Rev. Proc. 2003-38, Commercial Revitalization Deduction

Part III. Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and
claims for refund, credit or abatement; determination of correct tax liability.
(Also Part I, §§ 56, 168, 1400I.)

Rev. Proc. 2003–38
SECTION 1. PURPOSE
This revenue procedure provides the time
and manner for states to make allocations
under § 1400I of the Internal Revenue Code
of commercial revitalization expenditure
amounts to a new or substantially rehabilitated building that is placed in service in
a renewal community. This revenue procedure also explains how a taxpayer may
make an election under § 1400I(a) to recover the cost of the building using a more
accelerated method than is otherwise allowable under the depreciation provisions
in § 168.
SECTION 2. BACKGROUND
.01 Section 1400I, as added by § 101(a)
of the Community Renewal Tax Relief Act
of 2000, Pub. L. No. 106–554, 114 Stat.
2763A–587 (December 21, 2000), 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 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. If the taxpayer makes a commercial revitalization deduction election as
provided in this revenue procedure, a depreciation deduction is not allowable for the
amounts deducted or amortized under
§ 1400I(a). The commercial revitalization
deduction provided by § 1400I(a) is allowed for both regular tax and alternative
minimum tax purposes.
.02 Under § 1400I(b)(1), a qualified revitalization building is any building and its
structural components (such terms are defined in § 1.48–1(e) of the Income Tax
Regulations) if: (1) the building is placed

June 16, 2003

in service by the taxpayer in a renewal community (as defined in § 1400E) and the
original use of the building begins with the
taxpayer; or (2) the building is substantially rehabilitated (within the meaning of
§ 47(c)(1)(C)) by the taxpayer and is placed
in service by the taxpayer after the rehabilitation in a renewal community.
.03 The term “qualified revitalization expenditure” is defined in § 1400I(b)(2)(A) as,
in general, any amount properly chargeable to a capital account for property for
which depreciation is allowable under § 168
and that is either (1) nonresidential real
property (as defined in § 168(e)(2)(B)), or
(2) § 1250 property (as defined in § 1250(c))
that is functionally related and subordinate to the nonresidential real property.
However, 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. Accordingly, a taxpayer may
make a commercial revitalization deduction election for a qualified revitalization
building only to the extent that qualified
commercial revitalization expenditure
amounts are allocated to the building. If the
amount of that allocation exceeds the
amount properly chargeable to a capital account for the building, the qualified revitalization expenditures eligible for the
commercial revitalization deduction election are limited to the amount properly
chargeable to a capital account for the building.
.04 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. Further, the commercial revitalization agency must notify the chief ex-

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ecutive officer (or its equivalent) of the local
jurisdiction in which the qualified revitalization building is located of the allocation and provide that individual a reasonable
opportunity to comment on the allocation. The term “commercial revitalization
agency” is defined in § 1400I(d)(3) as any
agency authorized by a state to carry out
§ 1400I. Neither the original nor a copy of
the qualified allocation plan is to be sent
to the Internal Revenue Service.
.05 Pursuant to § 1400I(d)(4), an allocation under § 1400I is made at the same
time and in the same manner as under the
low-income housing credit provisions in
§ 42(h)(1) and (7). Section 42(h)(1)(B) provides that, except in the case of an allocation that meets the requirements of
§ 42(h)(1)(C), (D), (E), or (F), an allocation must be made not later than the close
of the calendar year in which the building is placed in service. Further, § 1.42–
1T(d)(8)(i) provides that the allocation may
not be made prior to the calendar year in
which the building is placed in service. Accordingly, the low-income housing credit allocation is generally made in the calendar
year in which the building is placed in service.
Nevertheless, certain allocations that
meet the requirements of § 42(h)(1)(C), (D),
(E), or (F) are not made in the calendar year
in which the building is placed in service.
An allocation meets the requirements of
§ 42(h)(1)(C) if there is a binding commitment, not later than the close of the calendar year in which the building is placed
in service, by the state agency to allocate
a specified dollar amount to the building beginning in a specified later taxable year. An
allocation with respect to an increase in
qualified basis meets the requirements of
§ 42(h)(1)(D) only if, among other things,
the allocation is made not later than the
close of the calendar year in which ends the
taxable year to which the allocation will first
apply. Pursuant to § 42(h)(1)(E) and (F) and
§ 1.42–6, a carryover allocation is allowed
with respect to a single-building project or
multi-building project that is placed in service not later than the close of the second
calendar year following the calendar year
in which the allocation is made, provided
certain basis requirements set forth therein
are met.

2003–24 I.R.B.

SECTION 3. GENERAL RULES FOR
AN ALLOCATION OF COMMERCIAL
REVITALIZATION EXPENDITURE
AMOUNTS
.01 Types of allocations allowed. A commercial revitalization agency may make the
following types of allocations of the commercial revitalization expenditure amount
(commercial revitalization expenditure
allocation):
(1) An allocation in the calendar year in
which a qualified revitalization building is
placed in service, as described in section 4
of this revenue procedure;
(2) A binding commitment to make an
allocation of a specified dollar amount to
a qualified revitalization building in the calendar year in which the building is placed
in service, as described in section 5 of this
revenue procedure; and
(3) A carryover allocation for a singlebuilding project or a multi-building project,
as described in section 6 of this revenue
procedure.
.02 Allocation must be made for each
building. A separate commercial revitalization expenditure allocation must be made
for each qualified revitalization building
whether new or substantially rehabilitated.
.03 $12 million ceiling for each renewal
community. Each state is permitted to allocate up to $12 million of commercial revitalization expenditure amounts to each
renewal community located within the state
for each calendar year after 2001 and before 2010 (the commercial revitalization expenditure ceiling). The $12 million of
commercial revitalization expenditure
amounts for any renewal community may
not be allocated, in whole or in part, to another renewal community. However, see
section 8.02 of this revenue procedure for
the special rule for the 2002 ceiling.
.04 Carryforward of ceiling is not permitted. If a commercial revitalization agency
does not allocate all of the commercial revitalization expenditure ceiling for a renewal community for any given calendar
year, the unused ceiling amount may not be
carried forward to a later year. However, see
section 8.01 of this revenue procedure for
the special rule for any unused 2002 ceiling amount.

2003–24 I.R.B.

SECTION 4. ALLOCATIONS FOR
BUILDINGS PLACED IN SERVICE IN
THE ALLOCATION YEAR
.01 Time for making a commercial revitalization expenditure allocation. Except as provided in sections 5 and 6 of this
revenue procedure, a commercial revitalization expenditure allocation to a qualified revitalization building must be made
in the calendar year in which that building is placed in service by the taxpayer.
.02 Manner for making a commercial revitalization expenditure allocation.
(1) In general. A commercial revitalization expenditure allocation is made for
a qualified revitalization building when an
allocation document containing the information described in section 4.02(2) of this
revenue procedure is completed, signed, and
dated by an authorized official of the commercial revitalization agency. The agency
must send a copy of the allocation document to the taxpayer receiving the allocation no later than 60 calendar days
following the close of the calendar year in
which the allocation is made. Neither the
original nor a copy of the allocation document is to be sent to the Service.
(2) Information required in the allocation document. The allocation document
must include:
(a) The name, address, and taxpayer
identification number of the commercial revitalization agency making the commercial revitalization expenditure allocation;
(b) The name, address, and taxpayer
identification number of the taxpayer receiving the allocation;
(c) The address of the qualified revitalization building, or if none exists, a specific description of the location of each
building;
(d) The date of the allocation of the
commercial revitalization expenditure
amount;
(e) The commercial revitalization expenditure amount allocated to the qualified revitalization building on that date; and
(f) A certification under penalties of perjury by an authorized official of the commercial revitalization agency that the official
has examined the information in the allocation document, and, to the best of the
official’s knowledge and belief, this information is true, correct, and complete.

1018

SECTION 5. BINDING
COMMITMENTS
Before or in the calendar year in which
a qualified revitalization building is placed
in service, a commercial revitalization
agency of a state may enter into a binding commitment to allocate a specified dollar amount of the commercial revitalization
expenditure ceiling in the calendar year in
which the building is placed in service. This
allocation must be made in accordance with
section 4 of this revenue procedure. A binding commitment, in and of itself, is not an
allocation.
SECTION 6. CARRYOVER
ALLOCATIONS
.01 In general.
(1) Definition of a carryover allocation. A carryover allocation is an allocation that is made with respect to a qualified
revitalization building that is placed in service by a taxpayer not later than the close
of the second calendar year following the
calendar year in which the allocation is
made, provided the taxpayer’s basis in the
project of which the building is a part (as
of the later of the date that is 6 months after the date that the allocation is made or
the close of the calendar year in which the
allocation is made) is more than 10 percent of the taxpayer’s reasonably expected
basis in the project as of the close of the
second calendar year following the calendar year in which the allocation is made.
A carryover allocation may be for either a
single-building project (a building-based allocation) or a multi-building project (a
project-based allocation). A carryover allocation reduces the commercial revitalization expenditure ceiling for the calendar
year in which the allocation is made. If a
carryover allocation is made after June 30,
2002, and before January 1, 2003, see section 8.03 of this revenue procedure for the
special rule for the 10 percent basis requirement.
(2) Determination of reasonably expected basis. The taxpayer’s reasonably expected basis in a project is the taxpayer’s
reasonably expected adjusted basis in land
and depreciable property, as determined under §§ 1012 and 1016, that is reasonably expected to be part of the project, whether or
not these amounts are includible in the basis of the qualified revitalization building.

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.02 Time and manner for making a carryover allocation of commercial revitalization expenditure amounts.
(1) In general. A carryover allocation of
commercial revitalization expenditure
amounts is made for a qualified revitalization building when a carryover allocation
document containing the information described in section 6.02(2) of this revenue
procedure is completed, signed, and dated
by an authorized official of the commercial revitalization agency. The agency must
send a copy of the carryover allocation
document to the taxpayer receiving the carryover allocation no later than 60 calendar days following the close of the calendar
year in which the carryover allocation is
made. Neither the original nor a copy of the
carryover allocation document is to be sent
to the Service.
(2) Information required in the carryover allocation document. The carryover allocation document must include:
(a) The name, address, and taxpayer
identification number of the commercial revitalization agency making the carryover allocation of the commercial revitalization
expenditure amounts;
(b) The name, address, and taxpayer
identification number of the taxpayer receiving the carryover allocation;
(c) The address of each qualified revitalization building in the project, or if none
exists, a specific description of the location of each building;
(d) The date of the carryover allocation of the commercial revitalization expenditure amount;
(e) The commercial revitalization expenditure amount allocated to the qualified revitalization building in a singlebuilding project or to the multi-building
project, as applicable, on that date;
(f) The taxpayer’s reasonably expected
basis in the project (land and depreciable
property) as of the close of the second calendar year following the calendar year in
which the allocation is made;
(g) The date that each qualified revitalization building in the project is expected
to be placed in service by the taxpayer; and
(h) A certification under penalties of perjury by an authorized official of the commercial revitalization agency that the official
has examined the information in the carryover allocation document, and, to the best

June 16, 2003

of the official’s knowledge and belief, this
information is true, correct, and complete.
SECTION 7. COMMERCIAL
REVITALIZATION DEDUCTION
ELECTION
.01 In general. The commercial revitalization deduction election provided by
§ 1400I(a) is made by each person owning the qualified revitalization building (for
example, by the member of a consolidated
group, the partnership, or the S corporation that owns the building). This election must be made for the taxable year in
which the building is placed in service. The
election only applies to the extent that qualified commercial revitalization expenditure amounts are allocated to the building
by the commercial revitalization agency of
the state in which the building is located.
If the amount of that allocation exceeds the
amount properly chargeable to a capital account for the building, the qualified revitalization expenditures eligible for the
commercial revitalization deduction election are limited to the amount properly
chargeable to a capital account for the building.
.02 Time and manner for making the
election.
(1) In general. The commercial revitalization deduction election must be made by
the due date (including extensions) of the
federal tax return for the taxable year in
which the qualified revitalization building is placed in service by the taxpayer. The
election must be made in the manner prescribed in the instructions for Form 4562,
Depreciation and Amortization. For 2002,
the taxpayer should refer to the instructions for line 42 of Form 4562.
(2) Limited relief for late election.
(a) Automatic 6-month extension. Pursuant to § 301.9100–2(b) of the Procedure and Administration Regulations, an
automatic extension of 6 months from the
due date of the federal tax return (excluding extensions) for the placed-in-service year
of the qualified revitalization building is
granted to make the commercial revitalization deduction election, provided the taxpayer timely filed the taxpayer’s federal tax
return for the placed-in-service year and the
taxpayer satisfies the requirements in
§ 301.9100–2(c) and § 301.9100–2(d).
(b) Other extensions. A taxpayer that fails
to make the commercial revitalization de-

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duction election for the qualified revitalization building as provided in section
7.02(1) or 7.02(2)(a) of this revenue procedure but wants to do so must file a request for an extension of time to make the
election under the rules in § 301.9100–3.
.03 Scope of the Election. If a taxpayer
placed in service more than one qualified
revitalization building during a taxable year,
the taxpayer may make the commercial revitalization deduction election for the
placed-in-service year separately for each
building as provided in section 7.02 of this
revenue procedure. For example, a taxpayer that places in service in 2003 three
qualified revitalization buildings for which
commercial revitalization expenditure
amounts are allocated, may elect to deduct one-half of the qualified revitalization expenditures for one building and elect
to amortize the qualified revitalization expenditures for the other two buildings ratably over a 120-month period.
.04 Revocation. The commercial revitalization deduction election is revocable
only with the prior written consent of the
Commissioner of Internal Revenue. To seek
the Commissioner’s consent, the taxpayer
must submit a request for a letter ruling in
accordance with the provisions of Rev. Proc.
2003–1, 2003–1 I.R.B. 1 (or its successor).
.05 Failure to make commercial revitalization deduction election. If a taxpayer
does not make the commercial revitalization deduction election for a qualified revitalization building within the time and in
the manner prescribed in section 7.02 of this
revenue procedure, the amount of depreciation allowable for that property must be
determined under § 168 for the placed-inservice year and for all subsequent years.
Thus, the commercial revitalization deduction election cannot be made by the taxpayer in any manner other than as set forth
in section 7.02 of this revenue procedure
(for example, through a request under
§ 446(e) to change the taxpayer’s method
of accounting).
SECTION 8. SPECIAL RULES FOR
CEILING, CARRYOVER
ALLOCATION, AND ALLOCATION
DOCUMENT
The following special rules apply to the
2002 or 2003 commercial revitalization expenditure ceiling, to certain carryover al-

2003–24 I.R.B.

locations made in 2002, and to any
allocation document made in 2002:
.01 Unallocated portion of 2002 ceiling. The $12 million commercial revitalization expenditure ceiling for 2003 for a
renewal community is increased by any portion of the 2002 commercial revitalization expenditure ceiling for that renewal
community that was not allocated in 2002.
For example, if State A has only one renewal community, RC, and only $7 million of the $12 million commercial
revitalization expenditure ceiling for 2002
for RC was allocated to qualified revitalization buildings in RC in 2002, the commercial revitalization expenditure ceiling for
2003 for RC in State A is $17 million.
.02 Aggregation of 2002 ceiling. The
2002 commercial revitalization expenditure ceiling for each renewal community
within a state may be aggregated and apportioned to any renewal community within
the state. However, after 2002, no aggregation of the ceiling is permitted, including any portion of the 2003 ceiling that is
attributable to the unallocated portion of the
2002 ceiling in accordance with section 8.01
of this revenue procedure (see section 3.03
of this revenue procedure).
For example, State B has two renewal
communities, RC1 and RC2. For 2002,
State B aggregated the $12 million ceilings for RC1 and RC2 resulting in a total
2002 ceiling of $24 million. Of that amount,
$15 million was apportioned to RC1 and
$9 million was apportioned to RC2 for
2002. This aggregation and apportionment
of the 2002 ceiling for RC1 and RC2 are
permitted pursuant to section 8.02 of this
revenue procedure. In 2002, $12 million of
the $15 million of RC1’s 2002 ceiling was
allocated to qualified revitalization buildings in RC1 and $7 million of the $9 million of RC2’s 2002 ceiling was allocated
to qualified revitalization buildings in RC2.
Pursuant to sections 3.03 and 8.01 of this
revenue procedure, the commercial revitalization expenditure ceiling for 2003 for
RC1 is $15 million ($12 million ceiling for
2003 plus the $3 million not allocated from
the 2002 ceiling) and for RC2 is $14 million ($12 million ceiling for 2003 plus the
$2 million not allocated from the 2002 ceil-

2003–24 I.R.B.

ing). In accordance with sections 3.03 and
8.02 of this revenue procedure, the $15 million ceiling for 2003 for RC1 and the $14
million ceiling for 2003 for RC2 may not
be aggregated and apportioned.
.03 Carryover allocation. If a carryover allocation is made after June 30, 2002,
and before January 1, 2003, the taxpayer
must meet the 10 percent basis requirement set forth in section 6.01(1) of this revenue procedure by December 31, 2003.
.04 Allocation document. Any allocation document made in 2002 that is not
made in the manner prescribed in section
4.02 or 6.02 of this revenue procedure, as
applicable, will be deemed to meet the requirements of section 4.02 or 6.02 of this
revenue procedure, as applicable, if the
document contains sufficient information to
identify the commercial revitalization
agency, the taxpayer, the qualified revitalization building, the date of the allocation, and the commercial revitalization
expenditure amount allocated to the qualified revitalization building in a singlebuilding project or to the multi-building
project, as applicable.

ing in a renewal community. This information will be used by the Service to verify
that the taxpayer is entitled to the commercial revitalization deduction. The collections of information are required to obtain
a benefit. The likely respondents are state
or local governments and business or other
for-profit institutions.
The estimated total annual reporting burden is 200 hours.
The estimated annual burden per respondent varies from 1 to 4 hours, depending on individual circumstances, with an
estimated average of 2.5 hours. The estimated number of respondents is 80.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally tax returns and tax return information are confidential, as required by
26 U.S.C. 6103.

SECTION 9. EFFECTIVE DATE

The Service and Treasury Department
welcome comments on this revenue procedure. Comments should be submitted in
writing by September 15, 2003, to:

This revenue procedure is effective for
qualified revitalization buildings placed in
service after December 31, 2001.
SECTION 10. PAPERWORK
REDUCTION ACT
The collections of information contained
in this revenue procedure have been reviewed and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C. 3507)
under control number 1545–1818.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless
the collection of information displays a valid
OMB control number.
The collections of information in this
revenue procedure are in sections 4.02, 5,
and 6.02 of this revenue procedure. This information is required to obtain an allocation of commercial revitalization expenditure
amounts for a qualified revitalization build-

1020

SECTION 11. REQUEST FOR
COMMENTS

Internal Revenue Service
Attn: CC:IT&A:RU
(REV. PROC. 2003–38), Room 5226
P.O. Box 7604
Benjamin Franklin Station
Washington, DC 20044.
Alternatively, comments may be submitted by e-mail to: Notice.Comments@
IRSCOUNSEL.TREAS.GOV. Please refer to
Rev. Proc. 2003–38 in the e-mail.
SECTION 12. DRAFTING
INFORMATION
The principal author of this revenue procedure is Emily Kalovidouris of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further
information regarding this revenue procedure, contact Ms. Kalovidouris at (202)
622–3110 (not a toll-free call).

June 16, 2003