SECTION 2. BACKGROUND

.01 Section 1400L(c), as added by § 301(a) of the Job Creation and Worker Assistance Act of 2002 (the “JCWAA”), Pub. L. No. 107–147, 116 Stat. 21 (March 9, 2002), provides that, for purposes of § 168, 5-year property includes any qualified Liberty Zone leasehold improvement property. For purposes of § 1400L, § 1400L(c)(2) provides that qualified Liberty Zone leasehold improvement property means qualified leasehold improvement property (as defined in § 168(k)(3) and § 1.168(k)–1T(c) of the temporary Income Tax Regulations) if (A) the building is located in the New York Liberty Zone (as defined in § 1400L(h)), (B) the improve

2005–29 I.R.B. 107 July 18, 2005

in this section 3.02 (including the manner prescribed by the instructions for the 2004 Form 4562) for making the election not to treat as 5-year property the qualified Liberty Zone leasehold improvement property placed in service by the taxpayer after September 10, 2001, during the 2003 or 2004 taxable year.

(2) Limited relief for late election . (a) Automatic 6-month extension . An automatic extension of 6 months from the due date of the federal tax return ( exclud- ing extensions) for the placed-in-service year of the qualified Liberty Zone leasehold improvement property is granted to make the election not to treat as 5-year property the qualified Liberty Zone leasehold improvement property placed in service by a taxpayer during the taxable year, provided the taxpayer filed the taxpayer’s federal tax return for the placed-in-service year and the taxpayer satisfies the requirements in § 301.9100–2(c) and § 301.9100–2(d) of the Procedure and Administration Regulations. See § 301.9100–2(b).

(b) Other extensions . A taxpayer that fails to make the election not to treat as 5-year property the qualified Liberty Zone leasehold improvement property placed in service by the taxpayer during the taxable year as provided in section 3.02(1), 3.02(2)(a), or 4 of this revenue procedure but wants to do so must file a request for an extension of time to make the election under the rules in § 301.9100–3.

.03 Revocation . An election not to treat as 5-year property the qualified Liberty Zone leasehold improvement property placed in service during the taxable year is revocable only with the prior written consent of the Commissioner of Internal Revenue. To seek the Commissioner’s consent, the taxpayer must submit a request for a letter ruling in accordance with the provisions of Rev. Proc. 2005–1, 2005–1 I.R.B. 1 (or any successor). .04 Failure to make election not to treat as 5-year property qualified Liberty Zone leasehold improvement property . Except as provided in section 4 of this revenue procedure, the election not to treat qualified Liberty Zone leasehold improvement property as 5-year property cannot be made in any other manner (for example, through a request under § 446(e) to change the taxpayer’s method of accounting). Thus, if a taxpayer fails to

Pub. L. No. 108–357, 118 Stat. 1480 (October 22, 2004)) and § 1.168(k)–1T(e) with respect to the election not to deduct the additional first year depreciation. This amendment is effective as if included in the provisions of the JCWAA.

.03 Section 211 of the AJCA amended § 168(e)(3) by providing that 15-year property includes any qualified leasehold improvement property placed in service after October 22, 2004, and before January 1, 2006. As a result, qualified leasehold improvement property is depreciated over a 15-year recovery period for purposes of the general depreciation system of § 168(a). Section 211 of the AJCA also amended § 168(b) to require the straight-line method of depreciation for any qualified leasehold improvement property and amended § 168(g) to require a 39-year recovery period for any qualified leasehold improvement property for purposes of the alternative depreciation system of § 168(g). For purposes of § 168(e), the term “qualified leasehold improvement property” is defined in § 168(e)(6) (as added by § 211 of the AJCA) as having the same meaning given that term in § 168(k)(3) and § 1.168(k)–1T(c) except that if the improvement was made by the person who was the lessor of the improvement when the improvement was placed in service, the improvement generally will be qualified leasehold improvement property only so long as the improvement is held by that person.

.04 If qualified Liberty Zone leasehold improvement property is not qualified leasehold improvement property (as defined in § 168(e)(6)), a taxpayer may elect not to treat qualified Liberty Zone leasehold improvement property placed in service by the taxpayer during the taxable year as 5-year property under § 168 and instead depreciate this property under § 168 as nonresidential real property over a 39-year recovery period for purposes of the general depreciation system of § 168(a) or over a 40-year recovery period for purposes of the alternative depreciation system of § 168(g). If qualified Liberty Zone leasehold improvement property is qualified leasehold improvement property (as defined in § 168(e)(6)), a taxpayer may elect not to treat qualified Liberty Zone leasehold improvement property placed in service by the taxpayer during the taxable year as 5-year property under § 168

and instead depreciate this property under § 168 over a 15-year recovery period for purposes of the general depreciation system of § 168(a) or over a 39-year recovery period for purposes of the alternative depreciation system of § 168(g). In all cases, the qualified Liberty Zone leasehold improvement property is depreciated under § 168 by using the straight-line method of depreciation and is not eligible for the additional first year depreciation deduction provided by § 168(k) or § 1400L(b).