atransaction coefficient. The transactioncoefficient is the formula (1 / (1 - x))

where x equals the sum of the annual de-preciation rates from the table identifiedunder paragraph (e)(2)(ii)(A) of this sec-tion (expressed as a decimal equivalent)corresponding to the replacement MACRSproperty (as determined under paragraph(e)(2)(ii)(A) of this section) for the taxableyears beginning with the placed-in-serviceyear of the relinquished MACRS prop-erty through the taxable year immediatelyprior to the year of disposition. The prod-uct of the annual depreciation rate andthe transaction coefficient is multiplied bythe depreciable exchanged basis (takinginto account paragraph (e)(2)(i) of thissection). In the year of replacement, thisproduct is then multiplied by a fraction,the numerator of which is the number ofmonths (including fractions of months) theproperty is deemed to be placed in serviceby the acquiring taxpayer during the yearof replacement (taking into account theapplicable convention) and the denomina-tor of which is 12. However, if the yearof replacement is the year the relinquishedMACRS property is placed in serviceby the acquiring taxpayer, the precedingsentence does not apply. In addition, ifthe year of replacement is less than 12months, the depreciation allowance deter-mined under paragraph (e)(2)(ii) of thissection must be adjusted for a short taxableyear (for further guidance, for example,see Rev. Proc. 89–15, 1989–1 C.B. 816,and §601.601(d)(2)(ii)(b) of this chapter).

(iii) Unrecovered basis. If the replace-ment MACRS property would have unre-covered depreciable basis after the final re-covery year (for example, due to a deferredexchange), the unrecovered basis is an al-lowable depreciation deduction in the tax-able year that corresponds to the final re-covery year unless the unrecovered basisis subject to a depreciation limitation suchas section 280F.

(3) Excess basis. As provided in para-graph (d)(1) of this section, any excess ba-sis in the replacement MACRS property istreated as property that is placed in serviceby the acquiring taxpayer at the time of re-placement. Thus, if the taxpayer choosesto use the appropriate optional deprecia-tion table for the depreciable excess basisin the replacement MACRS property, thedepreciation allowances for the deprecia-ble excess basis are determined by multi-plying the depreciable excess basis by theannual depreciation rate (expressed as a

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decimal equivalent) specified in the appro-priate table for each taxable year. The ap-propriate table for the depreciable excessbasis is based on the depreciation method,recovery period, and convention applica-ble to the depreciable excess basis undersection 168 at the time of replacement.However, If the year of replacement isless than 12 months, the depreciation al-lowance determined under this paragraph(e)(3) must be adjusted for a short taxableyear (for further guidance, for example,see Rev. Proc. 89–15, 1989–1 C.B. 816,and §601.601(d)(2)(ii)(b) of this chapter).

(4) Examples. The application of thisparagraph (e) is illustrated by the follow-ing examples:

Example 1. J, a calendar-year taxpayer, acquired5-year property for $10,000 and placed it in service inJanuary 2001. J uses the optional tables to depreciatethe property. J uses the half-year convention and didnot make any elections for the property. In Decem-ber 2003, J exchanges the 5-year property for used7-year property in a like-kind exchange. Pursuant toparagraph (k)(2)(i) of this section, J decided to apply§1.168(i)–6 to the exchange of the 5-year property forthe 7-year property, the replacement MACRS prop-erty. The depreciable exchanged basis of the 7-yearproperty equals the adjusted depreciable basis of the5-year property at the time of disposition of the relin-quished MACRS property, namely $3,840 ($10,000less $2,000 depreciation in 2001, $3,200 deprecia-tion in 2002, and $960 depreciation in 2003). J mustfirst determine the appropriate optional depreciationtable pursuant to paragraph (c) of this section. Sincethe replacement MACRS property has a longer re-covery period and the same depreciation method asthe relinquished MACRS property, J uses the optionaldepreciation table corresponding to a 7-year recov-ery period, the 200% declining balance method, andthe half-year convention (because the 5-year propertywas depreciated using a half-year convention). Hadthe replacement MACRS property been placed in ser-vice in the same taxable year as the placed-in-ser-vice year of the relinquished MACRS property, thedepreciation allowance for the replacement MACRSproperty for the year of replacement would be de-termined using recovery year 3 of the optional ta-ble. The depreciation allowance equals the deprecia-ble exchanged basis ($3,840) multiplied by the annualdepreciation rate for the current taxable year (.1749for recovery year 3) as modified by the transactioncoefficient [1 / (1 - (.1429 + .2449))] which equals1.6335. Thus, J multiplies $3,840, its depreciableexchanged basis in the replacement MACRS prop-erty, by the product of .1749 and 1.6335, and then byone-half, to determine the depreciation allowance for2003, $549. For 2004, J multiples its depreciable ex-changed basis in the replacement MACRS propertydetermined at the time of replacement of $3,840 bythe product of the modified annual depreciation ratefor the current taxable year (.1249 for recovery year4) and the transaction coefficient (1.6335) to deter-mine its depreciation allowance of $783.

Example 2. K, a calendar-year taxpayer, acquiredused Asset V for $100,000 and placed it in service

in January 1999. K depreciated Asset V under thegeneral depreciation system of section 168(a) byusing a 5-year recovery period, the 200-percentdeclining balance method of depreciation, and thehalf-year convention. In December 2003, as part ofthe involuntary conversion, Asset V is involuntarilyconverted due to an earthquake. In October 2005, Kpurchases used Asset W with the insurance proceedsfrom the destruction of Asset V and places AssetW in service to replace Asset V. Pursuant to para-graph (k)(2)(i) of this section, K decided to apply§1.168(i)–6 to the involuntary conversion of AssetV with the replacement of Asset W, the replacementMACRS property. If Asset W had been placedin service when Asset V was placed in service, itwould have been depreciated using a 7-year recoveryperiod, the 200-percent declining balance method,and the half-year convention. K uses the optionaldepreciation tables to depreciate Asset V and AssetW. For 2003 (recovery year 5 on the optional table),the depreciation deduction for Asset V is $5,760((0.1152)($100,000)(1/2)). Thus, the adjusted depre-ciable basis of Asset V at the time of replacement is$11,520 ($100,000 less $20,000 depreciation in 1999,$32,000 depreciation in 2000, $19,200 depreciationin 2001, $11,520 depreciation in 2002, and $5,760depreciation in 2003). Under the table that appliedto Asset V, the year of disposition was recovery year5 and the depreciation deduction was determinedunder the straight line method. The table that appliesfor Asset W is the table that applies the straight linedepreciation method, the half-year convention, anda 7-year recovery period. The appropriate recoveryyear under this table is recovery year 5. The depre-ciation deduction for Asset W for 2005 is $1,646(($11,520)(0.1429)(1/(1–0.5))(1/2)). Thus, the de-preciation deduction for Asset W in 2006 (recoveryyear 6) is $3,290 ($11,520)(0.1428)(1/(1–0.5)). Thedepreciation deduction for 2007 (recovery year 7) is$3,292 (($11,520)(.1429)(1/(1-.5))). The deprecia-tion deduction for 2008 (recovery year 8) is $3,292($11,520 less allowable depreciation for Asset W for2005 through 2007 ($1,646 + $3,290 + $3,292)).

Example 3. L, a calendar-year taxpayer, placedin service used Computer X in January 2002 for$5,000. L depreciated Computer X under the generaldepreciation system of section 168(a) by using the200-percent declining balance method of deprecia-tion, a 5-year recovery period, and the half-year con-vention. Computer X is destroyed in a fire in March2004. For 2004, the depreciation deduction allow-able for Computer X equals $480 ([($5,000)(.1920)]x (1/2)). Thus, the adjusted depreciable basis ofComputer X was $1,920 when it was destroyed($5,000 unadjusted depreciable basis less $1,000depreciation for 2002, $1,600 depreciation for 2003,and $480 depreciation for 2004). In April 2004, aspart of the involuntary conversion, L acquired andplaced in service used Computer Y with insuranceproceeds received due to the loss of Computer X.Computer Y will be depreciated using the same de-preciation method, recovery period, and conventionas Computer X. L elected to use the optional depre-ciation tables to compute the depreciation allowancefor Computer X and Computer Y. The depreciationdeduction allowable for 2004 for Computer Y equals$384 ([$1,920 x (.1920)(1/(1-.52))] x (1/2)).

(f) Mid-quarter convention. For pur-poses of applying the 40-percent test un-

der section 168(d) and the regulations un-der section 168(d), the following rules ap-ply:

(1) Exchanged basis. If, in a taxableyear, MACRS property is placed in serviceby the acquiring taxpayer (but not as a re-sult of a like-kind exchange or involuntaryconversion) and—

(i) In the same taxable year, is dis-posed of by the acquiring taxpayer in alike-kind exchange or an involuntary con-version and replaced by the acquiring tax-payer with replacement MACRS property,the exchanged basis (determined withoutany adjustments for depreciation deduc-tions during the taxable year) of the re-placement MACRS property is taken intoaccount in the year of replacement in thequarter the relinquished MACRS propertywas placed in service by the acquiring tax-payer; or

(ii) In the same taxable year, is dis-posed of by the acquiring taxpayer ina like-kind exchange or an involuntaryconversion, and in a subsequent taxableyear is replaced by the acquiring taxpayerwith replacement MACRS property, theexchanged basis (determined without anyadjustments for depreciation deductionsduring the taxable year) of the replacementMACRS property is taken into account inthe year of replacement in the quarter thereplacement MACRS property was placedin service by the acquiring taxpayer; or

(iii) In a subsequent taxable year, dis-posed of by the acquiring taxpayer in alike-kind exchange or involuntary conver-sion, the exchanged basis of the replace-ment MACRS property is not taken intoaccount in the year of replacement.

(2) Excess basis. Any excess basis istaken into account in the quarter the re-placement MACRS property is placed inservice by the acquiring taxpayer.

(3) Depreciable property acquired fornondepreciable property. Both the ex-changed basis and excess basis of the re-placement MACRS property described inparagraph (d)(2)(ii) of this section (depre-ciable property acquired for nondeprecia-ble property), are taken into account fordetermining whether the mid-quarter con-vention applies in the year of replacement.

(g) Section 179 election. In applyingthe section 179 election, only the excessbasis, if any, in the replacement MACRSproperty is taken into account. If the re-placement MACRS property is described

April 2, 2007 860 2007–14 I.R.B.

in paragraph (d)(2)(ii) of this section (de-preciable property acquired for nondepre-ciable property), only the excess basis inthe replacement MACRS property is takeninto account.

(h) Additional first year deprecia-tion deduction. See §1.168(k)–1(f)(5)(for qualified property or 50-per-cent bonus depreciation property) and§1.1400L(b)–1(f)(5) (for qualified NewYork Liberty Zone property).

(i) Elections—(1) Election not to ap-ply this section. A taxpayer may electnot to apply this section for any MACRSproperty involved in a like-kind exchangeor involuntary conversion. An electionunder this paragraph (i)(1) applies only tothe taxpayer making the election and theelection applies to both the relinquishedMACRS property and the replacementMACRS property. If an election is madeunder this paragraph (i)(1), the depre-ciation allowances for the replacementMACRS property beginning in the yearof replacement and for the relinquishedMACRS property in the year of dis-position are not determined under thissection (except as otherwise providedin this paragraph). Instead, for depre-ciation purposes only, the sum of theexchanged basis and excess basis, if any,in the replacement MACRS property istreated as property placed in service bythe taxpayer at the time of replacementand the adjusted depreciable basis of therelinquished MACRS property is treatedas being disposed of by the taxpayer atthe time of disposition. While the relin-quished MACRS property is treated asbeing disposed of at the time of disposi-tion for depreciation purposes, the electionnot to apply this section does not affectthe application of sections 1031 and 1033(for example, if a taxpayer does not makethe election under this paragraph (i)(1)and does not recognize gain or loss un-der section 1031, this result would notchange if the taxpayer chose to make theelection under this paragraph (i)(1)). Inaddition, the election not to apply thissection does not affect the application ofsections 1245 and 1250 to the relinquishedMACRS property. Paragraphs (c)(5)(i)(determination of depreciation for relin-quished MACRS property in the year ofdisposition), (c)(5)(iii) (rules for deferredtransactions), (g) (section 179 election),and (h) (additional first year depreciation

deduction) of this section apply to prop-erty to which this paragraph (i)(1) applies.See paragraph (j) of this section for thetime and manner of making the electionunder this paragraph (i)(1).

(2) Election to treat certain replace-ment property as MACRS property. Ifthe tangible depreciable property acquiredby a taxpayer in a like-kind exchange orinvoluntary conversion (the replacementproperty) replaces tangible depreciableproperty for which the taxpayer made avalid election under section 168(f)(1) toexclude it from the application of MACRS(the relinquished property), the taxpayermay elect to treat, for depreciation pur-poses only, the sum of the exchangedbasis and excess basis, if any, of the re-placement property as MACRS propertythat is placed in service by the taxpayerat the time of replacement. An electionunder this paragraph (i)(2) applies only tothe taxpayer making the election and theelection applies to both the relinquishedproperty and the replacement property. Ifan election is made under this paragraph(i)(2), the adjusted depreciable basis ofthe relinquished property is treated asbeing disposed of by the taxpayer at thetime of disposition. Rules similar to thoseprovided in §§1.168(i)–6(b)(3) and (4)apply for purposes of determining the timeof disposition and time of replacementunder this paragraph (i)(2). While therelinquished property is treated as beingdisposed of at the time of disposition fordepreciation purposes, the election underthis paragraph (i)(2) does not affect the ap-plication of sections 1031 and 1033, andthe application of sections 1245 and 1250to the relinquished property. If an electionis made under this paragraph (i)(2), rulessimilar to those provided in paragraphs(c)(5)(iii) (rules for deferred transactions),(g) (section 179 election), and (h) (addi-tional first year depreciation deduction)of this section apply to property. Exceptas provided in paragraph (k)(3)(ii) of thissection, a taxpayer makes the election un-der this paragraph (i)(2) by claiming thedepreciation allowance as determined un-der MACRS for the replacement propertyon the taxpayer’s timely filed (includingextensions) original Federal tax return forthe placed-in-service year of the replace-ment property as determined under thisparagraph (i)(2).

(j) Time and manner of making electionunder paragraph (i)(1) of this section—(1)In general. The election provided in para-graph (i)(1) of this section is made sep-arately by each person acquiring replace-ment MACRS property. The election ismade for each member of a consolidatedgroup by the common parent of the group,by the partnership (and not by the part-ners separately) in the case of a partner-ship, or by the S corporation (and not bythe shareholders separately) in the case ofan S corporation. A separate election un-der paragraph (i)(1) of this section is re-quired for each like-kind exchange or in-voluntary conversion. The election pro-vided in paragraph (i)(1) of this sectionmust be made within the time and mannerprovided in paragraph (j)(2) and (3) of thissection and may not be made by the tax-payer in any other manner (for example,the election cannot be made through a re-quest under section 446(e) to change thetaxpayer’s method of accounting), exceptas provided in paragraph (k)(2) of this sec-tion.

(2) Time for making election. The elec-tion provided in paragraph (i)(1) of thissection must be made by the due date (in-cluding extensions) of the taxpayer’s Fed-eral tax return for the year of replacement.

(3) Manner of making election. Theelection provided in paragraph (i)(1) ofthis section is made in the manner providedfor on Form 4562, Depreciation and Amor-tization, and its instructions. If Form 4562is revised or renumbered, any reference inthis section to that form is treated as a ref-erence to the revised or renumbered form.

(4) Revocation. The election providedin paragraph (i)(1) of this section, oncemade, may be revoked only with the con-sent of the Commissioner of Internal Rev-enue. Such consent will be granted only inextraordinary circumstances. Requests forconsent are requests for a letter ruling andmust be filed with the Commissioner of In-ternal Revenue, Washington, DC 20224.Requests for consent may not be made inany other manner (for example, through arequest under section 446(e) to change thetaxpayer’s method of accounting).

(k) Effective date—(1) In general. Ex-cept as provided in paragraph (k)(3) of thissection, this section applies to a like-kindexchange or an involuntary conversion ofMACRS property for which the time of

2007–14 I.R.B. 861 April 2, 2007

disposition and the time of replacementboth occur after February 27, 2004.

(2) Application to pre-effective datelike-kind exchanges and involuntary con-versions. For a like-kind exchange or aninvoluntary conversion of MACRS prop-erty for which the time of disposition,the time of replacement, or both occur onor before February 27, 2004, a taxpayermay—

(i) Apply the provisions of this sec-tion. If a taxpayer’s applicable Federaltax return has been filed on or beforeFebruary 27, 2004, and the taxpayer hastreated the replacement MACRS prop-erty as acquired, and the relinquishedMACRS property as disposed of, in alike-kind exchange or an involuntary con-version, the taxpayer changes its methodof accounting for depreciation of thereplacement MACRS property and relin-quished MACRS property in accordancewith this paragraph (k)(2)(i) by followingthe applicable administrative proceduresissued under §1.446–1(e)(3)(ii) for ob-taining the Commissioner’s automaticconsent to a change in method of ac-counting (for further guidance, see Rev.Proc. 2002–9, 2002–1 C.B. 327, and§601.601(d)(2)(ii)(b) of this chapter); or

(ii) Rely on prior guidance issued by theInternal Revenue Service for determiningthe depreciation deductions of replace-ment MACRS property and relinquishedMACRS property (for further guidance,for example, see Notice 2000–4, 2000–1C.B. 313, and §601.601(d)(2)(ii)(b) of thischapter). In relying on such guidance, ataxpayer may use any reasonable, consis-tent method of determining depreciationin the year of disposition and the yearof replacement. If a taxpayer’s applica-ble Federal tax return has been filed onor before February 27, 2004, and the tax-payer has treated the replacement MACRSproperty as acquired, and the relinquishedMACRS property as disposed of, in alike-kind exchange or an involuntary con-version, the taxpayer changes its methodof accounting for depreciation of thereplacement MACRS property and relin-quished MACRS property in accordancewith this paragraph (k)(2)(ii) by followingthe applicable administrative proceduresissued under §1.446–1(e)(3)(ii) for ob-taining the Commissioner’s automaticconsent to a change in method of ac-counting (for further guidance, see Rev.

Proc. 2002–9, 2002–1 C.B. 327, and§601.601(d)(2)(ii)(b) of this chapter).

(3) Like-kind exchanges and involun-tary conversions where the taxpayer madethe election under section 168(f)(1) for therelinquished property—(i) In general. Ifthe tangible depreciable property acquiredby a taxpayer in a like-kind exchange orinvoluntary conversion (the replacementproperty) replaces tangible depreciableproperty for which the taxpayer made avalid election under section 168(f)(1) toexclude it from the application of MACRS(the relinquished property), paragraph(i)(2) of this section applies to such relin-quished property and replacement prop-erty for which the time of dispositionand the time of replacement (both as de-termined under paragraph (i)(2) of thissection) both occur after February 26,2007.

(ii) Application of paragraph (i)(2) ofthis section to pre-February 26, 2007,like-kind exchanges and involuntary con-versions. If the tangible depreciable prop-erty acquired by a taxpayer in a like-kindexchange or involuntary conversion (thereplacement property) replaces tangibledepreciable property for which the tax-payer made a valid election under section168(f)(1) to exclude it from the applicationof MACRS (the relinquished property),the taxpayer may apply paragraph (i)(2)of this section to the relinquished propertyand the replacement property for whichthe time of disposition, the time of replace-ment (both as determined under paragraph(i)(2) of this section), or both occur onor before February 26, 2007. If the tax-payer wants to apply paragraph (i)(2) ofthis section and the taxpayer’s applicableFederal tax return has been filed on orbefore February 26, 2007, the taxpayermust change its method of accounting fordepreciation of the replacement propertyand relinquished property in accordancewith this paragraph (k)(3)(ii) by followingthe applicable administrative proceduresissued under §1.446–1(e)(3)(ii) for ob-taining the Commissioner’s automaticconsent to a change in method of ac-counting (for further guidance, see Rev.Proc. 2002–9, 2002–1 C.B. 327, and§601.601(d)(2)(ii)(b) of this chapter).


Par. 13. Section 1.168(i)–6T is re-moved.

Par. 14. Section 1.168(k)–1 is amendedas follows:

1. The second and third sentences inparagraph (f)(5)(v)(B) are revised.

2. The last sentences in Example 1(i),Example 3(i), Example 4(i), and Example5(i) in paragraph (f)(5)(vi) are revised.

3. Paragraph (g)(3)(ii) is revised.The revisions read as follows:

§1.168(k)–1 Additional first yeardepreciation.

* * * * *(f) * * *(5) * * *(v) * * *(B) * * * However, at the time of dis-

position of the involuntarily convertedMACRS property, the taxpayer deter-mines the exchanged basis (as defined in§1.168(i)–6(b)(7)) and the excess basis(as defined in §1.168(i)–6(b)(8)) of theacquired MACRS property and beginsto depreciate the depreciable exchangedbasis (as defined in §1.168(i)–6(b)(9)of the acquired MACRS property inaccordance with §1.168(i)–6(c). Thedepreciable excess basis (as definedin §1.168(i)–6(b)(10)) of the acquiredMACRS property continues to be de-preciated by the taxpayer in accordancewith the first sentence of this paragraph(f)(5)(v)(B).

* * * * *(vi) * * *Example 1. (i) * * * Pursuant to paragraph

(g)(3)(ii) of this section and §1.168(i)–6(k)(2)(i),EE decided to apply §1.168(i)–6 to the involuntaryconversion of Canopy V1 with the replacement ofCanopy W1, the acquired MACRS property.

* * * * *Example 3. (i) * * * Pursuant to paragraph

(g)(3)(ii) of this section and §1.168(i)–6(k)(2)(i),FF decided to apply §1.168(i)–6 to the exchangeof Computer X2 for Computer Y2, the acquiredMACRS property.


(g)(3)(ii) of this section and §1.168(i)–6(k)(2)(i),GG decided to apply §1.168(i)–6 to the exchangeof Equipment X3 for Equipment Y3, the acquiredMACRS property.


(g)(3)(ii) of this section and §1.168(i)–6(k)(2)(i),GG decided to apply §1.168(i)–6 to the exchange

April 2, 2007 862 2007–14 I.R.B.

of Equipment Y3 for Equipment Z1, the acquiredMACRS property.

* * * * *(g) * * *(3) * * *(ii) Paragraphs (f)(5)(ii)(F)(2) and

(f)(5)(v) of this section apply to a like-kindexchange or an involuntary conversion ofMACRS property and computer softwarefor which the time of disposition and thetime of replacement both occur after Feb-ruary 27, 2004. For a like-kind exchangeor an involuntary conversion of MACRSproperty for which the time of disposi-tion, the time of replacement, or bothoccur on or before February 27, 2004,see §1.168(i)–6(k)(2)(ii). For a like-kindexchange or involuntary conversion ofcomputer software for which the time ofdisposition, the time of replacement, orboth occur on or before February 27, 2004,a taxpayer may rely on prior guidance is-sued by the Internal Revenue Service fordetermining the depreciation deductionsof the acquired computer software andthe exchanged or involuntarily convertedcomputer software (for further guidance,see §1.168(k)–1T(f)(5) published in theFederal Register on September 8, 2003(T.D. 9091, 2003–2 C.B. 939 [68 FR53000])). In relying on such guidance, ataxpayer may use any reasonable, consis-tent method of determining depreciationin the year of disposition and the year ofreplacement.

* * * * *

Kevin M. Brown,Deputy Commissioner forServices and Enforcement.

Approved February 23, 2007.

Eric Solomon,Assistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on February 26,2007, 3:25 p.m., and published in the issue of the FederalRegister for March 1, 2007, 72 F.R. 9245)

Section 527.—PoliticalOrganizations

26 CFR 601.105: Examinations of returns and claimsfor refund, credit or abatement; determination of cor-rect tax liability.

A revenue procedure sets forth the elements of asafe harbor under section 527(1) of the Internal Rev-enue Code for waiver of amounts due for failure tocomply with certain reporting requirements due toreasonable cause but not willful neglect. See Rev.Proc. 2007-27, page 887.

Section 6011.—GeneralRequirement of Return,Statement, or List26 CFR 1.6011–1(a): General requirement of return,statement or list.(Also: §§ 6012(a), 6020(b), 6072(a), 6151.)

Frivolous tax returns; voluntarycompliance. This ruling discusses andrefutes the frivolous position taken bysome taxpayers that complying with theinternal revenue laws is purely voluntaryand that taxpayers are not legally requiredto file federal tax returns or pay federaltax because the filing of a tax return or thepayment of tax is a matter of choice.

Rev. Rul. 2007–20

PURPOSE

The Internal Revenue Service (Service)is aware that some taxpayers assert thatcompliance with the internal revenue lawsis purely voluntary, specifically, that theyare not required to file federal tax returnsor pay federal tax because the filing of a taxreturn or the payment of tax is a matter ofchoice. Taxpayers who take this positionargue that the Form 1040 Series instruc-tions provide that filing a return and pay-ing tax are voluntary and not mandatory.Often quoting from the Supreme Court’sopinion in Flora v. United States, 362 U.S.145, 176 (1960), they claim that “[o]ur sys-tem of taxation is based upon voluntary as-sessment and payment, not upon distraint.”Some of these taxpayers also contend thatsection 6020(b) of the Internal RevenueCode requires the Service to prepare a fed-eral tax return for any person who does notfile a return, which, according to these tax-payers, means that they are not required tofile a return.

This revenue ruling emphasizes to tax-payers, promoters, and return preparersthat the requirements to file a tax returnand pay the tax that is due are not optional.Any position to the contrary has no meritand is frivolous.

The Service is committed to identify-ing taxpayers who attempt to avoid theirfederal tax obligations by taking frivolouspositions. The Service will take vigorousenforcement action against these tax-payers and against promoters and returnpreparers who assist taxpayers in takingthese frivolous positions. Frivolous re-turns and other similar documents submit-ted to the Service are processed throughthe Service’s Frivolous Return Program.As part of this program, the Service de-termines whether taxpayers who havetaken frivolous positions have filed allrequired tax returns, computes the correctamount of tax and interest due, and deter-mines whether civil or criminal penaltiesshould apply. The Service also determineswhether civil or criminal penalties shouldapply to return preparers, promoters,and others who assist taxpayers in tak-ing frivolous positions, and recommendswhether an injunction should be soughtto halt these activities. Other informationabout frivolous tax positions is availableon the Service website at www.irs.gov.

ISSUE

Whether filing a tax return or paying taxis voluntary.

FACTS

Taxpayer A claims that he is not re-quired to file a federal income tax returnor pay income taxes because filing a re-turn and paying tax are “voluntary” activ-ities that he can legitimately opt not to do.Taxpayer A further claims that if a tax re-turn is required, the Service must prepareit for the taxpayer.

LAW AND ANALYSIS

Effective tax administration relies ontaxpayers willingly complying with the taxlaws, but taxpayers do not have the rightto choose whether the laws apply to them.References to a “voluntary” tax system inFlora, supra, and in Service publications,mean a system that allows taxpayers to de-termine, in the first instance, the correct

2007–14 I.R.B. 863 April 2, 2007

amount of their tax and to report their li-ability on appropriate returns, rather thanhaving the government make the determi-nations for them. See Hibbs v. Winn, 542U.S. 88, 100 n.3 (2004) (“[T]he taxpayer,not the taxing authority, is the first partyto make the relevant calculation of incometaxes owed.”) (Emphasis added). “Volun-tary” in this context does not mean thattaxpayers may opt out of the system. Asstated in United States v. Schiff, 876 F.2d272, 275 (2d Cir. 1989):

To the extent that income taxes are saidto be “voluntary,” . . . they are onlyvoluntary in that one files the returnsand pays the taxes without the IRSfirst telling each individual the amountdue and then forcing payment of thatamount. The payment of income taxesis not optional, however, . . . and theaverage citizen knows that the paymentof income taxes is legally required.

See also United States v. Middleton,246 F.3d 825, 840–41 (6th Cir. 2001);United States v. Raymond, 228 F.3d 804,812–13 (7th Cir. 2000); United States v.Gerads, 999 F.2d 1255, 1256 (8th Cir.1993); Wilcox v. Commissioner, 848 F.2d1007, 1008 (9th Cir. 1988); United Statesv. Tedder, 787 F.2d 540, 542 (10th Cir.1986); Moore v. Commissioner, 722 F.2d193, 196 (5th Cir. 1984); Woods v. Com-missioner, 91 T.C. 88, 90 (1988).

Any suggestion that taxpayers mayelect not to file returns or pay tax ig-nores the laws that affirmatively andunambiguously establish these require-ments. Specifically, the requirement topay income taxes is clearly established insection 1 of the Internal Revenue Code,which imposes a tax on the taxable in-come of individuals, estates, and trusts asdetermined by the tables set forth in thatsection, and section 11, which imposes atax on the taxable income of corporations.The requirement to file an income tax re-turn is explicitly stated in sections 6011(a),6012(a), and 6072(a) and correspondingTreasury Regulations. In addition, section6151 requires taxpayers to submit pay-ment of their taxes with their tax returns.Under these provisions of the Code, anytaxpayer who has received more than astatutorily determined amount of grossincome during the tax year is required tofile a return for the year and pay tax on theincome.

Underscoring the fallacy of any posi-tion that filing a tax return or paying taxis voluntary is the existence of civil andcriminal penalties for failing to file or pay.See Helvering v. Mitchell, 303 U.S. 391,399 (1938) (“In assessing income taxesthe Government relies primarily upon thedisclosure by the taxpayer of the relevantfacts . . . [on an] annual return [backed upby] . . . sanctions [that] may . . . be eithercriminal or civil.”) If, as some taxpayersclaim, reporting and paying taxes were op-tional, penalties for noncompliance wouldnot exist and would not be routinely im-posed and upheld.

Section 6651(a) imposes an addition totax for failure to file a required tax return orpay tax unless the failure is due to reason-able cause and not willful neglect. Section7203 imposes a criminal penalty (in addi-tion to the civil penalty) for willfully fail-ing to file a return or pay tax.

Finally, the Service is not obligated tomake returns for taxpayers who fail to doso. Section 6020(b) merely provides theService with a mechanism for determiningthe tax liability of a taxpayer who has notfiled a return. Section 6020(b) does not re-quire the Service to prepare a tax return inany case, and it does not excuse a taxpayerfrom the requirements to file and pay orfrom liability for unpaid taxes, plus civiland criminal penalties for the failure to fileor pay.

HOLDING(S)

Taxpayer A must file income tax returnsif the income threshold is met and mustpay the correct amount of income taxesowed. Compliance with the internal rev-enue laws, including filing tax returns andpaying tax, is not optional. Further, theService’s authority to prepare a return un-der section 6020(b) does not relieve a tax-payer of the obligation to file a tax returnor pay tax. Any claim by Taxpayer A thatone may lawfully opt not to file a return orpay tax is frivolous.

The Service will challenge the claimsof individuals who improperly attempt toavoid or evade their federal tax liability.


The position described above—that thelaw permits a taxpayer to choose not tofile an income tax return or pay incometaxes because these acts are voluntary—is

a frivolous position for purposes of section6702(c). The Service will challenge theclaims of individuals who attempt to im-properly avoid or evade their federal taxliability. In addition to liability for thetax due plus statutory interest, taxpayerswho fail to file valid returns or pay taxes,face substantial civil and criminal penal-ties. Potentially applicable civil penaltiesinclude: (1) the section 6662 accuracy-re-lated penalties, which are generally equalto 20 percent of the amount of tax the tax-payer should have paid; (2) the section6663 penalty for civil fraud, which is equalto 75 percent of the amount of tax the tax-payer should have paid; (3) the section6702(a) penalty of $5,000 for filing a doc-ument that purports to be a return and thatcontains a frivolous position or suggests adesire by the taxpayer to delay or impedethe administration of federal tax laws; (4)the section 6702(b) penalty of $5,000 forsubmitting a “specified frivolous submis-sion”; (5) the section 6651 additions to taxfor failure to file a return, failure to pay thetax owed, and fraudulent failure to file areturn; (6) the section 6673 penalty of upto $25,000 if the taxpayer makes frivolousarguments in the United States Tax Court;and (7) the section 6682 penalty of $500for providing false information with re-spect to withholding.

Taxpayers relying on this frivolous po-sition also may face criminal prosecutionunder: (1) section 7201 for attempting toevade or defeat tax, the penalty for which isa significant fine and imprisonment for upto 5 years; (2) section 7203 for willful fail-ure to file a return, the penalty for which isa significant fine and imprisonment for upto a year; (3) section 7206 for making falsestatements on a return, statement, or otherdocument, the penalty for which is a sig-nificant fine and imprisonment for up to 3years; and (4) other federal laws as appli-cable.

Persons, including return preparers,who promote this frivolous position andthose who assist taxpayers in claiming taxbenefits based on frivolous positions mayface civil and criminal penalties and alsomay be enjoined by a court pursuant tosections 7407 and 7408. Potential penal-ties include: (1) a $250 penalty undersection 6694 for each return or claim forrefund prepared by an income tax returnpreparer who knew or should have knownthat the taxpayer’s position was frivolous

April 2, 2007 864 2007–14 I.R.B.

(or $1,000 for each return or claim for re-fund if the return preparer’s actions werewillful, intentional, or reckless); (2) apenalty under section 6700 for promotingabusive tax shelters; (3) a $1,000 penaltyunder section 6701 for aiding and abettingthe understatement of tax; (4) criminalprosecution under section 7206, for whichthe penalty is a significant fine and impris-onment for up to 3 years, for assisting withor advising on the preparation of a falsereturn, statement, or other document underthe internal revenue laws; and (5) otherfederal laws as applicable.



Section 6203.—Methodof Assessment26 CFR 301.6203–1: Method of assessment.(Also: § 6330.)

Frivolous tax returns; summaryrecord of assessment. This ruling dis-cusses and refutes the frivolous positiontaken by some taxpayers that before theIRS may collect overdue taxes, the IRSmust provide taxpayers with a summaryrecord of assessment made on a Form 23C,Assessment Certificate-Summary Recordof Assessments, or on another particularform. These taxpayers claim that if aForm 23C is not provided, the assessmentis invalid and the IRS may not collect anytaxes due.

Rev. Rul. 2007–21

PURPOSE

The Internal Revenue Service (Service)is aware that some taxpayers are claim-ing that, before the Service may collectoverdue taxes, the Service must providetaxpayers with a summary record of as-sessment made on a Form 23C, “Assess-ment Certificate-Summary Record of As-sessments,” that is signed by an authorized

employee or officer. If a Form 23C is notprovided, these taxpayers claim that the as-sessment is invalid, and, consequently, thatthe Service may not collect any taxes due.

This revenue ruling emphasizes to tax-payers, promoters, and return preparersthat, although an assessment is recordedon a summary record of assessment, suchas the Form 23C or its computer-gener-ated equivalent, the Revenue AccountingControl System (RACS) Report 006, thereis no legal requirement that a summaryrecord of assessment be provided to ataxpayer before the Service may proceedwith collection activity. Further, if a tax-payer requests proof that an assessmentwas made, the Service is not required toprovide any particular form or informationin any particular format to the taxpayerso long as the Service provides the infor-mation required by Treasury Regulation§ 301.6203–1 to the taxpayer. Any po-sition to the contrary has no merit and isfrivolous.

The Service is committed to identify-ing taxpayers who attempt to avoid theirfederal tax obligations by taking frivolouspositions. The Service will take vigorousenforcement action against these tax-payers and against promoters and returnpreparers who assist taxpayers in takingthese frivolous positions. Frivolous re-turns and other similar documents submit-ted to the Service are processed throughthe Service’s Frivolous Return Program.As part of this program, the Service de-termines whether taxpayers who havetaken frivolous positions have filed allrequired tax returns, computes the correctamount of tax and interest due, and deter-mines whether civil or criminal penaltiesshould apply. The Service also determineswhether civil or criminal penalties shouldapply to return preparers, promoters,and others who assist taxpayers in tak-ing frivolous positions, and recommendswhether an injunction should be soughtto halt these activities. Other informationabout frivolous tax positions is availableon the Service’s website at www.irs.gov.

ISSUE

Whether the Service must provide a tax-payer with a summary record of assess-ment, such as a Form 23C, before collec-tion may begin.

FACTS

Taxpayer A argues in a request for acollection due process hearing under sec-tion 6330 or 6320 of the Internal RevenueCode that, pursuant to section 6203 andTreasury Regulation § 301.6203–1, theService must first provide the taxpayerwith a summary record of assessment oftaxes due before collection action maycommence. Taxpayer A further arguesthat the record provided must include aForm 23C signed by an authorized Serviceofficial. In response, the Service providesTaxpayer A with a record of assessment ona Form 4340 (“Certificate of Assessments,Payments, Other Specified Matters”),MFTRA-X (“Master File Transcript”), orother similar document. Taxpayer A as-serts these forms do not meet the legal re-quirements and until the Service producesa valid summary record of assessment,the Service is prohibited from collectingthe assessed liability. According to Tax-payer A, the Appeals Officer conductingthe collection due process hearing, in ver-ifying under section 6330(c)(1) that theService has complied with applicable lawand procedure, may not rely on anythingother than the Form 23C to determine, forpurposes of the section 6330(c)(1) require-ment, that a valid assessment was made.

LAW AND ANALYSIS

Section 6203 states that an assessmentof tax (including interest, additions to tax,and assessable penalties) “shall be madeby recording the liability of the taxpayerin the office of the Secretary in accor-dance with rules or regulations prescribedby the Secretary.” The section also statesthat, when requested by a taxpayer, “theSecretary shall furnish the taxpayer a copyof the record of assessment.” TreasuryRegulation § 301.6203–1 specifies thatan assessment is made “by an assessmentofficer signing the summary record ofassessment,” which “through supportingrecords” must include the “identificationof the taxpayer, the character of the liabil-ity assessed, the taxable period, if appli-cable, and the amount of the assessment.”Under the regulation, if a taxpayer re-quests a copy of the record of assessment,the Service will give the taxpayer “a copyof the pertinent parts of the assessmentwhich set forth the name of the taxpayer,

2007–14 I.R.B. 865 April 2, 2007

the date of assessment, the character ofthe liability assessed, the taxable period,if applicable, and the amounts assessed.”The date of the assessment is the date thesummary record is signed.

There is no requirement in the statute orregulation that the assessment be recordedon a specific form or that the taxpayer beprovided with a certain form as a record ofassessment.

Until its transition to computerizedrecordkeeping, the Service generally usedForm 23C for the summary record ofassessment, but it now uses, except inunusual circumstances, a computer-gener-ated summary record of assessment knownas the RACS Report 006. Both forms havebeen recognized as summary records ofassessment within the meaning of section6203. See March v. Internal RevenueService, 335 F.3d 1186, 1188 (10th Cir.2003). In Roberts v. Commissioner, 329F.3d 1224, 1228 (11th Cir. 2003), thetaxpayer argued that an assessment wasinvalid because the Service did not useForm 23C but instead used RACS Report006. The court held that there was noth-ing in the law to show that the use of theRACS report was not in compliance withthe statute and the regulation. The RACSreport and the Form 23C are both signedby an assessment officer. The RACS re-port, like the Form 23C, provides, whencoupled with “supporting records,” the in-formation set forth in Treasury Regulation§ 301.6203–1.

In response to a taxpayer’s request un-der section 6203 and the regulation for“a copy of the record of assessment,” theService is not required to provide any par-ticular form or document and may chooseamong documents that contain the itemsof information listed in the regulation.Instead of a RACS report 006, which doesnot break out individual taxpayer informa-tion, the Service may provide Form 4340,“Certificate of Assessments, Payments,Other Specified Matters,” or a MFTRA-Xtranscript (literal or plain-language tran-script) of the taxpayer’s account, eitherof which sets forth all of the informationrequired by the regulation, because eachidentifies the taxpayer, states the char-acter of the liabilities assessed, the taxperiod giving rise to the assessment, theamount of the assessment, and the dateof assessment. See Goodman v. UnitedStates, 185 Fed. Appx. 725, 728 (10th

Cir. 2006); Roberts, 329 F.3d at 1228;Carillo v. Commissioner, T.C. Memo.2005–290; Michael v. Commissioner, T.C.Memo. 2003–26. In addition, an AppealsOfficer is not required to obtain a Form23C or other particular document in a col-lection due process hearing and may relyon a Form 4340 or MFTRA-X transcriptto verify the validity of the assessmentfor purposes of section 6330(c)(1). SeeNestor v. Commissioner, 118 T.C. 162(2002); Perez v. Commissioner, T.C.Memo. 2002–274.

HOLDING

The Service is not required to provideTaxpayer A with a summary record of as-sessment before collecting any taxes due.An assessment is not invalid, and collec-tion is not precluded, because the Servicehas not provided a summary record of as-sessment to the taxpayer.

Additionally, Taxpayer A’s claim thatthe Service must produce a Form 23C orother record of assessment as proof ofassessment is frivolous. If a taxpayer re-quests a copy of the record of assessment,the Service may produce the informa-tion in any form or format, provided thesummary produced contains the infor-mation required by Treasury Regulation§ 301.6203–1. Acceptable copies of therecord of assessment include, but are notlimited to, Forms 4340 and MFTRA-Xtranscripts. Further, the Form 4340,MFTRA-X transcript, or other similardocuments may be used in a collection dueprocess proceeding to verify the validityof an assessment under section 6330(c)(1).

The Service will challenge the claimsof individuals who improperly attempt toavoid or evade their federal tax liability.


The position described above, that theService must provide a taxpayer with asummary record of assessment, such as aForm 23C, before collection or must pro-vide a Form 23C in any collection pro-ceeding is a frivolous position under sec-tion 6702. The Service will challengethe claims of individuals who attempt toimproperly avoid or evade their federaltax liability. In addition to liability forthe tax due plus statutory interest, tax-payers who insist upon receiving a Form

23C before complying with their tax obli-gations face substantial civil and crimi-nal penalties. Potentially applicable civilpenalties include: (1) the section 6702(b)$5,000 penalty for submitting a “speci-fied frivolous submission”; (2) the section6651(a)(3) addition to tax for failure to paythe tax owed; and (3) the section 6673penalty of up to $25,000 if the taxpayermakes frivolous arguments in the UnitedStates Tax Court.

Taxpayers relying on this frivolous po-sition also may face criminal prosecutionunder section 7201 for attempting to evadeor defeat tax, the penalty for which is a sig-nificant fine and imprisonment for up to 5years, or prosecution under other federallaws as applicable.



Section 7701.—Definitions26 CFR 301.7701–6(a): Person.(Also: §§ 6012, 7203, 7343, 26 CFR 1.6012–1(a).)

Frivolous tax returns; citizens of astate. This ruling discusses and refutes thefrivolous position taken by some taxpayersthat they are not subject to federal incometax, or that their income is excluded fromtaxation, because either (1) they claim tohave rejected or renounced United Statescitizenship and are citizens exclusively ofa state (sometimes characterized as a “nat-ural-born citizen” of a “sovereign state”),or (2) they are not persons as identified bythe Internal Revenue Code.

Rev. Rul. 2007–22

PURPOSE

The Internal Revenue Service (Service)is aware that some taxpayers are claimingthat they are not subject to federal in-come tax, or that their income is excludedfrom taxation, because: 1) the taxpay-ers have declared that they have rejectedor renounced United States citizenship

April 2, 2007 866 2007–14 I.R.B.

because the taxpayers are citizens exclu-sively of a State (sometimes characterizedas a “natural-born citizen” of a “sovereignstate”); or 2) the taxpayers claim they arenot persons as identified by the InternalRevenue Code. These taxpayers often fur-nish Forms W–4, Employee’s WithholdingAllowance Certificate, to their employerson which the taxpayers claim excessivewithholding allowances or claim completeexemption from withholding. Based onthese Forms W–4, federal income taxesare not withheld from wages paid. Alter-natively, these taxpayers attempt to avoidtheir federal income tax liability by sub-mitting a Form 4852, Substitute for FormW–2, Wage and Tax Statement, or Form1099–R, Distributions From Pensions,Annuities, Retirement or Profit-SharingPlans, IRAs, Insurance Contracts, etc.,to the Internal Revenue Service with azero on the line for the amount of wagesreceived. These taxpayers often eitherfail to file returns, or file returns showingno income and claiming a refund for anywithheld income taxes. The Service isalso aware that some promoters, includingreturn preparers, market a book, pack-age, kit, or other materials that claim toshow taxpayers how they can avoid pay-ing income taxes based on these and othermeritless arguments.

This revenue ruling emphasizes to tax-payers, promoters and return preparers thatall U.S. citizens and residents are subjectto federal income tax. Any argument thata taxpayer’s income is excluded from tax-ation because: 1) the taxpayer has rejectedor renounced United States citizenshipbecause the taxpayer is a citizen exclu-sively of a State (sometime characterizedas a “natural-born citizen” of a “sovereignstate”); or 2) the taxpayer is not a personas defined by the Internal Revenue Codeand is, therefore, not subject to federal tax,has no merit and is frivolous.

The Service is committed to identify-ing taxpayers who attempt to avoid theirfederal tax obligations by taking frivolouspositions. The Service will take vigorousenforcement action against these tax-payers and against promoters and returnpreparers who assist taxpayers in takingthese frivolous positions. Frivolous re-turns and other similar documents submit-ted to the Service are processed throughthe Service’s Frivolous Return Program.As part of this program, the Service de-

termines whether taxpayers who havetaken frivolous positions have filed allrequired tax returns; computes the correctamount of tax and interest due; and deter-mines whether civil or criminal penaltiesshould apply. The Service also deter-mines whether civil or criminal penaltiesshould apply to return preparers, promot-ers and others who assist taxpayers in tak-ing frivolous positions, and recommendswhether an injunction should be soughtto halt these activities. Other informationabout frivolous tax positions is availableon the Service website at www.irs.gov.

ISSUES

1. Whether a taxpayer may avoid fed-eral income tax liability by maintainingthat the taxpayer is not a citizen of theUnited States and, thus, is not subject tothe federal income tax laws.

2. Whether a taxpayer may avoid fed-eral income tax liability by claiming thetaxpayer is not a “person” as defined bythe Internal Revenue Code and, thus, is notsubject to the federal income tax laws.

FACTS

Taxpayer A claims to be exemptfrom federal income tax because, as a“sovereign citizen” of Taxpayer A’s stateof residence, Taxpayer A is not a citizenor resident of the United States and is notsubject to federal tax laws.

Taxpayer B claims that the FourteenthAmendment, providing “[a]ll persons bornor naturalized in the United States, andsubject to the jurisdiction thereof, are citi-zens of the United States and of the Statewherein they reside,” applies only to freedslaves and their descendants, and that allother persons are solely citizens of theirstate of residence.

Taxpayer C claims not to be a UnitedStates citizen or a person subject to tax be-cause Taxpayer C has not requested, ob-tained, or exercised any privilege from anagency of government.

Taxpayer D claims not to be a “person”or a “taxpayer” as defined by the Inter-nal Revenue Code because Taxpayer D isa freeborn and natural individual and notsubject to the jurisdiction of the UnitedStates.

The taxpayer often furnishes a FormW–4, Employee’s Withholding AllowanceCertificate, to the employer on which the

taxpayer claims excessive withholding al-lowances or claims complete exemptionfrom withholding. Based on this FormW–4, federal income taxes are not with-held from wages paid. Alternatively, thetaxpayer prepares a Form 4852 (Substi-tute for Form W–2) showing no wages re-ceived.

The taxpayer either fails to file a return,or files a return reporting zero income andclaiming a refund for all taxes withheld.The taxpayer then contends the taxpayer isnot covered by the federal tax laws and isnot subject to federal income tax becausethe taxpayer is not a citizen of the UnitedStates, or the taxpayer is not a person asdefined by the Internal Revenue Code.

LAW AND ANALYSIS

1. Citizenship

The Fourteenth Amendment to theUnited States Constitution defines thebasis for United States citizenship, stat-ing that “[a]ll persons born or naturalizedin the United States, and subject to thejurisdiction thereof, are citizens of theUnited States and of the State whereinthey reside.” The Fourteenth Amend-ment, therefore, establishes simultaneousstate and federal citizenship. See UnitedStates v. Cruikshank, 92 U.S. 542, 549(1875) (“The same person may be at thesame time a citizen of the United Statesand a citizen of a State. . . .”); In reSlaughter-House Cases, 83 U.S. (16 Wall.)36, 74 (1873) (A man “must reside withinthe State to make him a citizen of it, butit is only necessary that he should be bornor naturalized in the United States to bea citizen of the Union”). The FourteenthAmendment’s granting of citizenship ap-plies to all persons born or naturalized inthe United States, regardless of race. See,e.g., Bell v. State of Maryland, 378 U.S.226, 249 (1964) (Douglas, J., concurring)(“The Fourteenth Amendment also makesevery person who is born here a citizen;and there is no second or third or fourthclass of citizenship.”).

Section 7701(a)(9) of the Internal Rev-enue Code states that “[t]he term ‘UnitedStates’ when used in a geographical senseincludes only the States and the Districtof Columbia.” Claims that individuals arenot citizens of the United States but aresolely citizens of a sovereign state and not

2007–14 I.R.B. 867 April 2, 2007

subject to federal taxation have been uni-formly rejected by the courts. See, e.g.,United States v. Hilgeford, 7 F.3d 1340,1342 (7th Cir. 1993) (“The defendant inthis case apparently holds a sincere be-lief that he is a citizen of the mythical“Indiana State Republic” and for that rea-son is an alien beyond the jurisdictionalreach of federal courts. This belief is,of course, incorrect.”); United States v.Gerads, 999 F.2d 1255, 1256 (8th Cir.1993) (“[We] reject appellants’ contentionthat they are not citizens of the UnitedStates, but rather “Free Citizens of the Re-public of Minnesota” and, consequently,not subject to taxation.”); O’Driscoll v. In-ternal Revenue Service, 1991 U.S. Dist.LEXIS 9829, *5–6 (E.D. Penn. 1991)(“Despite plaintiff’s linguistic gymnastics,he is a citizen of both the United Statesand Pennsylvania, and liable for federaltaxes.”).

Similarly, the individual states are partof the United States and income earnedwithin them is fully subject to UnitedStates taxation. See, e.g., Solomon v.Commissioner, T.C. Memo. 1993–509(responding to argument that all of pe-titioner’s income was earned outside ofthe United States, the court held that“petitioner attempts to argue an absurdproposition, essentially that the State ofIllinois is not part of the United States.”).

2. Definition of Person

The Internal Revenue Code defines“person” and sets forth which personsare subject to federal taxes. Section7701(a)(14) defines “taxpayer” as “anyperson” subject to any internal revenuetax, and section 7701(a)(1) defines “per-son” to include an individual, trust, estate,partnership, or corporation.

Arguments that an individual is not a“person” within the meaning of the Inter-nal Revenue Code have been uniformlyrejected by the courts as have argumentswith respect to the term “individual.” See,e.g., United States v. Dawes, 874 F.2d746, 750–51 (10th Cir. 1989), overruledon other grounds, 895 F.2d 1577 (10th Cir.1990) (“The contention that appellants arenot taxpayers because they are ‘free born,white, preamble, sovereign, natural, indi-vidual common law ‘de jure’ citizens ofKansas’ is frivolous. Individuals are ‘per-sons’ under the Internal Revenue Code and

thus subject to 26 U.S.C. § 7203.”); UnitedStates v. Studley, 783 F.2d 934, 937 n.3(9th Cir. 1986) (in holding that an indi-vidual is a person under the Internal Rev-enue Code, the court noted “this argumenthas been consistently and thoroughly re-jected by every branch of the governmentfor decades. Indeed advancement of suchutterly meritless arguments is now the ba-sis for serious sanctions imposed on civillitigants who raise them”).

Courts have also uniformly rejectedclaims that a taxpayer is not a personsubject to tax because the taxpayer didnot request, obtain, or exercise any priv-ileges of citizenship. See, e.g., Lovell v.United States, 755 F.2d 517, 519 (7th Cir.1984) (“All individuals, natural or unnat-ural, must pay federal income tax on theirwages, regardless of whether they receivedany ‘privileges’ from the government”).

HOLDING

1. The Fourteenth Amendment of theUnited States Constitution establishes si-multaneous state and federal citizenship.Therefore, an individual cannot reject cit-izenship in the United States in favor ofstate citizenship, or otherwise claim not tobe a citizen of the United States for the pur-pose of avoiding federal tax liability. Fur-thermore, income earned within a state ofthe United States by a United States citi-zen or resident is taxable under federal taxlaws. Accordingly, Taxpayer A and Tax-payer B are subject to federal income taxliability because they are citizens of theUnited States and citizens of the state inwhich they reside.

2. The term “person” as used by the In-ternal Revenue Code includes natural per-sons and individuals. Moreover, a tax-payer need not request, obtain, or exercisea privilege from an agency of the govern-ment to be a “person” within the meaningof the Internal Revenue Code. Therefore,Taxpayer C and Taxpayer D are subject tofederal income tax liability.


The Service will challenge the claimsof individuals who improperly attempt toavoid or evade their federal tax liability.In addition to liability for the tax due plusstatutory interest, taxpayers who fail tofile valid returns or pay tax based on ar-guments that they are not citizens or per-

sons as contemplated by the Internal Rev-enue Code and, thus, are not subject to fed-eral tax face substantial civil and crimi-nal penalties. Potentially applicable civilpenalties include: (1) the section 6662 ac-curacy-related penalties, which are gen-erally equal to 20 percent of the amountof tax the taxpayer should have paid; (2)the section 6663 penalty for civil fraud,which is equal to 75 percent of the amountof tax the taxpayer should have paid; (3)the section 6702(a) penalty of $5,000 fora “frivolous tax return”; (4) the section6702(b) penalty of $5,000 for submittinga “specified frivolous submission”; (5) thesection 6651 additions to tax for failure tofile a return, failure to pay the tax owed,and fraudulent failure to file a return; (6)the section 6673 penalty of up to $25,000if the taxpayer makes frivolous argumentsin the United States Tax Court; and (7) thesection 6682 penalty of $500 for providingfalse information with respect to withhold-ing.

Taxpayers relying on these frivolouspositions also may face criminal prosecu-tion under: (1) section 7201 for attempt-ing to evade or defeat tax, the penaltyfor which is a significant fine and im-prisonment for up to 5 years; (2) section7203 for willful failure to file a return,the penalty for which is a significant fineand imprisonment for up to 1 year; (3)section 7206 for making false statementson a return, statement, or other document,the penalty for which is a significant fineand imprisonment for up to 3 years or (4)other provisions of federal law.

Persons, including return preparers,who promote these frivolous positions andthose who assist taxpayers in claiming taxbenefits based on frivolous positions mayface civil and criminal penalties and alsomay be enjoined by a court pursuant tosections 7407 and 7408. Potential penal-ties include: (1) a $250 penalty undersection 6694 for each return or claim forrefund prepared by an income tax returnpreparer who knew or should have knownthat the taxpayer’s position was frivolous(or $1,000 for each return or claim forrefund if the return preparer’s actionswere willful, intentional or reckless); (2) apenalty under section 6700 for promotingabusive tax shelters; (3) a $1,000 penaltyunder section 6701 for aiding and abettingthe understatement of tax; and (4) criminalprosecution under section 7206, for which

April 2, 2007 868 2007–14 I.R.B.

the penalty is a significant fine and impris-onment for up to 3 years, for assisting oradvising about the preparation of a falsereturn, statement or other document underthe internal revenue laws.


This revenue ruling was authored by theOffice of Associate Chief Counsel (Proce-dure and Administration), AdministrativeProvisions and Judicial Practice Division.

For further information regarding this rev-enue ruling, contact that office at (202)622–7950 (not a toll-free call).

2007–14 I.R.B. 869 April 2, 2007

Part III. Administrative, Procedural, and MiscellaneousClean Renewable EnergyBonds

Notice 2007–26

SECTION 1. PURPOSE

This notice solicits applications for al-locations of the national bond volume lim-itation authority (“volume cap”) to issuetax credit bonds called “clean renewableenergy bonds” (“CREBs”) under section54(f) of the Internal Revenue Code (the“Code”) to finance eligible clean renew-able energy projects described in section45 of the Code. This notice also providesrelated guidance on the following: (1)eligibility requirements that a project mustmeet to be considered for a volume capallocation; (2) application requirementsand the application form for requestsfor volume cap allocations; (3) the method(generally, a “smallest-to-largest” method)that the Internal Revenue Service (“IRS”)and the Treasury Department will use toallocate the volume cap; and (4) certainaspects of the applicable law regardingCREBs and expected regulatory guidancein this area.

Applications for volume cap allocationspursuant to this notice must be filed in ac-cordance with this notice by the followingapplication deadline: July 13, 2007.

This notice modifies and supersedesNotice 2005–98, 2005–2 C.B. 1211 (De-cember 11, 2005), which provided guid-ance on CREBs in connection with theallocation process for the original volumecap authorization under section 54.

SECTION 2. BACKGROUND

Section 1303 of the Energy Tax Incen-tives Act of 2005, Pub. L. No. 109–58,119 Stat. 594 (2005), added section 54 tothe Code. Section 54 originally providedfor a total national volume cap of $800 mil-lion for CREBs to finance eligible clean re-newable energy projects and delegated tothe Secretary of the Treasury the author-ity to allocate that volume cap, subject tothe constraint that the Secretary could al-locate no more than $500 million of thatvolume cap to qualified borrowers whichwere governmental bodies (with the bal-ance to be allocated to qualified borrow-

ers which were cooperative electric com-panies). Section 54 originally required thatCREBs had to be issued by an expirationdate of December 31, 2007.

Section 202 of the Tax Relief andHealth Care Act of 2006, Pub. L. No.109–432, 120 Stat. 2922 (2006) (the“2006 Act”), amended section 54 in threerespects. First, the 2006 Act increasedthe total national volume cap for CREBsfrom $800 million to $1.2 billion. Sec-ond, the 2006 Act extended the expirationdate for the issuance of CREBs under thetotal authorized national volume cap of$1.2 billion from December 31, 2007, toDecember 31, 2008. Third, the 2006 Actincreased the maximum allocations or re-allocations to qualified borrowers whichare governmental bodies from $500 mil-lion to $750 million (with the balance tobe allocated to cooperative electric com-panies).

Section 54(a) provides that a taxpayerthat holds a CREB on one or more creditallowance dates of the bond occurring dur-ing any taxable year is allowed as a nonre-fundable credit against Federal income taxfor the taxable year an amount equal to thesum of the credits determined under sec-tion 54(b) with respect to such dates.

Section 54(b)(1) provides that theamount of the credit with respect to anycredit allowance date is 25 percent of theannual credit. Section 54(b)(2) providesthat the annual credit is the product of (1)the credit rate determined by the Secre-tary, multiplied by (2) the outstanding faceamount of the bond.

Section 54(b)(3) provides that the Sec-retary shall determine daily a credit ratethat shall apply to the first day on whichthere is a binding, written contract for thesale or exchange of a CREB. The creditrate for any day is the credit rate the Sec-retary estimates will permit the issuanceof CREBs with a specified maturity or re-demption date without discount and with-out interest cost to the issuer.

Section 54(b)(4) provides that the term“credit allowance date” means March 15,June 15, September 15, December 15, andthe last day on which the bond is outstand-ing. Section 54(b)(5) generally providesthat if a bond is issued or redeemed, or ma-tures, during the 3-month period ending on

a credit allowance date, then the amount ofthe credit for that credit allowance date is aratable portion of the credit otherwise de-termined for that 3-month period.

Section 54(g) provides that gross in-come includes the amount of the creditallowed to the taxpayer under section 54(without regard to section 54(c)) and theamount so included is treated as interest in-come.

Section 54(d) provides that a “clean re-newable energy bond” or CREB meansany bond issued as part of an issue if: (1)the bond is issued by a qualified issuer pur-suant to an allocation by the Secretary tothe issuer of a portion of the volume capunder section 54(f)(2); (2) 95 percent ormore of the proceeds of the issue are to beused for capital expenditures incurred byqualified borrowers for one or more qual-ified projects; (3) the qualified issuer des-ignates the bond for purposes of section 54and the bond is in registered form; and (4)the issue meets certain requirements de-scribed in section 54(h) regarding the ex-penditure of bond proceeds, including arequirement that the issuer reasonably ex-pects, as of the issue date, that at least95 percent of the net proceeds will be ex-pended within 5 years.

Section 54(j)(4) defines a “qualifiedissuer” as: (1) a CREB lender; (2) acooperative electric company; or (3) agovernmental body. Section 54(j)(2) pro-vides that a “CREB lender” is a lenderthat is: (1) a cooperative that is ownedby, or has outstanding loans to, 100 ormore cooperative electric companies andwas in existence on February 1, 2002;or (2) any affiliated entity controlled bysuch a lender. Section 54(j)(1) defines theterm “cooperative electric company” as amutual or cooperative electric companydescribed in section 501(c)(12) or section1381(a)(2)(C), or a not-for-profit electricutility that has received a loan or loanguarantee under the Rural ElectrificationAct. Section 54(j)(3) defines the term“governmental body” as any State, terri-tory, possession of the United States, theDistrict of Columbia, Indian tribal govern-ment, or any political subdivision thereof.

Section 54(j)(5) provides that a “quali-fied borrower” is: (1) a mutual or coopera-tive electric company described in section

April 2, 2007 870 2007–14 I.R.B.

501(c)(12) or 1381(a)(2)(C); or (2) a gov-ernmental body.

Section 54(d)(2) defines the term “qual-ified project” as any of the following qual-ified facilities (as determined under sec-tion 45(d) without regard to any placedin service date) owned by a qualified bor-rower: (1) a wind facility under section45(d)(1); (2) a closed-loop biomass facilityunder section 45(d)(2); (3) an open-loopbiomass facility under section 45(d)(3); (4)a geothermal or solar energy facility un-der section 45(d)(4); (5) a small irrigationpower facility under section 45(d)(5); (6) alandfill gas facility under section 45(d)(6);(7) a trash combustion facility under sec-tion 45(d)(7); (8) a refined coal produc-tion facility under section 45(d)(8); and (9)a qualified hydropower facility under sec-tion 45(d)(9).

Section 54(f)(1), as amended by sec-tion 202(a)(1) of the 2006 Act, providesthat the national volume cap is $1.2 bil-lion. Section 54(f)(2), as amended by sec-tion 202(a)(2) of the 2006 Act, providesthat the Secretary shall allocate the volumecap among qualified projects in such man-ner as the Secretary determines appropri-ate, except that the Secretary may not allo-cate more than $750 million of the nationalvolume cap to finance qualified projects ofqualified borrowers that are governmentalbodies. The amendments to section 54 ofthe Code made by section 202 of the 2006Act apply to bonds issued, and allocationsor reallocations of volume cap made, afterDecember 31, 2006.

Section 54(d)(2)(D) provides that, forpurposes of section 54(d)(1)(B), which re-quires qualified borrowers to use at least95 percent of the proceeds of an issue forcapital expenditures for qualified projects,any action that a qualified borrower orqualified issuer takes that is within its con-trol and that causes such proceeds to failto be used for a qualified project is treatedas failing to satisfy that requirement. Sec-tion 54(d)(2)(D) further provides that theSecretary shall prescribe regulations spec-ifying remedial actions that may be taken(including conditions to taking such reme-dial actions) to prevent an action describedin the preceding sentence from causing abond to fail to be a CREB.

Section 54(k) generally requires that,for a CREB that is a pooled financingbond under section 149(f)(4)(A), borrow-

ers must enter into written loan commit-ments before the issue date of the CREB.

Section 54(l)(5) requires that the qual-ified issuer pay and amortize an equalamount of the principal of an issue ofCREBs during each calendar year that theissue is outstanding.

Section 54(e)(1) limits the term of aCREB to the maximum term determinedby the Secretary under section 54(e)(2).Section 54(e)(2) provides that, during eachcalendar month, the Secretary shall deter-mine the maximum term for CREBs issuedin the following calendar month. The max-imum term is the term the Secretary es-timates will result in the present value ofthe obligation to repay the principal on thebond being equal to 50 percent of the faceamount of the bond. Section 54(e)(2) fur-ther provides that such present value shallbe determined (1) without regard to the re-quirement of section 54(l)(5) to amortizethe principal of CREBs amortized ratablyeach year and (2) using a discount rateequal to the average annual interest rateof tax-exempt obligations having a term of10 years or more that are issued during themonth. If the term as so determined is nota multiple of a whole year, such term shallbe rounded to the next highest whole year.

Section 54(i) generally provides that thearbitrage requirements of section 148 ap-plicable to tax-exempt State or local bondsapply to CREBs.

Section 54(l)(6) requires issuers ofCREBs to submit information reportingreturns to the IRS similar to those requiredto be submitted under section 149(e) fortax-exempt State or local governmentalbonds.

Notice 2006–7, 2006–10 I.R.B. 559(March 6, 2006), provides guidance re-garding certain definitions used for CREBpurposes.

SECTION 3. APPLICATIONREQUIREMENTS IN GENERAL

Each application for a CREBs volumecap allocation (“Application”) must beprepared and submitted in accordancewith this section. In order for an Appli-cation to comply with this section, amongother things, the Application must be pre-pared in substantially the form attached tothis notice as Appendix A, subject to suchminor changes or variations as the IRS andthe Treasury Department may approve in

their discretion. This notice, including Ap-pendix A, may be found on the IRS website at http://www.irs.gov/taxexemptbond/index.html or http://www.irs.gov/pub/irs-drop/. By submitting an Applica-tion, the applicant agrees to comply withthe requirements of this notice.

a. Qualified issuer. An Applicationmust be submitted by a qualified issuerwithin the meaning of section 54(j)(4). A“qualified issuer” is: (1) a CREB lender(as defined in section 54(j)(2)); (2) a co-operative electric company (as defined insection 54(j)(1)); or (3) a governmentalbody (as defined in section 54(j)(3)). AnApplication must identify the qualified is-suer and must demonstrate that the en-tity constitutes a qualified issuer within themeaning of section 54(j)(4).

b. Signatures. An Application must besigned and dated by, and must include theprinted name and title of, an authorized of-ficial of the qualified issuer. For purposesof this notice, the term “authorized offi-cial of the qualified issuer” means an of-ficer, board member, employee, or otherofficial of the qualified issuer who is dulyauthorized to execute legal documents onbehalf of the qualified issuer in connec-tion with incurring debt of the qualified is-suer (e.g., a mayor, chairperson of a citycouncil, chairperson of a board of direc-tors, county or city administrator or man-ager, or chief financial officer), similar tothe kind of duly authorized official of anissuer who would be authorized to executedocuments in connection with an issuer’sdeclaration of official intent to reimburseexpenditures from the proceeds of a bor-rowing under § 1.150–2(e).

c. Contact person. An Applicationmust designate one or more persons withknowledge regarding the project, whomthe qualified issuer duly authorized to dis-cuss with the IRS any information relat-ing to the Application. The designationmust include the designee’s name, title,telephone number, fax number, and mail-ing address. If a designee is not an offi-cial or officer of the issuer, the Applica-tion must include an executed Form 8821(Tax Information Authorization), authoriz-ing the disclosure of taxpayer informationspecifically relating to the Application tothe designee.

d. Addresses. An Application must besubmitted in one of the following ways:(1) by hard copy in duplicate accompa-

2007–14 I.R.B. 871 April 2, 2007

nied by a copy of the application in elec-tronic format on compact disc (“CD”) bymail to the Internal Revenue Service (IRS),Attention SE:T:GE:TEB, 1111 Constitu-tion Avenue, NW, PE – 5N3, Washington,D.C. 20224; (2) by hard copy in dupli-cate accompanied by a copy of the appli-cation in electronic format on compact disc(“CD”) by hand delivery Monday throughFriday between the hours of 8 a.m. and4 p.m. to the Courier’s Desk, Internal Rev-enue Service, 1111 Constitution Avenue,NW, PE – 5N3, Washington, D.C., atten-tion SE:T:GE:TEB; or (3) by electronicsubmission in PDF format of a copy ofa signed original document to the IRS [email protected].

e. Due date. An Application must befiled with the IRS on or before the Appli-cation deadline of July 13, 2007.

f. Project description. Each Applica-tion must contain the information requiredby this subsection f.

(i) Qualified borrower. Each Applica-tion must identify the qualified borrowerexpected to own the qualified project. A“qualified borrower” is: (1) a mutual orcooperative electric company described insections 501(c)(12) or 1381(a)(2)(C); or(2) a governmental body (as defined insection 54(j)(3)). The Application mustdemonstrate that the entity is a qualifiedborrower within the meaning of section54(j)(5). If any bond is expected to be apooled financing bond (within the mean-ing of section 149(f)(4)(A)), the Applica-tion must demonstrate that the qualified is-suer will enter into a written loan commit-ment with each qualified borrower prior tothe issue date of the issue of CREBs.

(ii) Qualified project. Each Applica-tion must describe in reasonable detail theproject or projects to be financed with theproceeds of the CREBs. The Applicationmust demonstrate that each project willconstitute a “qualified project” under sec-tion 54(d)(2)(A). The Application mustindicate the expected date that the acqui-sition and construction of each projectwill commence and the expected date thateach project will be placed in service. TheApplication must contain a certificationby an independent, licensed engineer thateach project will meet the requirementsfor a qualified facility under section 45(d)(but without regard to section 45(d)(10)and to any placed in service date) and

that the project will be technically vi-able and will produce electricity. If theproject is a qualified hydropower facilityunder section 45(d)(9) producing incre-mental hydropower production (as definedunder section 45(c)(8)(B)), then the cer-tification also must state that the projectconsists only of efficiency improvementsor additions to capacity that produce addi-tional production as described in section45(c)(8)(B) based on a methodology thatwould meet Federal Energy RegulatoryCommission (FERC) standards. If theproject is a qualified hydropower facilityunder section 45(d)(9) producing qualifiedhydropower production that is a nonhy-droelectric dam under section 45(c)(8)(C),then the certification also must state thatthe facility, when constructed, will meetFERC licensing requirements and otherapplicable environmental, licensing andregulatory requirements.

(iii) Prior allocations and relatedprojects. Each Application must de-scribe the amount of CREB volume cappreviously allocated to each project de-scribed in the Application and to any“related projects.” For purposes of this no-tice and the Application, the term “relatedprojects” means projects that are owned bythe same qualified borrower, or a “relatedparty” as defined in § 1.150–1(b), locatedon the same site, and integrated, intercon-nected, or directly or indirectly dependenton each other, based on all the facts andcircumstances (“Related Projects”).

(iv) Location of project. The Appli-cation must indicate the location of theproject.

(v) Regulatory approvals. The Applica-tion must describe a plan to obtain all nec-essary Federal, state and local regulatoryapprovals for the project.

g. Plan of financing. The Applicationmust contain a reasonably detailed de-scription of the plan of financing for theproject, including all reasonably expectedsources and uses of financing and otherfunds, the status of such financing, the an-ticipated date of bond issuance, the sourcesof security and repayment for the bonds,the aggregate face amount of bonds ex-pected to be issued for the project, and theissuer’s reasonably expected schedule forspending proceeds of CREBs. If the qual-ified borrower intends to use the proceedsof CREBs, to refinance qualified projects

with CREBs, or to reimburse amountspaid with respect to a qualified project,the Application must demonstrate that therequirements under section 54(d)(2)(B)and (C), respectively, will be met.

h. Dollar amount of allocation re-quested. The Application must specifythe dollar amount of the volume cap re-quested.

SECTION 4. REQUIREDDECLARATIONS IN APPLICATIONS

Each Application submitted under thisnotice must include the following declara-tion signed and dated by an authorized of-ficial of the qualified issuer who has per-sonal knowledge of the relevant facts andcircumstances: “Under penalties of per-jury, I declare that I have examined thisdocument and, to the best of my knowl-edge and belief, all of the facts containedherein are true, correct, and complete.”

SECTION 5. CONSENT TODISCLOSURE OF ALLOCATION

In order to provide the public with in-formation on how the volume cap autho-rized by Congress has been allocated andfacilitate oversight of the CREB program,the IRS intends to publish the results ofthe allocation process. The informationwill be the most useful to the public if itidentifies the specific allocations awarded.Pursuant to § 6103, consent is required inorder for the Service to disclose identify-ing information with respect to applicantsawarded an allocation. Therefore, the Ser-vice requests that each applicant submitwith the Application a declaration, con-senting to the disclosure by the InternalRevenue Service of the name of the appli-cant (issuer), the name of the borrower (ifother than the issuer), the type and loca-tion of the project that is the subject of theApplication, and the amount of the CREBsvolume cap allocation for such project inthe event the project receives an alloca-tion. To provide valid consent, the decla-ration must be in the form set forth in Ap-pendix B. An applicant is not required toprovide a declaration consenting to disclo-sure in order to receive an allocation. TheService will not publish identifying infor-mation with respect to applications that arenot awarded an allocation of volume cap.

April 2, 2007 872 2007–14 I.R.B.

SECTION 6. VOLUMECAP ALLOCATIONS ANDMETHODOLOGY

a. In general. Available CREB volumecap under section 54, as amended by the2006 Act, and any “relinquished volumecap” (as defined in paragraph b. of thissection) will be allocated in accordancewith this section to qualified projects forwhich Applications meeting the require-ments of this notice have been filed withthe IRS on or before the Application dead-line set forth in this notice. Projects forgovernmental bodies and mutual or co-operative electric companies described insections 501(c)(12) or 1381(a)(2)(C) willbe allocated the full amount of volume caprequested beginning with the project(s)for which the smallest dollar amount ofvolume cap has been requested and con-tinuing with the project(s) for which thenext-smallest dollar amount of volume caphas been requested until the total amountof volume cap has been exhausted. Forthis purpose, any amount of the volumecap previously allocated to a project willbe taken into account by increasing theamount requested for the project in theApplication submitted pursuant to thisnotice by the amount previously allo-cated to the project. All applications thatmeet the requirements described in thisnotice will be granted according to themethodology set forth above until all ap-plications from governmental bodies havebeen granted, or up to a maximum of $750million has been allocated to projects ofqualified borrowers that are governmen-tal bodies, whichever occurs first. Theremaining volume cap will be allocatedunder the smallest-to-largest methodol-ogy described above to qualified projectsof qualified borrowers that are not gov-ernmental bodies. For purposes of thissection, all Related Projects will be treatedas a single project.

b. Relinquished volume cap. For pur-poses of this notice, “relinquished volumecap” means volume cap previously allo-cated to a qualified issuer to finance a qual-ified project for which the IRS has re-ceived written notice from a duly autho-rized official of the qualified issuer beforethe due date for Applications under this no-tice which states that the qualified issuerwill not issue CREBs pursuant to the allo-cation and is relinquishing such allocation.

SECTION 7. EXPECTEDTEMPORARY REGULATIONS;EFFECTIVE DATES; RELIANCE ONNOTICE

The Treasury Department and the IRSexpect to issue temporary and proposedregulations (the “Temporary Regulations”)under section 54 to provide guidance toholders and issuers of CREBs on selectedissues regarding the CREBs program, in-cluding potentially, among other matters,certain definitions, general CREBs pro-gram requirements, qualified projects, useand expenditure of proceeds, remedialactions, arbitrage investment restrictions,and information reporting applicable toCREBs. The Treasury Department andthe IRS expect that the Temporary Reg-ulations will apply to CREBs sold on orafter June 13, 2007 with respect to interimguidance provided in this notice. Prior tothe promulgation and effective date of theTemporary Regulations on CREBs undersection 54, taxpayers may rely on the in-terim guidance provided in this notice andNotice 2006–7.

SECTION 8. MAXIMUM TERM

The maximum term for a CREB is de-termined under section 54(e)(2) by usinga discount rate equal to 110 percent ofthe long-term adjusted AFR, compoundedsemi-annually, for the month in whichthe bond is sold. For purposes of thisnotice, a bond is “sold” on the first dayon which there is a binding contract inwriting for the sale or exchange of thebond. The maximum term for a CREBwill be published daily by the Bureau ofPublic Debt on its Internet site for Stateand Local Government Series securitiesat: https://www.treasurydirect.gov.

SECTION 9. CREDIT RATE

For each issue of CREBs, a separatecredit rate will apply to each of the levelannual repayments of principal of the is-sue (each, a “principal maturity”). Thecredit rate for a principal maturity of anissue of CREBs is the applicable CREBcredit rate for that principal maturity onthe date that the issue of CREBs is sold,which applicable CREB credit rate is pub-lished for that day by the Bureau of PublicDebt on its Internet site for State andLocal Government Series securities at:

https://www.treasurydirect.gov. The creditrates will be determined by the TreasuryDepartment based on its estimate of theyield on outstanding AA rated corporatebonds of a similar maturity for the busi-ness day immediately prior to the date onwhich the issue is sold.

SECTION 10. INFORMATIONREPORTING

Section 54(l)(6) requires issuers ofCREBs to submit information reportingreturns to the IRS similar to those requiredto be submitted under section 149(e) fortax-exempt State or local governmentalbonds. These information reporting re-turns are required to be submitted at thesame time and in the same manner as thoseunder section 149(e) on such forms asshall be prescribed by the Commissionerof the IRS for such purpose. Pendingfurther guidance from the IRS regardingthe applicable forms to be used for suchinformation reporting for CREBs, in thecase of an issue of CREBs, the issuer mustsubmit to the IRS an information returnon Form 8038, Information Return forTax-Exempt Private Activity Bond Issues,at the same time and in the same manneras required under section 149(e), withmodifications as described below. Issuersof CREBs should complete Part II of Form8038 by checking the box on Line 20(c)(Other) and writing “CREBs” in the spaceprovided for the bond description. Forpurposes of this notice, the term “issue”has the meaning used for tax-exempt bondpurposes in § 1.150–1(c).

SECTION 11. REMEDIAL ACTIONS

The Treasury Department and the IRSexpect that the Temporary Regulations willprovide that, for purposes of the require-ment of section 54(d)(1)(B) that qualifiedborrowers use at least 95 percent of theproceeds of an issue of CREBs for cap-ital expenditures for qualified projects, a“deliberate action” taken by a qualified is-suer or qualified borrower may cause suchproceeds to fail to be used for such qual-ified use. For this purpose, the term “de-liberate action” will have the same mean-ing as used in § 1.141–2(d)(3), except that“section 54” will be substituted for “sec-tion 141” in § 1.141–2(d)(3)(i). The Trea-sury Department and the IRS further ex-pect that the Temporary Regulations will

2007–14 I.R.B. 873 April 2, 2007

provide that a deliberate action that other-wise would cause an issue of CREBs tofail to meet the requirements of section54(d)(1)(B) will not be treated as a delib-erate action if the issuer takes a “reme-dial action” which meets the requirementsspecified in the Temporary Regulations.In addition, the Treasury Department andthe IRS expect that the Temporary Regu-lations will contain a “redemption or de-feasance” remedial action and an “alterna-tive use of disposition proceeds” remedialaction similar, but not identical to, the re-medial actions contained in § 1.141–12(d)and § 1.141–12(e).

SECTION 12. ARBITRAGEREQUIREMENTS

Section 54(i) generally requires that anissue of CREBs must satisfy the arbitrageinvestment restrictions under section 148applicable to tax-exempt bonds with re-spect to proceeds of the issue. In gen-eral, under section 148, subject to variousspecific prompt spending exceptions andother exceptions, the arbitrage investmentrestrictions, including the yield restrictionsand the arbitrage rebate requirement, ap-ply broadly to gross proceeds of tax-ex-empt bonds. The Treasury Department andthe IRS expect that, except as otherwiseprovided in this section 12, the arbitrageinvestment restrictions under section 148and § 1.148–1 to § 1.148–11, inclusive,and the exceptions to those restrictions willapply to gross proceeds of CREBs to thesame extent and in the same manner asthey apply to gross proceeds of tax-exemptstate or local governmental bonds the in-terest on which is excludable from grossincome under section 103.

The Treasury Department and the IRSfurther expect that, in applying the arbi-trage investment restrictions under section148 to CREBs, the modifications to thegeneral rules described in paragraphs a.through e. of this section 12, below, willapply.

a. Cooperative electric companiestreated like state or local governmen-tal entities. Cooperative electric com-panies under section 54(j)(1) will betreated as “governmental persons” under§ 1.141–1(b) for purposes of (1) apply-ing the arbitrage investment restrictionsunder section 148, including the program

investment definition under § 1.148–1(b),and (2) determining whether CREBs areprivate activity bonds under section 141 inapplying any particular arbitrage invest-ment restriction that depends on whetherbonds are private activity bonds,

b. 5-year temporary period exceptionto arbitrage yield restriction. If an issue ofCREBs meets the spending requirementsof section 54(h)(1), then the proceeds ofthe issue of CREBs will be treated as qual-ifying for a 5-year temporary period ex-ception to arbitrage yield restriction under§ 1.148–2(e)(2) beginning on issue date ofthe issue.

c. CREB credit disregarded in deter-mining CREB yield for arbitrage pur-poses. In determining the yield on an issueof CREBs for arbitrage purposes under§ 1.148–4, the CREBs credit allowed un-der section 54(a) and the credit rate undersection 54(b)(2)(A) will be disregarded.

d. Non-AMT tax-exempt bond invest-ment exception inapplicable. In applyingthe arbitrage restrictions against investinggross proceeds of an issue of CREBs inhigher yielding investments under sec-tion 148(a) and § 1.148–2, the exceptionto arbitrage yield restriction for invest-ments of gross proceeds of tax-exemptbonds in specified non-AMT tax-ex-empt bond investments under section148(b)(3) (relating to an exception to thedefinition of “investment property” forspecified non-AMT tax-exempt bonds)and § 1.148–2(d)(2)(v) (relating to a cor-responding exception to arbitrage yieldlimitations) will be inapplicable.

e. Application of small issuer exceptionto the arbitrage rebate requirement. Indetermining whether an issue of CREBsqualifies for the $5 million small issuerexception to the arbitrage rebate require-ment (increased to $10 million for certainpublic school facilities) under section148(f)(4)(D) and § 1.148–8, both CREBsand tax-exempt bonds the interest onwhich is excludable from gross incomeunder section 103 (other than private ac-tivity bonds) that are reasonably expectedto be issued or actually issued by theCREB issuer (and other applicable on-be-half-of entities and subordinate entitiestaken into account under that section)within a calendar year will be taken intoaccount in measuring the applicable sizelimitation.

SECTION 13. MISCELLANEOUSREGULATORY GUIDANCE

The Treasury Department and the IRSexpect that the Temporary Regulationswill provide guidance on selected discreteissues that have arisen with respect toCREBs, including clarifying that: (1) inapplying the reimbursement restrictionsunder section 54(d)(1)(C), the generalreimbursement rules and exceptions in§ 1.150–2 will apply; (2) joint ownershipof projects financed with CREBs willbe recognized in a manner similar to therecognition of joint ownership of outputprojects under the private activity bondrestrictions on tax-exempt bonds undersection 141; (3) in determining whether allor a part of a facility will be eligible to bea qualified project for CREBs purposes,allocation and accounting rules similarto those employed under section 141 formixed-use projects will be applied; (4) forpurposes of the requirement under section54(d) to use 95 percent of the proceedsof an issue of CREBs for qualified coststo finance capital expenditures for quali-fied projects, proceeds used to finance areserve or replacement fund (e.g., a debtservice reserve fund to secure the CREBs)will be treated as nonqualified costs andwill be eligible for financing with CREBsonly from the five percent nonqualifiedportion of the proceeds; and (5) except inlimited circumstances involving certainrefinancings to which section 54(d)(2)(B)applies and reimbursements to which sec-tion 54(d)(2)(C) applies, costs of acquiringexisting facilities (as contrasted with costsof enhancements, repair, or rehabilitationof existing facilities) generally will betreated as nonqualified costs for purposesof the 95 percent use of proceeds test un-der section 54(d).

SECTION 14. EFFECT ON OTHERDOCUMENTS

This notice modifies and supersedesNotice 2005–98, 2005–2 C.B. 1211 (De-cember 11, 2005), which provided guid-ance on CREBs in connection with theallocation process for the original volumecap authorization under section 54.

April 2, 2007 874 2007–14 I.R.B.

SECTION 15. DRAFTINGINFORMATION

The principal authors of this notice areZoran Stojanovic and Timothy Jones of theOffice of Associate Chief Counsel (Tax

Exempt & Government Entities). How-ever, other personnel from the IRS andthe Treasury Department participated in itsdevelopment. For further information re-garding this notice and the Application,

contact Tina Hill at (202) 283–9774 (nota toll-free call).

APPENDIX A

APPLICATION FOR ALLOCATION OF CLEAN ENERGY RENEWABLE BOND VOLUME CAP

Internal Revenue Service

Washington, D.C.

Dear Sir or Madam:

The following constitutes the application (“Application”) of (Name) (the “Applicant”) for allocation of clean renewable energy bond(“CREB”) volume cap under Section 54(f) of the Internal Revenue Code (the “Code”) (unless otherwise noted, section referencesherein are to the Code) to finance the project described below. (If a single Application is used to request CREB volume cap for morethan one project, then all of the required information in the Application must be provided separately for each project.)

1. Name of Applicant/Issuer

Street Address

City State Zip

Telephone Number Fax Number

2. Status of Issuer – (Select as appropriate)

The Applicant/Issuer is a “qualified issuer ” under section 54(j)(4) because it is—

(i) a “clean renewable energy lender” that is a cooperative owned by, or has outstanding loans to, 100 ormore cooperative electrical companies and was in existence on February 1, 2002 or is an affiliate thatis owned by such a lender, as demonstrated by the attached documents included as Exhibit D.

(ii) a “cooperative electric company” that is a mutual or cooperative electric company described insection 501(c)(12) or section 1381(a)(2)(C), as demonstrated by the attached documents includedas Exhibit D, including a copy of the determination letter previously obtained from the IRS, ifany (or other relevant documents).

(iii) a “governmental body” that is a State, territory, possession of the United States, District of Columbia,Indian tribal government, or any political subdivision of the foregoing, as demonstrated by theattached documents included as Exhibit D. (Supporting documents are not required to be attached forgovernmental bodies that are general purpose governmental entities with substantial taxing, eminentdomain, and police powers such as generally a county, city, municipality, township, or borough.)

3. Name of Borrower

Street Address

City State Zip

Telephone Number Fax Number

4. Status of Borrower – (Select as appropriate) The Borrower is a “qualified borrower” under section 54(j)(5)because it is—

(i) a qualified borrower under section 54(j)(5)(A) that is a mutual or cooperative electric company undersection 501(c)(12) or section 1381(a)(2)(C), as demonstrated by the attached documents includedas Exhibit D, including a copy of the determination letter previously obtained from the IRS, ifany (or other relevant documents).

2007–14 I.R.B. 875 April 2, 2007

(ii) a qualified borrower under section 54(j)(5)(B) that is a “governmental body” under section54(j)(3)(B) and is a State, territory, possession of the United States, District of Columbia, Indiantribal government, or any political subdivision of the foregoing, as demonstrated by the attacheddocuments included as Exhibit D. (Supporting documents are not required to be attached forgovernmental bodies that are general purpose governmental entities with substantial taxing, eminentdomain, and police powers such as generally a county, city, municipality, township, or borough.)

5. Name of Project.

6. Detailed Description of Project. A reasonably detailed description of the project (the “Project”) is set forth belowor in attached Exhibit A, including reasonably expected costs of components, such as land, site prep, equipment,installation, other dedicated facilities such as transmission, and capacity:

7. Qualified Project. The Project is a “qualified project” within the meaning of section 54(d)(2)(A) of the Code,because it is a “qualified facility” (as determined under section 45(d) of the Code without regard to section 45(d)(10)and to any placed in service date) that is (select as appropriate)—

(1) a wind facility – a facility using wind to produce electricity;

(2) a closed-loop biomass facility – a facility using closed-loop biomass (as defined in section 45(c)) toproduce electricity or, if owned by the taxpayer prior to January 1, 2008, a facility using closed-loop biomassto produce electricity which is modified to use closed-loop biomass to co-fire with coal, with other biomass,or with both, but only if the modification is approved under the Biomass Power for Rural DevelopmentPrograms or is part of a pilot project of the Commodity Credit Corporation;

(3) an open-loop biomass facility – a facility using open-loop biomass (as defined in section 45(c)) toproduce electricity and in the case of a facility using agricultural livestock waste nutrients, the nameplatecapacity rating of which is not less than 150 kilowatts;

(4) a geothermal or solar energy facility – a facility using geothermal energy (as defined in section 45(c)) orsolar energy to produce electricity (not including a facility described in section 48(a)(3) the basis of whichis taken into account by the taxpayer for purposes of determining the energy credit under section 48 ofthe Code);

(5) a small irrigation power facility – a facility using small irrigation power (as defined in section 45(c))to produce electricity;

(6) a landfill gas facility – a facility producing electricity from gas derived from the biodegradation ofmunicipal solid waste (as defined in section 45(c));

(7) a trash combustion facility – a facility that burns municipal solid waste (as defined in section 45(c))to produce electricity;

(8) a refined coal production facility – a facility producing refined coal (as defined in section 45(c)); or

(9) a qualified hydropower facility – a facility engaged in qualified hydropower production (as defined insection 45).

8. Construction Commencement Date and Placed in Service Date. The Borrower begun or expects to begin theconstruction, installation and equipping of the Project on . The Borrower expects that theProject will be placed into service on or before .

9. Independent Engineer’s Certificate: (If the Application is for more than one Project, a separate certificate must beincluded for each Project.) Attached as Exhibit B hereto is a certification by an independent, licensed engineer tothe effect that the Project will be a “qualified project” within the meaning of section 54(d)(2)(A) and a “qualifiedfacility” within the meaning of section 45(d) of the Code (without regard to section 45(d)(10) of the Code and to anyplaced in service date) and that the project is technically viable and will produce electricity.

If the project is a qualified hydropower facility —

a. producing incremental hydropower production, then the engineering certificate also must state thatthe project consists only of efficiency improvements or additions to capacity that produce additionalproduction as described in section 45(c)(8)(B) based on a methodology that would meet FederalEnergy Regulatory Commission (FERC) standards; or

April 2, 2007 876 2007–14 I.R.B.

b. that is a nonhydroelectric dam under section 45(c)(8)(C), then the engineering certificate also muststate that the facility, when constructed, will meet FERC licensing requirements and other applicableenvironmental, licensing and regulatory requirements.

10. Location of the Project:

Project address or physical location (do not include postal box numbers or mailing address)

City State Zip

County where Project is located

11. Individual to contact for more information about the Project:

Individual Name

Company Name

Street Address

City State Zip

Telephone Number

Fax Number

(Include as appropriate) The contact person is not an authorized official or officer of the Issuer and a properlyexecuted Form 8821 is included with this Application that authorizes the disclosure by the IRS of information thatrelates to this Application and the Project(s) described above to the contact person.

12. Regulatory Approvals. Identify each regulatory body, the action that must be taken, status of any pending actionand the remaining timeframe required to obtain each required approval such as a FERC approval, or siting permits.The plan of the Applicant for obtaining such approvals is as follows: (or attach an Exhibit)

13. Plan of Financing. Include a reasonably detailed description of the plan of financing for the Project, including allreasonably expected sources and uses of financing and other funds, the status of such financing, the anticipateddate of bond issuance, the sources of security and repayment for the bonds, the aggregate face amount of bondsexpected to be issued for the Project, and the issuer’s reasonably expected schedule for spending proceeds of CREBs.Attached as Exhibit C is a plan of financing for the Project.

14. Refinancings and Reimbursements. (Include the following statements, as applicable.) [(For refinancings, includethe following statement.) The Issuer intends to use the proceeds of CREBs to refinance qualified projects inaccordance with section 54(d)(2)(B).] [(For reimbursements, include the following statement.) The Issuer intends touse the proceeds of CREBs to reimburse costs of a qualified project in accordance with section 54(d)(2)(C).] (Inaddition, the Issuer must demonstrate that the requirements of § 54(d)(2)(B) or (C), as applicable, will be met.)

15. Dollar Amount of Allocation Requested for the Project. To finance the Project, the Applicant hereby requestsa CREB allocation in the amount of $ .

16. Prior Allocations for the Project or Related Project. (If the Project or any Related Project (as defined in section3.f(iii) of this Notice) previously received an allocation of CREBs volume cap, then this paragraph must include astatement to that effect.)

[If applicable, include the following statement: On (Insert date), the Project previously received a CREBs volumecap allocation in the amount of $ . A copy of the IRS allocation letter for that allocation is attached.]

[If applicable, include the following statement: On (Insert date), a Related Project previously received a CREBsvolume cap allocation in the amount of $ . A copy of the IRS allocation letter for that allocationis attached.]

17. Other allocation requests for Related Projects to the Project. Included below are descriptions of other projectsthat are Related Projects (as defined in paragraph 16 above) to the Project for which the applicant or other entitiesare applying for a CREB volume cap allocation. With respect to an applicant on a Related Project other than theApplicant, set forth below are the names, addresses, contact persons, and telephone numbers for any such applicant.

2007–14 I.R.B. 877 April 2, 2007

18. Pooled Financing Bonds. (If the issuer expects to use the requested allocation of CREB volume cap as part of apooled financing bond within the meaning of section 54(l)(2), then the issuer should include the undertakingnoted below.)

[The Applicant Issuer expects to use the requested allocation for CREBs volume cap in a pooled financing bondwithin the meaning of section 54(i)(2), and the Issuer expressly agrees that it will obtain a written loan commitmentfor all borrowers from the issue of CREBs to which the requested allocation relates before the issue date of that issue.]

I hereby certify that I am an authorized officer or official of the Applicant and am duly authorized to execute legal documentson behalf of the Applicant in connection with incurring debt and that I am duly authorized to execute legal documents on behalfof the Application in making this Application. Under penalties of perjury, I declare that (i) I have knowledge of the relevant factsand circumstances relating to this Application and the Project(s), (ii) I have examined this Application, and (iii) to the best of myknowledge and belief, all of the facts contained in this Application are true, correct and complete.

By:

Name and Title:

Date:

EXHIBIT A

DESCRIPTION OF THE PROJECT(RESPONSE TO QUESTION 6 OF THE APPLICATION)

(Attached hereto)

EXHIBIT B

ENGINEER’S CERTIFICATE(RESPONSE TO QUESTION 9 OF THE APPLICATION)

(Attached hereto in substantially the form below)

Dated: , 2007

This certificate is being provided to the Internal Revenue Service (“IRS”) in connection with an application (the “Application”)by [Name of Applicant Issuer: ] (the “Issuer”) to the IRS requesting an allocation of volumecap authority to issue clean renewable energy bonds (“CREBs”) under section 54 of the Internal Revenue Code, as amended (the“Code”). The CREBs are being issued to make a loan to [Name of qualified borrower: (the “Borrower”), tofinance the costs of certain clean renewable energy facilities described more particularly in the Application (the “Project”). Theundersigned hereby certifies as follows:

1. I am an independent, licensed engineer, duly qualified to practice the profession of engineering under the laws of theState of , and I am not an officer or employee of the Issuer or the Borrower.

2. I have reviewed the Application for a CREBs volume cap allocation (including the exhibits thereto) of the Issuer ofeven date herewith describing the Project. To the best of my knowledge, information, and belief, the Project will meet therequirements to be a “qualified project” under section 54(d)(2)(A) of the Code and correspondingly a “qualified facility”under section 45(d) of the Code, determined without regard to section 45(d)(10) of the Code and without regard to anyplaced in service date).

[(Include as appropriate) To the best of my knowledge, information, and belief, the Project is a qualified hydropowerfacility under section 45(d)(9)—

April 2, 2007 878 2007–14 I.R.B.

a. producing incremental hydropower production consisting only of efficiency improvements or additions to capacitythat produce additional production as described in section 45(c)(8)(B) based on a methodology that would meetFederal Energy Regulatory Commission (FERC) standards. or

b. that is a nonhydroelectric dam under section 45(c)(8)(C) and the facility, when constructed, will meet FERClicensing requirements and other applicable environmental, licensing and regulatory requirements.]

3. To the best of my knowledge, information and belief, the Project is technically viable and when constructed willproduce electricity.

IN WITNESS WHEREOF, I have hereunto affixed my official signature on the date of this Engineer’s Certificate.

By:Seal and/or License number:

Name and Title:

Company:

EXHIBIT C

PLAN OF FINANCING(RESPONSE TO QUESTION 13 OF THE APPLICATION)

(Attached hereto)

EXHIBIT D

DOCUMENTS REGARDING ISSUER OR BORROWER ORGANIZATIONAL STATUS(RESPONSE TO QUESTION 2 OR 4 OF THE APPLICATION, AS APPLICABLE)

(Attached hereto)

APPENDIX B

CONSENT TO PUBLIC DISCLOSUREOF CERTAIN CLEAN RENEWABLE ENERGY BOND

APPLICATION INFORMATION

In the event that the Application of [(Insert name of applicant here): ] (the “Applicant”) foran allocation of authority to issue clean renewable energy bonds (“CREBs”) under section 54 of the Internal Revenue Code isapproved, the undersigned authorized representative of the Applicant hereby consents to the disclosure by the Internal RevenueService through publication of a Notice in the Internal Revenue Bulletin or a press release of the name of applicant (issuer), thename of the borrower (if other than the issuer), the type and location of the project that is the subject of the Application, and theamount of the allocation, if any, of volume cap authority to issue CREBs for such project. The undersigned understands that thisinformation might be published, broadcast, discussed or otherwise disseminated in the public record.

This authorization shall become effective upon the execution thereof. Except to the extent disclosure is authorized herein,the returns and return information of the undersigned taxpayer are confidential and are protected by law under the InternalRevenue Code.

2007–14 I.R.B. 879 April 2, 2007

I certify that I have the authority to execute this consent to disclose on behalf of the taxpayer named below.

Date: Signature:

Print name:

Title:

Name of Applicant-Taxpayer:

Taxpayer Identification Number:

Taxpayer’s Address:

Note: Treasury Regulations require that the Internal Revenue Service must receive this consent within 60 days after it is signedand dated.

Certain Deduction LimitsUnder the Pension ProtectionAct of 2006

Notice 2007–28

This notice provides guidance on cer-tain of the changes made by the PensionProtection Act of 2006, Pub. L. 109–280(PPA ’06), to § 404 of the Internal Rev-enue Code (Code). Section 404 generallyprovides rules concerning the deductionfor contributions to plans of deferred com-pensation. Some of the PPA ’06 amend-ments to § 404 are effective for years be-ginning after December 31, 2005 (the 2006changes) and others are effective for yearsbeginning after December 31, 2007 (the2008 changes). This notice provides guid-ance with respect to the 2006 changes andone related issue. Future guidance will beprovided with respect to the 2008 changes.

Q–1. What changes to the rules of § 404of the Code were made by PPA ’06 foryears beginning after December 31, 2005?

A–1. In general, PPA ’06 amended§ 404 to modify the deduction permittedfor defined benefit pension plans under§ 404(a)(1). PPA ’06 also modified thecombined limit on deductions for contribu-tions to defined benefit plans and definedcontribution plans with overlapping cover-age as set forth in § 404(a)(7).

Q–2. To what years do the 2006changes apply when the taxable yearof the employer differs from the plan yearof the plan?

A–2. The 2006 changes apply to tax-able years of the employer beginning afterDecember 31, 2005.

Under § 1.404(a)–14(c) of the IncomeTax Regulations (regulations), if the planyear of the plan and the taxable year of theemployer do not coincide, the deductiblelimit for the taxable year of the employeris permitted to be determined as any oneof the following alternatives: (1) the de-ductible limit determined for the planyear beginning in the taxable year, (2) thedeductible limit determined for the planyear ending in the taxable year, or (3) aweighted average of alternatives (1) and(2). A plan year used under any of thesealternatives is referred to in this notice asan associated plan year.

The calculations of the deductible limitfor a taxable year are based on the calcu-lations with respect to an associated planyear or years and must reflect the law ineffect for the taxable year. For example,with respect to the 2006 calendar taxableyear, any associated plan year (i.e., a planyear beginning in 2006 or plan year end-ing in 2006 that is used to determine thedeductible limit for the 2006 taxable year)must reflect the 2006 changes. Thus, if thedeductible limit is determined with respectto the plan year ending in 2006 (which be-gins in 2005), the calculation of the limitwith respect to that plan year must reflectthe use of an interest rate within the per-missible corporate rate range (instead of aninterest rate within the permissible 30-yearTreasury rate range) (see Q&A–3 below)that was used for purposes of § 412, andmust reflect the limitation based upon 150percent of current liability (in place of thelimitation based on 100 percent of currentliability) under § 404(a)(1)(D). The fund-ing method and other actuarial assump-tions that were used for purposes of § 412for that plan year must also be used for thecalculations of the deductible limit.

As another example, in the case of a tax-able year that is not the calendar year andthat begins in 2005 and ends in 2006, and aplan year that is the calendar year, the de-ductible limit for any associated plan yearmust not reflect the 2006 changes. Thus,if the deductible limit for the taxable yearbeginning July 1, 2005, and ending June30, 2006, is determined based upon theplan year beginning in the taxable year (the2006 calendar plan year), the calculationsof such limit must not reflect the limitationbased on 150 percent of current liability(i.e., must be limited to 100 percent of un-funded current liability) and may use the30-year Treasury rate in place of the cor-porate rate.

Q–3. What changes to § 404(a)(1) ofthe Code were made by PPA ’06 for yearsbeginning after December 31, 2005?

A–3. In general, PPA ’06 amended§ 404(a)(1) of the Code for years begin-ning after December 31, 2005, to replacethe limitation of § 404(a)(1)(D) basedupon unfunded current liability with alimitation based on 150 percent of cur-rent liability (140 percent in the caseof a multiemployer plan). In addition,PPA ’06 eliminated the § 404(a)(1)(F)option to use any interest rate within 90percent to 110 percent of the weightedaverage of the rates of interest on 30-yearTreasury securities during the 4-year pe-riod ending on the last day before thebeginning of the plan year (the permis-sible 30-year Treasury rate range) forpurposes of determining current liabilityin determining the maximum deductionunder § 404(a)(1) rather than an interestrate within the 90 percent to 100 percentof the weighted average of the rates of in-terest on amounts invested conservativelyin long-term investment grade corporate

April 2, 2007 880 2007–14 I.R.B.

bonds (the permissible corporate raterange). The current liability is determinedpursuant to existing guidance, including,for example, Notice 90–11, 1990–1 C.B.319.

Q–4. When determining the deductiblelimit in accordance with the 2006 changes,is the deductible limit determined as of thevaluation date for the plan year?

A–4. Yes, the deductible limit is de-termined as of the valuation date for theplan year and is adjusted for interest to theearlier of the end of the plan year or theend of the taxable year of the employer(the “relevant date”). See, for example,§ 1.404(a)–14(f)(3) of the regulations.

Q–5. What does § 404(a)(1)(D)(ii) pro-vide and is the adoption of a new plantreated as a plan amendment for purposesof § 404(a)(1)(D)(ii)?

A–5. Section 404(a)(1)(D)(ii) providesthat, in the case of a plan which has 100or fewer participants for the plan year,unfunded current liability shall not in-clude the liability attributable to benefitincreases for highly compensated em-ployees (as defined in § 414(q), “HCEs”)resulting from a plan amendment whichis made or becomes effective, whicheveris later, within the last two years. Forpurposes of § 404(a)(1)(D)(ii), the adop-tion of a new plan will not be treated asa plan amendment only if the employerdid not maintain a defined benefit plancovering any HCE covered by the newplan during the past 2 years. Thus, for anemployer with a taxable year that is thecalendar year, if an HCE was covered bya defined benefit plan of the employer atany time during 2004 or 2005, a new planestablished during the 2006 taxable yearthat covers that HCE would be consid-ered a plan amendment for purposes of§ 404(a)(1)(D)(ii).

Q–6. What changes to § 404(a)(7) weremade by PPA ’06 for years beginning afterDecember 31, 2005?

A–6. In general, PPA ’06 amended§ 404(a)(7) of the Code for years begin-ning after December 31, 2005, to excludemultiemployer plans from considerationand to provide that the combined limitof § 404(a)(7) only applies in the case ofemployer contributions to one or more de-fined contribution plans to the extent thatsuch contributions exceed 6 percent of thecompensation otherwise paid or accrued

during the taxable year to the beneficiariesunder the plan.

Q–7. Is a plan that contains a qualifiedcash or deferred arrangement described in§ 401(k) taken into account for purposes ofthe combined limit of § 404(a)(7)?

A–7. Yes, a plan that contains aqualified cash or deferred arrangementdescribed in § 401(k) is taken into ac-count for purposes of the combined limitof § 404(a)(7). However, pursuant to§ 404(n), elective deferrals as defined in§ 402(g)(3) are not taken into account.Thus, matching contributions and non-elective employer contributions are takeninto account in applying the limits of§ 404(a), including the combined limitof § 404(a)(7). If elective deferrals arethe only contributions under a definedcontribution plan, then the plan is nottaken into account in applying the limitsof § 404(a)(7).

Q–8. How does the combined limitof § 404(a)(7) apply when employer con-tributions to defined contribution plans(other than elective deferrals) exceed 6percent of compensation of participants inthose plans?

A–8. When employer contributionsto defined contribution plans (other thanelective deferrals) exceed 6 percent ofcompensation of participants in thoseplans, the amount of employer contri-butions to defined contribution plans towhich the combined limit of § 404(a)(7)applies is equal to the amount of employercontributions for the plan year less 6 per-cent of compensation of participants inthose plans. Thus, the combined limit of§ 404(a)(7) (i.e., the greater of 25 percentof compensation, or the contributions tothe defined benefit plan or plans to the ex-tent such contributions do not exceed theamount necessary to satisfy the minimumfunding standard for the defined benefitplans, treating a contribution that does notexceed the unfunded current liability as anamount necessary to satisfy the minimumfunding standard for each defined bene-fit plan) applies to the total of employercontributions to defined benefit plans andemployer contributions to defined contri-bution plans (other than elective deferrals),less 6 percent of compensation of partici-pants in the defined contribution plans.

Q–9. How does the combined limitof § 404(a)(7) apply when employer con-tributions to defined contribution plans

(other than elective deferrals) do not ex-ceed 6 percent of compensation of partici-pants in those plans?

A–9. When employer contributionsto defined contribution plans (other thanelective deferrals) do not exceed 6 percentof compensation of participants in thoseplans, the combined limit of § 404(a)(7)does not apply to any employer contribu-tions to defined contribution plans. In sucha case, the combined limit of § 404(a)(7)(i.e., the greater of 25 percent of compen-sation, or the contributions to the definedbenefit plan or plans to the extent suchcontributions do not exceed the amountnecessary to satisfy the minimum fund-ing standard for the defined benefit plans,treating a contribution that does not ex-ceed the unfunded current liability as anamount necessary to satisfy the minimumfunding standard for each defined benefitplan) applies only to contributions to thedefined benefit plans.

Drafting Information

The principal author of this notice isJames E. Holland, Jr. of the EmployeePlans, Tax Exempt and Government Enti-ties Division. For further information re-garding this notice, contact Mr. Holland at(202) 283–9699 (not a toll-free number).

Request for Comments andInterim Guidance RegardingAllocation of Costs Underthe Simplified Methods ofAccounting Under § 263A

Notice 2007–29

The Internal Revenue Service andTreasury Department are studying theappropriateness of the use of negativeamounts in computing additional costsfor purposes of the simplified methods ofaccounting under § 263A of the InternalRevenue Code. This notice invites publiccomment on changes to the simplifiedproduction method under § 1.263A–2(b)and the simplified resale method under§ 1.263A–3(d) of the Income Tax Regu-lations. This notice also provides interimguidance pending the publication of futureguidance.

2007–14 I.R.B. 881 April 2, 2007

BACKGROUND

Section 471 provides the general rulesfor inventories and authorizes the Secre-tary to determine when the use of inven-tories are necessary to clearly reflect in-come and to determine the valuation meth-ods that are acceptable for tax purposes.The regulations under § 471 provide thegeneral rules for the valuation of invento-ries.

Section 263A was enacted under theTax Reform Act of 1986, and prescribesuniform capitalization rules for prop-erty produced or held for resale. Under§ 263A, producers of real or tangiblepersonal property and resellers of realor personal property must capitalize thedirect costs and a proper share of the in-direct costs of the property. Section 263Arequires capitalization of indirect costsbut generally does not set forth methodsfor allocating indirect costs. Instead, inaccordance with the legislative history, theregulations under § 263A generally pro-vide that taxpayers must allocate indirectcosts to property using detailed or specificcost allocation methods, including a spe-cific identification method, the standardcost method, and methods using burdenrates. Alternatively, taxpayers may use thesimplified production method or simpli-fied resale method (simplified methods),as applicable.

The legislative history to § 263A indi-cates that Congress desired the Service toadopt a flexible approach in the § 263Aregulations by providing simplified meth-ods and assumptions when the costs andburdens of compliance may outweighthe benefits. Accordingly, the simplifiedmethods are intended to alleviate the ad-ministrative burden of complying with thecapitalization rules of § 263A.

In general, the simplified methods de-termine aggregate amounts of additional§ 263A costs allocable to ending inven-tory. Additional § 263A costs generallyare those costs, other than interest, thatwere not capitalized under the taxpayer’smethod of accounting immediately prior tothe effective date of § 263A, but that arerequired to be capitalized under § 263A.Under the simplified methods, additional§ 263A costs allocable to ending inventoryare determined by multiplying § 471 costs(generally, the costs other than interest thetaxpayer capitalized under its method of

accounting immediately prior to the effec-tive date of § 263A) remaining on hand atyear end by an absorption ratio consistingof a numerator of additional § 263A costsincurred during the taxable year over a de-nominator of § 471 costs incurred duringthe taxable year.

At the time the § 263A regulationswere issued, some commentators ex-pressed concern that the simplified meth-ods, in particular the simplified productionmethod, would result in allocation of anexcessive amount of § 263A costs to rawmaterials inventories. They suggested thatthis result occurs because the simplifiedproduction method does not take into ac-count the fact that fewer indirect costs areincurred with respect to raw materials thatare normally held only a short period oftime, compared to other items of inven-tory held longer. The final regulations didnot adopt these recommendations becausethe simplified production method formulaproperly reflects the costs of raw materialsthat are purchased on the last day of theyear, and incorporating the suggestionswould have reduced the simplicity thatthe simplified production method was in-tended to provide.

More recently, controversy has arisenregarding the inclusion of negativeamounts in additional § 263A costs andwhether aggregate additional § 263A costsmay be a negative number. A negativeamount may occur, for example, whena taxpayer includes book costs greaterthan those required for tax purposes inthe § 471 cost of inventory. For example,if a taxpayer included book deprecia-tion in § 471 costs in accordance with§ 1.471–11(c)(2)(iii)(b) and the book de-preciation is greater than tax depreciationfor the year, the taxpayer may have capi-talized too much depreciation for purposesof § 263A and must reduce total § 263Acosts by the excess. A negative amountmay result if the taxpayer does not adjustits § 471 costs to remove this excess depre-ciation amount but instead makes a neg-ative adjustment to its additional § 263Acosts. Some taxpayers have reasoned thatallowing negative amounts is consistentwith the purpose of the simplified methodsto alleviate the administrative burden ofcomplying with the capitalization rules of§ 263A and may reduce overcapitalizationthat sometimes results.

The Service and Treasury Departmentare aware of this viewpoint but are con-cerned that including negative amountsin additional § 263A costs may result insignificant distortions in some situations.Including negative amounts in additional§ 263A costs may undercapitalize amountsbecause the simplified production methodformula may remove more of the costfrom ending inventory than was actuallyremaining in ending inventory. Gener-ally, this distortion is caused by the useof a different formula for removing thecost from ending inventory than the for-mula by which the cost was originallycapitalized under § 471. The inclusion ofraw materials in the simplified productionmethod formula also may cause distor-tions. For example, including a negativeamount for book depreciation greater thantax depreciation (excess depreciation) inthe simplified production method formulamay reduce ending inventory by morethan the amount of excess depreciationactually remaining in ending inventory. Insome circumstances this distortion maybe a reversal of the overcapitalization ofexcess tax depreciation over book depreci-ation in prior years, and thus, may not be acause for concern. However, the inclusioncan cause significant, lasting distortionin situations in which the taxpayer has atax basis much lower than book basis indepreciable property.

The Service and Treasury Departmentare considering amending the regulationsunder § 263A to prohibit the use of someor all negative amounts in computing addi-tional § 263A costs under the existing sim-plified methods and to provide a new alter-native simplified method of cost allocationunder § 263A. The Service and TreasuryDepartment will consider a new methodthat would allow negative amounts in com-puting additional § 263A costs, avoid re-quiring changes to existing systems fordetermining § 471 costs, but reduce dis-tortions. One option under considerationwould treat costs related to raw materialsdifferently from those related to work-in-process or finished goods. Another optionwould create distinctions based upon thetype of cost, with certain permanent itemssuch as basis differences being allocatedusing a separate formula. Additionally, theService and Treasury Department are con-sidering whether special rules should be

April 2, 2007 882 2007–14 I.R.B.

provided for smaller taxpayers to computeadditional § 263A costs.

INTERIM GUIDANCE

Pending the issuance of additional pub-lished guidance, the Service will not chal-lenge the inclusion of negative amounts incomputing additional costs under § 263Aor the permissibility of aggregate negativeadditional § 263A costs. These issues willnot be raised in any taxable year ending onor before publication of the guidance, and,if already raised as an issue in examina-tion or before Appeals or the Tax Court ina taxable year ending on or before March12, 2007, the issue will not be pursuedby the Service. In addition, pending fur-ther published guidance, the Service willnot deny consent for changes in methodof accounting solely on the basis that theproposed method involves the inclusion ofnegative amounts in computing additionalcosts under § 263A or the permissibilityof aggregate negative additional § 263Acosts. However, the Service will not granta taxpayer permission to treat a cost as anegative additional § 263A cost unless thetaxpayer already treats that cost as a § 471cost. In other words, the Service will notapprove a change in method of accountingto change the costs capitalized under § 471to begin capitalizing a cost under § 471and to remove the same cost from end-ing inventory by treating it as a negativeadditional § 263A cost. In addition, anytaxpayers granted consent to make thesechanges will be required to conform theirmethods of accounting to any future pub-lished guidance.

REQUEST FOR COMMENTS

The Service and Treasury Departmentspecifically request public comments onthe following issues:

1. If only some negative amountsare appropriate in computing additional§ 263A costs under the existing simplifiedmethods, which costs should be allowedand under what circumstances? For ex-ample, should variances that were treatedas top-side adjustments (aggregate adjust-ments to total ending inventory that arenot allocated to each item or unit in endinginventory) before enactment of § 263Abe treated differently from variances thatfirst arose after enactment of § 263A?If negative amounts may be included in

the numerator of the existing methods forsome costs, should aggregate negativeadditional § 263A costs be prohibited orrestricted? Should items that generate apermanent difference, such as basis dif-ferences, be allowed under the existingsimplified methods, or should they be al-located using a different method?

2. If the use of negative amounts is re-stricted for certain costs or in certain situ-ations as described in (1) above, what spe-cific modifications should be made to theexisting simplified methods to effect thisresult and how should the negative costsbe allocated? Should a new, alternativesimplified method be created to allocatethe negative costs or all additional § 263Acosts?

3. How might a new, alternative sim-plified method of allocating costs under§ 263A be designed that could be usedfor all additional § 263A costs, positiveor negative, in lieu of the existing sim-plified methods, that would treat costs re-lated to raw materials (including raw ma-terial content of work-in-process and fin-ished goods) differently from those relatedto work-in-process or finished goods (ex-cluding raw material content) and achievemaximum simplicity while reducing dis-tortions? In particular, comments are re-quested on (a) how costs, including vari-ances and book-tax differences, should beallocated between raw materials, work-in-process and finished goods, (b) whetheronly purchasing costs should be allocatedto raw materials, (c) whether purchasing,storage, and handling costs of raw mate-rials should be allocated to raw materials,(d) whether § 471 costs should be adjustedfor purchased raw materials in transit andbeginning inventory, and (e) whether sepa-rate absorption ratios should be calculatedfor raw materials, work-in-process and fin-ished goods, and, if so, how those ratiosshould be calculated.

4. Should the simplified methodsbe modified for small taxpayers and ifso, how? In particular, how should anychanges described above be applied tosmall taxpayers? What criteria should beused for determining whether a taxpayeris a small taxpayer?

Comments should be submitted in writ-ing on or before July 2, 2007, and shouldinclude a reference to Notice 2007–29.Send submissions to: CC:PA:LDP:PR(Notice 2007–29), Room 5203, Internal

Revenue Service, P.O. Box 7604, BenFranklin Station, Washington, DC 20044.Submissions may be hand delivered Mon-day through Friday between the hours of8 a.m. and 4 p.m. to: CC:PA:LPD:PR(Notice 2007–29), Courier’s Desk, In-ternal Revenue Service, 1111 Constitu-tion Avenue, N.W., Washington, DC.Alternatively, comments may be sub-mitted electronically directly to the Ser-vice via the following e-mail address:[email protected] include “Notice 2007–29” in thesubject line of any electronic communi-cation. All materials submitted will beavailable for public inspection and copy-ing.


The principal author of this notice isW. Thomas McElroy, Jr. of the Officeof the Associate Chief Counsel (IncomeTax and Accounting). For further infor-mation concerning this notice, contactMr. McElroy at (202) 622–4970 (not atoll-free number).

Frivolous Positions

Notice 2007–30

PURPOSE

Positions that are the same as or sim-ilar to the positions listed in this noticeare identified as frivolous for purposesof the penalty for a “frivolous tax re-turn” under section 6702(a) of the Inter-nal Revenue Code and the penalty fora “specified frivolous submission” un-der section 6702(b). Persons who file apurported return of tax, including an orig-inal or amended return, based on one ormore of these positions are subject to apenalty of $5,000 if the purported returnof tax does not contain information onwhich the substantial correctness of theself-assessed determination of tax maybe judged or contains information that onits face indicates the self-assessed deter-mination of tax is substantially incorrect.Likewise, persons who submit a “speci-fied submission” (namely, a request fora collection due process hearing or anapplication for an installment agreement,offer-in-compromise, or Taxpayer Assis-tance Order) based on one or more of the

2007–14 I.R.B. 883 April 2, 2007

positions listed in this notice are subjectto a penalty of $5,000. The penalty mayalso be applied if the purported return orany portion of the specified submissionis not based on a position set forth in thisnotice, yet reflects a desire to delay orimpede the administration of Federal taxlaws for purposes of section 6702(a)(2)(B)or 6702(b)(2)(A)(ii).

BACKGROUND

Section 407 of Tax Relief and HealthCare Act of 2006, Pub. L. No. 109–432,120 Stat. 2922 (2006), amended section6702 to increase the amount of the penaltyfor frivolous tax returns from $500 to$5,000 and to impose a penalty of $5,000on any person who submits a “specifiedfrivolous submission.” A submission isa “specified frivolous submission” if itis a “specified submission” (defined insection 6702(b)(2)(B) as a request for ahearing under section 6320 or 6330 or anapplication under section 6159, 7122 or7811) and any portion of the submission(i) is based on a position identified bythe Secretary as frivolous or (ii) reflects adesire to delay or impede administrationof the Federal tax laws. Section 6702 wasfurther amended to add a new subsection(c) requiring the Secretary to prescribea list of positions identified as frivolous.This notice contains the prescribed list.

DISCUSSION

Frivolous Positions. Positions that arethe same as or similar to the following arefrivolous.

1. Compliance with the internal revenuelaws is voluntary or optional and notrequired by law, including argumentsthat:a. Filing a Federal tax or infor-

mation return or paying tax ispurely voluntary under the law,or similar arguments described asfrivolous in Rev. Rul. 2007–20,2007–14 I.R.B. 863.

b. Nothing in the Internal RevenueCode imposes a requirement tofile a return or pay tax, or that aperson is not required to file a taxreturn or pay a tax unless the In-ternal Revenue Service respondsto the person’s questions, corre-spondence, or a request to iden-

tify a provision in the Code re-quiring the filing of a return or thepayment of tax.

c. There is no legal requirement tofile a Federal income tax returnbecause the instructions to Forms1040, 1040A, or 1040EZ or theTreasury regulations associatedwith the filing of the forms do notdisplay an OMB control numberas required by the Paperwork Re-duction Act of 1980, 44 U.S.C.§ 3501 et seq., or similar argu-ments described as frivolous inRev. Rul. 2006–21, 2006–15I.R.B. 745.

d. Because filing a tax return is notrequired by law, the Service mustprepare a return for a taxpayerwho does not file one in order toassess and collect tax.

e. A taxpayer has an option underthe law to file a document or setof documents in lieu of a returnor elect to file a tax return report-ing zero taxable income and zerotax liability even if the taxpayerreceived taxable income duringthe taxable period for which thereturn is filed, or similar argu-ments described as frivolous inRev. Rul. 2004–34, 2004–1 C.B.619.

f. An employer is not legally ob-ligated to withhold income oremployment taxes on employ-ees’ wages.

g. A taxpayer may “untax” himselfor herself at any time or revokethe consent to be taxed and there-after not be subject to internalrevenue taxes.

h. Only persons who have con-tracted with the government byapplying for a governmental priv-ilege or benefit, such as holding aSocial Security number, are sub-ject to tax, and those who havecontracted with the governmentmay choose to revoke the con-tract at will.

i. A taxpayer may lawfully declineto pay taxes if the taxpayer dis-agrees with the government’s useof tax revenues, or similar argu-ments described as frivolous inRev. Rul. 2005–20, 2005–1 C.B.821.

j. An administrative summons is-sued by the Service is per se in-valid and compliance with a sum-mons is not legally required.

2. The Internal Revenue Code is not law(or “positive law”) or its provisionsare ineffective or inoperative, includ-ing the sections imposing an incometax or requiring the filing of tax re-turns, because the provisions havenot been implemented by regulationseven though the provisions in ques-tion either (a) do not expressly requirethe Secretary to issue implementingregulations to become effective or (b)expressly require implementing regu-lations which have been issued.

3. A taxpayer’s income is excluded fromtaxation when the taxpayer rejectsor renounces United States citizen-ship because the taxpayer is a citizenexclusively of a State (sometimescharacterized as a “natural-born cit-izen” of a “sovereign state”), that isclaimed to be a separate country orotherwise not subject to the laws ofthe United States. This position in-cludes the argument that the UnitedStates does not include all or a part ofthe physical territory of the 50 Statesand instead consists of only placessuch as the District of Columbia,Commonwealths and Territories (e.g.,Puerto Rico), and Federal enclaves(e.g., Native American reservationsand military installations), or similararguments described as frivolous inRev. Rul. 2004–28, 2004–1 C.B.624, or Rev. Rul. 2007–22, 2007–14I.R.B. 866.

4. Wages, tips, and other compensa-tion received for the performance ofpersonal services are not taxable in-come or are offset by an equivalentdeduction for the personal servicesrendered, including an argument thata taxpayer has a “claim of right” toexclude the cost or value of the tax-payer’s labor from income or thattaxpayers have a basis in their laborequal to the fair market value of thewages they receive, or similar argu-ments described as frivolous in Rev.Rul. 2004–29, 2004–1 C.B. 627, orRev. Rul. 2007–19, 2007–14 I.R.B.843.

5. United States citizens and residentsare not subject to tax on their wages

April 2, 2007 884 2007–14 I.R.B.

or other income derived from sourceswithin the United States, as onlyforeign-based income or income re-ceived by nonresident aliens and for-eign corporations from sources withinthe United States is taxable, and sim-ilar arguments described as frivolousin Rev. Rul. 2004–30, 2004–1 C.B.622.

6. A taxpayer has been removed or re-deemed from the Federal tax systemthough the taxpayer remains a UnitedStates citizen or resident, or similar ar-guments described as frivolous in Rev.Rul. 2004–31, 2004–1 C.B. 617.

7. Only certain types of taxpayers aresubject to income and employmenttaxes, such as employees of the Fed-eral government, corporations, non-resident aliens, or residents of theDistrict of Columbia or the Federalterritories, or similar arguments de-scribed as frivolous in Rev. Rul.2006–18, 2006–15 I.R.B. 743.

8. Only certain types of income are tax-able, for example, income that resultsfrom the sale of alcohol, tobacco, orfirearms or from transactions or activ-ities that take place in interstate com-merce.

9. Federal income taxes are unconstitu-tional or a taxpayer has a constitu-tional right not to comply with theFederal tax laws for one of the follow-ing reasons:a. The First Amendment permits a

taxpayer to refuse to pay taxesbased on religious or moral be-liefs.

b. A taxpayer may withhold pay-ment of taxes or the filing of a taxreturn until the Service or othergovernment entity responds to aFirst Amendment petition for re-dress of grievances.

c. Mandatory compliance with, orenforcement of, the tax laws in-vades a taxpayer’s right to pri-vacy under the Fourth Amend-ment.

d. The requirement to file a tax re-turn is an unreasonable searchand seizure contrary to the FourthAmendment.

e. Income taxation, tax withhold-ing, or the assessment or collec-tion of tax is a “taking” of prop-erty without due process of law or

just compensation in violation ofthe Fifth Amendment.

f. The Fifth Amendment privilegeagainst self-incrimination grantstaxpayers the right not to file re-turns or the right to withhold allfinancial information from theService.

g. Mandatory or compelled com-pliance with the internal revenuelaws is a form of involuntaryservitude prohibited by the Thir-teenth Amendment.

h. Individuals may not be taxed un-less they are “citizens” withinthe meaning of the FourteenthAmendment.

i. The Sixteenth Amendment wasnot ratified, has no effect, con-tradicts the Constitution as orig-inally ratified, lacks an enablingclause, or does not authorize anon-apportioned, direct incometax.

j. Taxation of income attributed to atrust, which is a form of contract,violates the constitutional prohi-bition against impairment of con-tracts.

k. Similar constitutional argumentsdescribed as frivolous in Rev.Rul. 2005–19, 2005–1 C.B. 819.

10. A taxpayer is not a “person” withinthe meaning of section 7701(a)(14)or other provisions of the InternalRevenue Code, or similar argumentsdescribed as frivolous in Rev. Rul.2007–22, 2007–14 I.R.B. 866.

11. Federal Reserve Notes are not taxableincome when paid to a taxpayer be-cause they are not gold or silver andmay not be redeemed for gold or sil-ver.

12. In a transaction using gold and sil-ver coins, the value of the coins isexcluded from income or the amountrealized in the transaction is the facevalue of the coins and not their fairmarket value for purposes of deter-mining taxable income.

13. A taxpayer with a home-based busi-ness may deduct as business ex-penses the costs of maintaining thetaxpayer’s household along with per-sonal expenses, or similar argumentsdescribed as frivolous by Rev. Rul.2004–32, 2004–1 C.B. 621.

14. A “reparations” tax credit ex-ists, including arguments thatAfrican-American taxpayers mayclaim a tax credit on their Federalincome tax returns as reparationsfor slavery or other historical mis-treatment, that Native Americans areentitled to an analogous credit (or areexempt from Federal income tax onthe basis of a treaty), or similar argu-ments described as frivolous in Rev.Rul. 2004–33, 2004–1 C.B. 628, orRev. Rul. 2006–20, 2006–15 I.R.B.746.

15. A Native American or other taxpayerwho is not an employer engaged ina trade or business may neverthelessclaim (for example, in an amount ex-ceeding all reported income) the In-dian Employment Credit under sec-tion 45A, which explicitly requires,among other criteria, that the taxpayerbe an employer engaged in a trade orbusiness to claim the credit.

16. A taxpayer’s wages are excluded fromSocial Security taxes if the taxpayerwaives the right to receive Social Se-curity benefits, or a taxpayer is enti-tled to a refund of, or may claim acharitable-contribution deduction for,the Social Security taxes that the tax-payer has paid, or similar argumentsdescribed as frivolous in Rev. Rul.2005–17, 2005–1 C.B. 823.

17. Taxpayers may reduce or eliminatetheir Federal tax liability by altering atax return, including striking out thepenalty-of-perjury declaration, or at-taching documents to the return, suchas a disclaimer of liability, or simi-lar arguments described as frivolousin Rev. Rul. 2005–18, 2005–1 C.B.817.

18. A taxpayer is not obligated to payincome tax because the governmenthas created an entity separate anddistinct from the taxpayer—a “strawman”—that is distinguishable fromthe taxpayer by some variation of thetaxpayer’s name, and any tax obli-gations are exclusively those of the“straw man,” or similar argumentsdescribed as frivolous in Rev. Rul.2005–21, 2005–1 C.B. 822.

19. Inserting the phrase “nunc pro tunc”on a return or other document filedwith or submitted to the Service hasa legal effect, such as reducing a tax-

2007–14 I.R.B. 885 April 2, 2007

payer’s tax liability, or similar argu-ments described as frivolous in Rev.Rul. 2006–17, 2006–15 I.R.B. 748.

20. A taxpayer may avoid tax on incomeby attributing the income to a trust, in-cluding the argument that a taxpayercan put all of the taxpayer’s assets intoa trust to avoid income tax while stillretaining substantial powers of own-ership and control over those assets orthat a taxpayer may claim an expensededuction for the income attributed toa trust, or similar arguments describedas frivolous in Rev. Rul. 2006–19,2006–15 I.R.B. 749.

21. A taxpayer may lawfully avoid in-come tax by sending income offshore,including depositing income into aforeign bank account.

22. By purchasing equipment and ser-vices for an inflated price (whichmay or may not have been actuallypaid), a taxpayer can use the section44 Disabled Access Credit to reducetax or generate a refund irrespectiveof whether the taxpayer is a smallbusiness that purchased the equip-ment or services to comply with therequirements of the Americans withDisabilities Act.

23. A taxpayer is allowed to buy or sellthe right to claim a child as a quali-fying child for purposes of the EarnedIncome Tax Credit.

24. An IRS Form 23C, Assessment Cer-tificate — Summary Record of As-sessments, is an invalid record of as-sessment for purposes of section 6203and Treas. Reg. § 301.6203–1, theForm 23C must be personally signedby the Secretary of the Treasury foran assessment to be valid, the Ser-vice must provide a copy of the Form23C to a taxpayer if requested beforetaking collection action, or similararguments described as frivolous inRev. Rul. 2007–21, 2007–14 I.R.B.865.

25. A tax assessment is invalid becausethe assessment was made from a sec-tion 6020(b) substitute for return,which is not a valid return.

26. A statutory notice of deficiency is in-valid because the taxpayer to whomthe notice was sent did not file anincome tax return reporting the de-ficiency or because the statutory no-tice of deficiency was unsigned or not

signed by the Secretary of the Trea-sury or by someone with delegated au-thority.

27. A Notice of Federal Tax Lien is in-valid because it is not signed by a par-ticular official (such as by the Secre-tary of the Treasury), or because it wasfiled by someone without delegatedauthority.

28. The form or content of a Notice ofFederal Tax Lien is controlled by orsubject to a state or local law, and aNotice of Federal Tax Lien that doesnot comply in form or content with astate or local law is invalid.

29. A collection due process notice undersection 6320 or 6330 is invalid if itis not signed by the Secretary of theTreasury or other particular official,or if no certificate of assessment isattached.

30. Verification under section 6330 thatthe requirements of any applicablelaw or administrative procedure havebeen met may only be based on one ormore particular forms or documents(which must be in a certain format),such as a summary record of assess-ment, or that the particular forms ordocuments or the ones on which veri-fication was actually determined mustbe provided to a taxpayer at a collec-tion due process hearing.

31. A Notice and Demand is invalid be-cause it was not signed, was not on thecorrect form (e.g., a Form 17), or wasnot accompanied by a certificate of as-sessment when mailed.

32. The United States Tax Court is an il-legitimate court or does not, for anypurported constitutional or other rea-son, have the authority to hear and de-cide matters within its jurisdiction.

33. Federal courts may not enforce the in-ternal revenue laws because their ju-risdiction is limited to admiralty ormaritime cases or issues.

34. Revenue Officers are not authorizedto issue levies or Notices of FederalTax Lien or to seize property in satis-faction of unpaid taxes.

35. A Service employee lacks the author-ity to carry out the employee’s dutiesbecause the employee does not pos-sess a certain type of identification orcredential, for example, a pocket com-mission or a badge, or it is not in thecorrect form or on the right medium.

36. A person may represent a taxpayer be-fore the Service or in court proceed-ings even if the person does not havea power of attorney from the taxpayer,has not been enrolled to practice be-fore the Service, or has not been ad-mitted to practice before the court.

37. A civil action to collect unpaid taxesor penalties must be personally autho-rized by the Secretary of the Treasuryand the Attorney General.

38. A taxpayer’s income is not taxable ifthe taxpayer assigns or attributes theincome to a religious organization (a“corporation sole” or ministerial trust)claimed to be tax-exempt under sec-tion 501(c)(3), or similar argumentsdescribed as frivolous in Rev. Rul.2004–27, 2004–1 C.B. 625.

39. The Service is not an agency of theUnited States government but rathera private-sector corporation or anagency of a State or Territory withoutauthority to administer the internalrevenue laws.

40. Any position described as frivolous inany revenue ruling or other publishedguidance in existence when the returnadopting the position is filed with orthe specified submission adopting theposition is submitted to the Service.

Returns or submissions that contain po-sitions not listed above, which on their facehave no basis for validity in existing law,or which have been deemed frivolous in apublished opinion of the United States TaxCourt or other court of competent jurisdic-tion, may be determined to reflect a desireto delay or impede the administration ofFederal tax laws and thereby subject to the$5,000 penalty.

The list of frivolous positions abovewill be periodically revised as required bysection 6702(c).


The principal author of this notice is theOffice of Associate Chief Counsel (Pro-cedure & Administration). For furtherinformation regarding this notice, contactthe Office of Associate Chief Counsel(Procedure & Administration), Admin-istrative Provisions & Judicial PracticeDivision, Branch 2, at (202) 622–4940(not a toll-free call).

April 2, 2007 886 2007–14 I.R.B.

26 CFR 601.105: Examination of returns and claimsfor refund, credit or abatement; determination of cor-rect tax liability.(Also Part I, § 527.)

Rev. Proc. 2007–27

SECTION 1. BACKGROUND

.01 Section 527 of the Internal Rev-enue Code provides for the tax treatment ofall political organizations. Section 527(e)provides that a political organization is anorganization (whether or not incorporated)organized and operated primarily for thepurpose of accepting contributions or mak-ing expenditures to influence, or attempt toinfluence, the selection, nomination, elec-tion, or appointment of any individual toany Federal, State, or local public office,office in a political party or the election ofPresidential or Vice-Presidential electors.

.02 Under § 527(i), certain political or-ganizations must file Form 8871, PoliticalOrganization Notice of Section 527 Sta-tus, within 24 hours of being establishedand within 30 days of any material changeto information reported on Form 8871 tobe treated as tax-exempt § 527 organiza-tions. Until these political organizationsfile the form, their income (including in-come that would otherwise be treated asexempt function income) is subject to tax-ation pursuant to § 527(i)(4). See SectionI of Rev. Rul. 2003–49, 2003–1 C.B. 903.

.03 Under § 527(j), certain tax-ex-empt political organizations must reportperiodically on Form 8872, Political Or-ganization Report of Contributions andExpenditures, information about contri-butions received and expenditures madeby the organizations. These reports aredue either monthly or semi-annually inodd-numbered years and either monthlyor quarterly in even-numbered years. Inaddition, certain pre- and post-electionreports are required. Information requiredto be reported includes the names andaddresses of contributors, and, for indi-vidual contributors, their occupations andemployers. A tax-exempt political organ-ization that fails to include the requiredinformation is liable under § 527(j)(1) forthe payment of an amount equal to theamount of the contribution or expendituremultiplied by the highest corporate taxrate (currently 35%). See Section II ofRev. Rul. 2003–49, 2003–1 C.B. 903.

.04 Section 527(l) provides that the In-ternal Revenue Service may waive all orany portion of the tax assessed due to a fail-ure to comply with § 527(i) or the amountimposed under § 527(j) if the failure wasdue to reasonable cause and not due towillful neglect. In establishing reasonablecause, the key factor to consider is the ex-tent of the organization’s effort to obtainand report the required information. If theorganization establishes to the Service’ssatisfaction that there are significant mit-igating factors with respect to the failure,the failure arose from events beyond theorganization’s control, or the organizationhas exercised the appropriate level of duediligence to obtain and report the requiredinformation, waiver is appropriate.

.05 Political organizations have re-quested guidance on what steps a politicalorganization needs to take to establish thatits failure to disclose required informationwas due to reasonable cause and not dueto willful neglect.

SECTION 2. FORM 8872 SCHEDULEA SAFE HARBOR

.01 This revenue procedure provides a“safe harbor” for establishing that failureto report certain contributor informationon Form 8872 was due to reasonable causeand not due to willful neglect, and there-fore qualifies for relief under § 527(l)(2)of the Code. The safe harbor will applyonly to those contributions for which a po-litical organization establishes that it meetsthe requirements of the safe harbor. Forexample, if a political organization failsto report required information with respectto contribution X and contribution Y on aForm 8872, and the political organizationmeets the safe harbor criteria for contri-bution X, but not contribution Y, the or-ganization qualifies for relief pursuant tothe safe harbor with respect to contribu-tion X, but not contribution Y. In addition,the safe harbor will not apply in situationswhere the organization fails to report thename of the contributor on Form 8872 bythe time prescribed. For each contributionfor which the requirements of the safe har-bor are satisfied, the Service will waive thefull amount imposed under section 527(j)with respect to the contribution.

.02 A failure to report the address ofa contributor and, if the contributor is anindividual, the occupation and employer of

the contributor will be considered to be dueto reasonable cause and not due to willfulneglect provided that all of the followingrequirements are met:

(1) All fundraising solicitations by(or on behalf of) the tax-exempt politi-cal organization contain a clear request(in a conspicuous and easily recogniz-able format) for the contributor’s addressand, if the contributor is an individual,the contributor’s occupation and em-ployer (consistent with the instructionsfor Form 8872) and include a statementthat the political organization is subjectto Federal taxes and penalties if it fails todisclose this information to the Service.A fundraising solicitation includes anysolicitation of contributions or gifts inwritten (including electronically such asvia the internet or by facsimile or email)or printed form, by television or radio, orby telephone.

(2) For each contribution for which thecontributor has not provided the requiredinformation, such as the contributor’saddress, occupation and employer, thetax-exempt political organization makes awritten (including electronically such asvia the internet or by facsimile or email)request, or an oral request memorialized inwriting, to the contributor for the requiredinformation within 30 days of receipt ofthe contribution. The information requestmay thank the contributor for the contribu-tion, but must not include material on anyother subject or an additional solicitation.Each information request must includea statement that the tax-exempt politicalorganization is subject to Federal taxesand penalties if it fails to disclose thisinformation to the Service. In addition,each information request that is not oralor electronic must include a pre-addressedreturn envelope or postcard. Each oralor electronic information request mustinclude the mailing or Internet addressto which the required information shouldbe submitted instead of a pre-addressedreturn envelope or postcard.

(3) If the contributor has not re-sponded to the information request bythe due date of the Form 8872 and inthe tax-exempt political organization’srecords, including contributor records,fundraising records or previously filedForms 8872, the tax-exempt politicalorganization has information about thecontributor that is requested by the Form

2007–14 I.R.B. 887 April 2, 2007

8872, the organization must report suchinformation on the Form 8872.

(4) If any missing or corrected contrib-utor information is received after the con-tribution has been disclosed on Form 8872,the tax-exempt political organization filesan amended Form 8872 including the ad-ditional information within 30 days ofreceipt of the information, unless the in-formation is received less than 30 daysand more than 2 business days before anelection, in which case the tax-exemptpolitical organization files an amendedForm 8872 including the additional in-formation no later than 2 business daysbefore the election.

(5) The tax-exempt political organiza-tion discloses all the required informationon Forms 8872 with respect to at least 85percent of the total dollar amount of con-tributions it received during the calendaryear.

(6) The political organization keepscontemporaneous records sufficient tosubstantiate that it has complied with sub-paragraphs (1) through (5) in this section.

.03 Even if a tax-exempt political or-ganization does not meet the requirementsof the safe harbor, the Service still may ex-ercise its authority under section 527(l) ifit determines that the failure is due to rea-sonable cause and not willful neglect.

SECTION 3. REQUEST FORCOMMENTS

.01 The Service is considering whetherto publish additional guidance concerningthe application of § 527(l) to a politicalorganization that fails to file a completedForm 8871 or Form 8872 in the time andmanner prescribed. The Service requestspublic comment concerning (1) the needfor additional guidance and (2) circum-stances in which such a failure should bedeemed to be due to reasonable cause andnot due to willful neglect. For example,

under § 6724 and the regulations thereun-der, a failure to comply with certain infor-mation reporting requirements is deemedto be due to reasonable cause and not dueto willful neglect if the filer acted in a re-sponsible manner and either there are sig-nificant mitigating factors with respect tothe failure or the failure arose from eventsbeyond the filer’s control. The regulationsunder § 6724 provide examples of actingin a responsible manner, significant miti-gating factors and events beyond the or-ganization’s control. However, the Ser-vice recognizes that the reporting require-ments under § 527 have significant publicdisclosure and timeliness concerns (partic-ularly in relation to public disclosure priorto elections) that may differentiate themfrom other information reporting require-ments. Thus, comments should address thefollowing questions:

(1) In applying § 527(l), how might thefactors similar to those in the regulationsunder § 6724 be adapted for purposes of§ 527(l)?

(a) Are there any significant mitigatingfactors that are unique to failures to fileForm 8871 or Form 8872 in the time andmanner prescribed?

(b) Are there any events beyond thepolitical organization’s control that areunique to failures to file Form 8871 orForm 8872 in the time and manner pre-scribed?

(c) Are there any factors unique to po-litical organizations that should be con-sidered in determining whether a politicalorganization acted in a responsible man-ner, both before and after a failure to fileForm 8871 or Form 8872 in the time andmanner prescribed?

(2) Are there any factors relevant to de-termining whether all or only a portion ofthe amounts assessed should be waived?

(3) What documentation should thepolitical organization maintain to estab-lish that any failure to file Form 8871 or

Form 8872 in the time and manner pre-scribed was due to reasonable cause andnot due to willful neglect?

(4) Are there factors that indicate reliefunder § 527(l) should not be granted?

.02 Public comments should be submit-ted in writing on or before July 2, 2007.

Comments should be sent to the followingaddress:

Internal Revenue ServiceSE:T:EO:RA:G (Rev. Proc. 2007–27)P.O. Box 7604Ben Franklin StationWashington, DC 20044

Comments may be hand delivered to:

SE:T:EO:RA:G (Rev. Proc. 2007–27)Courier’s DeskInternal Revenue Service1111 Constitution Ave., NWWashington, DC 20224

Comments may also be sent elec-tronically via the Internet [email protected] include “Rev. Proc. 2007–27” inthe subject line.

All comments will be available for publicinspection.

SECTION 4. DRAFTINGINFORMATION

The principal author of this noticeis Judith E. Kindell of Exempt Organi-zations, Tax Exempt and GovernmentEntities Division. For further infor-mation regarding this notice, contactJudith E. Kindell at (202) 283–8964 (not atoll-free call).

April 2, 2007 888 2007–14 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situationsto show that the previous published rul-ings will not be applied pending somefuture action such as the issuance of newor amended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.

ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.

PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D. —Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z —Corporation.

2007–14 I.R.B. i April 2, 2007

Numerical Finding List1

Bulletins 2007–1 through 2007–14

Announcements:

2007-1, 2007-1 I.R.B. 243

2007-2, 2007-2 I.R.B. 263

2007-3, 2007-4 I.R.B. 376

2007-4, 2007-7 I.R.B. 518

2007-5, 2007-4 I.R.B. 376

2007-6, 2007-4 I.R.B. 376

2007-7, 2007-4 I.R.B. 377

2007-8, 2007-5 I.R.B. 416

2007-9, 2007-5 I.R.B. 417

2007-10, 2007-6 I.R.B. 464

2007-11, 2007-6 I.R.B. 464

2007-12, 2007-6 I.R.B. 465

2007-13, 2007-7 I.R.B. 519

2007-14, 2007-7 I.R.B. 519

2007-15, 2007-8 I.R.B. 596

2007-16, 2007-8 I.R.B. 597

2007-17, 2007-8 I.R.B. 597

2007-18, 2007-9 I.R.B. 625

2007-19, 2007-7 I.R.B. 521

2007-20, 2007-8 I.R.B. 599

2007-21, 2007-9 I.R.B. 630

2007-22, 2007-9 I.R.B. 631

2007-23, 2007-10 I.R.B. 665

2007-24, 2007-10 I.R.B. 681

2007-25, 2007-10 I.R.B. 682

2007-26, 2007-10 I.R.B. 682

2007-27, 2007-11 I.R.B. 733

2007-28, 2007-10 I.R.B. 683

2007-29, 2007-11 I.R.B. 733

2007-30, 2007-11 I.R.B. 734

2007-31, 2007-12 I.R.B. 769

2007-32, 2007-11 I.R.B. 734

2007-33, 2007-13 I.R.B. 841

2007-34, 2007-13 I.R.B. 842

Notices:

2007-1, 2007-2 I.R.B. 254

2007-2, 2007-2 I.R.B. 254

2007-3, 2007-2 I.R.B. 255

2007-4, 2007-2 I.R.B. 260

2007-5, 2007-3 I.R.B. 269

2007-6, 2007-3 I.R.B. 272

2007-7, 2007-5 I.R.B. 395

2007-8, 2007-3 I.R.B. 276

2007-9, 2007-5 I.R.B. 401

2007-10, 2007-4 I.R.B. 354

2007-11, 2007-5 I.R.B. 405

2007-12, 2007-5 I.R.B. 409

2007-13, 2007-5 I.R.B. 410

2007-14, 2007-7 I.R.B. 501

2007-15, 2007-7 I.R.B. 503

Notices— Continued:

2007-16, 2007-8 I.R.B. 536

2007-17, 2007-12 I.R.B. 748

2007-18, 2007-9 I.R.B. 608

2007-19, 2007-11 I.R.B. 689

2007-20, 2007-9 I.R.B. 610

2007-21, 2007-9 I.R.B. 611

2007-22, 2007-10 I.R.B. 670

2007-23, 2007-11 I.R.B. 690

2007-24, 2007-12 I.R.B. 750

2007-25, 2007-12 I.R.B. 760

2007-26, 2007-14 I.R.B. 870

2007-27, 2007-13 I.R.B. 814

2007-28, 2007-14 I.R.B. 880

2007-29, 2007-14 I.R.B. 881

2007-30, 2007-14 I.R.B. 883

Proposed Regulations:

REG-100841-97, 2007-12 I.R.B. 763

REG-157711-02, 2007-8 I.R.B. 537

REG-159444-04, 2007-9 I.R.B. 618

REG-115403-05, 2007-12 I.R.B. 767

REG-152043-05, 2007-2 I.R.B. 263

REG-161919-05, 2007-6 I.R.B. 463

REG-125632-06, 2007-5 I.R.B. 415

REG-147144-06, 2007-10 I.R.B. 680

REG-157834-06, 2007-13 I.R.B. 840

Revenue Procedures:

2007-1, 2007-1 I.R.B. 1

2007-2, 2007-1 I.R.B. 88

2007-3, 2007-1 I.R.B. 108

2007-4, 2007-1 I.R.B. 118

2007-5, 2007-1 I.R.B. 161

2007-6, 2007-1 I.R.B. 189

2007-7, 2007-1 I.R.B. 227

2007-8, 2007-1 I.R.B. 230

2007-9, 2007-3 I.R.B. 278

2007-10, 2007-3 I.R.B. 289

2007-11, 2007-2 I.R.B. 261

2007-12, 2007-4 I.R.B. 354

2007-13, 2007-3 I.R.B. 295

2007-14, 2007-4 I.R.B. 357

2007-15, 2007-3 I.R.B. 300

2007-16, 2007-4 I.R.B. 358

2007-17, 2007-4 I.R.B. 368

2007-18, 2007-5 I.R.B. 413

2007-19, 2007-7 I.R.B. 515

2007-20, 2007-7 I.R.B. 517

2007-21, 2007-9 I.R.B. 613

2007-22, 2007-10 I.R.B. 675

2007-23, 2007-10 I.R.B. 675

2007-24, 2007-11 I.R.B. 692

2007-25, 2007-12 I.R.B. 761

2007-26, 2007-13 I.R.B. 814

2007-27, 2007-14 I.R.B. 887

Revenue Rulings:

2007-1, 2007-3 I.R.B. 265

2007-2, 2007-3 I.R.B. 266

2007-3, 2007-4 I.R.B. 350

2007-4, 2007-4 I.R.B. 351

2007-5, 2007-5 I.R.B. 378

2007-6, 2007-5 I.R.B. 393

2007-7, 2007-7 I.R.B. 468

2007-8, 2007-7 I.R.B. 469

2007-9, 2007-6 I.R.B. 422

2007-10, 2007-10 I.R.B. 660

2007-11, 2007-9 I.R.B. 606

2007-12, 2007-11 I.R.B. 685

2007-13, 2007-11 I.R.B. 684

2007-14, 2007-12 I.R.B. 747

2007-15, 2007-11 I.R.B. 687

2007-16, 2007-13 I.R.B. 807

2007-17, 2007-13 I.R.B. 805

2007-18, 2007-13 I.R.B. 806

2007-19, 2007-14 I.R.B. 843

2007-20, 2007-14 I.R.B. 863

2007-21, 2007-14 I.R.B. 865

2007-22, 2007-14 I.R.B. 866

Tax Conventions:

2007-23, 2007-10 I.R.B. 665

Treasury Decisions:

9298, 2007-6 I.R.B. 434

9299, 2007-6 I.R.B. 460

9300, 2007-2 I.R.B. 246

9301, 2007-2 I.R.B. 244

9302, 2007-5 I.R.B. 382

9303, 2007-5 I.R.B. 379

9304, 2007-6 I.R.B. 423

9305, 2007-7 I.R.B. 479

9306, 2007-6 I.R.B. 420

9307, 2007-7 I.R.B. 470

9308, 2007-8 I.R.B. 523

9309, 2007-7 I.R.B. 497

9310, 2007-9 I.R.B. 601

9311, 2007-10 I.R.B. 635

9312, 2007-12 I.R.B. 736

9313, 2007-13 I.R.B. 805

9314, 2007-14 I.R.B. 845

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2006–27 through 2006–52 is in Internal Revenue Bulletin2006–52, dated December 26, 2006.

April 2, 2007 ii 2007–14 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2007–1 through 2007–14

Notices:

2002-45

Modified by

Notice 2007-22, 2007-10 I.R.B. 670

2005-29

Modified and superseded by

Notice 2007-4, 2007-2 I.R.B. 260

2005-86

Modified by

Notice 2007-22, 2007-10 I.R.B. 670

2005-98


Notice 2007-26, 2007-14 I.R.B. 870

2006-2


Notice 2007-4, 2007-2 I.R.B. 260

2006-50

Amplified, clarified, and modified by

Notice 2007-11, 2007-5 I.R.B. 405

2006-87

Modified and supplemented by

Notice 2007-25, 2007-12 I.R.B. 760

Proposed Regulations:

REG-208270-86

Corrected by

Ann. 2007-4, 2007-7 I.R.B. 518

REG-121509-00

Corrected by

Ann. 2007-17, 2007-8 I.R.B. 597

REG-141901-05

Corrected by

Ann. 2007-7, 2007-4 I.R.B. 377

REG-142270-05

Corrected by

Ann. 2007-2, 2007-2 I.R.B. 263

REG-125632-06

Corrected by

Ann. 2007-26, 2007-10 I.R.B. 682

REG-127819-06

Corrected by

Ann. 2007-5, 2007-4 I.R.B. 376

REG-136806-06

Corrected by

Ann. 2007-6, 2007-4 I.R.B. 376

Hearing cancelled by

Ann. 2007-19, 2007-7 I.R.B. 521

Revenue Procedures:

98-20

Superseded by

Rev. Proc. 2007-12, 2007-4 I.R.B. 354

2000-38

Modified by

Rev. Proc. 2007-16, 2007-4 I.R.B. 358

2000-50

Modified by

Rev. Proc. 2007-16, 2007-4 I.R.B. 358

2001-42

Modified and amplified by

Rev. Proc. 2007-19, 2007-7 I.R.B. 515

2002-9

Modified and amplified by

Rev. Proc. 2007-14, 2007-4 I.R.B. 357

Modified by

Rev. Proc. 2007-16, 2007-4 I.R.B. 358

2004-11

Superseded by

Rev. Proc. 2007-16, 2007-4 I.R.B. 358

2004-65


Rev. Proc. 2007-20, 2007-7 I.R.B. 517

2005-12

Superseded by

Rev. Proc. 2007-17, 2007-4 I.R.B. 368

2005-51

Amplified by

Rev. Proc. 2007-25, 2007-12 I.R.B. 761

2005-69

Superseded by

Rev. Proc. 2007-15, 2007-3 I.R.B. 300

2005-74

Superseded by

Rev. Proc. 2007-24, 2007-11 I.R.B. 692

2006-1

Superseded by

Rev. Proc. 2007-1, 2007-1 I.R.B. 1

2006-2

Superseded by

Rev. Proc. 2007-2, 2007-1 I.R.B. 88

2006-3

Superseded by

Rev. Proc. 2007-3, 2007-1 I.R.B. 108

2006-4

Superseded by

Rev. Proc. 2007-4, 2007-1 I.R.B. 118

Revenue Procedures— Continued:

2006-5

Superseded by

Rev. Proc. 2007-5, 2007-1 I.R.B. 161

2006-6

Superseded by

Rev. Proc. 2007-6, 2007-1 I.R.B. 189

2006-7

Superseded by

Rev. Proc. 2007-7, 2007-1 I.R.B. 227

2006-8

Superseded by

Rev. Proc. 2007-8, 2007-1 I.R.B. 230

2006-17

Obsoleted in part by

Rev. Proc. 2007-26, 2007-13 I.R.B. 814

2006-35

Modified by

Rev. Proc. 2007-22, 2007-10 I.R.B. 675

Revenue Rulings:

54-19

Obsoleted in part by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

55-132

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

56-462

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

56-518

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

57-505

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

58-370

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

58-500

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

69-141

Modified by

Notice 2007-22, 2007-10 I.R.B. 670

69-212

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

69-587

Revoked by

Rev. Rul. 2007-12, 2007-11 I.R.B. 685

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2006–27 through 2006–52 is in Internal Revenue Bulletin 2006–52, dated December 26,2006.

2007–14 I.R.B. iii April 2, 2007

Revenue Rulings— Continued:

71-477

Obsoleted by

Rev. Rul. 2007-14, 2007-12 I.R.B. 747

75-161

Obsoleted by

Rev. Rul. 2007-8, 2007-7 I.R.B. 469

76-188

Obsoleted by

Rev. Rul. 2007-8, 2007-7 I.R.B. 469

78-330

Modified by

Rev. Rul. 2007-8, 2007-7 I.R.B. 469

81-225

Clarified and amplified by

Rev. Rul. 2007-7, 2007-7 I.R.B. 468

92-19

Supplemented in part by

Rev. Rul. 2007-10, 2007-10 I.R.B. 660

96-51

Amplified by

Rev. Rul. 2007-12, 2007-11 I.R.B. 685

2002-41

Modified by

Notice 2007-22, 2007-10 I.R.B. 670

2003-43

Modified by

Notice 2007-2, 2007-2 I.R.B. 254

2003-92

Clarified and amplified by

Rev. Rul. 2007-7, 2007-7 I.R.B. 468

2003-102

Modified by

Notice 2007-22, 2007-10 I.R.B. 670

2005-24

Modified by

Notice 2007-22, 2007-10 I.R.B. 670

2005-76

Supplemented and superseded by

Rev. Rul. 2007-4, 2007-4 I.R.B. 351

2006-36

Modified by

Notice 2007-22, 2007-10 I.R.B. 670

Treasury Decisions:

9263

Corrected by

Ann. 2007-22, 2007-9 I.R.B. 631

9276

Corrected by

Ann. 2007-20, 2007-8 I.R.B. 599Ann. 2007-21, 2007-9 I.R.B. 630

Treasury Decisions— Continued:

9278

Corrected by

Ann. 2007-9, 2007-5 I.R.B. 417Ann. 2007-10, 2007-6 I.R.B. 464

9286

Corrected by

Ann. 2007-8, 2007-5 I.R.B. 416

9298

Corrected by

Ann. 2007-32, 2007-11 I.R.B. 734

9303

Corrected by

Ann. 2007-25, 2007-10 I.R.B. 682

April 2, 2007 iv 2007–14 I.R.B.

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