n-07-36.pdf

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# Part III - Administrative, Procedural, and Miscellaneous

GO Zone Bonus Depreciation Additional Guidance

Notice 2007-36

## SECTION 1. PURPOSE

This notice provides guidance with respect to the 50-percent additional first year
depreciation deduction provided by § 1400N(d) of the Internal Revenue Code (GO Zone
additional first year depreciation deduction) for specified Gulf Opportunity Zone
extension property (GO Zone extension property). This notice also provides additional
guidance with respect to the original use requirement described in § 1400N(d)(2)(A)(iii)
for qualified Gulf Opportunity Zone property (GO Zone property), including GO Zone
extension property.

## SECTION 2. BACKGROUND

.01 Section 1400N(d) generally allows a 50-percent additional first year
depreciation deduction for GO Zone property. The GO Zone additional first year
depreciation deduction is allowable in the taxable year in which the GO Zone property is
placed in service by the taxpayer.

.02 GO Zone property is depreciable property that meets all of the requirements
provided in § 1400N(d)(2) and in section 2.02 of Notice 2006-77, 2006-40 I.R.B. 590.
One of these requirements is that the original use of the property must commence with
the taxpayer in the GO Zone on or after August 28, 2005. Another requirement is that
the property must be placed in service by the taxpayer on or before December 31, 2007

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(December 31, 2008, in the case of qualified nonresidential real property and residential
rental property). Depreciable property described in § 1400N(d)(2)(B) and in section
2.03 of Notice 2006-77 is not eligible for the GO Zone additional first year depreciation
deduction.

.03 Section 1400N(d)(6), added by section 120 of the Tax Relief and Health Care
Act of 2006 (TRHCA), Pub. L. No. 109-432, 120 Stat. 2922, extends the placed-in-
service date requirement for GO Zone extension property. Section 1400N(d)(6)(A)
provides that in the case of any GO Zone extension property, § 1400N(d)(2)(A) is
applied without regard to § 1400N(d)(2)(A)(v), which is the placed-in-service date
requirement described in section 2.02 of this notice. Section 1400N(d)(6)(B) provides
that Go Zone extension property is property substantially all of the use of which is in one
or more specified portions of the GO Zone (as described in section 3 of this notice) and
that is either (I) nonresidential real property or residential rental property that is placed
in service by the taxpayer on or before December 31, 2010, or (II) in the case of a
taxpayer who places a building described in (I) in service on or before December 31,
2010, property described in § 168(k)(2)(A)(i) if substantially all of the use of such
property is in such building and such property is placed in service by the taxpayer not
later than 90 days after such building is placed in service. In the case of any GO Zone
extension property that is nonresidential real property or residential rental property,
§ 1400N(d)(6)(D) provides that the GO Zone additional first year depreciation deduction
is applicable only to the extent of the adjusted basis of such property attributable to
manufacture, construction, or production before January 1, 2010. For further guidance,
see section 4 of this notice.

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.04 The counties and parishes in Alabama, Louisiana, and Mississippi that
comprise the GO Zone are listed on page 2 of IRS Publication 4492, Information for
Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, under Gulf Opportunity
(GO) Zone (Core Disaster Area). In defining GO Zone extension property,
§ 1400N(d)(6)(C) provides that the term "specified portions of the GO Zone" means
those portions of the GO Zone that are in any county or parish that is identified by the
Secretary as being a county or parish in which hurricanes occurring during 2005
damaged (in the aggregate) more than 60 percent of the housing units in such county or
parish that were occupied (determined according to the 2000 Census). The Joint
Committee on Taxation's explanation of TRHCA references the data compiled, and
published on February 12, 2006, in Current Housing Unit Damage Estimates Hurricanes
Katrina, Rita, and Wilma, which is available at

www.dhs.gov/xlibrary/assets/GulfCoast HousingDamageEstimates 021206.pdf in
identifying the counties and parishes that qualify as specified portions of the GO Zone.
See Staff of Joint Committee of Taxation, Technical Explanation of H.R. 6408, the "Tax
Relief and Health Care Act of 2006," as Introduced in the House on December 7, 2006,
at 40, n.52 (December 7, 2006). For further guidance, see section 3 of this notice.

.05 With respect to the original use requirement described in section 2.02 of this
notice, section 2.02(3) of Notice 2006-77 provides that rules similar to the original use
rules in § 1.168(k)-1(b)(3) of the Income Tax Regulations apply. In addition, used
property will satisfy the original use requirement so long as the property has not been
previously used within the GO Zone. The Treasury Department and the Internal
Revenue Service have learned that taxpayers are uncertain how to apply the original

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use requirement to transactions involving reconditioned or rebuilt property in the GO
Zone. This notice clarifies the application of the original use requirement in
§ 1400N(d)(2)(A)(iii) for GO Zone property, including GO Zone extension property.
SECTION 3. SPECIFIED PORTIONS OF THE GO ZONE

Solely for purposes of § 1400N(d)(6), the portions of the GO Zone that are the
specified portions of the GO Zone are:

.01 Alabama: No counties.

.02 Louisiana: The parishes of Calcasieu, Cameron, Orleans, Plaquemines, St.
Bernard, St. Tammany, and Washington.

.03 Mississippi: The counties of Hancock, Harrison, Jackson, Pearl River, and
Stone.

SECTION 4. GO ZONE EXTENSION PROPERTY

.01 Definition. GO Zone extension property is depreciable property that meets all
of the following requirements:

(1) Property that is described in § 1400N(d)(2)(A)(i), (ii), (iii), and (iv), and in
sections 2.02(1), (2), (3), and (4) of Notice 2006-77 (as modified by section 5 of this
notice);

(2) Property that is not described in § 1400N(d)(2)(B) and in section 2.03 of
Notice 2006-77;

(3) Substantially all of the use of the property is in one or more specified
portions of the GO Zone (as defined in section 3 of this notice). For purposes of this
section 4.01(3), the term "substantially all" means 80 percent or more during each
taxable year. If greater than 20 percent of the use of the property is outside the

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counties and parishes designated as being part of the specified portions of the GO
Zone, then the property is not GO Zone extension property under § 1400N(d)(6); and

(4)(a) Property that is nonresidential real property (as defined in § 168(e)(2)(B))
or residential rental property (as defined in § 168(e)(2)(A)) and depreciated under § 168
and placed in service by the taxpayer on or before December 31, 2010; or

(b) In the case of a taxpayer that places in service on or before December 31,
2010, a building (as defined in § 1.48-1(e)(1)) that is described in section 4.01(4)(a) of
this notice and is GO Zone extension property, property that is described in
§ 168(k)(2)(A)(i) and § 1.168(k)-1(b)(2)(i) if substantially all of the use of such property
is in the building and such property is placed in service by the taxpayer not later than 90
calendar days after the building is placed in service by the taxpayer. For purposes of
this section 4.01(4)(b), the term "substantially all" means 80 percent or more during
each taxable year. If greater than 20 percent of the use of the property is not in the
building, then the property is not GO Zone extension property. Further, land
improvements that are not in the building (for example, the sidewalks surrounding the
building) are not GO Zone extension property. Moreover, if the building that is
described in section 4.01(4)(a) of this notice and is GO Zone extension property is a
multi-story building and the floors of that building are placed in service by the taxpayer
on different dates, the taxpayer must place in service the property described in this
section 4.01(4)(b) not later than 90 calendar days after the entire building is placed in
service by the taxpayer but not later than March 31, 2011.

.02 Determination of Adjusted Basis Qualifying for the GO Zone Additional First
Year Depreciation Deduction.

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(1) Property described in § 1400N(d)(6)(B)(ii)(I) and section 4.01(4)(a) of this
notice.

(a) In general. In the case of GO Zone extension property described in
§ 1400N(d)(6)(B)(ii)(I) and section 4.01(4)(a) of this notice (GO Zone extension real
property), § 1400N(d)(6)(D) provides that the GO Zone additional first year depreciation
deduction is available only for the adjusted basis of such property attributable to
manufacture, construction, or production before January 1, 2010. The amounts of
adjusted basis of the property attributable to manufacture, construction, or production
before January 1, 2010, are referred to as "progress expenditures."

(b) Determination of progress expenditures. For purposes of
§ 1400N(d)(6)(D), progress expenditures for GO Zone extension real property that is
manufactured, constructed, or produced generally is the amount paid or incurred that is
properly chargeable to capital account with respect to the property. The amount that is
properly chargeable to capital account for purposes of § 1400N(d)(6)(D) also includes
any other costs paid or incurred by the taxpayer, such as interest, or any other direct or
indirect costs that are required to be capitalized under § 263A(a) and the regulations
thereunder with respect to the manufacture, construction, or production of the property.

For GO Zone extension real property actually manufactured, constructed, or
produced by the taxpayer, the amount paid or incurred by the taxpayer is properly
chargeable to capital account at the time and to the extent that the amount is properly
includible in computing basis of the property under the taxpayer's method of accounting,
such as, for example, after the requirements of § 461 (including the economic
performance requirement of § 461(h)) are satisfied.

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In the case of GO Zone extension real property that is manufactured,
constructed, or produced for the taxpayer by another person under a written binding
contract (as defined in § 1.168(k)-1(b)(4)(ii)), the amount that is properly chargeable to
capital account for purposes of § 1400N(d)(6)(D) includes any payments by the
taxpayer under the contract that represent part of the purchase price of the property but
only to the extent progress is made in manufacture, construction, or production of the
property, or, to the extent costs are incurred by the taxpayer earlier than payments are
made (determined on a cumulative basis for the property), any part of that price for
which the taxpayer has satisfied the requirements of § 461 (including the economic
performance requirement of § 461(h)). In the case of an accrual method taxpayer, the
taxpayer has made a payment if the transaction would be considered a payment by a
taxpayer using the cash receipts and disbursements method of accounting. Solely for
purposes of this paragraph, the written binding contract must be entered into before the
manufacture, construction, or production of the property to be delivered under the
contract is completed.

With respect to GO Zone extension real property that is manufactured,
constructed, or produced by another person and is purchased by the taxpayer after the
manufacture, construction, or production of the property is completed, only the part of
the purchase price attributable to the cost of manufacture, construction, or production of
the GO Zone extension real property before January 1, 2010, is eligible for the GO Zone
additional first year depreciation deduction.

(2) Property described in § 1400N(d)(6)(B)(ii)(II) and section 4.01(4)(b) of this
notice. The progress expenditure rule in § 1400N(d)(6)(D) and section 4.02(1) of this

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notice does not apply to the GO Zone extension property described in
§ 1400N(d)(6)(B)(ii)(II) and section 4.01(4)(b) of this notice (GO Zone extension
personal property). Accordingly, the unadjusted depreciable basis (as defined in
§ 1.168(b)-1(a)(3)) of such GO Zone extension personal property is eligible for the GO
Zone additional first year depreciation deduction (assuming all requirements are met).
SECTION 5. ORIGINAL USE REQUIREMENT FOR THE GO ZONE ADDITIONAL
FIRST YEAR DEPRECIATION DEDUCTION

.01 In general. For purposes of the GO Zone additional first year depreciation
deduction, depreciable property will meet the requirements of § 1400N(d)(2)(A)(iii) if the
original use of the property commences with the taxpayer in the GO Zone on or after
August 28, 2005. Except as provided in rules similar to the original use rules in
§ 1.168(k)-1(b)(3)(iii) (sale-leaseback, syndication, and certain other transactions) and
in § 1.168(k)-1(b)(3)(iv) (fractional interests in property), original use means the first use
to which the property is put, whether or not that use corresponds to the use of the
property by the taxpayer. Thus, additional capital expenditures paid or incurred by a
taxpayer to recondition or rebuild property that is acquired by purchase or owned by the
taxpayer satisfy the original use requirement because it is the first use to which the
improvement is put.

The cost of reconditioned or rebuilt property does not satisfy the original use
requirement because the reconditioned or rebuilt property has been previously used.
However, for purposes of the GO Zone additional first year depreciation deduction, used
property (including reconditioned or rebuilt property) will satisfy the original use
requirement so long as the property has not been previously used within the GO Zone.

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Thus, unlike the rules in § 1.168(k)-1(b)(3)(i), the portion of the cost of reconditioned or
rebuilt property that is attributable to the cost of capital expenditures that were not
previously used within the GO Zone will satisfy the original use requirement, regardless
of whether or not the underlying property (before being reconditioned or rebuilt) to which
the capital expenditures relate was previously used either inside or outside of the GO
Zone. The question of whether property is reconditioned or rebuilt property is a
question of fact. For purposes of this section 5.01, property that contains used parts will
not be treated as reconditioned or rebuilt if the cost of the used parts is not more than
20 percent of the total cost of the property, whether acquired or self-constructed.

Rules similar to the rules in § 1.168(k)-1(b)(3)(ii), (iii), and (iv) also apply for
purposes of the original use requirement for the GO Zone additional first year
depreciation deduction.

.02 Examples. The following examples illustrate the provisions of this section 5.

Example 1. In July 2005, A, a calendar-year taxpayer, placed in service a new
building that is located in the GO Zone. During 2007, A incurs $2,000,000 of capital
expenditures to renovate and expand such building. In October 2007, A places these
capital expenditures in service for use in A's trade or business. The $2,000,000 of
capital expenditures incurred by A satisfies the original use requirement. Assuming all
other requirements are met, A may claim the GO Zone additional first year depreciation
deduction for the $2,000,000 of capital expenditures, regardless of whether the
$2,000,000 is added to the basis of the building or is capitalized as a separate asset.

Example 2. In March 2007, B, a calendar-year taxpayer, purchases from C for
$5,000,000 a damaged building that is located in the GO Zone and has been previously

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used in C's trade or business. In August 2007, B incurs $4,000,000 of capital
expenditures to renovate the building. In November 2007, B places the building in
service for use in B's trade or business. The $5,000,000 purchase price does not
qualify for the GO Zone additional first year depreciation deduction because the building
was previously used by C within the GO Zone and, therefore, the original use
requirement is not met. However, the $4,000,000 of capital expenditures incurred by B
satisfies the original use requirement. Assuming all other requirements are met, B may
claim the GO Zone additional first year depreciation deduction for the $4,000,000 of
capital expenditures, regardless of whether the $4,000,000 is added to the basis of the
building or is capitalized as a separate asset.

Example 3. D owns a building in the GO Zone that was used in D's trade or
business prior to Hurricane Katrina. This building was badly damaged by Hurricane
Katrina. Since that hurricane, the building has been closed. D incurs $3,000,000 of
capital expenditures to renovate and improve the closed building. All of the $3,000,000
capital expenditures are components and properties not previously used in the GO
Zone. Upon completion of the improvements in March 2007, D decides to sell the still-
closed building instead of placing the renovated building in service. In May 2007, D
sells the building to E for $8,000,000. At the time of the sale, the fair market value of
the improvements made by D is $3,000,000. None of the improvements made by D
were placed in service by D and, therefore, D could not take a depreciation deduction
with respect to the improvements. In June 2007, E places the building (with the
improvements) in service for use in E's trade or business. Of E's total cost of the
building ($8,000,000), $5,000,000 is attributable to the part of the building previously

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used in the GO Zone and $3,000,000 is attributable to the improvements made by D
that were not previously used in the GO Zone. Consequently, 62.5 percent of E's total
cost of the building is attributable to used components and property and, thus, E has
purchased a reconditioned or rebuilt building. Of E's total cost of the building
($8,000,000), $5,000,000 does not qualify for the GO Zone additional first year
depreciation deduction because this amount is attributable to property previously used
in the GO Zone. However, the remaining amount of $3,000,000 is for improvements
that were not previously used in the GO Zone and, thus, satisfies the original use
requirement. Assuming all other requirements are met, E may claim the GO Zone
additional first year depreciation deduction for the $3,000,000 cost of the improvements.

Example 4. The facts are the same as in Example 3, except that D incurs
$7,000,000 of capital expenditures to renovate and improve the closed building, all of
the $7,000,000 capital expenditures are components and properties not previously used
in the GO Zone, and the fair market value of these improvements at the time of the sale
of the building to E is $7,000,000. Of E's total cost of the building ($8,000,000),
$1,000,000 is attributable to the part of the building previously used in the GO Zone and
$7,000,000 is attributable to the improvements made by D that were not previously used
in the GO Zone. Consequently, only 12.5 percent of E's total cost of the building is
attributable to used parts and, thus, E is treated as purchasing a new building (and not a
reconditioned or rebuilt building). Thus, E's total cost of the building ($8,000,000)
satisfies the original use requirement. Assuming all other requirements are met, E may
claim the GO Zone additional first year depreciation deduction for the $8,000,000 cost
of the building.

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# SECTION 6. EFFECT ON OTHER DOCUMENTS

Section 2.02(3) of Notice 2006-77, 2006-40 I.R.B. 590, is clarified, modified, and
amplified to read as provided in section 5 of this notice.

## SECTION 7. DRAFTING INFORMATION

The principal author of this notice is Douglas H. Kim of the Office of Associate
Chief Counsel (Passthroughs & Special Industries). For further information regarding
this notice, contact Mr. Kim at (202) 622-3110 (not a toll-free call).