SECTION 2. BACKGROUND

.01 On January 5, 2004, the Service and Treasury Department published final regulations in the Federal Register (T.D. 9107, 2004–7 I.R.B. 447 [69 FR 436]) relating to the capitalization of intangible assets under § 263(a) of the Internal Revenue Code. Section 1.263(a)–4 prescribes the extent to which taxpayers must capitalize amounts paid or incurred to acquire or create (or to facilitate the acquisition or creation of) intangibles. Section 1.263(a)–5 prescribes the extent to which taxpayers must capitalize amounts paid or incurred to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions. Section 1.167(a)–3(b) provides a safe harbor useful life for certain intangible assets. The final regulations under §§ 1.263(a)–4 and 1.263(a)–5 are effective for amounts paid or incurred on or after December 31, 2003. The final regulations under § 1.167(a)–3(b) are effective for intangible assets created on or after December 31, 2003.

Under § 168(h)(2), “tax-exempt entity” includes organizations exempt from income tax under the Code and certain foreign persons and entities that are not subject to income tax under the Code with respect to the property.

Under § 168(h)(6), if any property that is not otherwise “tax-exempt use property” under § 168(h) is owned by a partnership that has both a tax-exempt entity and a person who is not a tax-exempt entity as partners, and any allocation to the tax-exempt entity of partnership items is not a qualified allocation, an amount equal to the tax-exempt entity’s proportionate share of the property generally is treated as tax-exempt use property.

Under § 168(h)(6)(B), an allocation to a tax-exempt entity is a qualified allocation if the allocation (1) is consistent with the allocation to the entity of the same distributive share of each item of income, gain, loss, deduction, credit and basis throughout the entire period that the entity is a partner in the partnership and (2) has substantial economic effect within the meaning of § 704(b)(2).

Section 168(h)(6)(E) provides that rules similar to those applicable to partnerships in determining whether property is tax-exempt use property apply to other pass-thru entities.

Under § 470(c)(2), “tax-exempt use property” does not include property otherwise subject to § 168(h)(6) if any credit is allowable under § 42 or § 47 with respect to the property.

Section 470 generally applies to leases entered into after March 12, 2004.

It has come to the attention of the Internal Revenue Service and the Treasury Department that, with respect to partnerships and other pass-thru entities that are subject to § 470 because of § 168(h)(6), difficulties may exist in applying the provisions of § 470 with respect to taxable years beginning before January 1, 2005.

Section 470(g) provides that the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of § 470.

TRANSITION RELIEF

In the case of partnerships and pass-thru entities described in § 168(h)(6)(E), for taxable years that begin before January 1, 2005, the Service will not apply § 470

to disallow losses associated with property that is treated as tax-exempt use property solely as a result of the application of § 168(h)(6).

REQUEST FOR COMMENTS

The Service and the Treasury Department request comments with respect to the application of § 470 when a partnership or other pass-thru entity is treated as holding tax-exempt use property because of the application of § 168(h)(6). Specifically, comments are requested regarding (1) the extent to which property held by these entities should be aggregated in determining tax-exempt use losses under § 470(a), (2) the manner in which deductions and income are allocated to a specific “property” for purposes of determining tax-exempt use loss, (3) whether tax-exempt use losses arising from property held by these entities are determined at the entity level or at the owner level, and (4) what types of entities other than partnerships should be considered pass-thru entities subject to § 470.

Comments should be submitted in writing on or before May 2, 2005, and should include a reference to Notice 2005–29. Comments may be submitted to CC:PA:LPD:PR (Notice 2005–29), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, comments may be submitted electronically via the following e-mail address: Notice.Comments@irscounsel.treas.gov . Please include “Notice 2005–29” in the subject line of any electronic communications.

Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2005–29), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. All comments are available for public inspection and copying.

DRAFTING INFORMATION

For further information regarding this notice, contact John Aramburu of the Office of Associate Chief Counsel (Income Tax & Accounting) at (202) 622–4960 (not a toll-free call).

2005–13 I.R.B. 797 March 28, 2005