Part I. Rulings — Internal Revenue Bulletin 2001-18

come housing tax credits under § 42(j)(6). Under this program, taxpayers may establish a Treasury Direct Account and pledge certain United States Treasury securities to the Internal Revenue Service as security.

This revenue ruling provides in Table 1 the bond factor amounts for calculating the amount of bond considered satisfactory under § 42(j)(6) or the amount of United States Treasury securities to pledge in a Treasury Direct Account under Rev. Proc. 99–11 for dispositions of qualified low-income buildings or interests therein during the period April through June 2001.

Section 42.—Low-Income Housing Credit

Low-income housing credit; satisfac- tory bond; “bond factor” amounts for the period April through June 2001. This ruling announces the monthly bond factor amounts to be used by taxpayers who dispose of qualified low-income buildings or interests therein during the period April through June 2001.

Rev. Rul. 2001–19

In Rev. Rul. 90–60, 1990–2 C.B. 4, the Internal Revenue Service provided guid

ance to taxpayers concerning the general methodology used by the Treasury Department in computing the bond factor amounts used in calculating the amount of bond considered satisfactory by the Secretary under § 42(j)(6) of the Internal Revenue Code. It further announced that the Secretary would publish in the Internal Revenue Bulletin a table of “bond factor” amounts for dispositions occurring during each calendar month.

Rev. Proc. 99–11, 1999–1 C.B. 275, established a collateral program as an alternative to providing a surety bond for taxpayers to avoid or defer recapture of the low-in

For a list of bond factor amounts applicable to dispositions occurring during other calendar years, see: Rev. Rul. 98–3, 1998–1 C.B. 248, and Rev. Rul. 2001–2, 2001–2 I.R.B. 255. For dispositions occurring during the period January through March 2001, see Rev. Rul. 2001–10, 2001–10 I.R.B. 755.

DRAFTING INFORMATION

The principal author of this revenue ruling is Gregory N. Doran of the Office of Associate Chief Counsel (Passthroughs

and Special Industries). For further information regarding this revenue ruling, contact Mr. Doran at (202) 622-3040 (not a toll-free call).

Section 61.—Gross Income Defined

26 CFR 1.61–1: Gross income.

Must a lease agreement provide that an entire construction allowance is for the purpose of constructing or improving qualified long-term real

property to satisfy the purpose requirement under § 1.110–1(b)(3) of the Income Tax Regulations? See Rev. Rul. 2001–20, beginning on this page.

Section 110.—Qualified Lessee Construction Allowances for Short-Term Leases

26 CFR 1.110–1: Qualified lessee construction allowances. (Also § 61; 1.61–1.)

Qualified lessee construction al- lowances for short-term leases. The

2001–18 I.R.B. 1143 April 30, 2001

purpose requirement under section 1.110–1(b)(3) of the Income Tax Regulations does not require a lease agreement to provide that the entire construction allowance is for the purpose of constructing or improving qualified long-term real property. However, only the portion of the construction allowance actually expended on qualified long-term real property for use in the lessee’s trade or business at the retail space may qualify as a qualified lessee construction allowance.

Rev. Rul. 2001–20

ISSUE

Must a lease agreement provide that an entire construction allowance is for the purpose of constructing or improving qualified long-term real property to satisfy the purpose requirement under § 1.110–1(b)(3) of the Income Tax Regulations?

FACTS

X is in the business of selling tangible personal property to the general public. On February 5, 2001, X and Y sign a 10year agreement for the lease by X of retail space located in Y ’s newly constructed shopping center. The 10-year lease term starts March 1, 2001. A provision of the lease agreement provides that Y will provide X with a construction allowance in the amount of $1 million for the retail space. The lease agreement provides that, to the extent the $1 million construction allowance is spent on qualified long-term real property, it is for the purpose of constructing or improving qualified long-term real property for use in X ’s business at the retail space located at Y ’s shopping center.

During X ’s 2001 taxable year, X receives the $1 million construction allowance and spends $800,000 on qualified long-term real property and $100,000 on section 1245 property for the leased retail space located in Y ’s shopping center. X is permitted to retain any excess over the amount it actually spends improving the retail space.

LAW AND ANALYSIS

Section 61(a) of the Internal Revenue Code provides that gross income means “all income from whatever source derived” except as otherwise provided in subtitle A of the Code.

Section 110(a) provides a safe harbor excluding from gross income any amount received in cash (or treated as a rent reduction) by a lessee from a lessor under a short-term lease of retail space, for the purpose of the lessee’s constructing or improving qualified long-term real property for use in the lessee’s trade or business at the retail space, but only to the extent that the amount does not exceed the amount expended by the lessee for the construction or improvement (a qualified lessee construction allowance).

Section 110(c)(1) defines the term “qualified long-term real property” as nonresidential real property which is part of, or otherwise present at, the retail space referred to in § 110(a) and which reverts to the lessor at the termination of the lease. Section 1.110–1(b)(2)(i) further defines qualified long-term real property as not including property qualifying as section 1245 property under section 1245(a)(3). Section 110(c)(2) defines the term “short-term lease” as a lease (or other agreement for occupancy or use) of retail space for 15 years or less (as determined under the rules of § 168(i)(3)). Section 110(c)(3) defines the term “retail space” as real property leased, occupied, or otherwise used by a lessee in its trade or business of selling tangible personal property or services to the general public.

Under the purpose requirement in § 1.110–1(b)(3), an amount is excluded from gross income under § 110(a) only to the extent that the lease agreement for the retail space expressly provides that the construction allowance is for the purpose of constructing or improving qualified long-term real property for use in the lessee’s trade or business at the retail space.

The intent of the purpose requirement in § 1.110–1(b)(3), which requires the lease agreement expressly provide that the construction allowance is for the purpose of constructing or improving qualified long-term real property, is to ensure that the lessor and the lessee take consistent tax positions. The requisite provision in the lease agreement serves as an acknowledgment by the lessor and the lessee that, to the extent the construction allowance is spent on qualified long-term real property, the improved or constructed property will be treated as owned by the lessor. The

purpose requirement in § 1.110–1(b)(3) does not require a lease agreement to provide that the entire construction allowance is for the purpose of constructing or improving qualified long-term real property. However, only the portion of the construction allowance actually spent on qualified long-term real property may qualify as a qualified lessee construction allowance. Accordingly, of the $1 million construction allowance provided by Y to X, $800,000 qualifies as a qualified lessee construction allowance that may be excluded from income under § 110(a).

HOLDING

The purpose requirement under § 1.110–1(b)(3) does not require a lease agreement to provide that the entire construction allowance is for the purpose of constructing or improving qualified longterm real property. However, only the portion of the construction allowance actually expended on qualified long-term real property for use in the lessee’s trade or business at the retail space may qualify as a qualified lessee construction allowance.

DRAFTING INFORMATION

The principal author of this revenue ruling is Paul Handleman of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Mr. Handleman at (202) 622-3040 (not a toll-free call).

Section 2032A.—Valuation of Certain Farm, Etc., Real Property

26 CFR 20.2032A–4: Method of valuing farm real property.

Special use value; farms; interest rates. The 2001 interest rates to be used in computing the special use value of farm real property for which an election is made under section 2032A of the Code are listed for estates of decedents.

Rev. Rul. 2001–21

This revenue ruling contains a list of the average annual effective interest rates on new loans under the Farm Credit Bank

April 30, 2001 1144 2001–18 I.R.B.

system. This revenue ruling also contains a list of the states within each Farm Credit Bank District.

Under § 2032A(e)(7)(A)(ii) of the Internal Revenue Code, rates on new Farm Credit Bank loans are used in computing the special use value of real property used as a farm for which an election is made under § 2032A. The rates in this revenue ruling may be used by estates that value farmland under § 2032A as of a date in 2001.

Average annual effective interest rates, calculated in accordance with § 2032A(e)(7)(A) and § 20.2032A–4(e) of the Estate Tax Regulations, to be used

under § 2032A(e)(7)(A)(ii), are set forth in the accompanying Table of Interest Rates (Table 1). The states within each Farm Credit Bank District are set forth in the accompanying Table of Farm Credit Bank Districts (Table 2).

Rev. Rul. 81–170, 1981–1 C.B. 454, contains an illustrative computation of an average annual effective interest rate. The rates applicable for valuation in 2000 are in Rev. Rul. 2000–26, 2000–22 I.R.B. 1124. For rate information for years prior to 2000, see Rev. Rul. 99–20, 1999–1 C.B. 972, and other revenue rulings that are referenced therein.

DRAFTING INFORMATION

The principal author of this revenue ruling is Lane Damazo of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Lane Damazo at (202) 622-3090 (not a toll-free call).

REV. RUL. 2001–21 TABLE 1 TABLE OF INTEREST RATES

(Year of Valuation 2001)

Farm Credit Bank District in Interest Which Property Is Located Rate

Columbia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.90 Omaha/Spokane . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.98 Sacramento . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.99 St. Paul . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.13 Springfield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.97 Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.22 Wichita . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.22

REV. RUL. 2001–21 TABLE 2

TABLE OF FARM CREDIT BANK DISTRICTS District States

Columbia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, Pennsylvania, South Carolina, Virginia, West Virginia Omaha/Spokane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alaska, Idaho, Iowa, Montana, Nebraska, Oregon, South Dakota, Washington, Wyoming. Sacramento . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arizona, California, Hawaii, Nevada, Utah. St. Paul . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arkansas, Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, North Dakota, Ohio, Tennessee, Wisconsin. Springfield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont. Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alabama, Louisiana, Mississippi, Texas Wichita . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado, Kansas, New Mexico, Oklahoma

2001–18 I.R.B. 1145 April 30, 2001