SECTION 3. SUBSTANTIALLY

ALL AND ACTIVE CONDUCT REQUIREMENTS UNDER § 1400N(d)(2)(A)(ii)

.01 Substantially All Requirement . Each depreciable property will meet the requirements of § 1400N(d)(2)(A)(ii) if substantially all of the use of the property is in the GO Zone and in the active conduct of a trade of business by the taxpayer in the GO Zone. For this purpose, the term “substantially all” means 80 percent or more during each taxable year. If greater than 20 percent of the use of the property either is outside the counties and parishes

2006–40 I.R.B. 590 October 2, 2006

designated as being part of the GO Zone or is not in the active conduct of a trade or business by the taxpayer in the GO Zone, then the property is not GO Zone property and is not eligible for the GO Zone additional first year depreciation deduction.

The following example illustrates the provisions of this section 3.01 and section 2.05 of this notice. Example . A, a calendar-year taxpayer, owns and operates a furniture store in the GO Zone. In December 2006, A purchases a new delivery truck and places it in service for use in A ’s business. The delivery truck is used less than 80 percent in the GO Zone in 2006 and is used 80 percent or more in the GO Zone in 2007 and 2008. Because the delivery truck does not meet the substantially all requirement described in this section 3.01 in its placed-in-service year (2006), the truck is not GO Zone property. Thus, the truck does not qualify for the GO Zone additional first year depreciation deduction, regardless of the fact that substantially all of the use of the truck is in the GO Zone in 2007 and 2008.

.02 Active Conduct of a Trade or Busi- ness Requirement .

(1) Trade or business definition . For purposes of § 1400N(d)(2)(A)(ii), the term “trade or business” has the same meaning as in § 162 and the regulations thereunder. Thus, property held merely for the production of income or used in an activity not engaged in for profit (as described in § 183) does not qualify for the GO Zone additional first year depreciation deduction.

(2) Active conduct . Solely for purposes of § 1400N(d)(2)(A)(ii), the determination of whether a trade or business is actively conducted by the taxpayer is to be made based on all of the facts and circumstances. A taxpayer generally is considered to actively conduct a trade or business if the taxpayer meaningfully participates in the management or operations of the trade or business. Furthermore, for purposes of § 1400N(d)(2)(A)(ii), a partner, member, or shareholder of a partnership, limited liability company, or S corporation, respectively, is considered to actively conduct a trade or business of the partnership, limited liability company, or S corporation if the partnership, limited liability company, or S corporation meaningfully participates (through the activities performed by itself, or by others on behalf of the partnership, limited liability company, or S corporation, respectively) in the management or operations of the trade or business. Similar rules apply to other pass-thru entities such as trusts or estates.

(3) Examples . The following examples illustrate the provisions of section 3.02 of this notice.

(a) Example 1 . During 2006, MNO, a limited liability company, constructs and places in service a new apartment building in the GO Zone. MNO is treated as a partnership for federal tax purposes. B, a member in MNO, manages and operates this apartment building for MNO. Because B manages and operates the apartment building for MNO, MNO meaningfully participates in the management and operations of the apartment building. Consequently, all of the use of the apartment building is in the GO Zone and in the active conduct of a trade or business by MNO in the GO Zone. Accordingly, the unadjusted depreciable basis (as defined in § 1.168(b)–1T(a)(3)) of the apartment building qualifies for the GO Zone additional first year depreciation deduction (assuming all other requirements are met). However, limitation provisions of the Code (for example, § 469) apply and may limit the amount of the GO Zone additional first year depreciation deduction that may be claimed by the members of MNO .

(b) Example 2 . During 2006, C, an individual, places in service a new restaurant in the GO Zone and employs D to operate it. During 2006, C periodically met with D to review operations relating to the restaurant. C also approved the restaurant’s budget for 2006 that was prepared by D . D performs all the necessary operating functions, including hiring chefs, acquiring the necessary food and restaurant supplies, and writing the checks to pay all bills and the chefs’ salaries. Based on these facts and circumstances, C meaningfully participates in the management of the restaurant. Consequently, all of the use of the restaurant is in the GO Zone and in the active conduct of a trade or business by C in the GO Zone. Accordingly, the unadjusted depreciable basis of the restaurant qualifies for the GO Zone additional first year depreciation deduction (assuming all other requirements are met). However, limitation provisions of the Code (for example, § 469) apply and may limit the amount of the GO Zone additional first year depreciation deduction that may be claimed by C .

(c) Example 3 . During 2006, PRS, a partnership, constructs and places in service a new small commercial building in the GO Zone and leases it to E, an unrelated party, who uses the building as a fast food restaurant. This building is the only property owned by PRS . The lease agreement between PRS and E is a triple net lease under which E is responsible for all of the costs relating to the building (for example, paying all taxes, insurance, and maintenance expenses) in addition to paying rent. Because of the triple net lease, PRS does not meaningfully participate in the management or operations of the building and the building is not used in the active conduct of a trade or business by PRS in the GO Zone. Accordingly, the building does not qualify for the GO Zone additional first year depreciation deduction.

(d) Example 4 . Same facts as Example 3, except that PRS, during 2006, constructs and places in service two other new commercial buildings in the GO Zone and leases these buildings to F, an unrelated party, who uses the two other buildings as office space. The lease agreement between PRS and F is not a triple net lease. G, a partner in PRS, manages and operates the two office buildings for PRS . Because G manages and operates the two office buildings for

PRS, PRS meaningfully participates in the management and operations of the two office buildings. Consequently, these two office buildings are used in the active conduct of a trade or business by PRS in the GO Zone. Accordingly, the total unadjusted depreciable basis of the two office buildings leased to F qualifies for the GO Zone additional first year depreciation deduction (assuming all other requirements are met). However, limitation provisions of the Code (for example, § 469) apply and may limit the amount of the GO Zone additional first year depreciation deduction that may be claimed by the partners of PRS with respect to the two buildings leased to F . Further, because the requirements of § 1400N(d)(2)(A)(ii) apply on a property-by-property basis, the building leased to E does not qualify for the GO Zone additional first year depreciation deduction, as provided in Example 3 .