SECTION 2. BACKGROUND

.01 Section 1400E, as added by § 101(a) of the Community Renewal Tax Relief Act of 2000 (“CRTRA”), 2000–3 C.B. 239, 241, provides for the designation of certain communities as renewal communities. An area designated as a renewal community is eligible for certain tax incentives including a commercial revitalization deduction under § 1400I, increased expensing under § 179 pursuant to § 1400J, and gross income exclusion for capital gain from the sale of qualifying assets pursuant to § 1400F. A “renewal community” is defined in § 1400E(a)(1) as any area that is nominated by one or more local governments and the state or states in which the area is located for designation as a renewal community (the “nominated area”) and that the Secretary of Housing and Urban Development (“HUD”) designates as a renewal community.

.02 To be designated as a renewal community, § 1400E(c) requires that the nominated area meet certain criteria. Section 1400E(a)(4)(B) and (f)(4) provides that the designations of renewal communities were required to be made by December 31, 2001, using 1990 census data to determine the population and poverty rate criteria.

.03 Section 222(a) of the American Jobs Creation Act of 2004 (the “AJCA”), Pub. L. No. 108–357, 118 Stat. 1480 (October 22, 2004), amended § 1400E by adding § 1400E(g), which authorizes HUD, under certain circumstances and at the request of all governments that nominated an area as a renewal community, to add a contiguous census tract to a renewal community based generally on 2000 census data. Section 222(b) of the AJCA provides that § 1400E(g) is effective as if included in the amendments made by § 101 of the CRTRA.

.04 A taxpayer may make a commercial revitalization deduction election under § 1400I(a) for a qualified revitalization building (as defined in § 1400I(b)(1)) only to the extent that a commercial revi

talization expenditure amount is allocated to the building under § 1400I by the commercial revitalization agency (as defined in § 1400I(d)(3)) for the state in which the building is located. Section 1400I allows a taxpayer to elect to recover the cost of a qualified revitalization building using a more accelerated method than is otherwise allowable under § 168. Pursuant to § 1400I(a), a taxpayer may elect either (1) to deduct one-half of any qualified revitalization expenditures (as defined in § 1400I(b)(2)) chargeable to a capital account with respect to any qualified revitalization building for the taxable year in which the building is placed in service, or (2) to amortize all of these expenditures ratably over the 120-month period beginning with the month in which the building is placed in service. Pursuant to § 1400I(c), the aggregate amount that may be treated as qualified revitalization expenditures with respect to any qualified revitalization building cannot exceed the lesser of (1) $10 million, or (2) the commercial revitalization expenditure amount allocated to the building under § 1400I by the commercial revitalization agency for the state in which the building is located.

.05 Under § 1400I(d), the commercial revitalization agency for each state is permitted to allocate up to $12 million of commercial revitalization expenditure amounts with respect to each renewal community located within the state for each calendar year after 2001 and before 2010. Pursuant to § 1400I(e), the allocation must be made pursuant to a qualified allocation plan (as defined in § 1400I(e)(2)) that is approved by the governmental unit of which the commercial revitalization agency is a part.

.06 Rev. Proc. 2003–38, 2003–1 C.B. 1017, provides the time and manner for a commercial revitalization agency to make allocations under § 1400I of the commercial revitalization expenditure amount for a qualified revitalization building that is placed in service in a renewal community and explains how a taxpayer may make a commercial revitalization deduction election under § 1400I(a). Pursuant to Rev. Proc. 2003–38, a commercial revitalization agency may make: (1) an allocation of commercial revitalization expenditure amounts for a qualified revitalization building in the calendar year in which that building is placed in service

February 27, 2006 540 2006–9 I.R.B.

million of this $17 million was allocated for qualified revitalization buildings in RC in 2003, the unallocated commercial revitalization expenditure amount for 2003 for RC is $3 million.

(c) 2004 calendar year . The unallocated commercial revitalization expenditure amount of a renewal community for 2004 is determined by reducing the $12 million commercial revitalization expenditure ceiling for the renewal community for 2004 by the amounts previously allocated for 2004.

(d) 2005 calendar year . The unallocated commercial revitalization expenditure amount of a renewal community for 2005 is determined by reducing the $12 million commercial revitalization expenditure ceiling for the renewal community for 2005 by the amounts previously allocated for 2005.

(3) Failed building amount . For purposes of section 3.02(2) of this revenue procedure, the amounts previously allocated for 2002, 2003, 2004, or 2005, include any “failed building amount.” A failed building amount is the amount of any allocation made in 2002, 2003, 2004, or 2005, as applicable, to a building or project that does not qualify as a qualified revitalization building within the period required by § 1400I and Rev. Proc. 2003–38. However, the failed building amount does not include the amount of a carryover allocation made before July 1 for which the taxpayer does not meet the 10-percent basis requirement by the close of the calendar year if the taxpayer notifies the renewal community or the commercial revitalization agency in that calendar year that the 10-percent basis requirement was not met. In the case of a placed-in-service year allocation, the failed building amount also does not include any amount that was allocated for a building if the taxpayer notifies, in the same calendar year in which the allocation was made, the renewal community or the commercial revitalization agency for that renewal community that the building was not placed in service by the taxpayer by the close of the calendar year for which the allocation was made.

For example, suppose State B has one renewal community, RC1. In 2004, RC1 allocated its entire $12 million commercial revitalization expenditure ceiling as follows: (a) on June 1, 2004, RC1 made a carryover allocation of $4 million for a

payer takes into account only 50 percent (instead of 100 percent) of the cost of qualified renewal property placed in service during the taxable year.

“Qualified renewal property” is defined in § 1400J(b) as any property to which § 168 applies (or would apply but for § 179) if the property was acquired by the taxpayer by purchase (as defined in § 179(d)(2)) after December 31, 2001, and before January 1, 2010, and the property would be qualified zone property (as defined in § 1397D) if references to renewal communities were substituted for references to empowerment zones in § 1397D. Accordingly, computer software described in § 179(d)(1)(A)(ii) to which § 167 applies (and not § 168) is not qualified renewal property.

.09 Section 1400F provides that gross income does not include any qualified capital gain (as defined in § 1400F(c)) from the sale or exchange of a qualified community asset (as defined in § 1400F(b)) held for more than 5 years.