SECTION 6. RECAPTURE RULES

UNDER § 1400N(d)(5)

.01 In General . Section 1400N(d)(5) provides that for purposes of § 1400N(d), rules similar to the recapture rules under § 179(d)(10) and § 1.179–1(e) apply with respect to any GO Zone property that ceases to be GO Zone property.

(1) any property used in connection with any private or commercial golf course, massage parlor, hot tub facility, suntan facility, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises (“prohibited activities”); or

(2) any gambling or animal racing property.

.02 Prohibited Activities . (1) Real property used for both a pro- hibited activity and a non-prohibited ac- tivity . Solely for purposes of § 1400N(d), the portion of any real property (determined by square footage) that is dedicated to any prohibited activity described in section 5.01(1) of this notice is not eligible for the GO Zone additional first year depreciation deduction. If real property is used for both a prohibited activity and an activity not described in section 5.01(1) of this notice, the portion of the real property (determined by square footage) that is not dedicated to the prohibited activity is eligible for the GO Zone additional first year depreciation deduction (assuming all other requirements under § 1400N(d) are met). For example, the GO Zone additional first year depreciation deduction for a shopping center that has both a suntan salon and businesses not described in section 5.01(1) of this notice (and that otherwise qualifies for the GO Zone additional first year depreciation deduction under § 1400N(d)), is determined without regard to the portion of the shopping center’s unadjusted depreciable basis that bears the same percentage to the total unadjusted depreciable basis as the percentage of square footage dedicated to the prohibited activity (that is, the suntan salon) bears to the total square footage of the shopping center.

(2) Trade or business activity that de- rives a small percentage of gross receipts from certain prohibited activities .

(a) De minimis rule . Solely for purposes of § 1400N(p)(3)(A)(i), a taxpayer’s trade or business activity that has less than 10 percent of its total gross receipts derived from massages, tanning services, or a hot tub facility is not treated as, respectively, a massage parlor, a suntan facility, or a hot tub facility. Such trade or business activity may include, for example, a physical therapy office or a beauty/day spa salon if its gross receipts derived from massages, suntanning, and hot tub facilities are less than 10 percent of its total gross receipts.

In determining whether this less than 10 percent test is satisfied, only gross receipts from the taxpayer’s trade or business activity that includes the massages, tanning services, or hot tub facility are taken into account. Further, if a taxpayer is a member of a consolidated group, only the gross receipts of the taxpayer (and not the consolidated group) are taken into account. Also, if the taxpayer is a partnership, S corporation, or other pass-thru entity, only the gross receipts of the pass-thru entity (and not the owners of the pass-thru entity) are taken into account.

(b) Definition of gross receipts . For purposes of this section 5.02(2), the term “gross receipts” means the taxpayer’s receipts for the taxable year that are recognized under the taxpayer’s methods of accounting used for federal income tax purposes for the taxable year. For this purpose, gross receipts include total sales (net of returns and allowances) and all amounts received for services. In addition, gross receipts include any income from investments, and from incidental or outside sources. For example, gross receipts include interest (including original issue discount and tax-exempt interest within the meaning of § 103), dividends, rents, royalties, and annuities, regardless of whether the amounts are derived in the ordinary course of the taxpayer’s trade or business. Gross receipts are not reduced by cost of goods sold or by the cost of property sold if such property is described in § 1221(a)(1), (3), (4), or (5). With respect to sales of capital assets as defined in § 1221, or sales of property described in § 1221(a)(2) (relating to property used in a trade or business), gross receipts are reduced by the taxpayer’s adjusted basis in such property. Gross receipts do not include the amounts received in repayment of a loan or similar instrument (for example, a repayment of the principal amount of a loan held by a commercial lender). Finally, gross receipts do not include amounts received by the taxpayer with respect to sales tax or other similar state and local taxes if, under the applicable state or local law, the tax is legally imposed on the purchaser of the good or service and the taxpayer merely collects and remits the tax to the taxing authority. If, in contrast, the tax is imposed on the taxpayer under the applicable law, then gross receipts include the amounts re

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.02 Application . If GO Zone property is no longer GO Zone property in the hands of the same taxpayer at any time before the end of the GO Zone property’s recovery period as determined under § 167(f)(1) or § 168, as applicable, then the taxpayer must recapture in the taxable year in which the GO Zone property is no longer GO Zone property (the recapture year) the benefit derived from claiming the GO Zone additional first year depreciation deduction for such property. The benefit derived from claiming the GO Zone additional first year depreciation deduction for the property is equal to the excess of the total depreciation claimed (including the GO Zone additional first year depreciation deduction) for the property for the taxable years before the recapture year over the total depreciation that would have been allowable for the taxable years before the recapture year as a deduction under § 167(f)(1) or § 168, as applicable, had the GO Zone additional first year depreciation deduction not been claimed (regardless of whether such excess reduced the taxpayer’s tax liability). The amount to be recaptured is treated as ordinary income for the recapture year. For the recapture year and subsequent taxable years, the taxpayer’s deductions under § 167(f)(1) or § 168, as applicable, are determined as if no GO Zone additional first year depreciation deduction was claimed with respect to the property. If, subsequent to the recapture year, a change in the use of the property results in the property again being GO Zone property, then the GO Zone additional first year depreciation deduction is not allowable for the property.

.03 Examples . The following examples illustrate the provisions of this section 6.

(a) Example 1 . H, a calendar-year taxpayer, owns and operates a furniture store in the GO Zone. In December 2006, H purchases a new delivery truck for $50,000 and places it in service for use in H ’s business. For 2006, this delivery truck is GO Zone property and is 5-year property under § 168(e). H depreciates its 5-year property placed in service in 2006 using the optional depreciation table that corresponds with the general depreciation system, the 200-percent declining balance method, a 5-year recovery period, and the half-year convention. During 2007, the delivery truck is used less than 80 percent in the GO Zone.

(i) For 2006, H is allowed the GO Zone additional first year depreciation deduction of $25,000 for the delivery truck (unadjusted depreciable basis of $50,000 multiplied by .50). In addition, H ’s depreciation deduction allowable in 2006 for the remaining

adjusted depreciable basis of $25,000 for the delivery truck (the unadjusted depreciable basis of $50,000 reduced by the GO Zone additional first year depreciation deduction of $25,000) is $5,000 (the remaining adjusted depreciable basis of $25,000 multiplied by the annual depreciation rate of .20 for recovery year 1). Thus, H ’s depreciation deduction allowable in 2006 for the delivery truck totals $30,000. (ii) For 2007, because the delivery truck does not meet the substantially all requirement described in section 3.01 of this notice, the delivery truck is no longer GO Zone property. Accordingly, for 2007, H must recapture as ordinary income $20,000 ($30,000 depreciation claimed by H for the truck before 2007 less the $10,000 depreciation that would have been allowable for the truck before 2007 had the GO Zone additional first year depreciation deduction not been claimed (unadjusted depreciable basis of $50,000 multiplied by the cumulative annual depreciation rate of .20 before 2007)). In addition, H ’s depreciation deduction allowable in 2007 for the delivery truck is $16,000 (unadjusted depreciable basis of $50,000 multiplied by the annual depreciation rate of .32 for recovery year 2) (determined as if no GO Zone additional first year depreciation deduction was claimed for the truck).

(b) Example 2 . Same facts as in Example 1, except that during 2008, the delivery truck is used 80 percent or more in the GO Zone. The GO Zone additional first year depreciation deduction is not allowable for the delivery truck even though the truck is GO Zone property in the hands of H in 2008. Thus, for 2008, H ’s depreciation deduction allowable in 2008 for the delivery truck is $9,600 (unadjusted depreciable basis of $50,000 multiplied by the annual depreciation rate of .1920 for recovery year 3) (determined as if no GO Zone additional first year depreciation deduction was claimed for the truck).