SECTION 4. EXAMPLE

The following example illustrates the guidance provided in Section 3 of this notice. C is a U.S. corporation with a foreign branch, B, that constitutes a QBU within the meaning of section 989. C’s functional currency is the U.S. dollar. Under Treas. Reg. § 1.985–1(b)(2)(ii)(A), B must also use the U.S. dollar as its functional currency which would otherwise be a nondollar local currency that is hyperinflationary within the meaning of Treas. Reg. § 1.985–1(b)(2)(ii)(D). On January 1, 2003, B purchases a parcel of undeveloped real property with units of local currency. On March 21, 2005, B transfers to C 100 units of B’s local currency and the parcel of undeveloped real property.

Because B is a QBU whose functional currency otherwise would be a hyperinflationary currency, B must compute its income or loss in U.S. dollars using the DASTM method of accounting. Because the transfers from B to C affect B’s balance sheet but do not affect its income, B must adjust its year-end balance sheet in accordance with the requirements of Treas. Reg. § 1.985–3(d)(3). If the 100 units of hyperinflationary currency had remained on B’s year-end balance sheet, then that currency would have been translated at the exchange rate for the last translation period of the taxable year, as required by Treas. Reg. § 1.985–3(d)(5)(iv). If the real property had remained on B’s year-end bal

2005–13 I.R.B. 795 March 28, 2005

deadline set forth in the forthcoming guidance.

DRAFTING INFORMATION

The principal author of this notice is Zoran Stojanovic of the Office of Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this notice, contact Zoran Stojanovic at (202) 622–3980 (not a toll-free call).

Transition Relief for Certain Partnerships and Other Pass-Thru Entities Under Section 470

Notice 2005–29

PURPOSE

This notice provides transition relief under § 470 of the Internal Revenue Code to partnerships and other pass-thru entities that are treated as holding tax-exempt use property as a result of the application of § 168(h)(6).

BACKGROUND

Section 848 of the American Jobs Creation Act of 2004, Pub. L. No. 108–357, 118 Stat. 1418, 1602 (the Act), which was enacted on October 22, 2004, creates new limitations on the deductibility of losses relating to tax-exempt use property through the enactment of § 470.

With limited exceptions, § 470(a) provides that a “tax-exempt use loss” for any taxable year is not allowed. Under § 470(c)(1), the term “tax exempt use loss” means, with respect to any taxable year, the amount (if any) by which the sum of the aggregate deductions (other than interest) directly allocable to tax-exempt use property, plus the aggregate deductions for interest properly allocable to the property, exceed the aggregate income from the property. Under § 470(b), any disallowed loss is treated as a deduction with respect to the property in the next taxable year.

Under § 470(c)(2), “tax-exempt use property” has the meaning provided under § 168(h) (with certain modifications). As a general rule, under § 168(h), property is treated as “tax-exempt use property” if it is leased to a “tax-exempt entity.”

ance sheet, then B’s basis in that property would have been translated at the exchange rate for the period in which the cost was incurred, as required by Treas. Reg. § 1.985–3(d)(5)(v).

In accordance with Section 3 of this notice, for purposes of the adjustments under Treas. Reg. § 1.985–3(d) B must translate the 100 units of hyperinflationary local currency transferred to C on March 21, 2005, using the exchange rate on that date and must translate the basis of the real property transferred to C on March 21, 2005, using the exchange rate for the period in which the cost of the property was incurred.