Part I. Rulings — Internal Revenue Bulletin 2002-10

The President has determined that during 2001 the areas listed below have been adversely affected by disasters of sufficient severity and magnitude to warrant assistance by the Federal Government under the Act.

A list of the areas warranting assistance under the Act is available at the Federal Emergency Management Agency Internet site at www.fema.gov . Accordingly, the Internal Revenue Service requests comments regarding the need for future publication of this revenue ruling. Comments should be submitted by May 1, 2002, either to:

Internal Revenue Service P. O. Box 7604 Ben Franklin Station Washington, DC 20044 Attn: CC:PA:T:CRU (ITA) Room 5041

or electronically via the Service internet site at: Notice.Comments@irscounsel. treas.gov (the Service comments e-mail address). All comments will be available for public inspection and copying.

FURTHER INFORMATION

For further information regarding this revenue ruling, contact James Roy at (202) 622–4950 (not a toll-free call).

Section 42.—Low-Income Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2002. See Rev. Rul. 2002–10, page 616.

If impact fees incurred by a taxpayer in connection with the new construction or expansion of a qualified low-income building are capitalized costs allocable to the building, are these fees included in the eligible basis of the qualified low-income building for purposes of § 42 of the Internal Revenue Code? See Rev. Rul. 2002–9, page 614.

Section 165.—Losses

26 CFR 1.165–11: Election in respect of losses attributable to a disaster.

Election in respect to losses attribut- able to a disaster. This ruling lists the areas declared by the President to qualify as major disaster or emergency areas during 2001 under the Disaster Relief and Emergency Assistance Act.

Rev. Rul. 2002–11

Under § 165(i) of the Internal Revenue Code, if a taxpayer suffers a loss attributable to a disaster occurring in an area subsequently determined by the President of the United States to warrant assistance by the Federal Government under the

Disaster Relief and Emergency Assistance Act, 42 U.S.C. §§ 5121–5204c (1988 & Supp. V 1993) (the Act), the taxpayer may elect to claim a deduction for that loss on the taxpayer’s federal income tax return for the taxable year immediately preceding the taxable year in which the disaster occurred. For purposes of § 165(i), a disaster includes an event declared a major disaster or an emergency under the Act.

Section 1.165–11(e) of the Income Tax Regulations provides that the election to deduct a disaster loss for the preceding year must be made by filing a return, an amended return, or a claim for refund on or before the later of (1) the due date of the taxpayer’s income tax return (determined without regard to any extension of time to file the return) for the taxable year in which the disaster actually occurred, or (2) the due date of the taxpayer’s income tax return (determined with regard to any extension of time to file the return) for the taxable year immediately preceding the taxable year in which the disaster actually occurred.

The provisions of § 165(i) apply only to losses that are otherwise deductible under § 165(a). An individual taxpayer may deduct losses if they are incurred in a trade or business, if they are incurred in a transaction entered into for profit, or if they are casualty losses under § 165(c)(3).

Disaster Area Disaster Description Disaster Date

Alabama

Counties of Blount, Fayette, Jefferson, Lamar, Tuscaloosa, and Walker

Counties of Autauga, Blount, Butler, Calhoun, Cherokee, Clay, Dale, DeKalb, Etowah, Fayette, Jefferson, Lamar, Lawrence, Madison, Marion, Marshall, St. Clair, Talladega, and Winston

Arkansas

Counties of Bradley, Clark, Cleveland, Columbia, Conway, Craighead, Dallas, Drew, Franklin, Hempstead, Hot Spring, Lafayette, Lincoln, Little River, Miller, Nevada, Newton, Ouachita, Polk, Prairie, Union, and White

FEMA-1362-DR Severe storms and flooding

FEMA-1399-DR Severe storms and tornadoes

FEMA-1363-DR Severe storms and flooding

February 16–17

November 24– December 12

February 14–March 21

2002–10 I.R.B. 608 March 11, 2002

Disaster Area Disaster Description Disaster Date

Colorado

Counties of Baca, Bent, Cheyenne, Crowley, Kiowa, Lincoln, Logan, Morgan, Phillips, Prowers, Sedgwick, Washington, Weld, and Yuma

District of Columbia

FEMA-1374-DR Severe storms

All FEMA-1389-DR Flooding

Florida

Counties of Alachua, Baker, Bradford, Brevard, Broward, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Dixie, Duval, Flagler, Gilchrist, Glades, Hamilton, Hardee, Hendry, Hernando, Highlands, Hillsborough, Indian River, Lafayette, Lake, Lee, Levy, Manatee, Marion, Martin, Miami-Dade, Monroe, Nassau, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Pinellas, Polk, Putnam, Sarasota, Seminole, St. Johns, St. Lucie, Sumter, Suwannee, Union, and Volusia

Counties of Bay, Calhoun, Gadsden, Holmes, Jefferson, Leon, Liberty, Wakulla, and Washington

Counties of Charlotte, Collier, DeSoto, Flagler, Hardee, Highlands, Lee, Manatee, Putnam, St. Johns, and Sarasota

Guam

FEMA-1359-DR Severe freeze

FEMA-1381-DR Tropical Storm Allison

FEMA-1393-DR Tropical Storm Gabrielle

All FEMA-1397-DR Earthquake

Illinois

Counties of Adams, Calhoun, Carroll, Hancock, Henderson, Jo Daviess, Mercer, Pike, Rock Island, and Whiteside

Iowa

Counties of Allamakee, Buchanan, Calhoun, Clayton, Clinton, Des Moines, Dubuque, Grundy, Henry, Humboldt, Jackson, Lee, Louisa, Lucas, Muscatine, Palo Alto, Pottawattamie, Ringgold, Sac, Scott, Union, Wapello, and Webster

Kansas

FEMA-1368-DR Flooding

FEMA-1367-DR Severe storms and flooding

County of Barton FEMA-1366-DR Severe storms and tornado

Kentucky

Counties of Bath, Clay, Elliot, Estill, Floyd, Harrison, Johnson, Knott, Lawrence, Letcher, Lewis, Livingston, Mason, Menifee, Perry, Pike, Powell, Rockcastle, Rowan, and Whitley

FEMA-1388-DR Severe storms and flooding

April 11–22

August 10–12

December 1, 2000– January 25, 2001

June 11–15

September 13–21

October 13

April 18–May 29

April 8–May 29

April 21–May 1

July 27–August 23

March 11, 2002 609 2002–10 I.R.B.

Disaster Area Disaster Description Disaster Date

Louisiana

Parishes of Bienville, Bossier, Caddo, Claiborne, Lincoln, Ouachita, Union, and Webster

Parishes of Ascension, Assumption, Beauregard, East Baton Rouge, East Feliciana Parish, Iberia, Iberville, Jefferson, Lafayette, Lafourche, Livingston, Orleans, Pointe Coupee, St. Bernard, St. Charles, Saint Helena, St. James, St. John the Baptist, St. Martin, St. Mary, St. Tammany, Tangipahoa, Terrebonne, Vermillion, Washington, West Baton Rouge, and West Feliciana

Maine

Counties of Franklin, Kennebec, Oxford, Penobscot, Washington, and York

Counties of Androscoggin, Aroostook, Cumberland, Franklin, Hancock, Lincoln, Oxford, Penobscot, Piscoataquis, Sagadahoc, Somerset, Washington, and York

Massachusetts

Counties of Berkshire, Essex, Franklin, Hampshire, Middlesex, Norfolk, and Worcester

Counties of Bristol, Essex, Middlesex, Norfolk, Plymouth, Suffolk, and Worcester

Minnesota

Counties of Aitkin, Anoka, Beltrami, Benton, Big Stone, Brown, Carlton, Carver, Chippewa, Chisago, Clay, Clearwater, Crow Wing, Dakota, Dodge, Douglas, Faribault, Freeborn, Grant, Goodhue, Hennepin, Houston, Isanti, Kanabec, Kandiyohi, Kittson, Koochiching Olmstead, Lac qui Parle, Lake of Woods, McLeod, Meeker, Mille Lacs, Morrison, Mower, Nicollet, Noble, Norman, Otter Tail, Pine, Polk, Ramsey, Red Lake, Redwood, Renville, Rice, Roseau, Scott, Sibley, St. Louis, Stearns, Stevens, Swift, Todd, Traverse, Wabasha, Washington, Wilkin, Winona, Wright, and Yellow Medicine; Fond du Lac Indian Reservation, Mille Lacs Indian Reservation, Red Lake Indian Reservation, and White Earth Indian Reservation; and Tribal Governments of Prairie Island and Upper Sioux

Mississippi

Counties of Amite, Alcorn, Attala, Bolivar, Calhoun, Carroll, Chickasaw, Choctaw, Clay, Coahoma, Forrest, Franklin, Grenada, Holmes, Humphreys, Itawamba, Jones, Lafayette, Lamar, Lee, Leflore, Lincoln, Lowndes, Madison, Marion, Monroe, Neshoba, Noxubee, Oktibbeha, Panola, Pearl River, Perry, Pike, Pontotoc, Prentiss, Quitman, Scott, Sunflower, Tallahatchie, Tate, Tippah, Tishomingo, Union, Walthall, Washington, Webster, Wilkinson, Winston, Yalobusha, and Yazoo

FEMA-1357-DR Severe winter storm

FEMA-1380-DR Tropical Storm Allison

FEMA-1371-DR Severe storms and flooding

FEMA-3164–EM Severe winter storm

FEMA-3165–EM Snowstorm

FEMA-1364-DR Severe storms and flooding

FEMA-1370-DR Flooding

FEMA-1360-DR Tornadoes and severe storms

December 11, 2000– January 3, 2001

June 5–22

March 5–31

March 5–7

March 5–April 16

March 23–July 3

February 16

2002–10 I.R.B. 610 March 11, 2002

Disaster Area Disaster Description Disaster Date

Counties of Attala, Holmes, Leake, Lee, Neshoba, and Pontotoc

Counties of George, Hancock, Harrison, Jackson, and Pearl River

Counties of Benton, Bolivar, Coahoma, DeSoto, Grenada, Hinds, Humphreys, Lafayette, Leake, Marshall, Madison, Panola, Prentiss, Quitman, Scott, Sunflower, Tallahatchie, Tate, Tippah, Tunica, and Washington

Montana

FEMA-1365-DR Severe storms and flooding

FEMA-1382-DR Tropical Storm Allison

FEMA-1398-DR Severe storms and tornadoes

April 3–5

June 6–13

November 24–25

April 8–9

June 3–14

April 10–23

August 17–18

March 5–7

September 11

County of Big Horn and Crow Indian Reservation FEMA-1377-DR Severe storms

Counties of Gallatin, Missoula, and Powell FEMA-1385-DR Severe storms

Nebraska

Counties of Banner, Blaine, Box Butte, Brown, Chase, Cherry, Cheyenne, Custer, Deuel, Dundy, Gage, Garden, Hayes, Hooker, Johnson, Keith, Keya Paha, Kimball, Lincoln, Logan, McPherson, Morrill, Nuckolls, Perkins, Rock, Saline, Sioux, and Thomas

FEMA-1373-DR Severe storms

Dakota County FEMA-1394-DR Severe storms and flooding

New Hampshire

Counties of Cheshire, Coos, Grafton, Hillsborough, Merrimack, Rockingham, and Strafford

New Jersey

FEMA-3166–EM Snowstorm

All counties FEMA-3169–EM Terrorist attack

New York

Counties of Albany, Allegany, Bronx, Broome, Cattaraugus, Cayuga, Chautauqua, Chemung, Chenango, Clinton, Columbia, Cortland, Delaware, Dutchess, Erie, Essex, Franklin, Fulton, Genesee, Greene, Hamilton, Herkimer, Jefferson, Kings, Lewis, Livingston, Madison, Monroe, Montgomery, Nassau, New York, Niagara, Oneida, Onondaga, Ontario, Orange, Orleans, Oswego, Otsego, Putnam, Queens, Rensselaer, Richmond, Rockland, Saratoga, Schenectady, Schoharie, Schuyler, Seneca, St. Lawrence, Steuben, Suffolk, Sullivan, Tioga, Tompkins, Ulster, Warren, Washington, Wayne, Westchester, Wyoming, and Yates

FEMA-1391-DR Terrorist attack

March 11, 2002 611 2002–10 I.R.B.

Disaster Area Disaster Description Disaster Date

North Dakota

Counties of Adams, Barnes, Benson, Bottineau, Burleigh, Cass, Cavalier, Dickey, Eddy, Foster, Golden Valley, Grand Forks, Grant, Griggs, Kidder, La Moure, Logan, McHenry, McLean, Morton, Mountrail, Nelson, Pembina, Pierce, Ramsey, Ransom, Richland, Rolette, Sargent, Sheridan, Steele, Stutsman, Towner, Traill, Walsh, and Wells; and Indian Reservations of the Spirit Lake Tribe and of the Turtle Mountain Band of Chippewa

Ohio

FEMA-1376-DR Floods

Counties of Brown, Butler, Clermont, and Hamilton FEMA-1390-DR Severe storms and flooding

Oklahoma

Counties of Adair, Atoka, Beckham, Blaine, Bryan, Caddo, Canadian, Carter, Cherokee, Choctaw, Cleveland, Coal, Comanche, Cotton, Craig, Creek, Custer, Delaware, Garfield, Garvin, Grady, Greer, Harmon, Haskell, Hughes, Jackson, Jefferson, Johnston, Kay, Kingfisher, Kiowa, Latimer, LeFlore, Lincoln, Logan, Love, Lowe, Marshall, Mayes, McClain, McCurtain, McIntosh, Murray, Muskogee, Nowata, Ofuskee, Oklahoma, Okmulgee, Osage, Ottawa, Pawnee, Payne, Pittsburg, Pontotoc, Pottawatomie, Pushmataha, Roger Mills, Rogers, Seminole, Sequoyah, Stephens, Tillman, Tulsa, Wagoner, Washington, and Washita

Counties of Alfalfa, Atoka, Beaver, Beckham, Blaine, Bryan, Caddo, Canadian, Carter, Choctaw, Cimarron, Coal, Comanche, Cotton, Custer, Dewey, Ellis, Garfield, Garvin, Grady, Harper, Haskell, Jackson, Jefferson, Johnston, Kingfisher, Kiowa, Latimer, LeFlore, Love, Major, Marshall, McClain, McCurtain, Murray, Muskogee, Okfuskee, Oklahoma, Okmulgee, Payne, Pittsburg, Pushmataha, Roger Mills, Stephens, Texas, Tillman, Washita, and Woodward

FEMA-1355-DR Severe winter storm

FEMA-1384-DR Severe storms

County of Washita FEMA-1395-DR Severe storms and flooding

Pennsylvania

Counties of Bucks and Montgomery FEMA-1383-DR Tropical Storm Allison

Puerto Rico

Municipalities of Adjuntas, Añasco, Cabo Rojo, Guánica, Guayanilla, Hormigueros, Lajas, Lares, Las Marias, Maricao, Moca, Rincon, Sabana Grande, San German, and Yauco

Municipalities of Aguas Buenas, Barranquitas, Bayamon, Ciales, Corozal, Jayuya, Juncos, Morovis, Naranjito, Orocovis, San Lorenzo, Utuado, and Vega Alta

FEMA-1372-DR Flooding

FEMA-1396-DR Severe storms and flooding

March 1–August 9

July 17–18

December 25, 2000– January 10, 2001

May 27–30

October 9–10

June 15–17

May 6–11

November 7–9

2002–10 I.R.B. 612 March 11, 2002

Disaster Area Disaster Description Disaster Date

South Dakota

Counties of Beadle, Brookings, Brown, Buffalo, Clark, Codington, Day, Deuel, Edmunds, Grant, Gregory, Hamlin, Hanson, Jerauld, Kingsbury, Marshall, Mellette, Moody, Roberts, Sanborn, Spink, Todd, Tripp, and Turner

Tennessee

Counties of Carter, Cocke, Greene, Johnson, Shelby, Unicoi, and Washington

Texas

Counties of Armstrong, Bailey, Bowie, Borden, Briscoe, Carson, Cass, Cherokee, Cooke, Crosby, Dawson, Deaf Smith, Delta, Fannin, Floyd, Franklin, Gains, Garza, Gray, Grayson, Gregg, Hall, Harrison, Hemphill, Hopkins, Hunt, Lamar, Lynn, Marion, Montague, Morris, Nacogdoches, Oldham, Panola, Parmer, Potter, Rains, Randall, Red River, Rusk, San Augustine, Shelby, Smith, Titus, Upshur, and Wood

Counties of Anderson, Angelina, Brazoria, Cherokee, Chambers, Fort Bend, Galveston, Grimes, Hardin, Harris, Harrison, Houston, Jasper, Jefferson, Leon, Liberty, Madison, Montgomery, Nacogdoches, Newton, Orange, Polk, Sabine, San Augustine, San Jacinto, Shelby, Smith, Trinity, Tyler, Walker, and Waller

Vermont

Counties of Addison, Bennington, Chittenden, Grand Isle, Lamoille, Orleans, Rutland, Windham, and Windsor

Virginia

Counties of Bath, Buchanan, Dickenson, Lee, Russell, Scott, Smyth, Tazewell, Washington, and Wise

FEMA-1375-DR Severe storms

FEMA-1387-DR Severe storms and flooding

FEMA-1356-DR Severe winter storm

FEMA-1379-DR Severe storms and flooding

FEMA-3167–EM Snowstorm

FEMA-1386-DR Severe storms and flooding

County of Arlington FEMA-1392-DR Terrorist attack

Washington

Counties of Benton, Chelan, Clallam, Clark, Cowlitz, Grays Harbor, Island, Jefferson, King, Kitsap, Kittitas, Lewis, Mason, Pacific, Pierce, Skagit, Skamania, Snohomish, Thurston, Wahkiakum, Whatcom, and Yakima

West Virginia

Counties of Boone, Cabell, Calhoun, Clay, Doddridge, Fayette, Greenbrier, Kanawha, Lincoln, Logan, Marion, Mason, McDowell, Mercer, Mingo, Nicholas, Preston, Putnam, Raleigh, Roane, Summers, Taylor, Wayne, and Wyoming

FEMA-1361-DR Earthquake

FEMA-1378-DR Severe storms and flooding

March 1–April 30

July 27–August 22

December 12, 2000– January 15, 2001

June 5–July 20

March 5–7

July 8–August 27

September 11

February 28–March 16

May 15–September 4

March 11, 2002 613 2002–10 I.R.B.

Disaster Area Disaster Description Disaster Date

Wisconsin

Counties of Adams, Ashland, Barron, Bayfield, Buffalo, Burnett, Calumet, Chippewa, Clark, Crawford, Douglas, Dunn, Grant, Iron, Jackson, Juneau, La Crosse, Outagamie, Pepin, Pierce, Polk, Portage, Rusk, St. Croix, Taylor, Trempealeau, Vernon, Washburn, Waupaca, Waushara, Winnebago, and Wood

FEMA-1369-DR Flooding

Section 167.—Depreciation

If impact fees incurred by a taxpayer in connection with the new construction or expansion of a building are capitalized costs allocable to the building, are these fees depreciable under § 167(a) of the Internal Revenue Code? See Rev. Rul. 2002–9, on this page.

Section 168.—Accelerated Cost Recovery System

If impact fees incurred by a taxpayer in connection with the new construction or expansion of a building are capitalized costs allocable to the building, how are these fees depreciated under § 168 of the Internal Revenue Code? See Rev. Rul. 2002–9, on this page.

Section 263.—Capital Expenditures

26 CFR 1.263(a)–1: Capital expenditures; in gen- eral.

Are impact fees incurred by a taxpayer in connection with the construction of a new residential rental building capitalized costs allocable to the building under § 263(a) of the Internal Revenue Code? See Rev. Rul. 2002–9, on this page.

Section 263A.—Capitalization and Inclusion in Inventory Costs of Certain Expenses

26 CFR 1.263A–1: Uniform capitalization of costs. (Also §§ 42, 167, 168, 263, 446, 481; 1.263(a)–1.)

Impact fees. This ruling provides that impact fees incurred by a taxpayer in connection with the construction of a new residential rental building are capitalized costs allocable to the building.

Rev. Rul. 2002–9

ISSUE

Are “impact fees” incurred by a taxpayer in connection with the construction of a new residential rental building capitalized costs allocable to the building under §§ 263(a) and 263A of the Internal Revenue Code?

FACTS

Taxpayer is in the business of developing, owning, and leasing residential rental property. Taxpayer purchased unimproved land located in County on which Taxpayer will construct a new residential building that it will rent to tenants. The development plan submitted by Taxpayer to County indicates that the building is expected to have x number of rental units. County imposes “impact fees” on new and expanded development.

Impact fees are one-time charges that are imposed by a state or local government against new development or expansion of existing development to finance specific offsite capital improvements for general public use that are necessitated by the new or expanded development. Generally, impact fees are refundable (in full or in part) if the new or expanded development ultimately is not constructed as planned.

Taxpayer was required by County to pay various impact fees (for example, for schools and law enforcement and fire protection facilities) in order to compensate County for the financial impact of Taxpayer’s new building. These impact fees were calculated based on Taxpayer’s projection of the number of rental units in, and on the size of, the building. Taxpayer paid the impact fees when the construction permit for the building was issued.

April 10–July 6

LAW AND ANALYSIS

Section 263(a) and § 1.263(a)–1(a) of the Income Tax Regulations provide that no deduction is allowed for any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. Section 1.263(a)–2(a) provides that capital expenditures include the cost of acquisition, construction, or erection of buildings, machinery and equipment, furniture and fixtures, and similar property having a useful life substantially beyond the taxable year.

Section 263A provides, in part, that direct costs and a properly allocable portion of indirect costs of real or tangible personal property produced by a taxpayer must be capitalized to the property produced. See also § 1.263A–1(a)(3)(ii). Section 263A(g)(1) provides that the term “produce” includes construct, build, install, manufacture, develop, or improve. See also § 1.263A–2(a)(1)(i). Property produced may include land, buildings, land improvements, and other tangible property owned by the taxpayer for federal income tax purposes. See § 1.263A– 2(a)(1)(ii). Section 1.263A–2(a)(3)(i) provides that any cost required to be capitalized by § 263A must be capitalized regardless of whether the cost was incurred before, during, or after production.

Section 1.263A–1(e) provides rules for determining the direct and indirect costs that are required to be capitalized to property produced. Section 1.263A–1(e)(2)(i) provides that direct costs consist of direct material and direct labor costs. Section 1.263A–1(e)(3)(i) defines indirect costs as all costs other than direct material costs and direct labor costs. Indirect costs are properly allocable to property produced when the costs directly benefit, or

2002–10 I.R.B. 614 March 11, 2002

are incurred by reason of, the performance of production activities. Indirect costs that are allocable to production activities then must be allocated among the properties produced. See § 1.263A– 1(f). In Oriole Homes Corp. v. U.S., 705 F.Supp. 1531 (S.D. Fla. 1989), the court held that road, educational, regional park, and municipal park impact fees required for the approval and recordation of plats for subdivisions are capital expenditures, to be capitalized as a development cost and deducted pro rata as each house is sold. In reaching its holding, the court stated that “the impact fees increased the value of the subdivisions and secured a benefit which lasted beyond the taxable year in which they were incurred.” Similarly, the impact fees incurred by Taxpayer resulted in a permanent improvement or betterment to Taxpayer’s development project. Accordingly, consistent with Oriole Homes, the impact fees incurred by Taxpayer must be capitalized to the property produced under § 263(a).

Moreover, because Taxpayer’s development project constitutes production of property within the meaning of § 263A(g)(1), Taxpayer is required to capitalize under § 263A the direct costs and a proper share of the allocable indirect costs associated with the development. In Von-Lusk v. Commissioner, 104 T.C. 207 (1995), the court held that certain expenses incurred by a real estate developer before actual physical work began on undeveloped land are subject to § 263A. The court found that the developer’s activities, such as obtaining building permits and zoning variances, negotiating permit fees, and similar activities, represent the “first steps in the development of the property.” The court further noted that the pursuit of building permits and zoning variances, negotiating permit fees, and similar activities “are ancillary to actual physical work on the land and are as much a part of a development project as digging a foundation or completing a structure’s frame. The project cannot move forward if these steps are not taken.”

The impact fees incurred by Taxpayer are not direct costs within the meaning of § 263A because they are neither direct material nor direct labor costs. However, the impact fees are indirect costs under

§ 263A because they directly benefit, and are incurred by reason of, Taxpayer’s production activity. Similar to the costs at issue in Von-Lusk, the impact fees were assessed by County because of Taxpayer’s plans to construct the new residential building, and thus are “as much a part of a development project as digging a foundation or completing a structure’s frame.” Thus, in accordance with § 1.263A–1(f), Taxpayer must allocate the impact fees to the property produced based on all the facts and circumstances. Because the impact fees are assessed as a result of Taxpayer’s plans to construct the building, the amount of the impact fees is calculated based upon the characteristics of the building, and the impact fees generally would be refundable if Taxpayer decides not to construct the building as planned, the impact fees are allocable to the building. Accordingly, the impact fees must be capitalized under § 263A as indirect costs allocable to the new residential rental building.

HOLDING

“Impact fees” incurred by a taxpayer in connection with the construction of a new residential rental building are capitalized costs allocable to the building under §§ 263(a) and 263A.

APPLICATION

Any change in a taxpayer’s treatment of impact fees incurred in connection with the new construction or expansion of a building to conform with this revenue ruling is a change in method of accounting to which the provisions of §§ 446 and 481 and the regulations thereunder apply. A taxpayer wanting to change the method of accounting for impact fees to conform with this revenue ruling must follow the automatic change in method of accounting provisions in Rev. Proc. 2002–9 (2002–3 I.R.B. 327) (or its successor), as modified and clarified by Announcement 2002–17 (2002–8 I.R.B. 561), with the following modifications: (1) If the taxpayer changes its method of accounting for impact fees to conform with this revenue ruling for the first taxable year ending on or after December 31, 2001, the scope limitations in section 4.02 of Rev. Proc. 2002–9 do not apply; and

(2) To assist the Internal Revenue Service in processing changes in method of accounting under this revenue ruling, and to ensure proper handling, section 6.02(4)(a) of Rev. Proc. 2002–9 is modified to require that a Form 3115 filed under this revenue ruling include the statement “Automatic Change Filed Under Rev. Rul. 2002–9.” This statement should be legibly printed or typed on the appropriate line on the Form 3115.

If a taxpayer changes its method of accounting for impact fees to conform with this revenue ruling, the treatment of impact fees will not be raised as an issue in any taxable year before the year of change, consistent with the audit protection provision of section 7.01 of Rev. Proc. 2002–9. If this change in method of accounting is made for the taxpayer’s first taxable year ending on or after December 31, 2001, and the treatment of impact fees has already been raised as an issue in a taxable year before the taxpayer’s first taxable year ending on or after December 31, 2001, the treatment of impact fees will not be further pursued.

If a depreciation deduction is allowable under § 167(a) for the building and it is subject to § 168, the taxpayer must depreciate the impact fees under § 168 as residential rental property or nonresidential real property (as both are defined in § 168(e)(2)), as appropriate, beginning when the newly constructed building or the expansion of the building is placed in service by the taxpayer. Moreover, for purposes of § 42, impact fees are included in the eligible basis of a qualified lowincome building. A change in method of accounting for impact fees to conform to this revenue ruling does not affect the amount of credit that has been allocated under § 42(h)(1) or allowed for buildings financed with tax-exempt bonds subject to the volume cap as determined under § 42(h)(4).

EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2002–9 is modified and amplified to include this accounting method change in section 4 of the APPENDIX.

DRAFTING INFORMATION

The principal authors of this revenue ruling are Kathleen Reed and Christopher

March 11, 2002 615 2002–10 I.R.B.

J. Wilson of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding § 42, 167, or 168, contact Gregory Doran at (202) 622-3040 or Mr. Wilson at (808) 539-2874. For further information regarding § 263(a) or 263A, contact Cheryl L. Oseekey at (202) 622–4970. These are not toll-free calls.

Section 280G.—Golden Parachute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of March 2002. See Rev. Rul. 2002–10, on this page.

Section 382.—Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term rate is set forth for the month of March 2002. See Rev. Rul. 2002–10, on this page.

Section 412.—Minimum Funding Standards

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2002. See Rev. Rul. 2002–10, on this page.

Section 446.—General Rule for Methods of Accounting

If a taxpayer changes its treatment of impact fees incurred in connection with the new construction or expansion of a building, is this change a change in method of accounting under § 446(e) of the Internal Revenue Code? See Rev. Rul. 2002–9, page 614.

Section 467.—Certain Payments for the Use of Property or Services

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2002. See Rev. Rul. 2002–10, on this page.

Section 468.—Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2002. See Rev. Rul. 2002–10, on this page.

Section 481.—Adjustments Required by Changes in Method of Accounting

If a taxpayer changes its treatment of impact fees incurred in connection with the new construction or expansion of a building, is an adjustment under § 481 of the Internal Revenue Code taken into account in computing taxable income? See Rev. Rul. 2002–9, page 614.

Section 482.—Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term rates are set forth for the month of March 2002. See Rev. Rul. 2002–10, on this page.

Section 483.—Interest on Certain Deferred Payments

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2002. See Rev. Rul. 2002–10, on this page.

Section 642.—Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term rates are set forth for the month of March 2002. See Rev. Rul. 2002–10, on this page.

Section 807.—Rules for Certain Reserves

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2002. See Rev. Rul. 2002–10, on this page.

Section 846.—Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2002. See Rev. Rul. 2002–10, on this page.

Section 1274.—Determin- ation of Issue Price in the Case of Certain Debt Instruments Issued for Property

(Also sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate . For purposes of sections 382, 1274, 1288, and other sections of the Code, tables set forth the rates for March 2002.

Rev. Rul. 2002–10

This revenue ruling provides various prescribed rates for federal income tax purposes for March 2002 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.

2002–10 I.R.B. 616 March 11, 2002

REV. RUL. 2002–10 TABLE 1

Applicable Federal Rates (AFR) for March 2002

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-Term

AFR 2.69% 2.67% 2.66% 2.66% 110% AFR 2.96% 2.94% 2.93% 2.92% 120% AFR 3.23% 3.20% 3.19% 3.18% 130% AFR 3.50% 3.47% 3.46% 3.45%

Mid-Term

AFR 4.52% 4.47% 4.45% 4.43%

110% AFR 4.98% 4.92% 4.89% 4.87%

120% AFR 5.43% 5.36% 5.32% 5.30%

130% AFR 5.89% 5.81% 5.77% 5.74%

150% AFR 6.82% 6.71% 6.65% 6.62%

175% AFR 7.97% 7.82% 7.75% 7.70%

Long-Term

AFR 5.48% 5.41% 5.37% 5.35%

110% AFR 6.04% 5.95% 5.91% 5.88%

120% AFR 6.60% 6.49% 6.44% 6.40%

130% AFR 7.15% 7.03% 6.97% 6.93%

REV. RUL. 2002–10 TABLE 2

Adjusted AFR for March 2002

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjusted AFR 2.07% 2.06% 2.05% 2.05%

Mid-term adjusted AFR 3.57% 3.54% 3.52% 3.51%

Long-term adjusted AFR 4.86% 4.80% 4.77% 4.75%

March 11, 2002 617 2002–10 I.R.B.

REV. RUL. 2002–10 TABLE 3

Rates Under Section 382 for March 2002

Adjusted federal long-term rate for the current month 4.86%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 5.01%

REV. RUL. 2002–10 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for March 2002

Appropriate percentage for the 70% present value low-income housing credit 8.17%

Appropriate percentage for the 30% present value low-income housing credit 3.50%

REV. RUL. 2002–10 TABLE 5

Rate Under Section 7520 for March 2002

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 5.4%

Section 1288.—Treatment of Original Issue Discounts on Tax-Exempt Obligations

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2002. See Rev. Rul. 2002–10, page 616.

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2002. See Rev. Rul. 2002–10, page 616.

Section 7872.—Treatment of Loans with Below-Market Interest Rates

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of March 2002. See Rev. Rul. 2002–10, page 616.

2002–10 I.R.B. 618 March 11, 2002