SECTION 3. ELECTION NOT TO

TREAT QUALIFIED LIBERTY ZONE LEASEHOLD IMPROVEMENT PROPERTY AS 5-YEAR PROPERTY

.01 In General . Pursuant to § 1400L(c)(5), 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. If the taxpayer makes this election, it applies to all qualified Liberty Zone leasehold improvement property placed in service by the taxpayer during the same taxable year.

.02 Time and Manner of Making the Election .

(1) In general . Except as provided in section 4 of this revenue procedure, an 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 must be made by the due date (including extensions) of the federal tax return for the taxable year in which the qualified Liberty Zone leasehold improvement property is placed in service by the taxpayer. The election must be made in the manner prescribed on Form 4562, Depreciation and Amortization, and its instructions. For example, the instructions for the 2004 Form 4562 require the taxpayer to attach to the federal tax return a statement indicating that the taxpayer is making the election under § 1400L(c)(5). The election is made separately by each person owning qualified Liberty Zone leasehold improvement property (for example, the common parent makes the election for each member of a consolidated group that wants to make the election; by the partnership; or by the S corporation). If a taxpayer files a 2003 or 2004 federal tax return after June 29, 2005, the taxpayer must follow the procedures

July 18, 2005 108 2005–29 I.R.B.

.02 Section 2.01 of the APPENDIX of Rev. Proc. 2002–9, as modified by Rev. Proc. 2004–11, 2004–1 C.B. 311, is modified as follows:

(1) Section 2.01(1)(d)(xii) of the APPENDIX is modified to read as follows:

“(xii) any change in method of accounting involving both a change from treating the cost or other basis of the property as nondepreciable or nonamortizable property to treating the cost or other basis of the property as depreciable or amortizable property and the adoption of a method of accounting for depreciation requiring an election under § 167, § 168, § 1400I, § 1400L, former § 168, or § 13261(g)(2) or (3) of the 1993 Act (for example, a change in the treatment of the space consumed in landfills placed in service in 1990 from nondepreciable to depreciable property (assuming section 2.01(1)(d)(xiii) of the APPENDIX does not apply) and the making of an election under 168(f)(1) to depreciate this property under the unit-ofproduction method of depreciation under § 167);”

(2) Section 2.01(1)(d)(xiv) and (xv) of the APPENDIX are modified, and section 2.01(1)(d)(xvi) of the APPENDIX is added, to read as follows:

“(xiv) a change from determining depreciation under § 168 to determining depreciation under former § 168 for any property subject to the transition rules in § 203(b) or 204(a) of the Tax Reform Act of 1986, 1986–3 (Vol. 1) C.B. 1, 60–80;

(xv) any change in the placed-in-service date of a depreciable or amortizable property. This change is corrected by adjustments in the applicable taxable year provided under § 1.446–1T(e)(2)(ii)( d )( 3 )( v ); or

(xvi) any property for which the rehabilitation credit under § 47 was claimed and that a taxpayer is reclassifying to 3-year property, 5-year property, 7-year property, 10-year property (other than real property with a class life of more than 12.5 years), 15-year property (other than real property with a class life of more than 12.5 years), 20-year property (other than real property with a class life of more than 12.5 years), or water utility property (other than real property with a class life of more than 12.5 years).”

(3) Section 2.01(5)(i) of the APPENDIX is modified as follows:

make the election not to treat as 5-year property qualified Liberty Zone leasehold improvement property within the time and in the manner prescribed in section 3.02 or 4 of this revenue procedure, the amount of depreciation allowable for that property under § 168 must be determined for the placed-in-service year and for all subsequent taxable years by using the straight-line method of depreciation and, as applicable, a 5-year recovery period for purposes of the general depreciation system of § 168(a) or a 9-year recovery period for purposes of the alternative depreciation system of § 168(g).