SECTION 2. BACKGROUND

.01 If an employer provides an employee with a vehicle that is available to the employee for personal use, the value of the personal use must generally be included in the employee’s income and wages. Internal Revenue Code § 61; Treas. Reg. § 1.61–21.

.02 For employer-provided passenger automobiles (including trucks and vans) made available to employees for personal use that meet the requirements of section 1.61–21(e)(1) of the regulations, generally the value of the personal use may be determined under the vehicle cents-per-mile valuation rule of section 1.61–21(e). However, regulations section 1.61–21(e)(1)(iii)(A) provides that for a passenger automobile first made available after 1988 to any employee of the employer for personal use, the value of the personal use may not be determined under the vehicle cents-per-mile valuation rule for a calendar year if the fair market value of the passenger automobile (determined pursuant to regulations section 1.61–21(d)(5)(i) through (iv)) on the first date the passenger automobile is made available to the employee exceeds a specified dollar limit.

.03 For employer-provided vehicles available to employees for personal use

whether property is tax-exempt use property, rules similar to those applicable to partnerships apply to other pass-thru entities. Section 849(a) of the AJCA provides that § 470 generally applies to leases entered into after March 12, 2004. Section 403(ff) of the Gulf Opportunity Zone Act of 2005, Pub. L. No. 109–135, 119 Stat. 2632, amended § 849(a) of the AJCA to provide that, in the case of property treated as tax-exempt use property solely by reason of § 168(h)(6), § 470 applies to property acquired after March 12, 2004.

Notice 2006–2 and Notice 2005–29 provide transition relief to partnerships and other pass-thru entities that are treated by § 470 as holding tax-exempt use property as a result of the application of § 168(h)(6). Specifically, Notice 2006–2 and Notice 2005–29 provide that, in the case of partnerships and pass-thru entities described in § 168(h)(6)(E), for taxable years that begin before January 1, 2006, and January 1, 2005, respectively, the Internal Revenue Service will not apply § 470 to disallow losses associated with property that is treated as tax-exempt use property solely as a result of the application of § 168(h)(6). Notice 2006–2 was issued subsequent to the receipt by the Treasury Department of a letter from the Chairmen and Ranking Members of both the Senate Finance Committee and House Ways and Means Committee requesting that the Treasury Department consider extending the transition relief provided in Notice 2005–29 for taxable years beginning before January 1, 2006.

On September 29, 2006, the Tax Technical Corrections Act of 2006 was introduced in Congress. This legislation addresses, among other things, the application of § 470 to partnerships and other pass-thru entities with tax-exempt use property as a result of § 168(h)(6). See H.R. 6264, 109th Cong. 2nd Sess. § 6(e) (2006) and S. 4026, 109th Cong. 2nd Sess. § 6(e) (2006). The Chairmen of the Senate Finance Committee and House Ways and Means Committee solicited comments regarding the legislation. As of the date of this notice, no congressional action has been taken on the legislation.

If enacted in its current form, the legislation will be effective retroactively, in the case of property treated as tax-exempt use property solely by reason of § 168(h)(6), to property acquired after March 12, 2004.

However, the DESCRIPTION OF THE TAX TECHNICAL CORRECTIONS ACT OF 2006, as prepared by the Staff of the Joint Committee on Taxation (October 2, 2006, JCX–48–06), provides that it is not intended that the effective date of the legislation supersede the rules set forth in Notice 2006–2 and Notice 2005–29, with respect to the application of § 470 in the case of partnerships and other pass-thru entities, for taxable years of these entities beginning in 2005 and 2004, respectively. The Service will continue to apply the rules set forth in Notice 2005–29 and Notice 2006–2. Additionally, in the case of partnerships and pass-thru entities described in § 168(h)(6)(E), for taxable years beginning before January 1, 2007, the Service will not apply § 470 to disallow losses associated with property that is treated as tax-exempt use property solely as a result of the application of § 168(h)(6).

EXTENSION OF TRANSITION RELIEF

In the case of partnerships and other pass-thru entities described in § 168(h)(6)(E), for taxable years that begin before January 1, 2007, the Service will not apply § 470 to disallow losses associated with property that is treated as tax-exempt use property solely as a result of the application of § 168(h)(6). Abusive transactions involving partnerships and other pass-thru entities remain subject to challenge by the Service under other provisions of the tax law.

EFFECT ON OTHER DOCUMENTS

Notice 2006–2 and Notice 2005–29 are modified and superseded.

DRAFTING INFORMATION

For further information regarding this notice, contact John Aramburu of the Office of the Associate Chief Counsel (Income Tax & Accounting) at (202) 622–4960 (not a toll-free call).

January 8, 2007 261 2007–2 I.R.B.

Lease Values of the automobiles in the fleet. The fleet-average valuation rule may not be used to determine the Annual Lease Value of any automobile if its fair market value on the date it is first made available exceeds $20,100 for a passenger automobile other than a truck or van, or $21,100 for a truck or van. If all other applicable requirements are met, an employer with a fleet of 20 or more vehicles consisting of passenger automobiles other than trucks or vans as well as trucks and vans may use the fleet-average valuation rule as long as none of the vehicles exceed their respective maximum allowable values. If the fair market value of any passenger automobile in the fleet exceeds these amounts, the employer may determine the value of the personal use under regulations section 1.61–21(f) (Commuting valuation) or the general valuation rules of section 1.61–21(b) or may determine the Annual Lease Value of such automobile separately under the automobile lease valuation rule of section 1.61–21(d)(2) if the applicable requirements are met.