SECTION 5. ORIGINAL USE

REQUIREMENT FOR THE GO ZONE ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION

.01 In general . For purposes of the GO Zone additional first year depreciation deduction, depreciable property will meet the requirements of § 1400N(d)(2)(A)(iii) if the original use of the property commences with the taxpayer in the GO Zone on or after August 28, 2005. Except as provided in rules similar to the original use rules in § 1.168(k)–1(b)(3)(iii) (sale-leaseback, syndication, and certain other transactions) and in § 1.168(k)–1(b)(3)(iv) (fractional interests in property), original use means the first use to which the property is put, whether or not that use corresponds to the use of the property by the taxpayer. Thus, additional capital expenditures paid or incurred by a taxpayer to recondition or rebuild property that is acquired by purchase or owned by the taxpayer satisfy the original use requirement because it is the first use to which the improvement is put.

The cost of reconditioned or rebuilt property does not satisfy the original use requirement because the reconditioned or rebuilt property has been previously used. However, for purposes of the GO Zone additional first year depreciation deduction, used property (including reconditioned or rebuilt property) will satisfy the original use requirement so long as the property has not been previously used within the GO Zone. Thus, unlike the rules in § 1.168(k)–1(b)(3)(i), the portion of the cost of reconditioned or rebuilt property that is attributable to the cost of capital expenditures that were not previously used within the GO Zone will satisfy the original use requirement, regardless of whether or not the underlying property (before being reconditioned or rebuilt) to which the capital expenditures relate was previously used either inside or outside of the GO Zone. The question of whether property is reconditioned or rebuilt property is a question of fact. For purposes of this section 5.01, property that contains used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than

20 percent of the total cost of the property, whether acquired or self-constructed.

Rules similar to the rules in § 1.168(k)–1(b)(3)(ii), (iii), and (iv) also apply for purposes of the original use requirement for the GO Zone additional first year depreciation deduction.

.02 Examples . The following examples illustrate the provisions of this section 5.

Example 1 . In July 2005, A, a calendar-year taxpayer, placed in service a new building that is located in the GO Zone. During 2007, A incurs $2,000,000 of capital expenditures to renovate and expand such building. In October 2007, A places these capital expenditures in service for use in A ’s trade or business. The $2,000,000 of capital expenditures incurred by A satisfies the original use requirement. Assuming all other requirements are met, A may claim the GO Zone additional first year depreciation deduction for the $2,000,000 of capital expenditures, regardless of whether the $2,000,000 is added to the basis of the building or is capitalized as a separate asset.

Example 2 . In March 2007, B, a calendar-year taxpayer, purchases from C for $5,000,000 a damaged building that is located in the GO Zone and has been previously used in C ’s trade or business. In August 2007, B incurs $4,000,000 of capital expenditures to renovate the building. In November 2007, B places the building in service for use in B ’s trade or business. The $5,000,000 purchase price does not qualify for the GO Zone additional first year depreciation deduction because the building was previously used by C within the GO Zone and, therefore, the original use requirement is not met. However, the $4,000,000 of capital expenditures incurred by B satisfies the original use requirement. Assuming all other requirements are met, B may claim the GO Zone additional first year depreciation deduction for the $4,000,000 of capital expenditures, regardless of whether the $4,000,000 is added to the basis of the building or is capitalized as a separate asset.

Example 3 . D owns a building in the GO Zone that was used in D ’s trade or business prior to Hurricane Katrina. This building was badly damaged by Hurricane Katrina. Since that hurricane, the building has been closed. D incurs $3,000,000 of capital expenditures to renovate and improve the closed building. All of the $3,000,000 capital expenditures are components and properties not previously used in the GO Zone. Upon completion of the improvements in March 2007, D decides to sell the still-closed building instead of placing the renovated building in service. In May 2007, D sells the building to E for $8,000,000. At the time of the sale, the fair market value of the improvements made by D is $3,000,000. None of the improvements made by D were placed in service by D and, therefore, D could not take a depreciation deduction with respect to the improvements. In June 2007, E places the building (with the improvements) in service for use in E ’s trade or business. Of E ’s total cost of the building ($8,000,000), $5,000,000 is attributable to the part of the building previously used in the GO Zone and $3,000,000 is attributable to the improvements made by D that were not previously used in the GO Zone. Consequently, 62.5 percent of E ’s total cost of the building is attributable to used components and property and, thus, E has purchased a

2007–17 I.R.B. 1002 April 23, 2007

satisfies the 0.1 percent requirement. The diesel fuel in a renewable diesel mixture may be either dyed or undyed. However, taxpayers are reminded of the penalty in § 6715 for the willful alteration of the strength or composition of any dye in dyed fuel. Also see § 48.6715–1.

(2) Treatment as biodiesel mixture . For purposes of the Code, Notice 2005–4, and Notice 2005–62, a renewable diesel mixture is treated as a biodiesel mixture.