Internal Revenue Bulletin 2007-14 (PDF rendition): IRS Revenue Rulings

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

Bulletin No. 200
7-14
April 2, 2007
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2007–19, page 843.
Frivolous tax returns; wages not taxable income.This rul-
ing discusses and refutes the frivolous position taken by some
taxpayers that wages are not taxable income.
Rev. Rul. 2
007–20, page 863.
Frivolous
tax returns; voluntary compliance.This ruling
discusses
and refutes the frivolous position taken by some tax-
payers tha
t complying with the internal revenue laws is purely
voluntary
and that taxpayers are not legally required to file fed-
eral tax r
eturns or pay federal tax because the filing of a tax
return or
the payment of tax is a matter of choice.
Rev. Rul. 2007–21, page 865.
Frivolous tax returns; summary record of assessment.
This ruling discusses and refutes the frivolous position taken by
some taxpayers that before the IRS may collect overdue taxes,
the IRS must provide taxpayers with a summary record of as-
sessment made on a Form 23C,Assessment Certificate-Sum-
mary Record of Assessments, or on another particular form.
These taxpayers claim that if a Form 23C is not provided, the
assessment is invalid and the IRS may not collect any taxes
due.
Rev. Rul. 2007–22, page 866.
Frivolous tax returns; citizens of a state.This ruling dis-
cussesandrefutesthefrivolouspositiontakenbysometaxpay-
ers that they are not subject to federal income tax, or that their
income is excluded from taxation, because either (1) they claim
to have rejected or renounced United States citizenship and are
citizens exclusively of a state (sometimes characterized as a
“natural-born citizen” of a “sovereign state”), or (2) they are not
persons as identified by the Internal Revenue Code.
T.D. 9314, page 845.
Final regulations under section 168 of the Code relate to the de-
preciation of property subject to the accelerated cost recovery
system (MACRS property). The regulations provide guidance
on how to depreciate MACRS property acquired in a like-kind
exchange under section 1031 or as a result of an involuntary
conversion under section 1033 when both the acquired and re-
linquished property are subject to MACRS in the hands of the
acquiring taxpayer.
Notice 2007–26, page 870.
This notice solicits applications for allocation of the available
volume cap for clean renewable energy bonds (CREBs) un-
der section 54 of the Code. The notice also provides guid-
ance on the CREB program requirements, volume cap alloca-
tion method, and certain aspects of applicable law regarding
CREBs. Notice 2005–98 modified and superseded.
Notice 2007–29, page 881.
Request for comments and interim guidance regarding
allocation of costs under the simplified methods of
accounting under section 263A.This notice invites public
comment on changes to the simplified production method un-
der regulations section 1.263A–2(b) and the simplified resale
method under regulations section 1.263A–3(d). Pending the
issuance of additional published guidance, the Service will
not challenge the inclusion of negative amounts in comput-
ing additional costs under section 263A of the Code or the
permissibility of aggregate negative additional section 263A
costs.
Notice 2007–30, page 883.
This notice lists positions identified as frivolous for purposes
of section 6702(c) of the Code.
(Continued on the next page)
Fi
nding Lists begin on page ii.

EMPLOYEE PLANS
Notice 2007–28, page 880.
Deductibility; contributions; sections 801 and 803 of the
Pension Protection Act of 2006.This notice addresses, in
question and answer format, the deductibility of certain contri-
butions to qualified defined benefit pension plans under section
404(a)(1) of the Code and the deductibility of certain contribu-
tions to a combination of plans under section 404(a)(7).
EXEMPT ORGANIZATIONS
Notice 2007–30, page 883.
This notice lists positions identified as frivolous for purposes
of section 6702(c) of the Code.
Rev. Proc. 2007–27, page 887.
This procedure sets forth the elements of a safe harbor under
section 527(1) of the Code for waiver of amounts due for failure
to comply with certain reporting requirements due to reason-
able cause but not willful neglect.
ESTATE TAX
Rev. Rul. 2007–20, page 863.
Frivolous tax returns;voluntary compliance.This ruling
discusses and refutes the frivolous position taken by some tax-
payers that complying with the internal revenue laws is purely
voluntary and that taxpayers are not legally required to file fed-
eral tax returns or pay federal tax because the filing of a tax
return or the payment of tax is a matter of choice.
Notice 2007–30, page 883.
This notice lists positions identified as frivolous for purposes
of section 6702(c) of the Code.
GIFT TAX
Rev. Rul. 2007–20, page 863.
Frivolous tax returns;voluntary compliance.This ruling
discusses and refutes the frivolous position taken by some tax-
payers that complying with the internal revenue laws is purely
voluntary and that taxpayers are not legally required to file fed-
eral tax returns or pay federal tax because the filing of a tax
return or the payment of tax is a matter of choice.
Notice 2007–30, page 883.
This notice lists positions identified as frivolous for purposes
of section 6702(c) of the Code.
EMPLOYMENT TAX
Rev. Rul. 2007–19, page 843.
Frivolous tax returns; wages not taxable income.This rul-
ing discusses and refutes the frivolous position taken by some
taxpayers that wages are not taxable income.
Rev. Rul. 2007
–20, page 863.
Frivolous tax
returns; voluntary compliance.This ruling
discusses and
refutes the frivolous position taken by some tax-
payers that co
mplying with the internal revenue laws is purely
voluntary and
that taxpayers are not legally required to file fed-
eral tax retur
ns or pay federal tax because the filing of a tax
return or the
payment of tax is a matter of choice.
Rev. Rul. 2007–22, page 866.
Frivolous tax returns; citizens of a state.This ruling dis-
cusses and refutes the frivolous position taken by some taxpay-
ers that they are not subject to federal income tax, or that their
income is excluded from taxation, because either (1) they claim
to have rejected or renounced United States citizenship and are
citizens exclusively of a state (sometimes characterized as a
“natural-born citizen” of a “sovereign state”), or (2) they are not
persons as identified by the Internal Revenue Code.
Notice 2007–30, page 883.
This notice lists positions identified as frivolous for purposes
of section 6702(c) of the Code.
SELF-EMPLOYMENT TAX
Rev. Rul. 2007–20, page 863.
Frivolous tax returns; voluntary compliance.This ruling
discusses and refutes the frivolous position taken by some tax-
payers that complying with the internal revenue laws is purely
voluntary and that taxpayers are not legally required to file fed-
eral tax returns or pay federal tax because the filing of a tax
return or the payment of tax is a matter of choice.
Notice 2007–30, page 883.
This notice lists positions identified as frivolous for purposes
of section 6702(c) of the Code.
EXCISE TAX
Rev. Rul. 2007–20, page 863.
Frivolous tax returns; voluntary compliance.This ruling
discusses and refutes the frivolous position taken by some tax-
payers that complying with the internal revenue laws is purely
voluntary and that taxpayers are not legally required to file fed-
eral tax returns or pay federal tax because the filing of a tax
return or the payment of tax is a matter of choice.
(Continued on the next page)
April 2, 20072007–14 I.R.B.

Notice 2007–30, page 883.
This notice lists positions identified as frivolous for purposes
of section 6702(c) of the Code.
ADMINISTRATIVE
Rev. Rul. 2007–19, page 843.
Frivolous tax returns; wages not taxable income.This rul-
ing discusses and refutes the frivolous position taken by some
taxpayers that wages are not taxable income.
Rev. Rul. 2007–20, page 863.
Frivolous tax returns;voluntary compliance.This ruling
discusses and refutes the frivolous position taken by some tax-
payers that complying with the internal revenue laws is purely
voluntary and that taxpayers are not legally required to file fed-
eral tax returns or pay federal tax because the filing of a tax
return or the payment of tax is a matter of choice.
Rev. Rul. 2007–21, page 865.
Frivolous tax returns; summary record of assessment.
This ruling discusses and refutes the frivolous position taken by
some taxpayers that before the IRS may collect overdue taxes,
the IRS must provide taxpayers with a summary record of as-
sessment made on a Form 23C,Assessment Certificate-Sum-
mary Record of Assessments, or on another particular form.
These taxpayers claim that if a Form 23C is not provided, the
assessment is invalid and the IRS may not collect any taxes
due.
Rev. Rul. 2007–22, page 866.
Frivolous tax returns; citizens of a state.This ruling dis-
cussesandrefutesthefrivolouspositiontakenbysometaxpay-
ers that they are not subject to federal income tax, or that their
income is excluded from taxation, because either (1) they claim
to have rejected or renounced United States citizenship and are
citizens exclusively of a state (sometimes characterized as a
“natural-born citizen” of a “sovereign state”), or (2) they are not
persons as identified by the Internal Revenue Code.
Notice 2007–26, page 870.
This notice solicits applications for allocation of the available
volume cap for clean renewable energy bonds (CREBs) un-
der section 54 of the Code. The notice also provides guid-
ance on the CREB program requirements, volume cap alloca-
tion method, and certain aspects of applicable law regarding
CREBs. Notice 2005–98 modified and superseded.
Notice 2007–30, page 883.
This notice lists positions identified as frivolous for purposes
of section 6702(c) of the Code.
2007–14 I.R.B.April 2, 2007

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
April 2, 20072007–14 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 61.—Gross Income
Defined
26 CFR 1.61–2: Compensation for services, includ-
ing fees, commissions, and similar items.
Frivolous tax returns; wages not tax-
able income.This ruling discusses and re-
futes the frivolous position taken by some
taxpayers that wages are not taxable in-
come.
Rev. Rul. 2007–19
PURPOSE
The Internal Revenue Service (Ser-
vice) is aware that some taxpayers are
attempting to reduce or eliminate their
federal income tax liability by claiming
that compensation received in exchange
for personal services is not taxable in-
come. These taxpayers often attempt to
avoid their federal income tax liability by
failing to file federal income tax returns or
by failing to report all income from wages
or other compensation on their federal in-
come tax return. They often furnish Forms
W–4,Employee’s Withholding Allowance
Certificate, on which they claim excessive
withholding allowances or claim complete
exemption from withholding. In addition,
they often claim deductions from gross
income for personal, living and family
expenditures in order to reduce the tax
liability related to wages or other compen-
sation.
The Service is aware that some pro-
moters and return preparers are advising
or recommending that taxpayers take these
or other meritless positions. This revenue
ruling emphasizes to taxpayers, promot-
ers and return preparers that wages and
other compensation received in exchange
for personal services are taxable income
subject to federal income tax. Any argu-
ment that such compensation is not taxable
income has no merit and is frivolous.
The Service is committed to identify-
ing taxpayers who attempt to avoid their
federal tax obligations by taking frivolous
positions. The Service will take vigorous
enforcement action against these tax-
payers and against promoters and return
preparers who assist taxpayers in taking
these frivolous positions. Frivolous re-
turns and other similar documents submit-
ted to the Service are processed through
the Service’s Frivolous Return Program.
As part of this program, the Service de-
termines whether taxpayers who have
taken frivolous positions have filed all
required tax returns; computes the correct
amount of tax and interest due; and deter-
mines whether civil or criminal penalties
should apply. The Service also deter-
mines whether civil or criminal penalties
should apply to return preparers, promot-
ers and others who assist taxpayers in tak-
ing frivolous positions and recommends
whether an injunction should be sought
to halt these activities. Other information
about frivolous tax positions is available
on the Service website atwww.irs.gov.
ISSUE
Whether Taxpayer A may avoid federal
income tax liability by maintaining that
the Internal Revenue Code does not tax
wages or other compensation received in
exchange for personal services.
FACTS
Taxpayer A receives wages in exchange
for personal services. Taxpayer A then
does one or more of the following: (1)
furnishes a Form W–4 to the employer on
which Taxpayer A claims excessive with-
holding allowances or claims complete ex-
emption from withholding; (2) fails to file
a federal income tax return; (3) fails to re-
port the wages on the federal income tax
return; (4) claims a refund for any withheld
income tax; or (5) claims deductions for
personal, living and family expenditures to
offset the wages reported on the federal in-
come tax return. Taxpayer A claims that
compensation received for personal ser-
vices is not subject to federal income tax.
Arguments that wages are not subject
to federal income tax take many forms in-
cluding, but not limited to, the following:
1. A tax on wages is a direct tax subject
to the provision in Article I, Section
2, Clause 3 of the Constitution that re-
quires that direct taxes be apportioned
among the states by population.
2. Money received in exchange for per-
sonal labor constitutes an equal, non-
taxable exchange of property.
3. Taxable income from wages or other
compensation for personal services
can only be determined after deduc-
tion of the cost of providing the labor.
LAW AND ANALYSIS
1. Article 1, Section 2, Clause 3 of
the United States Constitution states that
“direct Taxes shall be apportioned among
the several States which may be included
within this Union, according to their re-
spectiveNumbers....”Thisstatement
has been used to support the argument
that there is a constitutional impediment
to the imposition of a direct tax on an in-
dividual’s wages. The Sixteenth Amend-
ment to the Constitution, ratified in 1913,
provides that “[t]he Congress shall have
power to lay and collect taxes on incomes,
from whatever source derived, without ap-
portionment among the several States, and
without regard to any census or enumera-
tion.” The Sixteenth Amendment has been
reviewed by the Supreme Court and up-
held.Brushaber v. Union Pacific Rail-
road Co., 240 U.S. 1 (1916). Thus, the im-
position of income tax on wages, without
apportionment among the states, is autho-
rized.See, e.g., Funk v. Commissioner,
687 F.2d 264 (8th Cir. 1982);Abrams v.
Commissioner, 82 T.C. 403 (1984).
Section 61(a) of the Internal Revenue
Code defines gross income as income from
whatever source derived, including (but
not limited to) “compensation for services,
including fees, commissions, fringe bene-
fits, and similar items.” I.R.C. § 61(a)(1).
Courts consistently have upheld the de-
termination that wages fall within section
61(a)(1)’s definition of compensation and,
accordingly, constitute taxable income.
See,e.g.,Ledford v. United States,297
F.3d 1378 (Fed. Cir. 2002);United States
v. Connor, 898 F.2d 942 (3d Cir. 1990);
Casper v. Commissioner, 805 F.2d 902
(10th Cir. 1986);Connor v. Commis-
sioner, 770 F.2d 17 (2d Cir. 1985);Lovell
v. United States, 755 F.2d 517 (7th Cir.
1984);Perkins v. Commissioner, 746 F.2d
1187 (6th Cir. 1984);Funk v. Commis-
2007–14 I.R.B.843April 2, 2007

sioner, 687 F.2d 264 (8th Cir. 1982);
Lonsdale v. Commissioner, 661 F.2d 71
(5th Cir. 1981);Rowlee v. Commissioner,
80 T.C. 1111 (1983).
InUnited States v. Connor, 898 F.2d at
943, the Third Circuit noted that “[e]very
court which has ever considered the issue
has unequivocally rejected the argument
that wages are not income.” All income re-
ceived by a taxpayer is income under sec-
tion 61 unless it is specifically exempted or
excluded.See Commissioner v. Glenshaw
Glass Co., 348 U.S. 426, 429–30 (1955)
(“Congress applied no limitations as to the
source of taxable receipts, nor restrictive
labels as to the intention of Congress to
tax all gains except those specifically ex-
empted.”).
2. Some taxpayers claim that the pay-
ment of wages or other compensation in
exchange for personal labor is a nontax-
able exchange of property. These taxpay-
ers sometimes rely on sections 83 or 1001
of the Internal Revenue Code to support
this argument. Section 83 provides for the
determination of the amount to be included
in gross income and the timing of the inclu-
sion when property is transferred to an em-
ployee or independent contractor in con-
nection with the performance of services.
Section 1001 provides for the determina-
tion of the amount and timing of the recog-
nition of gain or loss from the sale or other
disposition of property.
Courts have universally rejected the
argument that labor is property that can
be exchanged for wages or other compen-
sation in a nontaxable transaction.See
Casper v. Commissioner, 805 F.2d at 905;
Funk v. Commissioner, 687 F.2d at 265.
Courts recognize a distinction between
selling labor and selling or exchanging
property.See Reading v. Commissioner,
70 T.C. 730, 733–34 (1978),aff’d,614
F.2d 159 (8th Cir. 1980). Further, the
courts have concluded that a taxpayer has
no tax basis in one’s labor and, therefore,
thefullamountofthewagesorothercom-
pensation received represents gain which
may be taxed as income.See,e.g.,Casper,
805 F.2d at 905;Abrams,82T.C.at407;
Reading, 70 T.C. at 733–34.
3. A related argument is that income
from the sale of labor cannot be deter-
mined until the taxpayer’s investment in
that labor has been recovered. This ar-
gument has been repeatedly rejected.See
Rowlee,80T.C.at1120;Reading,70T.C.
at 733–34. InReading,theTaxCourtex-
amined the contention that gain must be
realized for there to be income, analyz-
ing the distinction recognized under fed-
eral tax law between producing a physical
product and providing services. The court
flatly rejected the idea that living expenses
constitute the cost of “goods” sold for pro-
viding labor or services.Reading,70T.C.
at 733–34. Thus, the court concluded that
the gain from the sale of labor is the en-
tire amount received and upheld the disal-
lowance of deductions for personal living
expenses.
Courts have uniformly rejected argu-
ments that wages and other compensation
for personal services are not taxable in-
come. Accordingly, raising these argu-
ments justifies the imposition of sanctions.
See Ledford v. United States, 297 F.3d
at 1381–82 (Fed. Cir. 2002);Casper v.
Commissioner, 805 F.2d at 906;Connor v.
Commissioner, 770 F.2d at 20.
HOLDING
1. Wages fall within the definition of in-
come set forth in section 61(a)(1) of
the Internal Revenue Code. Taxpayer
A’s wages and other compensation for
services are income subject to federal
income tax and must be reported on
Taxpayer A’s federal income tax re-
turn.
2. The payment of wages and other com-
pensation for personal services is not
an equal exchange of property. The
full amount of wages received by Tax-
payer A is subject to federal income
tax and must be reported on Taxpayer
A’s federal income tax return.
3. Wages and other compensation re-
ceived by Taxpayer A in exchange
for personal services are subject to
federal income tax without reduction
of Taxpayer A’s personal living ex-
penses.
CIVIL AND CRIMINAL PENALTIES
The Service will challenge the claims
of individuals who improperly attempt to
avoid or evade their federal tax liability.
In addition to liability for the tax due plus
statutory interest, taxpayers who fail to file
valid returns or pay tax based on arguments
that wages and other compensation for per-
sonal services are exempt from federal in-
come tax face substantial civil and crimi-
nal penalties. Potentially applicable civil
penalties include: (1) the section 6662 ac-
curacy-related penalties, which are gen-
erally equal to 20 percent of the amount
of tax the taxpayer should have paid; (2)
the section 6663 penalty for civil fraud,
which is equal to 75 percent of the amount
of tax the taxpayer should have paid; (3)
the section 6702(a) penalty of $5,000 for
a “frivolous tax return”; (4) the section
6702(b) penalty of $5,000 for submitting
a “specified frivolous submission”; (5) the
section 6651 additions to tax for failure to
file a return, failure to pay the tax owed,
and fraudulent failure to file a return; (6)
the section 6673 penalty of up to $25,000
if the taxpayer makes frivolous arguments
in the United States Tax Court; and (7) the
section 6682 penalty of $500 for providing
false information with respect to withhold-
ing.
Taxpayers relying on these frivolous
positions also may face criminal prosecu-
tion under: (1) section 7201 for attempt-
ing to evade or defeat tax, the penalty
for which is a significant fine and im-
prisonment for up to 5 years; (2) section
7203 for willful failure to file a return,
the penalty for whichis a significant fine
and imprisonment for up to one year; (3)
section 7206 for making false statements
on a return, statement, or other document,
the penalty for whichis a significant fine
and imprisonment for up to 3 years; or (4)
other provisions of federal law.
Persons, including return preparers,
who promote these frivolous positions and
those who assist taxpayers in claiming tax
benefits based on frivolous positions may
face civil and criminal penalties and also
may be enjoined by a court pursuant to
sections 7407 and 7408. Potential penal-
ties include: (1) a $250 penalty under
section 6694 for each return or claim for
refund prepared by an income tax return
preparer who knew or should have known
that the taxpayer’s position was frivolous
(or $1,000 for each return or claim for
refund if the return preparer’s actions
were willful, intentional or reckless); (2) a
penalty under section 6700 for promoting
abusive tax shelters; (3) a $1,000 penalty
under section 6701 for aiding and abetting
the understatement of tax; and (4) criminal
prosecution under section 7206, for which
April 2, 20078442007–14 I.R.B.

the penalty is a significant fine and impris-
onment for up to 3 years, for assisting or
advising about the preparation of a false
return, statement or other document under
the internal revenue laws.
DRAFTING INFORMATION
This revenue ruling was authored by the
Office of Associate Chief Counsel (Pro-
cedure & Administration), Administrative
Provisions and Judicial Practice Division.
For further information regarding this rev-
enue ruling, contactthat office at (202)
622–7950 (not a toll-free call).
Section 168.—Accelerated
Cost Recovery System
26 CFR 1.168(a)–1: Modified accelerated cost re-
covery system.
T.D. 9314
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Depreciation of MACRS
Property That is Acquired in
aLike-KindExchangeorAs
a Result of an Involuntary
Conversion
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains fi-
nal regulations relating to the deprecia-
tion of property subject to the accelerated
cost recovery system under section 168
of the Internal Revenue Code (MACRS
property). Specifically, these final regu-
lations provide guidance on how to de-
preciate MACRS property acquired in a
like-kind exchange under section 1031 or
as a result of an involuntary conversion un-
der section 1033 when both the acquired
and relinquished property are subject to
MACRS in the hands of the acquiring tax-
payer. These final regulations will af-
fect taxpayers involved in a like-kind ex-
change under section 1031 or an involun-
tary conversion under section 1033. The
corresponding temporary regulations are
removed.
DATES:Effective Dates:These regula-
tions are effective on February 26, 2007.
Applicability Dates:For dates of
applicability,see §§1.168(a)–1(b),
1.168(b)–1(b),1.168(d)–1(d)(3),
1.168(i)–1(l),1.168(i)–6(k),and
1.168(k)–1(g)(3)(ii).
FOR FURTHER INFORMATION
CONTACT: Patrick S. Kirwan, (202)
622–3110 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to
26 CFR part 1 under section 168 of the
Internal Revenue Code (Code). Section
168 provides the depreciation deduction
for tangible property generally placed in
service after December 31, 1986.
On March 1, 2004, the IRS and the
Treasury Department published in the
Federal Register(69 FR 9529) tempo-
rary regulations (T.D. 9115, 2004–1 C.B.
680) relating to the depreciation allow-
able for tangible property of a character
subject to the allowance for depreciation
provided in section 167(a) that is generally
placed in service after December 31, 1986,
and is subject to section 168 (MACRS
property) that is acquired in a like-kind
exchange or as a result of involuntary
conversion. On the same date the IRS
published a notice of proposed rulemaking
related to this topic in theFederal Regis-
ter(REG–106590–00, REG–138499–02,
2004–1 C.B. 704 [69 FR 9560]). No
public hearing on the regulations was re-
quested or held. Several written comments
to the notice of proposed rulemaking were
received. After consideration of all the
comments received, the proposed regu-
lations are adopted as amended by this
Treasury decision, and the corresponding
temporary regulations are removed. The
revisions to the proposed regulations are
discussed in this preamble. Unless other-
wise specifically stated, references to the
temporary regulations are to T.D. 9115.
General Overview
Section 167 allows as a depreciation de-
duction a reasonable allowance for the ex-
haustion, wear, and tear of property used
in a trade or business or held for the pro-
duction of income. The depreciation al-
lowable for depreciable tangible property
placed in service after 1986 generally is
determined under section 168. Section
1001 generally provides for the recogni-
tion of gain or loss on the sale or exchange
of property. Under section 1031(a)(1), no
gain or loss is recognized on an exchange
of property held for productive use in a
trade or business or for investment if the
property is exchanged solely for property
of like kind that is to be held either for
productive use in a trade or business or
for investment. Section 1031(b) provides
that if an exchange would be within the
provision of section 1031(a) were it not
for the fact that the property received in
the exchange consists not only of prop-
erty permitted to be received in such an
exchange, but also of other property or
money, then the gain, if any, to the recip-
ient shall be recognized, but in an amount
not in excess of the sum of such money and
the fair market value of such other prop-
erty. Under section 1031(c), no loss from
a transaction that also involves other prop-
erty or money is recognized. Under sec-
tion 1031(d), the basis of property acquired
in an exchange described in section 1031 is
the same as that of the property exchanged,
decreased by the amount of any money re-
ceived by the taxpayer and increased by
the amount of gain (or decreased by the
amount of loss) that was recognized on
such exchange.
Section 1033(a)(1) provides that if
property (as a result of its destruction in
whole or in part, theft, seizure, or req-
uisition or condemnation or threat or
imminence thereof) is compulsorily or in-
voluntarily converted into property similar
or related in service or use to the prop-
erty so converted, no gain is recognized.
Under section 1033(b)(1), the basis of
property acquired by the taxpayer in such
a transaction is the basis of the converted
property. Under section 1033(a)(2)(A), if
property is compulsorily or involuntarily
converted into money or into property not
similar or related in service or use to the
converted property, and, within the time
frame described in section 1033(a)(2)(B),
2007–14 I.R.B.845April 2, 2007

the taxpayer purchases other property that
is related in service or use to the converted
property or purchases stock in the acqui-
sition of control of a corporation owning
such property, then the taxpayer may elect
to recognize gain only to the extent that
the amount realized upon such conversion
exceeds the cost of such other property
or stock. Under section 1033(b)(2), if
such an election is made, the basis of the
replacement property acquired by the tax-
payer generally is the cost of that property
decreased by any gain not recognized by
reason of section 1033(a)(2).
Summary of Comments and
Explanation of Provisions
Scope
In general, the final regulations adopt
the rules outlined in the proposed and
temporary regulations with the addition of
some clarifying language and examples
provided in response to comments. The
temporary regulations provided guidance
as to how to determine the annual de-
preciation allowance under section 168
for replacement property acquired in a
like-kind exchange or involuntary conver-
sion. However, the temporary regulations
did not apply to a like-kind exchange or
involuntary conversion if the allowance
for depreciation of either the relinquished
or replacement property is computed
under a depreciation system other than
section 168 (MACRS), or for which a tax-
payer made a valid election under section
168(f)(1) to exclude it from the applica-
tion of MACRS. A commentator requested
that the final regulations apply to all prop-
erty acquired in a like-kind exchange or
involuntary conversion. However, it is an-
ticipated that the vast majority of like-kind
exchanges and involuntary conversions
occurring after the effective date of the
final regulations will involve the exchange
of MACRS property. In addition, there are
differences between MACRS and other
depreciation systems which would require
the creation of additional rules which
would only apply in a limited number of
circumstances. Furthermore, certain types
of property are statutorily excluded from
being treated as MACRS property. There-
fore, the final regulations do not adopt the
commentator’s suggestion. However, the
final regulations allow a taxpayer to elect
to treat the sum of the exchanged basis
and excess basis of the replacement prop-
erty as MACRS property that is placed
in service at the time of replacement if
the tangible depreciable property acquired
by a taxpayer in a like-kind exchange or
involuntary conversion replaces tangible
depreciable property for which the tax-
payer made a valid election under section
168(f)(1) to exclude it from the application
of MACRS. For example, a taxpayer that
exchanges a machine depreciated under
the unit of production method for a used
machine may depreciate under MACRS
the sum of the exchanged basis and excess
basis of the used machine (replacement
property) as a machine placed in service
at the time of replacement.
Optional Depreciation Tables
Fortaxpayerswhowishtousetheop-
tional depreciation tables to determine the
depreciation allowances for the replace-
ment MACRS property instead of the
formulas (for example, see section 6 of
Rev. Proc. 87–57, 1987–2 C.B. 687, 692),
the final regulations provide guidance on
choosing the applicable optional table as
well as how to modify the calculation for
computing the depreciation allowances
for the replacement MACRS property. A
commentator notedthat under the tem-
porary regulations depreciation computed
using the optional tables could be differ-
ent than the depreciation computed using
the formulas and suggested adopting a
different transaction coefficient. The IRS
and Treasury recognize that use of the
optional depreciation tables may result in
a different computation of depreciation.
Nonetheless, the optional depreciation
tables are intended to provide an alterna-
tive method of calculating depreciation
for taxpayers. Furthermore, the transac-
tion coefficient formula provided in the
temporary regulations is consistent with
transaction coefficient formulas provided
in other depreciation guidance. Therefore,
the final regulations retain the rules pro-
vided in the temporary regulations.
Depreciation Convention Provisions
Several comments were received about
the application of the depreciation conven-
tion provisions under the temporary reg-
ulations. In response to these comments,
several changes were made in the final reg-
ulations. Section 1.168(i)–6(c)(5)(ii)(A)
was added in order to provide an expla-
nation of the applicable convention sepa-
rate from the explanation of the rule for
determining the remaining recovery pe-
riod for the replacement MACRS prop-
erty. Section 1.168(i)–6(c)(4)(v) specifi-
cally addresses the convention that applies
to the exchanged basis when the year of
replacement is after the year of disposi-
tion and the relinquished MACRS prop-
erty was placed in service in the year of
disposition. Section 1.168(i)–6(c)(5)(i)(B)
of the final regulations contains a new rule
that provides that if, using the convention
that applies to the relinquished MACRS
property, the remaining recovery period of
the relinquished MACRS property at the
beginning of the year of disposition is less
than the number of months between the
first of that year and the time of dispo-
sition, the entire basis in the relinquished
MACRS property is deductible in the year
of disposition and the exchanged basis is
zero. In light of this new rule,Example
4of §1.168(i)–6T(c)(6) of the temporary
regulations has been replaced byExample
5of §1.168(i)–6(c)(6).
Deferred Exchanges
The temporary regulations did not per-
mit a taxpayer to take depreciation on re-
linquished MACRS property during the
period between the disposition of the relin-
quished MACRS property and the acquisi-
tion of the replacement MACRS property.
A comment was received which noted that
under the half-year convention if relin-
quished MACRS property is disposed of
in year 1 and the replacement MACRS
property is not acquired until year 2, the
taxpayerwouldonlybeentitledtodeduct
a half-year of depreciation in each year.
The IRS and Treasury Department recog-
nize that this resultcould occur under the
convention rules. However, similar re-
sultsoccurwhenpropertyisdisposedof
and replaced in a transaction to which sec-
tion 1031 or section 1033 do not apply.
In addition, the IRS and Treasury Depart-
ment believe that a taxpayer cannot de-
preciate property the taxpayer does not
own. Therefore, the final regulations re-
tain the rule provided in the temporary reg-
ulations with respect to this issue. The fi-
nal regulations reserve on providing spe-
April 2, 20078462007–14 I.R.B.

cific guidance as to whether an intermedi-
ary (such as an exchange accommodation
titleholder) is entitled to depreciation.
Acquisition Pri
or to Disposition for an
Involuntary Co
nversion
The temporary regulations allowed
taxpayers to begin depreciating replace-
ment property upon acquisition even if the
acquisition occurs prior the disposition
of the relinquished property if the re-
placement property is acquired to meet the
requirements of section 1033(a)(2)(B) (ac-
quisition under threat of condemnation).
However, the temporary regulations also
required taxpayers to include in taxable
income any excess depreciation allowable
on the unadjusted depreciable basis of the
replacement MACRS property over the
depreciation allowable on the excess basis
of the replacement MACRS property from
the date the replacement MACRS prop-
erty was placed in service by the taxpayer
to the time of disposition of the relin-
quished MACRS property. A comment
was received suggesting that taxpayers be
permitted to reduce the exchanged basis of
the replacement property by the excess de-
preciation rather than requiring a taxpayer
to recognize the excess depreciation as
taxable income. This suggestion was not
adopted in the final regulations because it
would have the effect of inappropriately
accelerating depreciation deductions for
the replacement property.
Exchanges of Multiple Properties
The determination of the basis of prop-
erty acquired in a like-kind exchange in-
volving multiple properties is described in
§1.1031(j)–1 and the determination of the
basis of multiple properties acquired as a
result of an involuntary conversion is de-
scribed in §1.1033(b)–1. Commentators
requested examples to show how the tem-
porary regulations apply to the deprecia-
tion treatment of a like-kind exchange or
an involuntary conversion involving mul-
tiple properties. Other commentators sug-
gested that taxpayers be permitted to use
any reasonable, consistent method of al-
locating basis among the properties. The
IRS and Treasury Department believe that
these comments concern the allocation of
basis principles under sections 1031 and
1033, rather than the depreciation rules
under section 168. Once basis in prop-
erty is determined or allocated under sec-
tion 1031 or section 1033, these final reg-
ulations would then apply for determin-
ing the depreciation allowable with respect
to such basis. The IRS and Treasury De-
partment believe that issues related to al-
location of basis among multiple proper-
ties involved in like-kind exchanges or in-
voluntary conversions for purposes of de-
preciation are beyond the scope of the fi-
nal regulations. Therefore the final regu-
lations do not address these issues. How-
ever, the IRS and Treasury Department in-
tend to invite interested parties to submit
written comments regarding whether ad-
ditional published guidance is needed in
this area, and to invite written comments
that specifically propose or address possi-
ble resolutions to these issues.
Transactions Involving Nondepreciable
Property
A commentator requested guidance as
to how depreciation is calculated if the
relinquished property was only partially
used for business purposes. In response
to this comment, the final regulations pro-
vide an example to show how depreciation
is calculated on replacement property re-
ceived in exchange for property that was
used only partially for business purposes
(seeExample 2in §1.168(i)–6(d)(3)(iii)).
General Asset Accounts
Under the temporary regulations, gen-
eral asset account treatment terminates
for the relinquished MACRS property as
of the first day of the year of disposition.
Because this rule would require taxpayers
to track each property in a general asset
account, the IRS and Treasury Department
requested comments on alternative meth-
ods to account for a like-kind exchange or
involuntary conversion involving MACRS
property contained in a general asset ac-
count when the replacement MACRS
property has a longer recovery period
or less accelerated depreciation method
than the relinquished MACRS property or
when the basis of the general asset account
would change as a result of the like-kind
exchange or involuntary conversion. No
comments were received on this rule and
no alternatives were suggested. Therefore,
the regulations are adopted as proposed.
Effective Date
These final regulations generally apply
to a like-kind exchange or an involuntary
conversion of MACRS property for which
the time of disposition and the time of re-
placement both occur after February 27,
2004. For a like-kind exchange or an in-
voluntary conversion of MACRS property
for which the time of disposition, the time
of replacement, or both occur on or be-
fore February 27, 2004, a taxpayer may ap-
ply these final regulations or rely on prior
guidance issued by the IRS.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations and,
because these regulations do not impose a
collection of information requirement on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility Anal-
ysis is not required. Pursuant to section
7805(f) of the Code, the notice of proposed
rulemaking preceding these final regula-
tions was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is Patrick S. Kirwan, Office of the
Associate Chief Counsel (Passthroughs
and Special Industries). However, other
personnel from the IRS and Treasury
Department participated in their develop-
ment.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
2007–14 I.R.B.847April 2, 2007

Par. 2. Sections 1.168(a)–1 and
1.168(b)–1 are added to read as follows:
§1.168(a)–1 Modified accelerated cost
recovery system.
(a) Section 168 determines the depreci-
ation allowance for tangible property that
is of a character subject to the allowance
for depreciation provided in section 167(a)
and that is placed in service after Decem-
ber 31, 1986 (or after July 31, 1986, if
the taxpayer made an election under sec-
tion 203(a)(1)(B) of the Tax Reform Act
of 1986; 100 Stat. 2143). Except for prop-
erty excluded from the application of sec-
tion 168 as a result of section 168(f) or
as a result of a transitional rule, the pro-
visions of section 168 are mandatory for
all eligible property. The allowance for
depreciation under section 168 constitutes
the amount of depreciation allowable un-
der section 167(a). The determination of
whether tangible property is property of a
character subject to the allowance for de-
preciation is made under section 167 and
the regulations under section 167.
(b) This section is applicable on and
after February 27, 2004.
§1.168(b)–1 Definitions.
(a)Definitions. For purposes of section
168 and the regulations under section 168,
the following definitions apply:
(1)Depreciable propertyis property
that is of a character subject to the al-
lowance for depreciation as determined
under section 167 and the regulations un-
der section 167.
(2)MACRS propertyis tangible, depre-
ciable property that is placed in service af-
ter December 31, 1986 (or after July 31,
1986, if the taxpayer made an election un-
der section 203(a)(1)(B) of the Tax Reform
Act of 1986; 100 Stat. 2143) and subject to
section 168, except for property excluded
from the application of section 168 as a re-
sult of section 168(f) or as a result of a tran-
sitional rule.
(3)Unadjusted depreciable basisis the
basis of property for purposes of section
1011 without regard to any adjustments de-
scribed in section 1016(a)(2) and (3). This
basis reflects the reduction in basis for the
percentage of the taxpayer’s use of prop-
erty for the taxable year other than in the
taxpayer’s trade or business (or for the pro-
duction of income), for any portion of the
basis the taxpayer properly elects to treat
as an expense under section 179, section
179C, or any similar provision, and for any
adjustments to basis provided by other pro-
visions of the Internal Revenue Code and
the regulations under the Code (other than
section 1016(a)(2) and (3)) (for example,
areductioninbasisbytheamountofthe
disabled access credit pursuant to section
44(d)(7)). For property subject to a lease,
see section 167(c)(2).
(4)Adjusted depreciable basisis the
unadjusted depreciable basis of the prop-
erty, as defined in §1.168(b)–1(a)(3),
less the adjustments described in section
1016(a)(2) and (3).
(b)Effective date.Thissectionisappli-
cable on or after February 27, 2004.
§§1.168(a)–1T and 1.168(b)–1T
[Removed]
Par. 3. Sections 1.168(a)–1T and
1.168(b)–1T are removed.
Par. 4. Section 1.168(d)–1 is amended
by revising the section heading and para-
graphs (b)(3) and (d)(3) to read as follows:
§1.168(d)–1 Applicable
conventions—half-year and mid-quarter
conventions.
*****
(b) * * *
(3)Property placed in service and dis-
posed of in the same taxable year.(i)Un-
der section 168(d)(3)(B)(ii), the deprecia-
ble basis of property placed in service and
disposed of in the same taxable year is not
taken into account in determining whether
the 40-percent test is satisfied. However,
the depreciable basis of property placed
in service, disposed of, subsequently reac-
quired, and again placed in service, by the
taxpayer in the same taxable year must be
taken into account in applying the 40-per-
cent test, but the basis of the property is
only taken into account on the later of the
dates that the property is placed in service
by the taxpayer during the taxable year.
Further, see §§1.168(i)–6(c)(4)(v)(B) and
1.168(i)–6(f) for rules relating to property
placed in service and exchanged or invol-
untarily converted during the same taxable
year.
(ii) The applicable convention, as de-
termined under this section, applies to
all depreciable property (except nonres-
idential real property, residential rental
property, and any railroad grading or
tunnel bore) placed in service by the
taxpayer during the taxable year, ex-
cluding property placed in service and
disposed of in the same taxable year.
However, see §§1.168(i)–6(c)(4)(v)(A)
and 1.168(i)–6(f) for rules relating to
MACRS property that has a basis deter-
mined under section 1031(d) or section
1033(b). No depreciation deduction is
allowed for property placed in service
and disposed of during the same taxable
year. However, see §1.168(k)–1(f)(1)
for rules relating to qualified property
or 50-percent bonus depreciation prop-
erty, and §1.1400L(b)–1(f)(1) for rules
relating to qualified New York Liberty
Zone property, that is placed in service by
the taxpayer in the same taxable year in
which either a partnership is terminated as
a result of a technical termination under
section 708(b)(1)(B) or the property is
transferred in a transaction described in
section 168(i)(7).
*****
(d) * * *
(3)Like-kind exchanges and involun-
tary conversions. The last sentence in
paragraph (b)(3)(i) and the second sen-
tence in paragraph (b)(3)(ii) of this sec-
tion apply to exchanges to which section
1031 applies, and involuntary conversions
towhichsection1033applies,ofMACRS
property for which the time of disposition
and the time of replacement both occur af-
ter February 27, 2004.
§1.168
(d)–1T [Removed]
Par. 5. Section 1.168(d)–1T is re-
moved.
Par. 6. Section 1.168(i)–0 is amended
as follows:
1. The entries for §1.168(i)–1(d)(2),
(e)(3)(i), (e)(3)(v), (e)(3)(vi), (f), (f)(1),
(f)(2), (f)(2)(i), (i), (j), and (l) are revised.
2. The entries for §1.168(i)–1(l)(1),
(l)(2), and (l)(3) are added.
The revisions and additions read as fol-
lows:
§1.168(i)–0 Table of contents for the
general asset account rules.
*****
§1.168(i)–1 General asset accounts.
*****
April 2, 20078482007–14 I.R.B.

(d) * * *
(2) Special rule for passenger automo-
biles.
*****
(e) * * *
(3) * * *
(i) In general.
*****
(v) Transactions subject to section 1031
or 1033.
(vi) Anti-abuse rule.
*****
(f) Assets generating foreign source in-
come.
(1) In general.
(2) Source of ordinary income, gain, or
loss.
(i) Source determined by allocation and
apportionment of depreciation allowed.
*****
(i)Identificationofdisposedorcon-
verted asset.
(j) Effect of adjustments on prior dispo-
sitions.
*****
(l) Effective date.
(1) In general.
(2) Exceptions.
(3) Like-kind exchanges and involun-
tary conversions.
§1.168(i)–0T [Removed]
Par. 7. Section 1.168(i)–0T is removed.
Par. 8. Section 1.168(i)–1 is amended
as follows:
1.Paragraphs (d)(2), (e)(3)(i),
(e)(3)(iii)(B)(4), (e)(3)(v), (e)(3)(vi),
(f)(1), (f)(2)(i), (i), (j), (l)(1), and (l)(3) are
revised.
2. The first sentence in paragraph
(l)(2)(ii)(B) is amended by removing the
language “as modified by Rev. Proc.
2004–11, 2004–1 C.B. 311”.
The revisions read as follows:
§1.168(i)–1 General asset accounts.
*****
(d) * * *
(2)Special rule for passenger automo-
biles. For purposes of applying section
280F(a), the depreciation allowance for
a general asset account established for
passenger automobiles is limited for each
taxable year to the amount prescribed in
section 280F(a) multiplied by the excess
of the number of automobiles originally
included in the account over the number of
automobiles disposed of during the taxable
year or in any prior taxable year in a trans-
action described in paragraph (e)(3)(iii)
(disposition of an asset in a qualifying dis-
position), (e)(3)(iv) (transactions subject
to section 168(i)(7)), (e)(3)(v) (transac-
tions subject to section 1031 or 1033),
(e)(3)(vi) (anti-abuse rule), (g) (assets
subject to recapture), or (h)(1) (conversion
to personal use) of this section.
(e) * * *
(3) * * *
(i)In general. This paragraph (e)(3)
provides the rules for terminating general
asset account treatment upon certain dis-
positions. While the rules under para-
graphs (e)(3)(ii) and (iii) of this section are
optional rules, the rules under paragraphs
(e)(3)(iv), (v), and (vi) of this section are
mandatory rules. A taxpayer applies para-
graph (e)(3)(ii) or (iii) of this section by re-
porting the gain, loss, or other deduction
on the taxpayer’s timely filed Federal in-
come tax return (including extensions) for
the taxable year in which the disposition
occurs. For purposes of applying para-
graph (e)(3)(iii) through (vi) of this sec-
tion, see paragraph (i) of this section for
identifying the unadjusted depreciable ba-
sis of a disposed asset.
*****
(iii) * * *
(B)***
(4) A transaction, other than a trans-
action described in paragraphs (e)(3)(iv)
(pertaining to transactions subject to sec-
tion 168(i)(7)) and (e)(3)(v) (pertaining
to transactions subject to section 1031
or 1033) of this section, to which a non-
recognition section of the Code applies
(determined without regard to this sec-
tion).
*****
(v)Transactions subject to section
1031 or section 1033—(A)Like-kind ex-
change or involuntary conversion of all
assets remaining in a general asset ac-
count. If all the assets, or the last asset,
in a general asset account are transferred
by a taxpayer in a like-kind exchange (as
defined under §1.168–6(b)(11)) or in an
involuntary conversion (as defined under
§1.168–6(b)(12)), the taxpayer must ap-
ply this paragraph (e)(3)(v)(A) (instead
of applying paragraph (e)(2), (e)(3)(ii),
or (e)(3)(iii) of this section). Under this
paragraph (e)(3)(v)(A), the general as-
set account terminates as of the first day
of the year of disposition (as defined in
§1.168(i)–6(b)(5)) and—
(1) The amount of gain or loss for the
general asset account is determined under
section 1001(a) by taking into account the
adjusted depreciable basis of the general
asset account at the time of disposition
(as defined in §1.168(i)–6(b)(3)). The
depreciation allowance for the general
asset account in the year of disposition
is determined in the same manner as
the depreciation allowance for the relin-
quished MACRS property (as defined in
§1.168(i)–6(b)(2)) in the year of dispo-
sition is determined under §1.168(i)–6.
The recognition and character of gain or
loss are determined in accordance with
paragraph (e)(3)(ii)(A) of this section
(notwithstanding thatparagraph (e)(3)(ii)
of this section is an optional rule); and
(2) The adjusted depreciable basis of
the general asset account at the time of dis-
position is treated as the adjusted depre-
ciable basis of the relinquished MACRS
property.
(B)Like-kind exchange or involuntary
conversion of less than all assets remain-
ing in a general asset account. If an asset
in a general asset account is transferred
by a taxpayer in a like-kind exchange or
in an involuntary conversion and if para-
graph (e)(3)(v)(A) of this section does
not apply to this asset, the taxpayer must
apply this paragraph (e)(3)(v)(B) (instead
of applying paragraph (e)(2), (e)(3)(ii), or
(e)(3)(iii) of this section). Under this para-
graph (e)(3)(v)(B), general asset account
treatment for the asset terminates as of
the first day of the year of disposition (as
defined in §1.168(i)–6(b)(5)), and—
(1) The amount of gain or loss for the
asset is determined by taking into account
the asset’s adjusted basis at the time of dis-
position (as defined in §1.168(i)–6(b)(3)).
The adjusted basis of the asset at the
time of disposition equals the unadjusted
depreciable basis of the asset less the de-
preciation allowed or allowable for the
asset, computed by using the depreciation
method, recovery period, and convention
applicable to the general asset account in
which the asset was included. The depreci-
ation allowance for the asset in the year of
disposition is determined in the same man-
ner as the depreciation allowance for the
2007–14 I.R.B.849April 2, 2007

relinquished MACRS property (as defined
in §1.168(i)–6(b)(2)) in the year of dis-
position is determined under §1.168(i)–6.
The recognition and character of the gain
or loss are determined in accordance with
paragraph (e)(3)(iii)(A) of this section
(notwithstanding thatparagraph (e)(3)(iii)
of this section is an optional rule); and
(2) As of the first day of the year of dis-
position, the taxpayer must remove the re-
linquished asset from the general asset ac-
count and make the adjustments to the gen-
eral asset account described in paragraph
(e)(3)(iii)(C)(2) through (4)ofthissection.
(vi)Anti-abuse rule—(A)In general.
If an asset in a general asset account is
disposed of by a taxpayer in a transaction
described in paragraph (e)(3)(vi)(B) of
this section, general asset account treat-
ment for the asset terminates as of the
first day of the taxable year in which the
disposition occurs. Consequently, the
taxpayer must determine the amount of
gain, loss, or other deduction attribut-
able to the disposition in the manner de-
scribed in paragraph (e)(3)(iii)(A) of this
section (notwithstanding that paragraph
(e)(3)(iii)(A) of this section is an optional
rule) and must make the adjustments to the
general asset account described in para-
graph (e)(3)(iii)(C)(1) through (4)ofthis
section.
(B)Abusive transactions. A transaction
is described in this paragraph (e)(3)(vi)(B)
if the transaction is not described in para-
graph (e)(3)(iv) or (e)(3)(v) of this sec-
tion and the transaction is entered into, or
made, with a principal purpose of achiev-
ing a tax benefit or result that would not
be available absent an election under this
section. Examples of these types of trans-
actions include—
(1) A transaction entered into with a
principal purpose of shifting income or de-
ductions among taxpayers in a manner that
would not be possible absent an election
under this section in order to take advan-
tage of differing effective tax rates among
the taxpayers; or
(2) An election made under this section
with a principal purpose of disposing of an
asset from a general asset account in or-
der to utilize an expiring net operating loss
or credit. The fact that a taxpayer with a
net operating loss carryover or a credit car-
ryover transfers an asset to a related per-
son or transfers an asset pursuant to an ar-
rangement where the asset continues to be
used (or is available for use) by the tax-
payer pursuant to a lease (or otherwise) in-
dicates, absent strong evidence to the con-
trary, that the transaction is described in
this paragraph (e)(3)(vi)(B).
(f) * * *
(1)In general. This paragraph (f) pro-
vides the rules for determining the source
of any income, gain, or loss recognized,
and the appropriate section 904(d) separate
limitation category or categories for any
foreign source income, gain, or loss recog-
nized, on a disposition (within the meaning
of paragraph (e)(1) of this section) of an as-
set in a general asset account that consists
of assets generating both United States and
foreign source income. These rules apply
only to a disposition to which paragraph
(e)(2) (general disposition rules), (e)(3)(ii)
(disposition of all assets remaining in a
general asset account), (e)(3)(iii) (disposi-
tion of an asset in a qualifying disposition),
(e)(3)(v) (transactions subject to section
1031 or 1033), or (e)(3)(vi) (anti-abuse
rule) of this section applies.
(2) * * *
(i)Source determined by allocation and
apportionmentofdepreciation allowed.
The amount of any ordinary income, gain,
or loss that is recognized on the disposition
of an asset in a general asset account must
be apportioned between United States and
foreign sources based on the allocation
and apportionment of the—
(A) Depreciation allowed for the gen-
eral asset account as of the end of the tax-
able year in which the disposition occurs
if paragraph (e)(2) of this section applies
to the disposition;
(B) Depreciation allowed for the gen-
eral asset account as of the time of dis-
position if the taxpayer applies paragraph
(e)(3)(ii) of this section to the disposition
of all assets, or the last asset, in the general
asset account, or if all the assets, or the last
asset, in the general asset account are dis-
posed of in a transaction described in para-
graph (e)(3)(v)(A) of this section; or
(C) Depreciation allowed for the dis-
posed asset for only the taxable year in
which the disposition occurs if the tax-
payer applies paragraph (e)(3)(iii) of this
section to the disposition of the asset in a
qualifying disposition, if the asset is dis-
posed of in a transaction described in para-
graph (e)(3)(v)(B) of this section (like-
kind exchange or involuntary conversion),
or if the asset is disposed in a transaction
described in paragraph (e)(3)(vi) of this
section (anti-abuse rule).
*****
(i) * * * A taxpayer may use any rea-
sonable method that is consistently applied
to the taxpayer’s general asset accounts
for purposes of determining the unadjusted
depreciable basis of a disposed or con-
verted asset in a transaction described in
paragraph (e)(3)(iii) (disposition of an as-
set in a qualifying disposition), (e)(3)(iv)
(transactions subject to section 168(i)(7)),
(e)(3)(v) (transactions subject to section
1031 or 1033), (e)(3)(vi) (anti-abuse rule),
(g) (assets subject to recapture), or (h)(1)
(conversion to personal use) of this sec-
tion.
(j)Effect of adjustments on prior dis-
positions. The adjustments to a general
asset account under paragraph (e)(3)(iii),
(e)(3)(iv), (e)(3)(v), (e)(3)(vi), (g), or
(h)(1) of this section have no effect on the
recognition and character of prior dispo-
sitions subject to paragraph (e)(2) of this
section.
*****
(l) * * *
(1)In general. Except as provided in
paragraphs (l)(2) and (l)(3) of this section,
this section applies to depreciable assets
placed in service in taxable years ending
on or after October 11, 1994. For depre-
ciable assets placed in service after De-
cember 31, 1986, in taxable years end-
ing before October 11, 1994, the Internal
Revenue Service will allow any reasonable
method that is consistently applied to the
taxpayer’s general asset accounts.
*****
(3)Like-kind exchanges and invol-
untary conversions. This section ap-
plies for an asset transferred by a tax-
payer in a like-kind exchange (as de-
fined under §1.168–6(b)(11)) or in an
involuntary conversion (as defined under
§1.168–6(b)(12)) for which the time of dis-
position (as defined in §1.168(i)–6(b)(3))
and the time of replacement (as defined in
§1.168(i)–6(b)(4)) both occur after Febru-
ary 27, 2004. For an asset transferred by a
taxpayer in a like-kind exchange or in an
involuntary conversion for which the time
of disposition, the time of replacement, or
both occur on or before February 27, 2004,
see §1.168(i)–1 in effect prior to Febru-
ary 27, 2004 (§1.168(i)–1 as contained in
April 2, 20078502007–14 I.R.B.

26 CFR part 1 edition revised as of April
1, 2003).
§1.168(i)–1T [Removed]
Par. 9. Section 1.168(i)–1T is removed.
Par. 10. Section 1.168(i)–5 is added to
read as follows:
§1.168(i)–5 Table of contents.
This section lists the major paragraphs
contained in §1.168(i)–6.
§1.168(i)–6 Like-kind exchanges and
involuntary conversions.
(a) Scope.
(b) Definitions.
(1) Replacement MACRS property.
(2) Relinquished MACRS property.
(3) Time of disposition.
(4) Time of replacement.
(5) Year of disposition.
(6) Year of replacement.
(7) Exchanged basis.
(8) Excess basis.
(9) Depreciable exchanged basis.
(10) Depreciable excess basis.
(11) Like-kind exchange.
(12) Involuntary conversion.
(c) Determination of depreciation al-
lowance.
(1) Computation of the depreciation al-
lowance for depreciable exchanged basis
beginning in the year of replacement.
(i) In general.
(ii) Applicable recovery period, depre-
ciation method, and convention.
(2) Effect of depreciation treatment of
the replacement MACRS property by pre-
vious owners of the acquired property.
(3) Recovery period and/or deprecia-
tion method of the properties are the same,
or both are not the same.
(i) In general.
(ii) Both the recovery period and the
depreciation method are the same.
(iii) Either the recovery period or the
depreciation method is the same, or both
are not the same.
(4) Recovery period or depreciation
method of the properties is not the same.
(i) Longer recovery period.
(ii) Shorter recovery period.
(iii) Less accelerated depreciation
method.
(iv) More accelerated depreciation
method.
(v) Convention.
(A) Either the relinquished MACRS
property or the replacement MACRS
property is mid-month property.
(B) Neither the relinquished MACRS
property nor the replacement MACRS
property is mid-month property.
(5) Year of disposition and year of re-
placement.
(i) Relinquished MACRS property.
(A) General rule.
(B) Special rule.
(ii) Replacement MACRS property.
(A) Remaining recovery period of the
replacement MACRS property.
(B) Year of replacement is 12 months.
(iii) Year of disposition or year of re-
placement is less than 12 months.
(iv) Deferred transactions.
(A) In general.
(B) Allowable depreciation for a quali-
fied intermediary.
(v) Remaining recovery period.
(6) Examples.
(d) Special rules for determining depre-
ciation allowances.
(1) Excess basis.
(i) In general.
(ii) Example.
(2) Depreciable and nondepreciable
property.
(3) Depreciation limitations for auto-
mobiles.
(i) In general.
(ii) Order in which limitations on depre-
ciation under section 280F(a) are applied.
(iii) Examples.
(4) Involuntary conversion for which
the replacement MACRS property is ac-
quired and placed in service before dispo-
sition of relinquished MACRS property.
(e) Use of optional depreciation tables.
(1) Taxpayer not bound by prior use of
table.
(2) Determination of the depreciation
deduction.
(i) Relinquished MACRS property.
(ii) Replacement MACRS property.
(A) Determination of the appropriate
optional depreciation table.
(B) Calculating the depreciation deduc-
tion for the replacement MACRS property.
(iii) Unrecovered basis.
(3) Excess basis.
(4) Examples.
(f) Mid-quarter convention.
(1) Exchanged basis.
(2) Excess basis.
(3) Depreciable property acquired for
nondepreciable property.
(g) Section 179 election.
(h) Additional first year depreciation
deduction.
(i) Elections.
(1) Election not to apply this section.
(2) Election to treat certain replacement
property as MACRS property.
(j) Time and manner of making election
under paragraph (i)(1) of this section.
(1) In general.
(2) Time for making election.
(3) Manner of making election.
(4) Revocation.
(k) Effective date.
(1) In general.
(2) Application to pre-effective date
like-kind exchanges and involuntary con-
versions.
(3) Like-kind exchanges and involun-
tary conversions where the taxpayer made
the election under section 168(f)(1) for the
relinquished property.
§1.168(i)–5T [Removed]
Par. 11. Section 1.168(i)–5T is re-
moved.
Par. 12. Section 1.168(i)–6 is added to
read as follows:
§1.168(i)–6 Like-kind exchanges and
involuntary conversions.
(a)Scope. This section provides the
rules for determining the depreciation al-
lowance for MACRS property acquired
in a like-kind exchange or an involun-
tary conversion, including a like-kind
exchange or an involuntary conversion
of MACRS property that is exchanged or
replaced with other MACRS property in a
transaction between members of the same
affiliated group. The allowance for depre-
ciation under this section constitutes the
amount of depreciation allowable under
section 167(a) for the year of replacement
and any subsequent taxable year for the
replacement MACRS property and for
the year of disposition of the relinquished
MACRS property. The provisions of this
section apply only to MACRS property to
which §1.168(h)–1 (like-kind exchanges
of tax-exempt use property) does not ap-
ply. Additionally, paragraphs (c) through
(f) of this section apply only to MACRS
property for which an election under para-
graph (i) of this section has not been made.
2007–14 I.R.B.851April 2, 2007

(b)Definitions. For purposes of this
section, the following definitions apply:
(1)Replacement MACRS property
is MACRS property (as defined in
§1.168(b)–1(a)(2)) in the hands of the
acquiring taxpayer that is acquired for
other MACRS property in a like-kind ex-
change or an involuntary conversion.
(2)Relinquished MACRS propertyis
MACRS property that is transferred by the
taxpayer in a like-kind exchange, or in an
involuntary conversion.
(3)Time of dispositionis when the
disposition of the relinquished MACRS
property takes place under the convention,
as determined under §1.168(d)–1, that ap-
plies to the relinquished MACRS property.
(4)Time of replacementis the later of—
(i) When the replacement MACRS
property is placed in service under the
convention, as determined under this
section, that applies to the replacement
MACRS property; or
(ii) The time of disposition of the ex-
changed or involuntarily converted prop-
erty.
(5)Year of dispositionis the taxable
year that includes the time of disposition.
(6)Year of replacementis the taxable
year that includes the time of replacement.
(7)Exchanged basisis determined af-
ter the depreciation deductions for the year
of disposition are determined under para-
graph (c)(5)(i) of this section and is the
lesser of—
(i) The basis in the replacement
MACRS property, as determined under
section 1031(d) and the regulations under
section 1031(d) or section 1033(b) and the
regulations under section 1033(b); or
(ii) The adjusted depreciable basis (as
defined in §1.168(b)–1(a)(4)) of the relin-
quished MACRS property.
(8)Excess basisis any excess of the
basis in the replacement MACRS property,
as determined under section 1031(d) and
the regulations under section 1031(d) or
section 1033(b) and the regulations under
section 1033(b), over the exchanged basis
as determined under paragraph (b)(7) of
this section.
(9)Depreciable exchanged basisis the
exchanged basis as determined under para-
graph (b)(7) of this section reduced by—
(i) The percentage of such basis attrib-
utable to the taxpayer’s use of property
for the taxable year other than in the tax-
payer’s trade or business (or for the pro-
duction of income); and
(ii) Any adjustments to basis provided
by other provisions of the Internal Rev-
enue Code (Code) and the regulations un-
der the Code (including section 1016(a)(2)
and (3), for example, depreciation deduc-
tions in the year of replacement allowable
undersection168(k)or1400L(b)).
(10)Depreciable excess basisis the ex-
cess basis as determined under paragraph
(b)(8) of this section reduced by—
(i) The percentage of such basis attrib-
utable to the taxpayer’s use of property
for the taxable year other than in the tax-
payer’s trade or business (or for the pro-
duction of income);
(ii) Any portion of the basis the tax-
payer properly elects to treat as an expense
under section 179; and
(iii) Any adjustments to basis provided
by other provisions of the Code and the
regulations under the Code (including sec-
tion 1016(a)(2) and (3), for example, de-
preciation deductions in the year of re-
placement allowable under section 168(k)
or 1400L(b)).
(11)Like-kind exchangeis an exchange
of property in a transaction to which sec-
tion 1031(a)(1), (b), or (c) applies.
(12)Involuntary conversionis a trans-
action described in section 1033(a)(1) or
(2) that resulted in the nonrecognition of
any part of the gain realized as the result
of the conversion.
(c)Determination of depreciation al-
lowance—(1)Computation of the de-
preciation allowance for depreciable ex-
changed basis beginning in the year of
replacement—(i)In general. This para-
graph (c) provides rules for determining
the applicable recovery period, the ap-
plicable depreciation method, and the
applicable convention used to determine
the depreciation allowances for the depre-
ciable exchanged basis beginning in the
year of replacement. See paragraph (c)(5)
of this section for rules relating to the com-
putation of the depreciation allowance for
the year of disposition and for the year
of replacement. See paragraph (d)(1) of
this section for rules relating to the com-
putation of the depreciation allowance for
depreciable excess basis. See paragraph
(d)(4) of this section if the replacement
MACRS property is acquired before dis-
position of the relinquished MACRS prop-
erty in a transaction to which section 1033
applies. See paragraph (e) of this section
for rules relating to the computation of the
depreciation allowance using the optional
depreciation tables.
(ii)Applicable recovery period, de-
preciation method, and convention.The
recovery period, depreciation method, and
convention determined under this para-
graph (c) are the only permissible methods
of accounting for MACRS property within
the scope of this section unless the tax-
payer makes the election under paragraph
(i) of this section notto apply this section.
(2)Effect of depreciation treatment
of the replacement MACRS property by
previous owners of the acquired prop-
erty. If replacement MACRS property is
acquired by a taxpayer in a like-kind ex-
change or an involuntary conversion, the
depreciation treatment of the replacement
MACRS property by previous owners
has no effect on the determination of
depreciation allowances for the replace-
ment MACRS property in the hands of
the acquiring taxpayer. For example, a
taxpayer exchanging, in a like-kind ex-
change, MACRS property for property
that was depreciated under section 168
of the Internal Revenue Code of 1954
(ACRS) by the previous owner must use
this section because the replacement prop-
erty will become MACRS property in the
hands of the acquiring taxpayer. In addi-
tion, elections made by previous owners
in determining depreciation allowances
for the replacement MACRS property
have no effect on the acquiring taxpayer.
For example, a taxpayer exchanging, in a
like-kind exchange, MACRS property that
the taxpayer depreciates under the general
depreciation system of section 168(a) for
other MACRS property that the previous
owner elected to depreciate under the al-
ternative depreciation system pursuant to
section 168(g)(7) does not have to con-
tinue using the alternative depreciation
system for the replacement MACRS prop-
erty.
(3)Recovery period and/or depreci-
ation method of the properties are the
same, or both are not the same—(i)In
general. For purposes of paragraphs (c)(3)
and (c)(4) of this section in determining
whether the recovery period and the depre-
ciation method prescribed under section
168 for the replacement MACRS property
are the same as the recovery period and
the depreciation method prescribed under
April 2, 20078522007–14 I.R.B.

section 168 for the relinquished MACRS
property, the recovery period and the de-
preciation method for the replacement
MACRS property are considered to be
the recovery period and the depreciation
method that would have applied under sec-
tion 168, taking into account any elections
made by the acquiring taxpayer under
section 168(b)(5) or 168(g)(7), had the re-
placement MACRS property been placed
in service by the acquiring taxpayer at the
same time as the relinquished MACRS
property.
(ii)Both the recovery period and the de-
preciation method are the same.Ifboth
the recovery period and the depreciation
method prescribed under section 168 for
the replacement MACRS property are the
same as the recovery period and the depre-
ciation method prescribed under section
168 for the relinquished MACRS prop-
erty, the depreciation allowances for the
replacement MACRS property beginning
in the year of replacement are determined
by using the same recovery period and
depreciation method that were used for
the relinquished MACRS property. Thus,
the replacement MACRS property is de-
preciated over the remaining recovery pe-
riod (taking into account the applicable
convention), and by using the deprecia-
tion method, of the relinquished MACRS
property. Except as provided in paragraph
(c)(5) of this section, the depreciation al-
lowances for the depreciable exchanged
basis for any 12-month taxable year be-
ginning with the year of replacement are
determined by multiplying the depreciable
exchanged basis by the applicable depre-
ciation rate for each taxable year (for fur-
ther guidance, for example, see section 6 of
Rev. Proc. 87–57, 1987–2 C.B. 687, 692,
and §601.601(d)(2)(ii)(b)ofthischapter).
(iii)Either the recovery period or the
depreciation method is the same, or both
are not the same. Ifeithertherecov-
ery period or the depreciation method
prescribed under section 168 for the re-
placement MACRS property is the same
as the recovery period or the depreciation
method prescribed under section 168 for
the relinquished MACRS property, the
depreciation allowances for the depre-
ciable exchanged basis beginning in the
year of replacement are determined us-
ing the recovery period or the depreciation
method that is the same as the relinquished
MACRS property. See paragraph (c)(4) of
this section to determine the depreciation
allowances when the recovery period or
the depreciation method of the replace-
ment MACRS property is not the same as
that of the relinquished MACRS property.
(4)Recovery period or depreciation
method of the properties is not the same.
If the recovery period prescribed under
section 168 for the replacement MACRS
property (as determined under paragraph
(c)(3)(i) of this section) is not the same
as the recovery period prescribed under
section 168 for the relinquished MACRS
property, the depreciation allowances for
the depreciable exchanged basis beginning
in the year of replacement are determined
under this paragraph (c)(4). Similarly, if
the depreciation method prescribed under
section 168 for the replacement MACRS
property (as determined under paragraph
(c)(3)(i) of this section) is not the same as
the depreciation method prescribed under
section 168 for the relinquished MACRS
property, the depreciation method used to
determine the depreciation allowances for
the depreciable exchanged basis beginning
in the year of replacement is determined
under this paragraph (c)(4).
(i)Longer recovery period.Ifthere-
covery period prescribed under section
168 for the replacement MACRS property
(as determined under paragraph (c)(3)(i) of
this section) is longer than that prescribed
for the relinquished MACRS property, the
depreciation allowances for the deprecia-
ble exchanged basis beginning in the year
of replacement are determined as though
the replacement MACRS property had
originally been placed in service by the
acquiring taxpayer in the same taxable
year the relinquished MACRS property
was placed in service by the acquiring tax-
payer, but using the longer recovery period
of the replacement MACRS property (as
determined under paragraph (c)(3)(i) of
this section) and theconvention deter-
mined under paragraph (c)(4)(v) of this
section. Thus, the depreciable exchanged
basis is depreciated over the remaining
recovery period (taking into account the
applicable convention) of the replacement
MACRS property.
(ii)Shorter recovery period.Ifthe
recovery period prescribed under section
168 for the replacement MACRS property
(as determined underparagraph (c)(3)(i)
of this section) is shorter than that of the
relinquished MACRS property, the de-
preciation allowancesfor the depreciable
exchanged basis beginning in the year
of replacement are determined using the
same recovery period as that of the re-
linquished MACRS property. Thus, the
depreciable exchanged basis is depreciated
over the remaining recovery period (taking
into account the applicable convention) of
the relinquished MACRS property.
(iii)Less accelerated depreciation
method—(A) If the depreciation method
prescribed under section 168 for the re-
placement MACRS property (as deter-
mined under paragraph (c)(3)(i) of this
section) is less accelerated than that of the
relinquished MACRS property at the time
of disposition, the depreciation allowances
for the depreciable exchanged basis begin-
ning in the year of replacement are deter-
mined as though the replacement MACRS
property had originally been placed in ser-
vice by the acquiring taxpayer at the same
time the relinquished MACRS property
was placed in service by the acquiring
taxpayer, but using the less accelerated de-
preciation method. Thus, the depreciable
exchanged basis is depreciated using the
less accelerated depreciation method.
(B) Except as provided in paragraph
(c)(5) of this section, the depreciation al-
lowances for the depreciable exchanged
basis for any 12-month taxable year be-
ginning in the year of replacement are
determined by multiplying the adjusted
depreciable basis by the applicable de-
preciation rate for each taxable year. If,
for example, the depreciation method of
the replacement MACRS property in the
year of replacement is the 150-percent
declining balance method and the depreci-
ationmethodoftherelinquishedMACRS
property in the year of replacement is the
200-percent declining balance method,
and neither method had been switched
to the straight line method in the year of
replacement or any prior taxable year, the
applicable depreciation rate for the year of
replacement and subsequent taxable years
is determined by using the depreciation
rate of the replacement MACRS property
as if the replacement MACRS property
was placed in service by the acquiring
taxpayer at the same time the relinquished
MACRS property was placed in service by
the acquiring taxpayer, until the 150-per-
cent declining balance method has been
switched to the straight line method. If,
for example, the depreciation method of
2007–14 I.R.B.853April 2, 2007

the replacement MACRS property is the
straight line method, the applicable de-
preciation rate for the year of replacement
is determined by using the remaining re-
covery period at the beginning of the year
of disposition (as determined under this
paragraph (c)(4) and taking into account
the applicable convention).
(iv)More accelerated depreciation
method—(A) If the depreciation method
prescribed under section 168 for the re-
placement MACRS property (as deter-
mined under paragraph (c)(3)(i) of this
section) is more accelerated than that of
the relinquished MACRS property at the
time of disposition, the depreciation al-
lowances for the replacement MACRS
property beginning in the year of re-
placement are determined using the same
depreciation method as the relinquished
MACRS property.
(B) Except as provided in paragraph
(c)(5) of this section, the depreciation al-
lowances for the depreciable exchanged
basis for any 12-month taxable year be-
ginning in the year of replacement are
determined by multiplying the adjusted
depreciable basis by the applicable de-
preciation rate for each taxable year. If,
for example, the depreciation method of
the relinquished MACRS property in the
year of replacement is the 150-percent
declining balance method and the depreci-
ation method of the replacement MACRS
property in the year of replacement is the
200-percent declining balance method,
and neither method had been switched
to the straight line method in the year of
replacement or any prior taxable year, the
applicable depreciation rate for the year of
replacement and subsequent taxable years
is the same depreciation rate that applied
to the relinquished MACRS property in
the year of replacement, until the 150-per-
cent declining balance method has been
switched to the straight line method. If,
for example, the depreciation method is
the straight line method, the applicable de-
preciation rate for the year of replacement
is determined by using the remaining re-
covery period at the beginning of the year
of disposition (as determined under this
paragraph (c)(4) and taking into account
the applicable convention).
(v)Convention. The applicable con-
vention for the exchanged basis is deter-
mined under this paragraph (c)(4)(v).
(A)Either the relinquished MACRS
property or the replacement MACRS
property is mid-month property.Ifei-
ther the relinquished MACRS property
or the replacement MACRS property is
property for which the applicable conven-
tion (as determined under section 168(d))
is the mid-month convention, the ex-
changed basis must be depreciated using
the mid-month convention.
(B)Neither the relinquished MACRS
property nor the replacement MACRS
property is mid-month property. If neither
the relinquished MACRS property nor the
replacement MACRS property is prop-
erty for which the applicable convention
(as determined under section 168(d)) is
the mid-month convention, the applica-
ble convention for the exchanged basis is
the same convention that applied to the
relinquished MACRS property. If the re-
linquished MACRS property is placed in
service in the year of disposition, and the
time of replacement is also in the year of
disposition, the convention that applies
to the relinquished MACRS property is
determined under paragraph (f)(1)(i) of
this section. If, however, relinquished
MACRS property was placed in service in
the year of disposition and the time of re-
placement is in a taxable year subsequent
to the year of disposition, the convention
that applies to the exchanged basis is the
convention that applies in that subsequent
taxable year (see paragraph (f)(1)(ii) of
this section).
(5)Year of disposition and year of re-
placement. No depreciation deduction is
allowable for MACRS property disposed
of by a taxpayer in a like-kind exchange
or involuntary conversion in the same tax-
able year that such property was placed
in service by the taxpayer. If replacement
MACRS property is disposed of by a tax-
payer during the same taxable year that the
relinquished MACRS property is placed in
service by the taxpayer, no depreciation
deduction is allowable for either MACRS
property. Otherwise, the depreciation al-
lowances for the year of disposition and for
the year of replacement are determined as
follows:
(i)Relinquished MACRS property—(A)
General rule. Except as provided in para-
graphs (c)(5)(i)(B), (c)(5)(iii), (e), and (i)
of this section, the depreciation allowance
in the year of disposition for the relin-
quished MACRS property is computed
by multiplying the allowable depreciation
deduction for the property for that year
by a fraction, the numerator of which is
the number of months (including frac-
tions of months) the property is deemed
to be placed in service during the year of
disposition (taking into account the ap-
plicable convention of the relinquished
MACRS property), and the denominator
of which is 12. In the case of termina-
tion under §1.168(i)–1(e)(3)(v) of general
asset account treatment of an asset, or
of all the assets remaining, in a general
asset account, the allowable depreciation
deduction in the year of disposition for
the asset or assets for which general asset
account treatment is terminated is de-
termined using the depreciation method,
recovery period, and convention of the
general asset account. This allowable de-
preciation deduction is adjusted to account
for the period the asset or assets is deemed
to be in service in accordance with this
paragraph (c)(5)(i).
(B)Special rule. If, at the beginning
of the year of disposition, the remain-
ing recovery period of the relinquished
MACRS property, taking into account
the applicable convention of such prop-
erty, is less than the period between the
beginning of the year of disposition and
the time of disposition, the depreciation
deduction for the relinquished MACRS
property for the year of disposition is
equal to the adjusted depreciable basis of
the relinquished MACRS property at the
beginning of the year of disposition. If this
paragraph applies, the exchanged basis is
zero and no depreciation is allowable for
the exchanged basis in the replacement
MACRS property.
(ii)Replacement MACRS prop-
erty—(A)Remaining recovery period
of the replacement MACRS property.The
replacement MACRS property is treated
as placed in service at the time of replace-
ment under the convention that applies
to the replacement MACRS property as
determined under this paragraph (c)(5)(ii).
The remaining recovery period of the re-
placement MACRS property at the time
of replacement is the excess of the recov-
ery period for the replacement MACRS
property, as determined under paragraph
(c) of this section, over the period of time
that the replacement MACRS property
would have been in service if it had been
placed in service when the relinquished
April 2, 20078542007–14 I.R.B.

MACRS property was placed in service
and removed from service at the time of
disposition of the relinquished MACRS
property. This period is determined by
using the convention that applied to the re-
linquished MACRS property to determine
thedatethattherelinquishedMACRS
property is deemed to have been placed
in service and the date that it is deemed
to have been disposed of. The length of
time the replacement MACRS property
would have been in service is determined
by using these dates and the convention
that applies to the replacement MACRS
property.
(B)Year of replacement is 12 months.
Except as provided in paragraphs
(c)(5)(iii), (e), and (i) of this section, the
depreciation allowance in the year of re-
placement for the depreciable exchanged
basis is determined by—
(1) Calculating the applicable depre-
ciation rate for the replacement MACRS
property as of the beginning of the year of
replacement taking into account the depre-
ciation method prescribed for the replace-
ment MACRS property under paragraph
(c)(3) of this section and the remaining re-
covery period of the replacement MACRS
property as of the beginning of the year of
disposition as determined under this para-
graph (c)(5)(ii);
(2) Calculating the depreciable ex-
changed basis of the replacement MACRS
property, and adding to that amount the
amount determined under paragraph
(c)(5)(i) of this section for the year of
disposition; and
(3) Multiplying the product of the
amounts determined under paragraphs
(c)(5)(ii)(B)(1) and (B)(2) of this section
by a fraction, the numerator of which is
the number of months (including fractions
of months) the property is deemed to be in
service during the year of replacement (in
the year of replacement the replacement
MACRS property is deemed to be placed
in service by the acquiring taxpayer at the
time of replacement under the conven-
tion determined under paragraph (c)(4)(v)
of this section), and the denominator of
which is 12.
(iii)Year of disposition or year of re-
placement is less than 12 months.If
the year of disposition or the year of re-
placement is less than 12 months, the
depreciation allowance determined un-
der paragraph (c)(5)(ii)(A) of this section
must be adjusted for a short taxable year
(for further guidance, for example, see
Rev. Proc. 89–15, 1989–1 C.B. 816, and
§601.601(d)(2)(ii)(b) of this chapter).
(iv)Deferred transactions—(A)In gen-
eral. If the replacement MACRS property
is not acquired until after the disposition of
the relinquished MACRS property, taking
into account the applicable convention of
the relinquished MACRS property and re-
placement MACRS property, depreciation
is not allowable during the period be-
tween the disposition of the relinquished
MACRS property and the acquisition
of the replacement MACRS property.
The recovery period for the replacement
MACRS property is suspended during
this period. For purposes of paragraph
(c)(5)(ii) of this section, only the depre-
ciable exchanged basis of the replacement
MACRS property is taken into account
for calculating the amount in paragraph
(c)(5)(ii)(B)(2) of this section if the year of
replacement is a taxable year subsequent
to the year of disposition.
(B)Allowable depreciation for a quali-
fied intermediary. [Reserved].
(v)Remaining recovery period.The
remaining recovery period of the replace-
ment MACRS property is determined as
of the beginning of the year of disposition
of the relinquished MACRS property. For
purposes of determining the remaining re-
covery period of the replacement MACRS
property, the replacement MACRS prop-
erty is deemed to have been originally
placed in service under the convention
determined under paragraph (c)(4)(v)
of this section but at the time the relin-
quished MACRS property was deemed to
be placed in service under the convention
that applied to it when it was placed in
service.
(6)Examples. The application of this
paragraph (c) is illustrated by the follow-
ing examples:
Example 1. A1, a calendar-year taxpayer, ex-
changes Building M, an office building, for Building
N, a warehouse in a like-kind exchange. Building
M is relinquished in July 2004 and Building N is ac-
quired and placed in service in October 2004. A1 did
not make any elections under section 168 for either
Building M or Building N. The unadjusted deprecia-
ble basis of Building M was $4,680,000 when placed
in service in July 1997. Since the recovery period
anddepreciationmethodprescribedundersection
168 for Building N (39 years, straight line method)
are the same as the recovery period and depreciation
method prescribed under section 168 for Building
M (39 years, straight line method), Building N is
depreciated over the remaining recovery period of,
and using the same depreciation method and conven-
tion as that of, Building M. Applying the applicable
convention, Building M is deemed disposed of on
July 15, 2004, and Building N is placed in service on
October 15, 2004. Thus, Building N will be depreci-
ated using the straight line method over a remaining
recovery period of 32 years beginning in October
2004 (the remaining recovery period of 32 years and
6.5 months at the beginning of 2004, less the 6.5
months of depreciation taken prior to the disposition
of the exchanged MACRS property (Building M) in
2004). For 2004, the year in which the transaction
takes place, the depreciation allowance for Building
M is ($120,000)(6.5/12) which equals $65,000. The
depreciation allowance for Building N for 2004 is
($120,000)(2.5/12) which equals $25,000. For 2005
and subsequent years, Building N is depreciated
over the remaining recovery period of, and using the
same depreciation method and convention as that
of, Building M. Thus, the depreciation allowance
for Building N is the same as Building M, namely
$10,000 per month.
Example 2. B, a calendar-year taxpayer, placed
in service Bridge P in January 1998. Bridge P is de-
preciated using the half-year convention. In January
2004, B exchanges Bridge P for Building Q, an apart-
ment building, in a like-kind exchange. Pursuant to
paragraph (k)(2)(i) of this section, B decided to apply
§1.168(i)–6 to the exchange of Bridge P for Building
Q, the replacement MACRS property. B did not make
any elections under section 168 for either Bridge P or
Building Q. Since the recovery period prescribed un-
der section 168 for Building Q (27.5 years) is longer
than that of Bridge P (15 years), Building Q is de-
preciated as if it had originally been placed in ser-
vice in July 1998 and disposed of in July 2004 using
a 27.5 year recovery period. Additionally, since the
depreciation method prescribed under section 168 for
Building Q (straight line method) is less accelerated
than that of Bridge P (150-percent declining balance
method), then the depreciation allowance for Build-
ing Q is computed using the straight line method.
Thus, when Building Q is acquired and placed in ser-
vice in 2004, its basis is depreciated over the remain-
ing 21.5 year recovery period using the straight line
method of depreciation and the mid-month conven-
tion beginning in July 2004.
Example 3. C, a calendar-year taxpayer, placed in
service Building R, a restaurant, in January 1996. In
January 2004, C exchanges Building R for Tower S,
a radio transmitting tower, in a like-kind exchange.
Pursuant to paragraph (k)(2)(i) of this section, C
decided to apply §1.168(i)–6 to the exchange of
Building R for Tower S, the replacement MACRS
property. C did not make any elections under section
168 for either Building R or Tower S. Since the
recovery period prescribed under section 168 for
Tower S (15 years) is shorter than that of Building R
(39 years), Tower S is depreciated over the remaining
recovery period of Building R. Additionally, since
the depreciation method prescribed under section
168 for Tower S (150% declining balance method) is
more accelerated than that ofBuilding R (straight line
method), then the depreciation allowance for Tower S
is also computed using the same depreciation method
as Building R. Thus, Tower S is depreciated over
the remaining 31 year recovery period of Building R
using the straight line method of depreciation and the
2007–14 I.R.B.855April 2, 2007

mid-month convention. Alternatively, C may elect
under paragraph (i) of this section to treat Tower S
as though it is placed in service in January 2004. In
such case, C uses the applicable recovery period, de-
preciation method, and convention prescribed under
section 168 for Tower S.
Example 4. (i) In February 2002, D, a calen-
dar-year taxpayer and manufacturer of rubber prod-
ucts, acquired for $60,000 and placed in service Asset
T (a special tool) and depreciated Asset T using the
straight line method election under section 168(b)(5)
and the mid-quarter convention over its 3-year recov-
ery period. D elected not to deduct the additional
first year depreciation for 3-year property placed in
service in 2002. In June 2004, D exchanges Asset
T for Asset U (not a special tool) in a like-kind ex-
change. D elected not to deduct the additional first
year depreciation for 7-year property placed in ser-
vice in 2004. Since the recovery period prescribed
under section 168 for Asset U (7 years) is longer than
that of Asset T (3 years), Asset U is depreciated as
if it had originally been placed in service in Febru-
ary 2002 using a 7-year recovery period. Addition-
ally, since the depreciation method prescribed under
section 168 for Asset U (200-percent declining bal-
ance method) is more accelerated than that of Asset
T (straight line method) at the time of disposition, the
depreciation allowance for Asset U is computed us-
ing the straight line method. Asset U is depreciated
over its remaining recovery period of 4.75 years us-
ing the straight line method of depreciation and the
mid-quarter convention.
(ii) The 2004 depreciation allowance for Asset T
is $7,500 ($20,000 allowable depreciation deduction
for 2004) × 4.5 months ÷ 12).
(iii) The depreciation rate in 2004 for Asset U is
0.1951 (1 ÷ 5.125 years (the length of the applica-
ble recovery period remaining as of the beginning of
2004)). Therefore, the depreciation allowance for As-
set U in 2004 is $2,744 (0.1951 × $22,500 (the sum
of the $15,000 depreciable exchanged basis of Asset
U ($22,500 adjusted depreciable basis at the begin-
ning of 2004 for Asset T, less the $7,500 depreciation
allowable for Asset T for 2004) and the $7,500 depre-
ciation allowable for Asset T for 2004) × 7.5 months
÷ 12).
Example 5. The facts are the same as inExample
4except that D exchanges Asset T for Asset U in June
2005, in a like-kind exchange. Under these facts, the
remaining recovery period of Asset T at the beginning
of 2005 is 1.5 months and, as a result, is less than
the 5-month period between the beginning of 2005
(year of disposition) and June 2005 (time of disposi-
tion). Accordingly, pursuant to paragraph (c)(5)(i)(B)
of this section, the 2005 depreciation allowance for
Asset T is $2,500 ($2,500 adjusted depreciable ba-
sis at the beginning of 2005 ($60,000 original basis
minus $17,500 depreciation deduction for 2002 mi-
nus $20,000 depreciation deduction for 2003 minus
$20,000 depreciation deduction for 2004)). Because
the exchanged basis of asset U is $0.00 no deprecia-
tion is allowable for asset U.
Example 6. On January 1, 2004, E, a calendar-
year taxpayer, acquired and placed in service Canopy
V, a gas station canopy. The purchase price of Canopy
V was $60,000. On August 1, 2004, Canopy V was
destroyed in a hurricane and was therefore no longer
usable in E’s business. On October 1, 2004, as part of
the involuntary conversion, E acquired and placed in
service new Canopy W with the insurance proceeds
E received due to the loss of Canopy V. E elected
not to deduct the additional first year depreciation for
5-year property placed in service in 2004. E depre-
ciates both canopies underthe general depreciation
system of section 168(a) by using the 200-percent de-
clining balance method of depreciation, a 5-year re-
covery period, and the half-year convention. No de-
preciation deduction is allowable for Canopy V. The
depreciation deduction allowable for Canopy W for
2004 is $12,000 ($60,000 × the annual depreciation
rate of .40 × ½ year). For 2005, the depreciation de-
duction for Canopy W is $19,200 ($48,000 adjusted
basis x the annual depreciation rate of .40).
Example 7. The facts are the same as inExam-
ple 6, except that E did not make the election out of
the additional first year depreciation for 5-year prop-
erty placed in service in 2004. E depreciates both
canopies under the general depreciation system of
section 168(a) by using the 200-percent declining bal-
ance method of depreciation, a 5-year recovery pe-
riod, and the half-year convention. No depreciation
deduction is allowable for Canopy V. For 2004, E
is allowed a 50-percent additional first year depreci-
ation deduction of $30,000 for Canopy W (the un-
adjusted depreciable basis of $60,000 multiplied by
.50), and a regular MACRS depreciation deduction
of $6,000 for Canopy W (the depreciable exchanged
basis of $30,000 multiplied by the annual deprecia-
tion rate of .40 × ½ year). For 2005, E is allowed
a regular MACRS depreciation deduction of $9,600
for Canopy W (the depreciable exchanged basis of
$24,000 ($30,000 minus regular 2003 depreciation of
$6,000) multiplied by the annual depreciation rate of
.40).
Example 8. In January 2001, F, a calendar-year
taxpayer, places in service a paved parking lot, Lot
W, and begins depreciating Lot W over its 15-year
recovery period. F’s unadjusted depreciable basis in
Lot W is $1,000x. On April 1, 2004, F disposes of
Lot W in a like-kind exchange for Building X, which
is nonresidential real property. Lot W is depreciated
using the 150 percent declining balance method and
the half-year convention. Building X is depreciated
using the straight-line method with a 39-year recov-
ery period and using the mid-month convention. Both
Lot W and Building X were in service at the time of
the exchange. Because Lot Wwas depreciated using
the half-year convention, it is deemed to have been
placed in service on July 1, 2001, the first day of
the second half of 2001, and to have been disposed
of on July 1, 2004, the first day of the second half
of 2004. To determine the remaining recovery pe-
riod of Building X at the time of replacement, Build-
ing X is deemed to have been placed in service on
July 1, 2001, and removed from service on July 1,
2004. Thus, Building X is deemed to have been in
service, at the time of replacement, for 3 years (36
months=5.5 months in 2001 + 12 months in 2002 +
12 months in 2003 + 6.5 months in 2004) and its re-
maining recovery period is 36 years (39 - 3). Because
Building X is deemed to be placed in service at the
time of replacement, July 1, 2004, the first day of the
second half of 2004, Building X is depreciated for
5.5 months in 2004. However, at the beginning of
the year of replacement the remaining recovery pe-
riod for Building X is 36 years and 6.5 months (39
years - 2 years and 5.5 months (5.5 months in 2001
+ 12 months in 2002 + 12 months in 2003)). The
depreciation rate for building X for 2004 is 0.02737
(= 1/(39-2-5.5/12)). For 2005, the depreciation rate
for Building X is 0.02814 (= 1/(39-3-5.5/12)).
Example 9. ThefactsarethesameasinExam-
ple 8. F did not make the election under paragraph
(i) of this section for Building Y in the initial ex-
change. In January 2006, F exchanges Building Y
for Building Z, an office building, in a like-kind ex-
change. F did not make any elections under section
168 for either Building Y or Building Z. Since the re-
covery period prescribed for Building Y as a result
of the initial exchange (39 years) is longer than that
of Building Z (27.5 years), Building Z is depreciated
over the remaining 33 years of the recovery period of
Building Y. The depreciation methods are the same
for both Building Y and Building Z so F’s exchanged
basis in Building Z is depreciated over 33 years, us-
ing the straight-line method and the mid-month con-
vention, beginning in January 2006. Alternatively, F
could have made the election under paragraph (i) of
this section. If F makes such election, Building Z is
treated as placed in service by F when acquired in Jan-
uary 2006 and F would recover its exchanged basis
in Building Z over 27.5 years, using the straight line
method and the mid-month convention, beginning in
January 2006.
(d)Special rules for determining depre-
ciation allowances—(1)Excess basis—(i)
In general. Any excess basis in the re-
placement MACRS property is treated as
property that is placed in service by the
acquiring taxpayer in the year of replace-
ment. Thus, the depreciation allowances
for the depreciable excess basis are deter-
mined by using the applicable recovery pe-
riod, depreciation method, and convention
prescribed under section 168 for the prop-
erty at the time of replacement. However,
if replacement MACRS property is dis-
posed of during the same taxable year the
relinquished MACRS property is placed in
service by the acquiring taxpayer, no de-
preciation deduction is allowable for ei-
ther MACRS property. See paragraph (g)
of this section regarding the application of
section 179. See paragraph (h) of this sec-
tion regarding the application of section
168(k) or 1400L(b).
(ii)Example. The application of this
paragraph (d)(1) is illustrated by the fol-
lowing example:
Example. In 1989, G placed in service a hospi-
tal. On January 16, 2004, G exchanges this hospi-
tal plus $2,000,000 cash for an office building in a
like-kind exchange. On January 16, 2004, the hospi-
tal has an adjusted depreciable basis of $1,500,000.
After the exchange, the basis of the office building is
$3,500,000. Pursuant to paragraph (k)(2)(i) of this
section, G decided to apply §1.168(i)–6 to the ex-
change of the hospital for the office building, the re-
placement MACRS property. The depreciable ex-
changed basis of the office building is depreciated in
accordance with paragraph (c) of this section. The
depreciable excess basis of $2,000,000 is treated as
April 2, 20078562007–14 I.R.B.

being placed in service by G in 2004 and, as a re-
sult, is depreciated using the applicable depreciation
method, recovery period, and convention prescribed
for the office building under section 168 at the time
of replacement.
(2)Depreciable and nondepreciable
property—(i) If land or other nondepre-
ciable property is acquired in a like-kind
exchange for, or as a result of an involun-
tary conversion of, depreciable property,
the land or other nondepreciable property
is not depreciated. If both MACRS and
nondepreciable property are acquired in
a like-kind exchange for, or as part of
an involuntary conversion of, MACRS
property, the basis allocated to the nonde-
preciable property (as determined under
section 1031(d) and the regulations under
section 1031(d) or section 1033(b) and
the regulations under section 1033(b)) is
not depreciated and the basis allocated
to the replacement MACRS property (as
determined under section 1031(d) and
the regulations under section 1031(d) or
section 1033(b) and the regulations under
section 1033(b)) is depreciated in accor-
dance with this section.
(ii) If MACRS property is acquired, or
if both MACRS and nondepreciable prop-
erty are acquired, ina like-kind exchange
for, or as part of an involuntary conver-
sion of, land or other nondepreciable prop-
erty, the basis in the replacement MACRS
property that is attributable to the relin-
quished nondepreciable property is treated
as though the replacement MACRS prop-
erty is placed in service by the acquir-
ing taxpayer in the year of replacement.
Thus, the depreciation allowances for the
replacement MACRS property are deter-
mined by using the applicable recovery pe-
riod, depreciation method, and convention
prescribed under section 168 for the re-
placement MACRS property at the time
of replacement. See paragraph (g) of this
section regarding the application of section
179. See paragraph (h) of this section re-
garding the application of section 168(k)
or 1400L(b).
(3)Depreciation limitations for auto-
mobiles—(i)In general. Depreciation al-
lowances under section 179 and section
167 (including allowances under sections
168 and 1400L(b)) for a passenger auto-
mobile, as defined insection 280F(d)(5),
are subject to the limitations of section
280F(a). The depreciation allowances for
a passenger automobile that is replacement
MACRS property (replacement MACRS
passenger automobile) generally are lim-
ited in any taxable year to the replacement
automobile section 280F limit for the tax-
able year. The taxpayer’s basis in the re-
placement MACRS passenger automobile
is treated as being comprised of two sep-
arate components. The first component is
the exchanged basis and the second com-
ponent is the excess basis, if any. The
depreciation allowances for a passenger
automobile that is relinquished MACRS
property (relinquished MACRS passenger
automobile) for the taxable year generally
are limited to the relinquished automobile
section 280F limit for that taxable year. In
the year of disposition the sum of the de-
preciation deductions for the relinquished
MACRS passenger automobile and the re-
placement MACRS passenger automobile
may not exceed the replacement automo-
bile section 280F limit unless the taxpayer
makes the election under §1.168(i)–6(i).
For purposes of this paragraph (d)(3), the
following definitions apply:
(A)Replacement automobile section
280F limitis the limit on depreciation
deductions under section 280F(a) for the
taxable year based on the time of re-
placement of the replacement MACRS
passenger automobile (including the effect
of any elections under section 168(k) or
section 1400L(b), as applicable).
(B)Relinquished automobile section
280F limitis the limit on depreciation
deductions under section 280F(a) for the
taxable year based on when the relin-
quished MACRS passenger automobile
was placed in service by the taxpayer.
(ii)Order in which limitations on depre-
ciation under section 280F(a) are applied.
Generally, depreciation deductions allow-
able under section 280F(a) reduce the basis
in the relinquished MACRS passenger au-
tomobile and the exchanged basis of the re-
placement MACRS passenger automobile,
before the excess basis of the replacement
MACRS passenger automobile is reduced.
The depreciation deductions for the relin-
quished MACRS passenger automobile in
the year of disposition and the replacement
MACRS passenger automobile in the year
of replacement and each subsequent tax-
able year are allowable in the following or-
der:
(A) The depreciation deduction allow-
able for the relinquished MACRS passen-
ger automobile as determined under para-
graph (c)(5)(i) of this section for the year
of disposition to the extent of the smaller of
the replacement automobile section 280F
limit and the relinquished automobile sec-
tion 280F limit, if the year of disposition
is the year of replacement. If the year
of replacement is a taxable year subse-
quent to the year of disposition, the de-
preciation deduction allowable for the re-
linquished MACRS passenger automobile
for the year of disposition is limited to
the relinquished automobile section 280F
limit.
(B) The additional first year depre-
ciation allowable on the remaining ex-
changed basis (remaining carryover basis
as determined under §1.168(k)–1(f)(5)
or §1.1400L(b)–1(f)(5), as applicable)
of the replacement MACRS passen-
ger automobile, as determined under
§1.168(k)–1(f)(5) or §1.1400L(b)–1(f)(5),
as applicable, to the extent of the excess of
the replacement automobile section 280F
limit over the amount allowable under
paragraph (d)(3)(ii)(A) of this section.
(C) The depreciation deduction allow-
able for the taxable year on the deprecia-
ble exchanged basis of the replacement
MACRS passenger automobile deter-
mined under paragraph (c) of this section
to the extent of any excess over the sum of
the amounts allowable under paragraphs
(d)(3)(ii)(A)and(B)ofthissectionofthe
smaller of the replacement automobile
section 280F limit and the relinquished
automobile section 280F limit.
(D) Any section 179 deduction allow-
able in the year of replacement on the ex-
cess basis of the replacement MACRS pas-
senger automobile to the extent of the ex-
cess of the replacement automobile section
280F limit over the sum of the amounts
allowable under paragraphs (d)(3)(ii)(A),
(B), and (C) of this section.
(E) The additionalfirst year depreci-
ation allowable on the remaining excess
basis of the replacement MACRS pas-
senger automobile, as determined under
§1.168(k)–1(f)(5) or §1.1400L(b)–1(f)(5),
as applicable, to the extent of the excess of
the replacement automobile section 280F
limit over the sum of the amounts allow-
able under paragraphs (d)(3)(ii)(A), (B),
(C), and (D) of this section.
(F) The depreciation deduction allow-
able under paragraph (d) of this section for
the depreciable excess basis of the replace-
ment MACRS passenger automobile to the
2007–14 I.R.B.857April 2, 2007

extent of the excess of the replacement au-
tomobile section 280F limit over the sum
of the amounts allowable under paragraphs
(d)(3)(ii)(A), (B), (C), (D), and (E) of this
section.
(iii)Examples. The application of this
paragraph (d)(3) is illustrated by the fol-
lowing examples:
Example 1. H, a calendar-year taxpayer, acquired
and placed in service Automobile X in January 2000
for $30,000 to be used solely for H’s business. In De-
cember 2003, H exchanges, in a like-kind exchange,
Automobile X plus $15,000 cash for new Automo-
bile Y that will also be used solely in H’s business.
Automobile Y is 50-percent bonus depreciation prop-
erty for purposes of section 168(k)(4). Both automo-
biles are depreciated using the double declining bal-
ance method, the half-year convention, and a 5-year
recovery period. Pursuant to §1.168(k)–1(g)(3)(ii)
and paragraph (k)(2)(i) of this section, H decided to
apply §1.168(i)–6 to the exchange of Automobile X
for Automobile Y, the replacement MACRS property.
The relinquished automobile section 280F limit for
2003 for Automobile X is $1,775. The replacement
automobile section 280F limit for Automobile Y is
$10,710. The exchanged basis for Automobile Y is
$17,315 ($30,000 less total depreciation allowable of
$12,685 (($3,060 for 2000, $4,900 for 2001, $2,950
for 2002, and $1,775 for 2003)). Without taking sec-
tion 280F into account, the additional first year depre-
ciation deduction for the remaining exchanged basis
is $8,658 ($17,315 x 0.5). Because this amount is
less than $8,935 ($10,710 (the replacement automo-
bile section 280F limit for 2003 for Automobile Y) -
$1,775 (the depreciation allowable for Automobile X
for 2003)), the additional first year depreciation de-
duction for the exchanged basis is $8,658. No de-
preciation deduction is allowable in 2003 for the de-
preciable exchanged basisbecause the depreciation
deductions taken for Automobile X and the remain-
ing exchanged basis exceed the exchanged automo-
bile section 280F limit. An additional first year de-
preciation deduction of $277 is allowable for the ex-
cess basis of $15,000 in Automobile Y. Thus, at the
end of 2003 the adjusted depreciable basis in Auto-
mobile Y is $23,379 comprised of adjusted deprecia-
ble exchanged basis of $8,657 ($17,315 (exchanged
basis) – $8,658 (additional first year depreciation for
exchanged basis)) and of an adjusted depreciable ex-
cess basis of $14,723 ($15,000 (excess basis) - $277
(additional first year depreciation for 2003)).
Example 2. The facts are the same as inEx-
ample 1, except that H used Automobile X only
75 percent for business use. As such, the total al-
lowable depreciation for Automobile X is reduced
to reflect that the automobile is only used 75 per-
cent for business. The total allowable depreciation
of Automobile X is $9,513.75 ($2,295 for 2000
($3,060 limit x .75), $3,675 for 2001 ($4,900 limit
x .75), $2,212.50 for 2002 ($2,950 limit x .75), and
$1,331.25 for 2003 ($1,775 limit x .75). However,
under §1.280F–2T(g)(2)(ii)(A), the exchanged basis
is reduced by the excess (ifany) of the depreciation
that would have been allowable if the exchanged
automobile had been used solely for business over
the depreciation that was allowable in those years.
Thus, the exchanged basis, for purposes of comput-
ing depreciation, for Automobile Y is $17,315.
Example 3. The facts are the same as inExam-
ple 1, except that H placed in service Automobile X
in January 2002, and H elected not to claim the ad-
ditional first year depreciation deduction for 5-year
property placed in service in 2002 and 2003. The re-
linquished automobile section 280F limit for Auto-
mobile X for 2003 is $4,900. Because the replace-
ment automobile section 280F limit for 2003 for Au-
tomobile Y ($3,060) is less than the relinquished au-
tomobile section 280F limit for Automobile X for
2003 and is less than $5,388 (($30,000 (cost) - $3,060
(depreciation allowable for 2002)) x 0.4 x 6/12), the
depreciation that would be allowable for Automobile
X (determined without regard to section 280F) in the
year of disposition, the depreciation for Automobile
X in the year of disposition is limited to $3,060. For
2003 no depreciation is allowable for the excess basis
and the exchanged basis in Automobile Y.
Example 4. AB, a calendar-year taxpayer, pur-
chased and placed in service Automobile X1 in Feb-
ruary 2000 for $10,000. X1 is a passenger auto-
mobile subject to section 280F(a) and is used solely
for AB’s business. AB depreciated X1 using a 5-
year recovery period, thedouble declining balance
method, and the half-year convention. As of Jan-
uary 1, 2003, the adjusted depreciable basis of X1
was $2,880 ($10,000 original cost minus $2,000 de-
preciation deduction for 2000, minus $3,200 depre-
ciation deduction for 2001, and $1,920 depreciation
deduction for 2002). In November 2003, AB ex-
changes, in a like-kind exchange, Automobile X1
plus $14,000 cash for new Automobile Y1 that will
be used solely in AB’s business. Automobile Y1 is
50-percent bonus depreciation property for purposes
of section 168(k)(4) and qualifies for the expensing
election under section 179. Pursuant to paragraph
§1.168(k)–1(g)(3)(ii) and paragraph (k)(2)(i) of this
section, AB decided to apply §1.168(i)–6 to the ex-
change of Automobile X1 for Automobile Y1, the
replacement MACRS property. AB also makes the
election under section 179 for the excess basis of Au-
tomobile Y1. AB depreciates Y1 using a five-year re-
covery period, the double declining balance method
and the half-year convention. For 2003, the relin-
quished automobile section 280F limit for Automo-
bile X1 is $1,775 and the replacement automobile
section 280F limit for 2003 for Automobile Y1 is
$10,710.
(i) The 2003 depreciation deduction for Automo-
bile X1 is $576. The depreciation deduction calcu-
lated for X1 is $576 (the adjusted depreciable basis of
Automobile X1 at the beginning of 2003 of $2,880 ×
40% × ½ year), which is less than the relinquished au-
tomobile section 280F limit and the replacement au-
tomobile section 280F limit.
(ii) The additional first year depreciation deduc-
tion for the exchanged basis is $1,152. The additional
first year depreciation deduction of $1,152 (remain-
ing exchanged basis of $2,304 ($2,880 adjusted ba-
sis of Automobile X1 at the beginning of 2003 minus
$576) × 0.5)) is less than the replacement automobile
section 280F limit minus $576.
(iii) AB’s MACRS depreciation deduction allow-
able in 2003 for the remaining exchanged basis of
$1,152 is $47 (the relinquished automobile section
280F limit of $1,775 less the depreciation deduction
of $576 taken for Automobile X1 less the additional
first year depreciation deduction of $1,152 taken for
the exchanged basis) which is less than the depre-
ciation deduction calculated for the depreciable ex-
changed basis.
(iv) For 2003, AB takes a $1,400 section 179 de-
duction for the excess basis of Automobile Y1. AB
must reduce the excess basis of $14,000 by the section
179 deduction of $1,400 to determine the remaining
excess basis of $12,600.
(v) For 2003, AB is allowed a 50-percent addi-
tional first year depreciation deduction of $6,300 (the
remaining excess basis of $12,600 multiplied by .50).
(vi) For 2003, AB’s depreciation deduction for
the depreciable excess basis is limited to $1,235.
The depreciation deduction computed without regard
to the replacement automobile section 280F limit
is $1,260 ($6,300 depreciable excess basis x 0.4 x
6/12). However the depreciation deduction for the
depreciable excess basis is limited to $1,235 ($10,710
(replacement automobile section 280F limit) - $576
(depreciation deduction for Automobile X1) - $1,152
(additional first year depreciation deduction for the
exchanged basis) - $47 (depreciation deduction for
exchanged basis) $1,400 (section 179 deduction) -
$6,300 (additional first year depreciation deduction
for remaining excess basis)).
(4)Involuntary conversion for which
the replacement MACRS property is ac-
quired and placed in service before dis-
position of relinquished MACRS property.
If, in an involuntary conversion, a tax-
payer acquires and places in service the
replacement MACRS property before the
date of disposition of the relinquished
MACRS property, the taxpayer depreci-
ates the unadjusted depreciable basis of
the replacement MACRS property un-
der section 168 beginning in the taxable
year when the replacement MACRS prop-
erty is placed in service by the taxpayer
and by using the applicable depreciation
method, recovery period, and conven-
tion prescribed under section 168 for
the replacement MACRS property at the
placed-in-service date. However, at the
time of disposition of the relinquished
MACRS property, the taxpayer deter-
mines the exchanged basis and the excess
basis of the replacement MACRS property
and begins to depreciate the deprecia-
ble exchanged basis of the replacement
MACRS property in accordance with
paragraph (c) of this section. The depre-
ciable excess basis of the replacement
MACRS property continues to be de-
preciated by the taxpayer in accordance
with the first sentence of this paragraph
(d)(4). Further, in the year of disposition
of the relinquished MACRS property, the
taxpayer must include in taxable income
the excess of the depreciation deductions
allowable on the unadjusted depreciable
basis of the replacement MACRS prop-
erty over the depreciation deductions that
April 2, 20078582007–14 I.R.B.

would have been allowable to the tax-
payer on the depreciable excess basis of
the replacement MACRS property from
the date the replacement MACRS prop-
erty was placed in service by the taxpayer
(taking into account the applicable con-
vention) to the time of disposition of the
relinquished MACRS property. However,
see §1.168(k)–1(f)(5)(v) for replacement
MACRS property that is qualified property
or 50-percent bonus depreciation property
and §1.1400L(b)–1(f)(5) for replacement
MACRS property that is qualified New
York Liberty Zone property.
(e)Use of optional depreciation ta-
bles—(1)Taxpayer not bound by prior use
of table. If a taxpayer used an optional
depreciation table for the relinquished
MACRS property, the taxpayer is not re-
quired to use an optional table for the
depreciable exchanged basis of the re-
placement MACRS property. Conversely,
if a taxpayer did not use an optional depre-
ciation table for therelinquished MACRS
property, the taxpayer may use the appro-
priate table for the depreciable exchanged
basis of the replacement MACRS property.
If a taxpayer decides not to use the table
for the depreciable exchanged basis of the
replacement MACRS property, the depre-
ciation allowance for this property for the
year of replacement and subsequent tax-
able years is determined under paragraph
(c) of this section. If a taxpayer decides
to use the optional depreciation tables, no
depreciation deduction is allowable for
MACRS property placed in service by
the acquiring taxpayer and subsequently
exchanged or involuntarily converted by
such taxpayer in the same taxable year,
and, if, during the same taxable year,
MACRS property is placed in service by
the acquiring taxpayer, exchanged or in-
voluntarily converted by such taxpayer,
and the replacement MACRS property is
disposed of by such taxpayer, no depre-
ciation deduction is allowable for either
MACRS property.
(2)Determination of the deprecia-
tion deduction—(i)Relinquished MACRS
property. In the year of disposition, the de-
preciation allowancefor the relinquished
MACRS property is computed by mul-
tiplying the unadjusted depreciable basis
(less the amount of the additional first year
depreciation deduction allowed or allow-
able, whichever is greater, under section
168(k) or section 1400L(b), as applicable)
of the relinquished MACRS property by
the annual depreciation rate (expressed
as a decimal equivalent) specified in the
appropriate table for the recovery year
corresponding to the year of disposition.
This product is then multiplied by a frac-
tion, the numerator of which is the number
of months (including fractions of months)
the property is deemed to be placed in
service during the year of the exchange
or involuntary conversion (taking into ac-
count the applicable convention) and the
denominator of which is 12. However,
if the year of disposition is less than 12
months, the depreciation allowance de-
termined under this paragraph (e)(2)(i)
must be adjusted for a short taxable year
(for further guidance, for example, see
Rev. Proc. 89–15, 1989–1 C.B. 816, and
§601.601(d)(2)(ii)(b) of this chapter).
(ii)Replacement MACRS prop-
erty—(A)Determination of the appro-
priate optional depreciation table.Ifa
taxpayer chooses to use the appropriate
optional depreciation table for the depre-
ciable exchanged basis, the depreciation
allowances for the depreciable exchanged
basis beginning in the year of replacement
are determined by choosing the optional
depreciation table that corresponds to the
recovery period, depreciation method, and
convention of the replacement MACRS
property determined under paragraph (c)
of this section.
(B)Calculating the depreciation de-
duction for the replacement MACRS
property.(1) The depreciation deduc-
tion for the taxable year is computed by
first determining the appropriate recovery
year in the table identified under para-
graph (e)(2)(ii)(A)of this section. The
appropriate recovery year for the year of
replacement is the same as the recovery
year for the year of disposition, regardless
of the taxable year in which the replace-
ment property is acquired. For example,
if the recovery year for the year of dispo-
sition would have been year 4 in the table
that applied before the disposition of the
relinquished MACRS property, then the
recovery year for the year of replacement
is Year 4 in the table identified under para-
graph (e)(2)(ii)(A) of this section.
(2) Next, the annual depreciation rate
(expressed as a decimal equivalent) for
each recovery year is multiplied by a
transaction coefficient. The transaction
coefficient is the formula (1 / (1 - x))
where x equals the sum of the annual de-
preciation rates fromthe table identified
under paragraph (e)(2)(ii)(A) of this sec-
tion (expressed as a decimal equivalent)
corresponding to the replacement MACRS
property (as determined under paragraph
(e)(2)(ii)(A) of this section) for the taxable
years beginning with the placed-in-service
year of the relinquished MACRS prop-
erty through the taxable year immediately
prior to the year of disposition. The prod-
uct of the annual depreciation rate and
the transaction coefficient is multiplied by
the depreciable exchanged basis (taking
into account paragraph (e)(2)(i) of this
section). In the year of replacement, this
product is then multiplied by a fraction,
the numerator of which is the number of
months (including fractions of months) the
property is deemed tobe placed in service
by the acquiring taxpayer during the year
of replacement (taking into account the
applicable convention) and the denomina-
tor of which is 12. However, if the year
of replacement is the year the relinquished
MACRS property is placed in service
by the acquiring taxpayer, the preceding
sentence does not apply. In addition, if
the year of replacement is less than 12
months, the depreciation allowance deter-
mined under paragraph (e)(2)(ii) of this
section must be adjusted for a short taxable
year (for further guidance, for example,
see Rev. Proc. 89–15, 1989–1 C.B. 816,
and §601.601(d)(2)(ii)(b) of this chapter).
(iii)Unrecovered basis. If the replace-
ment MACRS property would have unre-
covered depreciable basis after the final re-
covery year (for example, due to a deferred
exchange), the unrecovered basis is an al-
lowable depreciation deduction in the tax-
able year that corresponds to the final re-
covery year unless the unrecovered basis
is subject to a depreciation limitation such
as section 280F.
(3)Excess basis. As provided in para-
graph (d)(1) of this section, any excess ba-
sis in the replacement MACRS property is
treated as property that is placed in service
by the acquiring taxpayer at the time of re-
placement. Thus, if the taxpayer chooses
to use the appropriate optional deprecia-
tion table for the depreciable excess basis
in the replacement MACRS property, the
depreciation allowances for the deprecia-
ble excess basis are determined by multi-
plying the depreciable excess basis by the
annual depreciation rate (expressed as a
2007–14 I.R.B.859April 2, 2007

decimal equivalent) specified in the appro-
priate table for each taxable year. The ap-
propriate table for the depreciable excess
basis is based on the depreciation method,
recovery period, and convention applica-
ble to the depreciable excess basis under
section 168 at the time of replacement.
However, If the year of replacement is
less than 12 months, the depreciation al-
lowance determined under this paragraph
(e)(3) must be adjusted for a short taxable
year (for further guidance, for example,
see Rev. Proc. 89–15, 1989–1 C.B. 816,
and §601.601(d)(2)(ii)(b)ofthischapter).
(4)Examples. The application of this
paragraph (e) is illustrated by the follow-
ing examples:
Example 1. J, a calendar-year taxpayer, acquired
5-year property for $10,000 and placed it in service in
January 2001. J uses the optional tables to depreciate
the property. J uses the half-year convention and did
not make any elections for the property. In Decem-
ber 2003, J exchanges the 5-year property for used
7-year property in a like-kind exchange. Pursuant to
paragraph (k)(2)(i) of this section, J decided to apply
§1.168(i)–6 to the exchange of the 5-year property for
the 7-year property, thereplacement MACRS prop-
erty. The depreciable exchanged basis of the 7-year
property equals the adjusted depreciable basis of the
5-year property at the time of disposition of the relin-
quished MACRS property, namely $3,840 ($10,000
less $2,000 depreciation in 2001, $3,200 deprecia-
tion in 2002, and $960 depreciation in 2003). J must
first determine the appropriate optional depreciation
table pursuant to paragraph (c) of this section. Since
the replacement MACRS property has a longer re-
covery period and the same depreciation method as
the relinquished MACRS property, J uses the optional
depreciation table corresponding to a 7-year recov-
ery period, the 200% declining balance method, and
the half-year convention (because the 5-year property
was depreciated using a half-year convention). Had
the replacement MACRS property been placed in ser-
vice in the same taxable year as the placed-in-ser-
vice year of the relinquished MACRS property, the
depreciation allowance for the replacement MACRS
property for the year of replacement would be de-
termined using recovery year 3 of the optional ta-
ble. The depreciation allowance equals the deprecia-
ble exchanged basis ($3,840) multiplied by the annual
depreciation rate for the current taxable year (.1749
for recovery year 3) as modified by the transaction
coefficient [1 / (1 - (.1429 + .2449))] which equals
1.6335. Thus, J multiplies $3,840, its depreciable
exchanged basis in the replacement MACRS prop-
erty, by the product of .1749 and 1.6335, and then by
one-half, to determine the depreciation allowance for
2003, $549. For 2004, J multiples its depreciable ex-
changed basis in the replacement MACRS property
determined at the time of replacement of $3,840 by
the product of the modified annual depreciation rate
for the current taxable year (.1249 for recovery year
4) and the transaction coefficient (1.6335) to deter-
mine its depreciation allowance of $783.
Example 2. K, a calendar-year taxpayer, acquired
used Asset V for $100,000 and placed it in service
in January 1999. K depreciated Asset V under the
general depreciation system of section 168(a) by
using a 5-year recovery period, the 200-percent
declining balance method of depreciation, and the
half-year convention. In December 2003, as part of
the involuntary conversion, Asset V is involuntarily
converted due to an earthquake. In October 2005, K
purchases used Asset W with the insurance proceeds
from the destruction of Asset V and places Asset
W in service to replace Asset V. Pursuant to para-
graph (k)(2)(i) of this section, K decided to apply
§1.168(i)–6 to the involuntary conversion of Asset
V with the replacement of Asset W, the replacement
MACRS property. If Asset W had been placed
in service when Asset V was placed in service, it
would have been depreciated using a 7-year recovery
period, the 200-percent declining balance method,
and the half-year convention. K uses the optional
depreciation tables to depreciate Asset V and Asset
W. For 2003 (recovery year 5 on the optional table),
the depreciation deduction for Asset V is $5,760
((0.1152)($100,000)(1/2)). Thus, the adjusted depre-
ciable basis of Asset V at the time of replacement is
$11,520 ($100,000 less $20,000 depreciation in 1999,
$32,000 depreciation in 2000, $19,200 depreciation
in 2001, $11,520 depreciation in 2002, and $5,760
depreciation in 2003). Under the table that applied
to Asset V, the year of disposition was recovery year
5 and the depreciation deduction was determined
under the straight line method. The table that applies
for Asset W is the table that applies the straight line
depreciation method, the half-year convention, and
a 7-year recovery period. The appropriate recovery
year under this table is recovery year 5. The depre-
ciation deduction for Asset W for 2005 is $1,646
(($11,520)(0.1429)(1/(1–0.5))(1/2)). Thus, the de-
preciation deduction for Asset W in 2006 (recovery
year 6) is $3,290 ($11,520)(0.1428)(1/(1–0.5)). The
depreciation deduction for 2007 (recovery year 7) is
$3,292 (($11,520)(.1429)(1/(1-.5))). The deprecia-
tion deduction for 2008 (recovery year 8) is $3,292
($11,520 less allowable depreciation for Asset W for
2005 through 2007 ($1,646 + $3,290 + $3,292)).
Example 3. L, a calendar-year taxpayer, placed
in service used Computer X in January 2002 for
$5,000. L depreciated Computer X under the general
depreciation system of section 168(a) by using the
200-percent declining balance method of deprecia-
tion, a 5-year recovery period, and the half-year con-
vention. Computer X is destroyed in a fire in March
2004. For 2004, the depreciation deduction allow-
able for Computer X equals $480 ([($5,000)(.1920)]
x (1/2)). Thus, the adjusted depreciable basis of
Computer X was $1,920 when it was destroyed
($5,000 unadjusted depreciable basis less $1,000
depreciation for 2002, $1,600 depreciation for 2003,
and $480 depreciation for 2004). In April 2004, as
part of the involuntary conversion, L acquired and
placed in service used Computer Y with insurance
proceeds received due to the loss of Computer X.
Computer Y will be depreciated using the same de-
preciation method, recovery period, and convention
as Computer X. L elected to use the optional depre-
ciation tables to compute the depreciation allowance
for Computer X and Computer Y. The depreciation
deduction allowable for 2004 for Computer Y equals
$384 ([$1,920 x (.1920)(1/(1-.52))] x (1/2)).
(f)Mid-quarter convention. For pur-
poses of applying the 40-percent test un-
der section 168(d) and the regulations un-
der section 168(d), the following rules ap-
ply:
(1)Exchanged basis. If, in a taxable
year, MACRS property is placed in service
by the acquiring taxpayer (but not as a re-
sult of a like-kind exchange or involuntary
conversion) and—
(i) In the same taxable year, is dis-
posed of by the acquiring taxpayer in a
like-kind exchange or an involuntary con-
version and replaced by the acquiring tax-
payer with replacement MACRS property,
the exchanged basis (determined without
any adjustments for depreciation deduc-
tions during the taxable year) of the re-
placement MACRS property is taken into
account in the year of replacement in the
quarter the relinquished MACRS property
was placed in service by the acquiring tax-
payer; or
(ii) In the same taxable year, is dis-
posed of by the acquiring taxpayer in
a like-kind exchange or an involuntary
conversion, and in a subsequent taxable
year is replaced by the acquiring taxpayer
with replacement MACRS property, the
exchanged basis (determined without any
adjustments for depreciation deductions
during the taxable year) of the replacement
MACRS property is taken into account in
the year of replacement in the quarter the
replacement MACRS property was placed
in service by the acquiring taxpayer; or
(iii) In a subsequent taxable year, dis-
posed of by the acquiring taxpayer in a
like-kind exchange or involuntary conver-
sion, the exchanged basis of the replace-
ment MACRS property is not taken into
account in the year of replacement.
(2)Excess basis. Any excess basis is
taken into account in the quarter the re-
placement MACRS property is placed in
service by the acquiring taxpayer.
(3)Depreciable property acquired for
nondepreciable property. Both the ex-
changed basis and excess basis of the re-
placement MACRS property described in
paragraph (d)(2)(ii) of this section (depre-
ciable property acquired for nondeprecia-
ble property), are taken into account for
determining whether the mid-quarter con-
vention applies in the year of replacement.
(g)Section 179 election. In applying
the section 179 election, only the excess
basis, if any, in the replacement MACRS
property is taken into account. If the re-
placement MACRS property is described
April 2, 20078602007–14 I.R.B.

in paragraph (d)(2)(ii) of this section (de-
preciable property acquired for nondepre-
ciable property), only the excess basis in
the replacement MACRS property is taken
into account.
(h)Additional first year deprecia-
tion deduction. See §1.168(k)–1(f)(5)
(for qualified property or 50-per-
cent bonus depreciation property) and
§1.1400L(b)–1(f)(5) (for qualified New
York Liberty Zone property).
(i)Elections—(1)Election not to ap-
ply this section. A taxpayer may elect
not to apply this section for any MACRS
property involved in a like-kind exchange
or involuntary conversion. An election
under this paragraph (i)(1) applies only to
the taxpayer making the election and the
election applies to both the relinquished
MACRS property and the replacement
MACRS property. If an election is made
under this paragraph (i)(1), the depre-
ciation allowances for the replacement
MACRS property beginning in the year
of replacement and for the relinquished
MACRS property in the year of dis-
position are not determined under this
section (except as otherwise provided
in this paragraph). Instead, for depre-
ciation purposes only, the sum of the
exchanged basis and excess basis, if any,
in the replacement MACRS property is
treated as property placed in service by
the taxpayer at the time of replacement
and the adjusted depreciable basis of the
relinquished MACRS property is treated
as being disposed of by the taxpayer at
the time of disposition. While the relin-
quished MACRS property is treated as
being disposed of at the time of disposi-
tion for depreciation purposes, the election
not to apply this section does not affect
the application of sections 1031 and 1033
(for example, if a taxpayer does not make
the election under this paragraph (i)(1)
and does not recognize gain or loss un-
der section 1031, this result would not
change if the taxpayer chose to make the
election under this paragraph (i)(1)). In
addition, the electionnottoapplythis
section does not affect the application of
sections 1245 and 1250 to the relinquished
MACRS property. Paragraphs (c)(5)(i)
(determination of depreciation for relin-
quished MACRS property in the year of
disposition), (c)(5)(iii) (rules for deferred
transactions), (g) (section 179 election),
and (h) (additional first year depreciation
deduction) of this section apply to prop-
erty to which this paragraph (i)(1) applies.
See paragraph (j) of this section for the
time and manner of making the election
under this paragraph (i)(1).
(2)Election to treat certain replace-
ment property as MACRS property.If
the tangible depreciable property acquired
by a taxpayer in a like-kind exchange or
involuntary conversion (the replacement
property) replaces tangible depreciable
property for which the taxpayer made a
valid election under section 168(f)(1) to
exclude it from the application of MACRS
(the relinquished property), the taxpayer
may elect to treat, for depreciation pur-
poses only, the sum of the exchanged
basis and excess basis, if any, of the re-
placement property as MACRS property
that is placed in service by the taxpayer
at the time of replacement. An election
under this paragraph (i)(2) applies only to
the taxpayer making the election and the
election applies to both the relinquished
property and the replacement property. If
an election is made under this paragraph
(i)(2), the adjusted depreciable basis of
the relinquished property is treated as
being disposed of by the taxpayer at the
time of disposition. Rules similar to those
provided in §§1.168(i)–6(b)(3) and (4)
apply for purposes of determining the time
of disposition and time of replacement
under this paragraph (i)(2). While the
relinquished property is treated as being
disposed of at the time of disposition for
depreciation purposes, the election under
this paragraph (i)(2) does not affect the ap-
plication of sections1031 and 1033, and
the application of sections 1245 and 1250
to the relinquished property. If an election
is made under this paragraph (i)(2), rules
similar to those provided in paragraphs
(c)(5)(iii) (rules for deferred transactions),
(g) (section 179 election), and (h) (addi-
tional first year depreciation deduction)
of this section apply to property. Except
as provided in paragraph (k)(3)(ii) of this
section, a taxpayer makes the election un-
der this paragraph (i)(2) by claiming the
depreciation allowance as determined un-
der MACRS for the replacement property
on the taxpayer’s timely filed (including
extensions) original Federal tax return for
the placed-in-service year of the replace-
ment property as determined under this
paragraph (i)(2).
(j)Time and manner of making election
under paragraph (i)(1) of this section—(1)
In general. The election provided in para-
graph (i)(1) of this section is made sep-
arately by each person acquiring replace-
ment MACRS property. The election is
made for each member of a consolidated
group by the common parent of the group,
by the partnership (and not by the part-
ners separately) in the case of a partner-
ship, or by the S corporation (and not by
the shareholders separately) in the case of
an S corporation. A separate election un-
der paragraph (i)(1) of this section is re-
quired for each like-kind exchange or in-
voluntary conversion. The election pro-
vided in paragraph (i)(1) of this section
must be made within the time and manner
provided in paragraph (j)(2) and (3) of this
section and may not be made by the tax-
payer in any other manner (for example,
the election cannot be made through a re-
quest under section 446(e) to change the
taxpayer’s method of accounting), except
as provided in paragraph (k)(2) of this sec-
tion.
(2)Time for making election. The elec-
tion provided in paragraph (i)(1) of this
section must be made by the due date (in-
cluding extensions) of the taxpayer’s Fed-
eral tax return for the year of replacement.
(3)Manner of making election.The
election provided in paragraph (i)(1) of
this section is made in the manner provided
for on Form 4562,Depreciation and Amor-
tization, and its instructions. If Form 4562
is revised or renumbered, any reference in
this section to that form is treated as a ref-
erence to the revised or renumbered form.
(4)Revocation. The election provided
in paragraph (i)(1) of this section, once
made, may be revoked only with the con-
sent of the Commissioner of Internal Rev-
enue. Such consent will be granted only in
extraordinary circumstances. Requests for
consent are requests for a letter ruling and
must be filed with the Commissioner of In-
ternal Revenue, Washington, DC 20224.
Requests for consent may not be made in
any other manner (for example, through a
request under section 446(e) to change the
taxpayer’s method of accounting).
(k)Effective date—(1)In general.Ex-
cept as provided in paragraph (k)(3) of this
section, this section applies to a like-kind
exchange or an involuntary conversion of
MACRS property for which the time of
2007–14 I.R.B.861April 2, 2007

disposition and the time of replacement
both occur after February 27, 2004.
(2)Application to pre-effective date
like-kind exchanges and involuntary con-
versions. For a like-kind exchange or an
involuntary conversion of MACRS prop-
erty for which the time of disposition,
the time of replacement, or both occur on
or before February 27, 2004, a taxpayer
may—
(i) Apply the provisions of this sec-
tion. If a taxpayer’s applicable Federal
tax return has been filed on or before
February 27, 2004, and the taxpayer has
treated the replacement MACRS prop-
erty as acquired, and the relinquished
MACRS property as disposed of, in a
like-kind exchange or an involuntary con-
version, the taxpayer changes its method
of accounting for depreciation of the
replacement MACRS property and relin-
quished MACRS property in accordance
with this paragraph (k)(2)(i) by following
the applicable administrative procedures
issued under §1.446–1(e)(3)(ii) for ob-
taining the Commissioner’s automatic
consent to a change in method of ac-
counting (for further guidance, see Rev.
Proc. 2002–9, 2002–1 C.B. 327, and
§601.601(d)(2)(ii)(b) of this chapter); or
(ii) Rely on prior guidance issued by the
Internal Revenue Service for determining
the depreciation deductions of replace-
ment MACRS property and relinquished
MACRS property (for further guidance,
for example, see Notice 2000–4, 2000–1
C.B. 313, and §601.601(d)(2)(ii)(b)ofthis
chapter). In relying on such guidance, a
taxpayer may use any reasonable, consis-
tent method of determining depreciation
in the year of disposition and the year
of replacement. If a taxpayer’s applica-
ble Federal tax return has been filed on
or before February 27, 2004, and the tax-
payer has treated the replacement MACRS
property as acquired, and the relinquished
MACRS property as disposed of, in a
like-kind exchange or an involuntary con-
version, the taxpayer changes its method
of accounting for depreciation of the
replacement MACRS property and relin-
quished MACRS property in accordance
with this paragraph (k)(2)(ii) by following
the applicable administrative procedures
issued under §1.446–1(e)(3)(ii) for ob-
taining the Commissioner’s automatic
consent to a change in method of ac-
counting (for further guidance, see Rev.
Proc. 2002–9, 2002–1 C.B. 327, and
§601.601(d)(2)(ii)(b) of this chapter).
(3)Like-kind exchanges and involun-
tary conversions where the taxpayer made
the election under section 168(f)(1) for the
relinquished property—(i)In general.If
the tangible depreciable property acquired
by a taxpayer in a like-kind exchange or
involuntary conversion (the replacement
property) replaces tangible depreciable
property for which the taxpayer made a
valid election under section 168(f)(1) to
exclude it from the application of MACRS
(the relinquished property), paragraph
(i)(2) of this section applies to such relin-
quished property and replacement prop-
erty for which the time of disposition
and the time of replacement (both as de-
termined under paragraph (i)(2) of this
section) both occur after February 26,
2007.
(ii)Application of paragraph (i)(2) of
this section to pre-February 26, 2007,
like-kind exchanges and involuntary con-
versions. If the tangible depreciable prop-
erty acquired by a taxpayer in a like-kind
exchange or involuntary conversion (the
replacement property) replaces tangible
depreciable property for which the tax-
payer made a valid election under section
168(f)(1) to exclude it from the application
of MACRS (the relinquished property),
the taxpayer may apply paragraph (i)(2)
of this section to the relinquished property
and the replacement property for which
the time of disposition, the time of replace-
ment (both as determined under paragraph
(i)(2) of this section), or both occur on
or before February 26, 2007. If the tax-
payer wants to apply paragraph (i)(2) of
this section and the taxpayer’s applicable
Federal tax return has been filed on or
before February 26, 2007, the taxpayer
must change its method of accounting for
depreciation of the replacement property
and relinquished property in accordance
with this paragraph (k)(3)(ii) by following
the applicable administrative procedures
issued under §1.446–1(e)(3)(ii) for ob-
taining the Commissioner’s automatic
consent to a change in method of ac-
counting (for further guidance, see Rev.
Proc. 2002–9, 2002–1 C.B. 327, and
§601.601(d)(2)(ii)(b) of this chapter).
§1.168(i)–6T [Removed]
Par. 13. Section 1.168(i)–6T is re-
moved.
Par. 14. Section 1.168(k)–1 is amended
as follows:
1. The second and third sentences in
paragraph (f)(5)(v)(B) are revised.
2. The last sentences in Example 1(i),
Example 3(i), Example 4(i), and Example
5(i) in paragraph (f)(5)(vi) are revised.
3. Paragraph (g)(3)(ii) is revised.
The revisions read as follows:
§1.168(k)–1 Additional first year
depreciation.
*****
(f) * * *
(5) * * *
(v) * * *
(B)***However,atthetimeofdis-
position of the involuntarily converted
MACRS property, the taxpayer deter-
mines the exchanged basis (as defined in
§1.168(i)–6(b)(7)) and the excess basis
(as defined in §1.168(i)–6(b)(8)) of the
acquired MACRS property and begins
to depreciate the depreciable exchanged
basis (as defined in §1.168(i)–6(b)(9)
of the acquired MACRS property in
accordance with §1.168(i)–6(c). The
depreciable excess basis (as defined
in §1.168(i)–6(b)(10)) of the acquired
MACRS property continues to be de-
preciated by the taxpayer in accordance
with the first sentence of this paragraph
(f)(5)(v)(B).
*****
(vi)***
Example 1. (i)***Pursuanttoparagraph
(g)(3)(ii) of this section and §1.168(i)–6(k)(2)(i),
EE decided to apply §1.168(i)–6 to the involuntary
conversion of Canopy V1 with the replacement of
Canopy W1, the acquired MACRS property.
*****
Example 3. (i)***Pursuanttoparagraph
(g)(3)(ii) of this section and §1.168(i)–6(k)(2)(i),
FF decided to apply §1.168(i)–6 to the exchange
of Computer X2 for Computer Y2, the acquired
MACRS property.
*****
Example 4. (i)***Pursuanttoparagraph
(g)(3)(ii) of this section and §1.168(i)–6(k)(2)(i),
GG decided to apply §1.168(i)–6 to the exchange
of Equipment X3 for Equipment Y3, the acquired
MACRS property.
*****
Example 5. (i)***Pursuanttoparagraph
(g)(3)(ii) of this section and §1.168(i)–6(k)(2)(i),
GG decided to apply §1.168(i)–6 to the exchange
April 2, 20078622007–14 I.R.B.

of Equipment Y3 for Equipment Z1, the acquired
MACRS property.
*****
(g) * * *
(3) * * *
(ii) Paragraphs (f)(5)(ii)(F)(2)and
(f)(5)(v) of this section apply to a like-kind
exchange or an involuntary conversion of
MACRS property and computer software
for which the time of disposition and the
time of replacement both occur after Feb-
ruary 27, 2004. For a like-kind exchange
or an involuntary conversion of MACRS
property for which the time of disposi-
tion, the time of replacement, or both
occur on or before February 27, 2004,
see §1.168(i)–6(k)(2)(ii). For a like-kind
exchange or involuntary conversion of
computer software for which the time of
disposition, the time of replacement, or
both occur on or before February 27, 2004,
a taxpayer may rely on prior guidance is-
sued by the Internal Revenue Service for
determining the depreciation deductions
of the acquired computer software and
the exchanged or involuntarily converted
computer software (for further guidance,
see §1.168(k)–1T(f)(5) published in the
Federal Registeron September 8, 2003
(T.D. 9091, 2003–2 C.B. 939 [68 FR
53000])). In relying on such guidance, a
taxpayer may use any reasonable, consis-
tent method of determining depreciation
in the year of disposition and the year of
replacement.
*****
Kevin M. Brown,
Deputy Commissioner for
Services and Enforcement.
Approved February 23, 2007.
Eric Solomon,
Assistant Secretary of the
Treasury (Tax Policy).
(Filed by the Office of the Federal Register on February 26,
2007, 3:25 p.m., and published in the issue of the Federal
Register for March 1, 2007, 72 F.R. 9245)
Section 527.—Political
Organizations
26 CFR 601.105: Examinations of returns and claims
for refund, credit or abatement; determination of cor-
rect tax liability.
A revenue procedure sets forth the elements of a
safe harbor under section 527(1) of the Internal Rev-
enue Code for waiver of amounts due for failure to
comply with certain reporting requirements due to
reasonable cause but not willful neglect. See Rev.
Proc. 2007-27, page 887.
Section 6011.—General
Requirement of Return,
Statement, or List
26 CFR 1.6011–1(a): General requirement of return,
statement or list.
(Also: §§ 6012(a), 6020(b), 6072(a), 6151.)
Frivolous tax returns; voluntary
compliance.This ruling discusses and
refutes the frivolous position taken by
some taxpayers that complying with the
internal revenue laws is purely voluntary
and that taxpayers are not legally required
to file federal tax returns or pay federal
tax because the filing of a tax return or the
payment of tax is a matter of choice.
Rev. Rul. 2007–20
PURPOSE
The Internal Revenue Service (Service)
is aware that some taxpayers assert that
compliance with the internal revenue laws
is purely voluntary, specifically, that they
are not required to file federal tax returns
or pay federal tax because the filing of a tax
return or the payment of tax is a matter of
choice. Taxpayers who take this position
argue that the Form 1040 Series instruc-
tions provide that filing a return and pay-
ing tax are voluntary and not mandatory.
Often quoting from the Supreme Court’s
opinion inFlora v. United States, 362 U.S.
145, 176 (1960), they claim that “[o]ur sys-
tem of taxation is based upon voluntary as-
sessment and payment, not upon distraint.”
Some of these taxpayers also contend that
section 6020(b) of the Internal Revenue
Code requires the Service to prepare a fed-
eral tax return for any person who does not
file a return, which, according to these tax-
payers, means that they are not required to
fileareturn.
This revenue ruling emphasizes to tax-
payers, promoters, and return preparers
that the requirements to file a tax return
and pay the tax that is due are not optional.
Anypositiontothecontraryhasnomerit
and is frivolous.
The Service is committed to identify-
ing taxpayers who attempt to avoid their
federal tax obligations by taking frivolous
positions. The Service will take vigorous
enforcement action against these tax-
payers and against promoters and return
preparers who assist taxpayers in taking
these frivolous positions. Frivolous re-
turns and other similar documents submit-
ted to the Service are processed through
the Service’s Frivolous Return Program.
As part of this program, the Service de-
termines whether taxpayers who have
taken frivolous positions have filed all
required tax returns, computes the correct
amount of tax and interest due, and deter-
mines whether civil or criminal penalties
should apply. The Service also determines
whether civil or criminal penalties should
apply to return preparers, promoters,
and others who assist taxpayers in tak-
ing frivolous positions, and recommends
whether an injunction should be sought
to halt these activities. Other information
about frivolous tax positions is available
on the Service website atwww.irs.gov.
ISSUE
Whether filing a tax return or paying tax
is voluntary.
FACTS
Taxpayer A claims that he is not re-
quired to file a federal income tax return
or pay income taxes because filing a re-
turn and paying tax are “voluntary” activ-
ities that he can legitimately opt not to do.
Taxpayer A further claims that if a tax re-
turn is required, the Service must prepare
it for the taxpayer.
LAW AND ANALYSIS
Effective tax administration relies on
taxpayers willingly complying with the tax
laws, but taxpayers do not have the right
to choose whether the laws apply to them.
References to a “voluntary” tax system in
Flora,supra, and in Service publications,
mean a system that allows taxpayers to de-
termine, in the first instance, the correct
2007–14 I.R.B.863April 2, 2007

amount of their tax andtoreporttheirli-
ability on appropriate returns, rather than
having the government make the determi-
nations for them.See Hibbs v. Winn,542
U.S. 88, 100 n.3 (2004) (“[T]he taxpayer,
not the taxing authority, is thefirstparty
to make the relevant calculation of income
taxes owed.”) (Emphasis added). “Volun-
tary” in this context does not mean that
taxpayers may opt out of the system. As
stated inUnited States v. Schiff, 876 F.2d
272, 275 (2d Cir. 1989):
To the extent that income taxes are said
to be “voluntary,” . . . they are only
voluntary in that one files the returns
and pays the taxes without the IRS
first telling each individual the amount
due and then forcing payment of that
amount. The payment of income taxes
is not optional, however, . . . and the
average citizen knows that the payment
of income taxes is legally required.
See also United States v. Middleton,
246 F.3d 825, 840–41 (6th Cir. 2001);
United States v. Raymond, 228 F.3d 804,
812–13 (7th Cir. 2000);United States v.
Gerads, 999 F.2d 1255, 1256 (8th Cir.
1993);Wilcox v. Commissioner, 848 F.2d
1007, 1008 (9th Cir. 1988);United States
v. Tedder, 787 F.2d 540, 542 (10th Cir.
1986);Moore v. Commissioner, 722 F.2d
193, 196 (5th Cir. 1984);Woods v. Com-
missioner, 91 T.C. 88, 90 (1988).
Any suggestion that taxpayers may
elect not to file returns or pay tax ig-
nores the laws that affirmatively and
unambiguously establish these require-
ments. Specifically, the requirement to
pay income taxes is clearly established in
section 1 of the Internal Revenue Code,
which imposes a tax on the taxable in-
come of individuals, estates, and trusts as
determined by the tables set forth in that
section, and section 11, which imposes a
tax on the taxable income of corporations.
The requirement to file an income tax re-
turn is explicitly stated in sections 6011(a),
6012(a), and 6072(a) and corresponding
Treasury Regulations. In addition, section
6151 requires taxpayers to submit pay-
ment of their taxes with their tax returns.
Under these provisions of the Code, any
taxpayer who has received more than a
statutorily determined amount of gross
income during the tax year is required to
file a return for the year and pay tax on the
income.
Underscoring the fallacy of any posi-
tion that filing a tax return or paying tax
is voluntary is the existence of civil and
criminal penalties for failing to file or pay.
See Helvering v. Mitchell, 303 U.S. 391,
399 (1938) (“In assessing income taxes
the Government relies primarily upon the
disclosure by the taxpayer of the relevant
facts . . . [on an] annual return [backed up
by] . . . sanctions [that] may . . . be either
criminal or civil.”) If, as some taxpayers
claim, reporting and paying taxes were op-
tional, penalties for noncompliance would
not exist and would not be routinely im-
posed and upheld.
Section 6651(a) imposes an addition to
tax for failure to file a required tax return or
pay tax unless the failure is due to reason-
able cause and not willful neglect. Section
7203 imposes a criminal penalty (in addi-
tion to the civil penalty) for willfully fail-
ing to file a return or pay tax.
Finally, the Service is not obligated to
make returns for taxpayers who fail to do
so. Section 6020(b) merely provides the
Service with a mechanism for determining
the tax liability of a taxpayer who has not
filed a return. Section 6020(b) does not re-
quire the Service to prepare a tax return in
any case, and it does not excuse a taxpayer
from the requirements to file and pay or
from liability for unpaid taxes, plus civil
and criminal penalties for the failure to file
or pay.
HOLDING(S)
Taxpayer A must file income tax returns
if the income threshold is met and must
pay the correct amount of income taxes
owed. Compliance with the internal rev-
enue laws, including filing tax returns and
paying tax, is not optional. Further, the
Service’s authority to prepare a return un-
der section 6020(b) does not relieve a tax-
payer of the obligation to file a tax return
or pay tax. Any claim by Taxpayer A that
one may lawfully opt not to file a return or
pay tax is frivolous.
The Service will challenge the claims
of individuals who improperly attempt to
avoid or evade their federal tax liability.
CIVIL AND CRIMINAL PENALTIES
The position described above—that the
law permits a taxpayer to choose not to
file an income tax return or pay income
taxes because these acts are voluntary—is
a frivolous position for purposes of section
6702(c). The Service will challenge the
claims of individuals who attempt to im-
properly avoid or evade their federal tax
liability. In addition to liability for the
tax due plus statutory interest, taxpayers
who fail to file valid returns or pay taxes,
face substantial civil and criminal penal-
ties. Potentially applicable civil penalties
include: (1) the section 6662 accuracy-re-
lated penalties, which are generally equal
to 20 percent of the amount of tax the tax-
payer should have paid; (2) the section
6663 penalty for civil fraud, which is equal
to 75 percent of the amount of tax the tax-
payer should have paid; (3) the section
6702(a) penalty of $5,000 for filing a doc-
ument that purports to be a return and that
contains a frivolous position or suggests a
desire by the taxpayer to delay or impede
the administration of federal tax laws; (4)
the section 6702(b) penalty of $5,000 for
submitting a “specified frivolous submis-
sion”; (5) the section 6651 additions to tax
for failure to file a return, failure to pay the
tax owed, and fraudulent failure to file a
return; (6) the section 6673 penalty of up
to $25,000 if the taxpayer makes frivolous
arguments in the United States Tax Court;
and (7) the section 6682 penalty of $500
for providing false information with re-
spect to withholding.
Taxpayers relying on this frivolous po-
sition also may face criminal prosecution
under: (1) section 7201 for attempting to
evade or defeat tax, the penalty for which is
a significant fine and imprisonment for up
to5years;(2)section7203forwillfulfail-
ure to file a return, the penalty for which is
a significant fine and imprisonment for up
to a year; (3) section 7206 for making false
statements on a return, statement, or other
document, the penalty for which is a sig-
nificant fine and imprisonment for up to 3
years; and (4) other federal laws as appli-
cable.
Persons, including return preparers,
who promote this frivolous position and
those who assist taxpayers in claiming tax
benefits based on frivolous positions may
face civil and criminal penalties and also
may be enjoined by a court pursuant to
sections 7407 and 7408. Potential penal-
ties include: (1) a $250 penalty under
section 6694 for each return or claim for
refund prepared by an income tax return
preparer who knew or should have known
that the taxpayer’s position was frivolous
April 2, 20078642007–14 I.R.B.

(or $1,000 for each return or claim for re-
fund if the return preparer’s actions were
willful, intentional, or reckless); (2) a
penalty under section 6700 for promoting
abusive tax shelters; (3) a $1,000 penalty
under section 6701 for aiding and abetting
the understatement of tax; (4) criminal
prosecution under section 7206, for which
the penalty is a significant fine and impris-
onmentforupto3years,forassistingwith
or advising on the preparation of a false
return, statement, or other document under
the internal revenue laws; and (5) other
federal laws as applicable.
DRAFTING INFORMATION
This revenue ruling was authored by the
Office of Associate Chief Counsel (Pro-
cedure & Administration), Administrative
Provisions and Judicial Practice Division.
For further information regarding this rev-
enue ruling, contactthat office at (202)
622–7950 (not a toll-free call).
Section 6203.—Method
of Assessment
26 CFR 301.6203–1: Method of assessment.
(Also: § 6330.)
Frivolous tax returns; summary
record of assessment.This ruling dis-
cusses and refutes the frivolous position
taken by some taxpayers that before the
IRS may collect overdue taxes, the IRS
must provide taxpayers with a summary
record of assessment made on a Form 23C,
Assessment Certificate-Summary Record
of Assessments, or on another particular
form. These taxpayers claim that if a
Form 23C is not provided, the assessment
is invalid and the IRS may not collect any
taxes due.
Rev. Rul. 2007–21
PURPOSE
The Internal Revenue Service (Service)
is aware that some taxpayers are claim-
ing that, before the Service may collect
overdue taxes, the Service must provide
taxpayers with a summary record of as-
sessment made on a Form 23C, “Assess-
ment Certificate-Summary Record of As-
sessments,” that is signed by an authorized
employee or officer. If a Form 23C is not
provided, these taxpayers claim that the as-
sessment is invalid, and, consequently, that
the Service may not collect any taxes due.
This revenue ruling emphasizes to tax-
payers, promoters, and return preparers
that, although an assessment is recorded
on a summary record of assessment, such
as the Form 23C or its computer-gener-
ated equivalent, the Revenue Accounting
Control System (RACS) Report 006, there
is no legal requirement that a summary
record of assessment be provided to a
taxpayer before the Service may proceed
with collection activity. Further, if a tax-
payer requests proof that an assessment
was made, the Service is not required to
provide any particular form or information
in any particular format to the taxpayer
so long as the Service provides the infor-
mation required by Treasury Regulation
§ 301.6203–1 to the taxpayer. Any po-
sition to the contrary has no merit and is
frivolous.
The Service is committed to identify-
ing taxpayers who attempt to avoid their
federal tax obligations by taking frivolous
positions. The Service will take vigorous
enforcement action against these tax-
payers and against promoters and return
preparers who assist taxpayers in taking
these frivolous positions. Frivolous re-
turns and other similar documents submit-
ted to the Service are processed through
the Service’s Frivolous Return Program.
As part of this program, the Service de-
termines whether taxpayers who have
taken frivolous positions have filed all
required tax returns, computes the correct
amount of tax and interest due, and deter-
mines whether civil or criminal penalties
should apply. The Service also determines
whether civil or criminal penalties should
applytoreturnpreparers,promoters,
and others who assist taxpayers in tak-
ing frivolous positions, and recommends
whether an injunction should be sought
to halt these activities. Other information
about frivolous tax positions is available
on the Service’s website atwww.irs.gov.
ISSUE
Whether the Service must provide a tax-
payer with a summary record of assess-
ment, such as a Form 23C, before collec-
tion may begin.
FACTS
Taxpayer A argues in a request for a
collection due process hearing under sec-
tion 6330 or 6320 of the Internal Revenue
Code that, pursuant to section 6203 and
Treasury Regulation § 301.6203–1, the
Service must first provide the taxpayer
with a summary record of assessment of
taxes due before collection action may
commence. Taxpayer A further argues
that the record provided must include a
Form 23C signed by an authorized Service
official. In response, the Service provides
Taxpayer A with a record of assessment on
a Form 4340 (“Certificate of Assessments,
Payments, Other Specified Matters”),
MFTRA-X (“Master File Transcript”), or
other similar document. Taxpayer A as-
serts these forms do not meet the legal re-
quirements and untilthe Service produces
a valid summary record of assessment,
the Service is prohibited from collecting
the assessed liability. According to Tax-
payer A, the Appeals Officer conducting
the collection due process hearing, in ver-
ifying under section 6330(c)(1) that the
Service has complied with applicable law
and procedure, may not rely on anything
other than the Form 23C to determine, for
purposes of the section 6330(c)(1) require-
ment, that a valid assessment was made.
LAW AND ANALYSIS
Section 6203 states that an assessment
of tax (including interest, additions to tax,
and assessable penalties) “shall be made
by recording the liability of the taxpayer
in the office of the Secretary in accor-
dance with rules or regulations prescribed
by the Secretary.” The section also states
that, when requested by a taxpayer, “the
Secretary shall furnish the taxpayer a copy
of the record of assessment.” Treasury
Regulation § 301.6203–1 specifies that
an assessment is made “by an assessment
officer signing the summary record of
assessment,” which “through supporting
records” must include the “identification
of the taxpayer, the character of the liabil-
ity assessed, the taxable period, if appli-
cable,andtheamountoftheassessment.”
Under the regulation, if a taxpayer re-
quests a copy of the record of assessment,
the Service will give the taxpayer “a copy
of the pertinent parts of the assessment
which set forth the name of the taxpayer,
2007–14 I.R.B.865April 2, 2007

the date of assessment, the character of
the liability assessed, the taxable period,
if applicable, and the amounts assessed.”
Thedateoftheassessmentisthedatethe
summary record is signed.
There is no requirement in the statute or
regulation that the assessment be recorded
on a specific form or that the taxpayer be
provided with a certain form as a record of
assessment.
Until its transition to computerized
recordkeeping, the Service generally used
Form 23C for the summary record of
assessment, but it now uses, except in
unusual circumstances, a computer-gener-
ated summary record of assessment known
as the RACS Report 006. Both forms have
been recognized as summary records of
assessment within the meaning of section
6203.See March v. Internal Revenue
Service, 335 F.3d 1186, 1188 (10th Cir.
2003). InRoberts v. Commissioner,329
F.3d 1224, 1228 (11th Cir. 2003), the
taxpayer argued that an assessment was
invalid because the Service did not use
Form 23C but instead used RACS Report
006. The court held that there was noth-
ing in the law to show that the use of the
RACS report was not in compliance with
the statute and the regulation. The RACS
report and the Form 23C are both signed
by an assessment officer. The RACS re-
port, like the Form 23C, provides, when
coupled with “supporting records,” the in-
formation set forth in Treasury Regulation
§ 301.6203–1.
In response to a taxpayer’s request un-
der section 6203 and the regulation for
“a copy of the record of assessment,” the
Service is not required to provide any par-
ticular form or document and may choose
among documents that contain the items
ofinformationlistedintheregulation.
Instead of a RACS report 006, which does
not break out individual taxpayer informa-
tion, the Service may provide Form 4340,
“Certificate of Assessments, Payments,
Other Specified Matters,” or a MFTRA-X
transcript (literal or plain-language tran-
script) of the taxpayer’s account, either
of which sets forth all of the information
required by the regulation, because each
identifies the taxpayer, states the char-
acter of the liabilities assessed, the tax
period giving rise to the assessment, the
amount of the assessment, and the date
of assessment.See Goodman v. United
States, 185 Fed. Appx. 725, 728 (10th
Cir. 2006);Roberts, 329 F.3d at 1228;
Carillo v. Commissioner, T.C. Memo.
2005–290;Michael v. Commissioner,T.C.
Memo. 2003–26. In addition, an Appeals
Officer is not required to obtain a Form
23C or other particular document in a col-
lection due process hearing and may rely
on a Form 4340 or MFTRA-X transcript
to verify the validity of the assessment
for purposes of section 6330(c)(1).See
Nestor v. Commissioner,118T.C.162
(2002);Perez v. Commissioner,T.C.
Memo. 2002–274.
HOLDING
The Service is not required to provide
Taxpayer A with a summary record of as-
sessment before collecting any taxes due.
An assessment is not invalid, and collec-
tion is not precluded, because the Service
has not provided a summary record of as-
sessment to the taxpayer.
Additionally, Taxpayer A’s claim that
the Service must produce a Form 23C or
other record of assessment as proof of
assessment is frivolous. If a taxpayer re-
quests a copy of the record of assessment,
the Service may produce the informa-
tion in any form or format, provided the
summary produced contains the infor-
mation required by Treasury Regulation
§ 301.6203–1. Acceptable copies of the
record of assessment include, but are not
limited to, Forms 4340 and MFTRA-X
transcripts. Further, the Form 4340,
MFTRA-X transcript, or other similar
documents may be used in a collection due
process proceeding to verify the validity
of an assessment under section 6330(c)(1).
The Service will challenge the claims
of individuals who improperly attempt to
avoid or evade their federal tax liability.
CIVIL AND CRIMINAL PENALTIES
The position described above, that the
Service must provide a taxpayer with a
summary record of assessment, such as a
Form 23C, before collection or must pro-
vide a Form 23C in any collection pro-
ceeding is a frivolous position under sec-
tion 6702. The Service will challenge
the claims of individuals who attempt to
improperly avoid or evade their federal
tax liability. In addition to liability for
the tax due plus statutory interest, tax-
payers who insist upon receiving a Form
23C before complying with their tax obli-
gations face substantial civil and crimi-
nal penalties. Potentially applicable civil
penalties include: (1) the section 6702(b)
$5,000 penalty for submitting a “speci-
fied frivolous submission”; (2) the section
6651(a)(3) addition to tax for failure to pay
the tax owed; and (3) the section 6673
penalty of up to $25,000 if the taxpayer
makes frivolous arguments in the United
States Tax Court.
Taxpayers relying on this frivolous po-
sition also may face criminal prosecution
under section 7201 for attempting to evade
or defeat tax, the penalty for which is a sig-
nificant fine and imprisonment for up to 5
years, or prosecution under other federal
laws as applicable.
DRAFTING INFORMATION
This revenue ruling was authored by the
Office of Associate Chief Counsel (Pro-
cedure & Administration), Administrative
Provisions and Judicial Practice Division.
For further information regarding this rev-
enue ruling, contact that office at (202)
622–7950 (not a toll-free call).
Section 7701.—Definitions
26 CFR 301.7701–6(a): Person.
(Also: §§ 6012, 7203, 7343, 26 CFR 1.6012–1(a).)
Frivolous tax returns; citizens of a
state.This ruling discusses and refutes the
frivolous position taken by some taxpayers
that they are not subject to federal income
tax, or that their income is excluded from
taxation, because either (1) they claim to
have rejected or renounced United States
citizenship and are citizens exclusively of
a state (sometimes characterized as a “nat-
ural-born citizen” of a “sovereign state”),
or (2) they are not persons as identified by
the Internal Revenue Code.
Rev. Rul. 2007–22
PURPOSE
The Internal RevenueService (Service)
is aware that some taxpayers are claiming
that they are not subject to federal in-
come tax, or that their income is excluded
from taxation, because: 1) the taxpay-
ers have declared that they have rejected
or renounced United States citizenship
April 2, 20078662007–14 I.R.B.

because the taxpayers are citizens exclu-
sively of a State (sometimes characterized
as a “natural-born citizen” of a “sovereign
state”); or 2) the taxpayers claim they are
not persons as identified by the Internal
Revenue Code. These taxpayers often fur-
nish Forms W–4,Employee’s Withholding
Allowance Certificate, to their employers
on which the taxpayers claim excessive
withholding allowances or claim complete
exemption from withholding. Based on
these Forms W–4, federal income taxes
are not withheld from wages paid. Alter-
natively, these taxpayers attempt to avoid
their federal income tax liability by sub-
mitting a Form 4852,Substitute for Form
W–2, Wage and Tax Statement, or Form
1099–R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc.,
to the Internal Revenue Service with a
zero on the line for the amount of wages
received. These taxpayers often either
fail to file returns, or file returns showing
no income and claiming a refund for any
withheld income taxes. The Service is
also aware that some promoters, including
return preparers, market a book, pack-
age, kit, or other materials that claim to
show taxpayers how they can avoid pay-
ing income taxes based on these and other
meritless arguments.
This revenue ruling emphasizes to tax-
payers, promoters and return preparers that
all U.S. citizens and residents are subject
to federal income tax. Any argument that
a taxpayer’s income is excluded from tax-
ation because: 1) the taxpayer has rejected
or renounced United States citizenship
because the taxpayer is a citizen exclu-
sively of a State (sometime characterized
as a “natural-born citizen” of a “sovereign
state”); or 2) the taxpayer is not a person
as defined by the Internal Revenue Code
and is, therefore, not subject to federal tax,
has no merit and is frivolous.
The Service is committed to identify-
ing taxpayers who attempt to avoid their
federal tax obligations by taking frivolous
positions. The Service will take vigorous
enforcement action against these tax-
payers and against promoters and return
preparers who assist taxpayers in taking
these frivolous positions. Frivolous re-
turns and other similar documents submit-
ted to the Service are processed through
the Service’s Frivolous Return Program.
As part of this program, the Service de-
termines whether taxpayers who have
taken frivolous positions have filed all
required tax returns; computes the correct
amount of tax and interest due; and deter-
mines whether civil or criminal penalties
should apply. The Service also deter-
mines whether civil or criminal penalties
should apply to return preparers, promot-
ers and others who assist taxpayers in tak-
ing frivolous positions, and recommends
whether an injunction should be sought
to halt these activities. Other information
about frivolous tax positions is available
on the Service website atwww.irs.gov.
ISSUES
1. Whether a taxpayer may avoid fed-
eral income tax liability by maintaining
that the taxpayer is not a citizen of the
United States and, thus, is not subject to
the federal income tax laws.
2. Whether a taxpayer may avoid fed-
eral income tax liability by claiming the
taxpayer is not a “person” as defined by
the Internal Revenue Code and, thus, is not
subject to the federal income tax laws.
FACTS
Taxpayer A claims to be exempt
from federal income tax because, as a
“sovereign citizen” of Taxpayer A’s state
of residence, Taxpayer A is not a citizen
or resident of the United States and is not
subject to federal tax laws.
Taxpayer B claims that the Fourteenth
Amendment, providing “[a]ll persons born
or naturalized in the United States, and
subject to the jurisdiction thereof, are citi-
zens of the United States and of the State
wherein they reside,” applies only to freed
slaves and their descendants, and that all
other persons are solely citizens of their
state of residence.
Taxpayer C claims not to be a United
States citizen or a person subject to tax be-
cause Taxpayer C has not requested, ob-
tained, or exercised any privilege from an
agency of government.
Taxpayer D claims not to be a “person”
or a “taxpayer” as defined by the Inter-
nal Revenue Code because Taxpayer D is
a freeborn and natural individual and not
subject to the jurisdiction of the United
States.
The taxpayer often furnishes a Form
W–4,Employee’s Withholding Allowance
Certificate, to the employer on which the
taxpayer claims excessive withholding al-
lowances or claims complete exemption
from withholding. Based on this Form
W–4, federal income taxes are not with-
held from wages paid. Alternatively, the
taxpayer prepares a Form 4852 (Substi-
tute for Form W–2) showing no wages re-
ceived.
The taxpayer either fails to file a return,
or files a return reporting zero income and
claiming a refund for all taxes withheld.
The taxpayer then contends the taxpayer is
not covered by the federal tax laws and is
not subject to federal income tax because
the taxpayer is not a citizen of the United
States, or the taxpayer is not a person as
defined by the Internal Revenue Code.
LAW AND ANALYSIS
1. Citizenship
The Fourteenth Amendment to the
United States Constitution defines the
basis for United States citizenship, stat-
ing that “[a]ll persons born or naturalized
in the United States, and subject to the
jurisdiction thereof, are citizens of the
United States and of the State wherein
they reside.” The Fourteenth Amend-
ment, therefore, establishes simultaneous
state and federal citizenship.See United
States v. Cruikshank, 92 U.S. 542, 549
(1875) (“The same person may be at the
same time a citizen of the United States
and a citizen of a State. . . .”);In re
Slaughter-House Cases,83U.S.(16Wall.)
36, 74 (1873) (A man “must reside within
the State to make him a citizen of it, but
it is only necessary that he should be born
or naturalized in the United States to be
a citizen of the Union”). The Fourteenth
Amendment’s granting of citizenship ap-
plies to all persons born or naturalized in
the United States, regardless of race.See,
e.g., Bell v. State of Maryland,378U.S.
226, 249 (1964) (Douglas, J., concurring)
(“The Fourteenth Amendment also makes
every person who is bornhereacitizen;
and there is no second or third or fourth
class of citizenship.”).
Section 7701(a)(9) of the Internal Rev-
enue Code states that “[t]he term ‘United
States’ when used in a geographical sense
includes only the States and the District
of Columbia.” Claims that individuals are
not citizens of the United States but are
solely citizens of a sovereign state and not
2007–14 I.R.B.867April 2, 2007

subject to federal taxation have been uni-
formly rejected by the courts.See, e.g.,
United States v. Hilgeford, 7 F.3d 1340,
1342 (7th Cir. 1993) (“The defendant in
this case apparently holds a sincere be-
lief that he is a citizen of the mythical
“Indiana State Republic” and for that rea-
son is an alien beyond the jurisdictional
reach of federal courts. This belief is,
of course, incorrect.”);United States v.
Gerads, 999 F.2d 1255, 1256 (8th Cir.
1993) (“[We] reject appellants’ contention
that they are not citizens of the United
States, but rather “Free Citizens of the Re-
public of Minnesota” and, consequently,
not subject to taxation.”);O’Driscoll v. In-
ternal Revenue Service, 1991 U.S. Dist.
LEXIS 9829, *5–6 (E.D. Penn. 1991)
(“Despite plaintiff’s linguistic gymnastics,
he is a citizen of both the United States
and Pennsylvania, and liable for federal
taxes.”).
Similarly, the individual states are part
of the United States and income earned
within them is fully subject to United
States taxation.See, e.g., Solomon v.
Commissioner, T.C. Memo. 1993–509
(responding to argument that all of pe-
titioner’s income was earned outside of
the United States, the court held that
“petitioner attempts to argue an absurd
proposition, essentially that the State of
Illinois is not part of the United States.”).
2. Definition of Person
The Internal Revenue Code defines
“person” and sets forth which persons
are subject to federal taxes. Section
7701(a)(14) defines “taxpayer” as “any
person” subject to any internal revenue
tax, and section 7701(a)(1) defines “per-
son” to include an individual, trust, estate,
partnership, or corporation.
Arguments that an individual is not a
“person” within the meaning of the Inter-
nal Revenue Code have been uniformly
rejected by the courts as have arguments
with respect to the term “individual.”See,
e.g., United States v. Dawes, 874 F.2d
746, 750–51 (10th Cir. 1989),overruled
on other grounds, 895 F.2d 1577 (10th Cir.
1990) (“The contention that appellants are
not taxpayers because they are ‘free born,
white, preamble, sovereign, natural, indi-
vidual common law ‘de jure’ citizens of
Kansas’ is frivolous. Individuals are ‘per-
sons’ under the Internal Revenue Code and
thus subject to26 U.S.C. § 7203.”);United
States v. Studley, 783 F.2d 934, 937 n.3
(9th Cir. 1986) (in holding that an indi-
vidual is a person under the Internal Rev-
enue Code, the court noted “this argument
has been consistently and thoroughly re-
jected by every branch of the government
for decades. Indeed advancement of such
utterly meritless arguments is now the ba-
sis for serious sanctions imposed on civil
litigants who raise them”).
Courts have also uniformly rejected
claims that a taxpayer is not a person
subject to tax because the taxpayer did
not request, obtain,or exercise any priv-
ileges of citizenship.See, e.g., Lovell v.
United States, 755 F.2d 517, 519 (7th Cir.
1984) (“All individuals, natural or unnat-
ural, must pay federal income tax on their
wages, regardless of whether they received
any ‘privileges’ from the government”).
HOLDING
1. The Fourteenth Amendment of the
United States Constitution establishes si-
multaneous state and federal citizenship.
Therefore, an individual cannot reject cit-
izenship in the United States in favor of
state citizenship, or otherwise claim not to
be a citizen of the United States for the pur-
pose of avoiding federal tax liability. Fur-
thermore, income earned within a state of
the United States by a United States citi-
zen or resident is taxable under federal tax
laws. Accordingly, Taxpayer A and Tax-
payer B are subject to federal income tax
liability because they are citizens of the
United States and citizens of the state in
whichtheyreside.
2. The term “person” as used by the In-
ternal Revenue Code includes natural per-
sons and individuals. Moreover, a tax-
payer need not request, obtain, or exercise
a privilege from an agency of the govern-
ment to be a “person” within the meaning
of the Internal Revenue Code. Therefore,
Taxpayer C and Taxpayer D are subject to
federal income tax liability.
CIVIL AND CRIMINAL PENALTIES
The Service will challenge the claims
of individuals who improperly attempt to
avoid or evade their federal tax liability.
In addition to liability for the tax due plus
statutory interest, taxpayers who fail to
file valid returns or pay tax based on ar-
guments that they are not citizens or per-
sons as contemplated by the Internal Rev-
enue Code and, thus, are not subject to fed-
eral tax face substantial civil and crimi-
nal penalties. Potentially applicable civil
penalties include: (1) the section 6662 ac-
curacy-related penalties, which are gen-
erally equal to 20 percent of the amount
of tax the taxpayer should have paid; (2)
the section 6663 penalty for civil fraud,
which is equal to 75 percent of the amount
of tax the taxpayer should have paid; (3)
the section 6702(a) penalty of $5,000 for
a “frivolous tax return”; (4) the section
6702(b) penalty of $5,000 for submitting
a “specified frivolous submission”; (5) the
section 6651 additions to tax for failure to
file a return, failure to pay the tax owed,
and fraudulent failure to file a return; (6)
the section 6673 penalty of up to $25,000
if the taxpayer makes frivolous arguments
in the United States Tax Court; and (7) the
section 6682 penalty of $500 for providing
false information with respect to withhold-
ing.
Taxpayers relying on these frivolous
positions also may face criminal prosecu-
tion under: (1) section 7201 for attempt-
ing to evade or defeat tax, the penalty
for which is a significant fine and im-
prisonment for up to 5 years; (2) section
7203 for willful failure to file a return,
the penalty for whichis a significant fine
and imprisonment for up to 1 year; (3)
section 7206 for making false statements
on a return, statement, or other document,
the penalty for whichis a significant fine
and imprisonment for up to 3 years or (4)
other provisions of federal law.
Persons, including return preparers,
who promote these frivolous positions and
those who assist taxpayers in claiming tax
benefits based on frivolous positions may
face civil and criminal penalties and also
may be enjoined by a court pursuant to
sections 7407 and 7408. Potential penal-
ties include: (1) a $250 penalty under
section 6694 for each return or claim for
refund prepared by an income tax return
preparer who knew or should have known
that the taxpayer’s position was frivolous
(or $1,000 for each return or claim for
refund if the return preparer’s actions
were willful, intentional or reckless); (2) a
penalty under section 6700 for promoting
abusive tax shelters; (3) a $1,000 penalty
under section 6701 for aiding and abetting
the understatement of tax; and (4) criminal
prosecution under section 7206, for which
April 2, 20078682007–14 I.R.B.

the penalty is a significant fine and impris-
onment for up to 3 years, for assisting or
advising about the preparation of a false
return, statement or other document under
the internal revenue laws.
DRAFTING INFORMATION
This revenue ruling was authored by the
Office of Associate Chief Counsel (Proce-
dure and Administration), Administrative
Provisions and Judicial Practice Division.
For further information regarding this rev-
enue ruling, contact that office at (202)
622–7950 (not a toll-free call).
2007–14 I.R.B.869April 2, 2007

Part III. Administrative, Procedural, and Miscellaneous
Clean Renewable Energy
Bonds
Notice 2007–26
SECTION 1. PURPOSE
This notice solicits applications for al-
locations of the national bond volume lim-
itation authority (“volume cap”) to issue
tax credit bonds called “clean renewable
energy bonds” (“CREBs”) under section
54(f) of the Internal Revenue Code (the
“Code”) to finance eligible clean renew-
able energy projects described in section
45 of the Code. This notice also provides
related guidance on the following: (1)
eligibility requirements that a project must
meet to be considered for a volume cap
allocation; (2) application requirements
and the application form for requests
for volume cap allocations; (3) the method
(generally, a “smallest-to-largest” method)
that the Internal Revenue Service (“IRS”)
and the Treasury Department will use to
allocate the volume cap; and (4) certain
aspects of the applicable law regarding
CREBs and expected regulatory guidance
in this area.
Applications for volume cap allocations
pursuant to this notice must be filed in ac-
cordance with this notice by the following
application deadline: July 13, 2007.
This noticemodifies and supersedes
Notice 2005–98, 2005–2 C.B. 1211 (De-
cember 11, 2005), which provided guid-
ance on CREBs in connection with the
allocation process for the original volume
cap authorization under section 54.
SECTION 2. BACKGROUND
Section 1303 of the Energy Tax Incen-
tives Act of 2005, Pub. L. No. 109–58,
119 Stat. 594 (2005), added section 54 to
the Code. Section 54 originally provided
for a total national volume cap of $800 mil-
lion for CREBs to finance eligible clean re-
newable energy projects and delegated to
the Secretary of the Treasury the author-
ity to allocate that volume cap, subject to
the constraint that the Secretary could al-
locate no more than $500 million of that
volume cap to qualified borrowers which
were governmental bodies (with the bal-
ance to be allocated to qualified borrow-
ers which were cooperative electric com-
panies). Section 54 originally required that
CREBs had to be issued by an expiration
date of December 31, 2007.
Section 202 of the Tax Relief and
Health Care Act of 2006, Pub. L. No.
109–432, 120 Stat. 2922 (2006) (the
“2006 Act”), amended section 54 in three
respects. First, the 2006 Act increased
the total national volume cap for CREBs
from $800 million to $1.2 billion. Sec-
ond, the 2006 Act extended the expiration
date for the issuance of CREBs under the
total authorized national volume cap of
$1.2 billion from December 31, 2007, to
December 31, 2008. Third, the 2006 Act
increased the maximum allocations or re-
allocations to qualified borrowers which
are governmental bodies from $500 mil-
lion to $750 million (with the balance to
be allocated to cooperative electric com-
panies).
Section 54(a) provides that a taxpayer
that holds a CREB on one or more credit
allowance dates of the bond occurring dur-
ing any taxable year is allowed as a nonre-
fundable credit against Federal income tax
for the taxable year an amount equal to the
sum of the credits determined under sec-
tion 54(b) with respect to such dates.
Section 54(b)(1) provides that the
amount of the credit with respect to any
credit allowance date is 25 percent of the
annual credit. Section 54(b)(2) provides
that the annual credit is the product of (1)
the credit rate determined by the Secre-
tary, multiplied by (2) the outstanding face
amount of the bond.
Section 54(b)(3) provides that the Sec-
retary shall determine daily a credit rate
that shall apply to the first day on which
there is a binding, written contract for the
sale or exchange of a CREB. The credit
rate for any day is the credit rate the Sec-
retary estimates will permit the issuance
of CREBs with a specified maturity or re-
demption date without discount and with-
outinterestcosttotheissuer.
Section 54(b)(4) provides that the term
“credit allowance date” means March 15,
June 15, September 15, December 15, and
the last day on which the bond is outstand-
ing. Section 54(b)(5) generally provides
that if a bond is issued or redeemed, or ma-
tures, during the 3-month period ending on
a credit allowance date, then the amount of
the credit for that credit allowance date is a
ratable portion of the credit otherwise de-
termined for that 3-month period.
Section 54(g) provides that gross in-
come includes the amount of the credit
allowed to the taxpayer under section 54
(without regard to section 54(c)) and the
amount so included is treated as interest in-
come.
Section 54(d) provides that a “clean re-
newable energy bond” or CREB means
any bond issued as part of an issue if: (1)
the bond is issued by a qualified issuer pur-
suant to an allocation by the Secretary to
the issuer of a portion of the volume cap
under section 54(f)(2); (2) 95 percent or
more of the proceeds of the issue are to be
used for capital expenditures incurred by
qualified borrowers for one or more qual-
ified projects; (3) the qualified issuer des-
ignates the bond for purposes of section 54
and the bond is in registered form; and (4)
the issue meets certain requirements de-
scribedinsection54(h)regardingtheex-
penditure of bond proceeds, including a
requirement that the issuer reasonably ex-
pects, as of the issue date, that at least
95 percent of the net proceeds will be ex-
pended within 5 years.
Section 54(j)(4) defines a “qualified
issuer” as: (1) a CREB lender; (2) a
cooperative electric company; or (3) a
governmental body. Section 54(j)(2) pro-
vides that a “CREB lender” is a lender
that is: (1) a cooperative that is owned
by, or has outstanding loans to, 100 or
more cooperative electric companies and
was in existence on February 1, 2002;
or (2) any affiliated entity controlled by
such a lender. Section 54(j)(1) defines the
term “cooperative electric company” as a
mutual or cooperative electric company
described in section 501(c)(12) or section
1381(a)(2)(C), or a not-for-profit electric
utility that has received a loan or loan
guarantee under the Rural Electrification
Act. Section 54(j)(3) defines the term
“governmental body” as any State, terri-
tory, possession of the United States, the
District of Columbia, Indian tribal govern-
ment, or any political subdivision thereof.
Section 54(j)(5) provides that a “quali-
fied borrower” is: (1) a mutual or coopera-
tive electric company described in section
April 2, 20078702007–14 I.R.B.

501(c)(12) or 1381(a)(2)(C); or (2) a gov-
ernmental body.
Section 54(d)(2) defines the term “qual-
ified project” as any of the following qual-
ified facilities (as determined under sec-
tion 45(d) without regard to any placed
in service date) owned by a qualified bor-
rower: (1) a wind facility under section
45(d)(1); (2) a closed-loop biomass facility
under section 45(d)(2); (3) an open-loop
biomass facility under section 45(d)(3); (4)
a geothermal or solar energy facility un-
der section 45(d)(4); (5) a small irrigation
power facility under section 45(d)(5); (6) a
landfill gas facility under section 45(d)(6);
(7) a trash combustion facility under sec-
tion 45(d)(7); (8) a refined coal produc-
tion facility under section 45(d)(8); and (9)
a qualified hydropower facility under sec-
tion 45(d)(9).
Section 54(f)(1), as amended by sec-
tion 202(a)(1) of the 2006 Act, provides
that the national volume cap is $1.2 bil-
lion. Section 54(f)(2), as amended by sec-
tion 202(a)(2) of the 2006 Act, provides
that the Secretary shall allocate the volume
cap among qualified projects in such man-
ner as the Secretary determines appropri-
ate, except that the Secretary may not allo-
cate more than $750 million of the national
volume cap to finance qualified projects of
qualified borrowers that are governmental
bodies. The amendments to section 54 of
the Code made by section 202 of the 2006
Act apply to bonds issued, and allocations
or reallocations of volume cap made, after
December 31, 2006.
Section 54(d)(2)(D) provides that, for
purposes of section 54(d)(1)(B), which re-
quires qualified borrowers to use at least
95 percent of the proceeds of an issue for
capital expenditures for qualified projects,
any action that a qualified borrower or
qualified issuer takes that is within its con-
trol and that causes such proceeds to fail
to be used for a qualified project is treated
as failing to satisfy that requirement. Sec-
tion 54(d)(2)(D) further provides that the
Secretary shall prescribe regulations spec-
ifying remedial actions that may be taken
(including conditions to taking such reme-
dial actions) to prevent an action described
in the preceding sentence from causing a
bond to fail to be a CREB.
Section 54(k) generally requires that,
for a CREB that is a pooled financing
bond under section 149(f)(4)(A), borrow-
ers must enter into written loan commit-
mentsbeforetheissuedateoftheCREB.
Section 54(l)(5) requires that the qual-
ified issuer pay and amortize an equal
amount of the principal of an issue of
CREBs during each calendar year that the
issue is outstanding.
Section 54(e)(1) limits the term of a
CREB to the maximum term determined
by the Secretary under section 54(e)(2).
Section 54(e)(2) provides that, during each
calendar month, the Secretary shall deter-
mine the maximum term for CREBs issued
in the following calendar month. The max-
imum term is the term the Secretary es-
timates will result in the present value of
the obligation to repay the principal on the
bond being equal to 50 percent of the face
amount of the bond. Section 54(e)(2) fur-
ther provides that such present value shall
be determined (1) without regard to the re-
quirement of section 54(l)(5) to amortize
the principal of CREBs amortized ratably
each year and (2) using a discount rate
equal to the average annual interest rate
of tax-exempt obligations having a term of
10 years or more that are issued during the
month. If the term as so determined is not
a multiple of a whole year, such term shall
be rounded to the next highest whole year.
Section 54(i) generally provides that the
arbitrage requirements of section 148 ap-
plicable to tax-exempt State or local bonds
apply to CREBs.
Section 54(l)(6) requires issuers of
CREBs to submit information reporting
returns to the IRS similar to those required
to be submitted under section 149(e) for
tax-exempt State or local governmental
bonds.
Notice 2006–7, 2006–10 I.R.B. 559
(March 6, 2006), provides guidance re-
garding certain definitions used for CREB
purposes.
SECTION 3. APPLICATION
REQUIREMENTS IN GENERAL
Each application for a CREBs volume
cap allocation (“Application”) must be
prepared and submitted in accordance
with this section. In order for an Appli-
cation to comply with this section, among
other things, the Application must be pre-
pared in substantially the form attached to
this notice as Appendix A, subject to such
minor changes or variations as the IRS and
the Treasury Department may approve in
their discretion. This notice, including Ap-
pendix A, may be found on the IRS web
site athttp://www.irs.gov/taxexemptbond/
index.htmlorhttp://www.irs.gov/pub/
irs-drop/. By submitting an Applica-
tion, the applicant agrees to comply with
the requirements of this notice.
a.Qualified issuer. An Application
must be submitted by a qualified issuer
within the meaning of section 54(j)(4). A
“qualified issuer” is: (1) a CREB lender
(as defined in section 54(j)(2)); (2) a co-
operative electric company (as defined in
section 54(j)(1)); or (3) a governmental
body (as defined in section 54(j)(3)). An
Application must identify the qualified is-
suer and must demonstrate that the en-
tity constitutes a qualified issuer within the
meaning of section 54(j)(4).
b.Signatures. An Application must be
signed and dated by, and must include the
printed name and title of, an authorized of-
ficial of the qualified issuer. For purposes
of this notice, the term “authorized offi-
cial of the qualified issuer” means an of-
ficer, board member, employee, or other
official of the qualified issuer who is duly
authorized to execute legal documents on
behalf of the qualified issuer in connec-
tion with incurring debt of the qualified is-
suer (e.g., a mayor, chairperson of a city
council, chairperson of a board of direc-
tors, county or city administrator or man-
ager, or chief financial officer), similar to
the kind of duly authorized official of an
issuer who would be authorized to execute
documents in connection with an issuer’s
declaration of official intent to reimburse
expenditures from the proceeds of a bor-
rowing under § 1.150–2(e).
c.Contact person. An Application
must designate one or more persons with
knowledge regarding the project, whom
the qualified issuer duly authorized to dis-
cuss with the IRS any information relat-
ing to the Application. The designation
must include the designee’s name, title,
telephone number, fax number, and mail-
ing address. If a designee is not an offi-
cial or officer of the issuer, the Applica-
tion must include an executed Form 8821
(Tax Information Authorization), authoriz-
ing the disclosure of taxpayer information
specifically relating to the Application to
the designee.
d.Addresses. An Application must be
submitted in one of the following ways:
(1) by hard copy in duplicate accompa-
2007–14 I.R.B.871April 2, 2007

nied by a copy of the application in elec-
tronic format on compact disc (“CD”) by
mail to the Internal Revenue Service (IRS),
Attention SE:T:GE:TEB, 1111 Constitu-
tion Avenue, NW, PE – 5N3, Washington,
D.C. 20224; (2) by hard copy in dupli-
cate accompanied by a copy of the appli-
cation in electronic format on compact disc
(“CD”) by hand delivery Monday through
Friday between the hours of 8 a.m. and
4 p.m. to the Courier’s Desk, Internal Rev-
enue Service, 1111 Constitution Avenue,
NW, PE – 5N3, Washington, D.C., atten-
tion SE:T:GE:TEB; or (3) by electronic
submission in PDF format of a copy of
a signed original document to the IRS to
Tina.F.Hill@irs.gov.
e.Due date. An Application must be
filed with the IRS on or before the Appli-
cation deadline of July 13, 2007.
f.Project description. Each Applica-
tion must contain the information required
by this subsection f.
(i)Qualified borrower. Each Applica-
tion must identify the qualified borrower
expected to own the qualified project. A
“qualified borrower” is: (1) a mutual or
cooperative electric company described in
sections 501(c)(12) or 1381(a)(2)(C); or
(2) a governmental body (as defined in
section 54(j)(3)). The Application must
demonstrate that the entity is a qualified
borrower within the meaning of section
54(j)(5). If any bond is expected to be a
pooled financing bond (within the mean-
ing of section 149(f)(4)(A)), the Applica-
tion must demonstrate that the qualified is-
suer will enter into a written loan commit-
ment with each qualified borrower prior to
theissuedateoftheissueofCREBs.
(ii)Qualified project. Each Applica-
tion must describe in reasonable detail the
project or projects to be financed with the
proceeds of the CREBs. The Application
must demonstrate that each project will
constitute a “qualified project” under sec-
tion 54(d)(2)(A). The Application must
indicate the expected date that the acqui-
sition and construction of each project
will commence and the expected date that
each project will be placed in service. The
Application must contain a certification
by an independent, licensed engineer that
each project will meet the requirements
for a qualified facility under section 45(d)
(but without regard to section 45(d)(10)
and to any placed in service date) and
that the project will be technically vi-
able and will produce electricity. If the
project is a qualified hydropower facility
under section 45(d)(9) producing incre-
mental hydropower production (as defined
under section 45(c)(8)(B)), then the cer-
tification also must state that the project
consists only of efficiency improvements
or additions to capacity that produce addi-
tional production as described in section
45(c)(8)(B) based on a methodology that
would meet Federal Energy Regulatory
Commission (FERC) standards. If the
project is a qualified hydropower facility
under section 45(d)(9) producing qualified
hydropower production that is a nonhy-
droelectric dam under section 45(c)(8)(C),
then the certification also must state that
the facility, when constructed, will meet
FERC licensing requirements and other
applicable environmental, licensing and
regulatory requirements.
(iii)Prior allocations and related
projects. Each Application must de-
scribe the amount of CREB volume cap
previously allocated to each project de-
scribed in the Application and to any
“related projects.” For purposes of this no-
tice and the Application, the term “related
projects” means projects that are owned by
the same qualified borrower, or a “related
party” as defined in § 1.150–1(b), located
on the same site, and integrated, intercon-
nected, or directly or indirectly dependent
on each other, based on all the facts and
circumstances (“Related Projects”).
(iv)Location of project. The Appli-
cation must indicate the location of the
project.
(v)Regulatory approvals. The Applica-
tion must describe a plan to obtain all nec-
essary Federal, state and local regulatory
approvals for the project.
g.Plan of financing. The Application
must contain a reasonably detailed de-
scription of the plan of financing for the
project, including all reasonably expected
sources and uses of financing and other
funds, the status of such financing, the an-
ticipated date of bond issuance, the sources
of security and repayment for the bonds,
the aggregate face amount of bonds ex-
pected to be issued for the project, and the
issuer’s reasonably expected schedule for
spending proceeds of CREBs. If the qual-
ified borrower intends to use the proceeds
of CREBs, to refinance qualified projects
with CREBs, or to reimburse amounts
paid with respect to a qualified project,
the Application must demonstrate that the
requirements under section 54(d)(2)(B)
and (C), respectively, will be met.
h.Dollar amount of allocation re-
quested. The Application must specify
the dollar amount of the volume cap re-
quested.
SECTION 4. REQUIRED
DECLARATIONS IN APPLICATIONS
Each Application submitted under this
notice must include the following declara-
tion signed and dated by an authorized of-
ficial of the qualified issuer who has per-
sonal knowledge of the relevant facts and
circumstances: “Under penalties of per-
jury, I declare that Ihave examined this
document and, to the best of my knowl-
edge and belief, all of the facts contained
herein are true, correct, and complete.”
SECTION 5. CONSENT TO
DISCLOSURE OF ALLOCATION
In order to provide the public with in-
formation on how the volume cap autho-
rized by Congress has been allocated and
facilitate oversight of the CREB program,
the IRS intends to publish the results of
the allocation process. The information
will be the most useful to the public if it
identifies the specific allocations awarded.
Pursuant to § 6103, consent is required in
order for the Service to disclose identify-
ing information with respect to applicants
awarded an allocation. Therefore, the Ser-
vice requests that eachapplicant submit
with the Application a declaration, con-
senting to the disclosure by the Internal
Revenue Service of the name of the appli-
cant (issuer), the name of the borrower (if
other than the issuer), the type and loca-
tion of the project that is the subject of the
Application, and the amount of the CREBs
volume cap allocation for such project in
the event the project receives an alloca-
tion. To provide valid consent, the decla-
ration must be in the form set forth in Ap-
pendix B. An applicant is not required to
provide a declaration consenting to disclo-
sure in order to receive an allocation. The
Service will not publish identifying infor-
mation with respect to applications that are
not awarded an allocation of volume cap.
April 2, 20078722007–14 I.R.B.

SECTION 6. VOLUME
CAP ALLOCATIONS AND
METHODOLOGY
a.In general. Available CREB volume
cap under section 54, as amended by the
2006 Act, and any “relinquished volume
cap” (as defined in paragraph b. of this
section) will be allocated in accordance
with this section to qualified projects for
which Applications meeting the require-
ments of this notice have been filed with
the IRS on or before the Application dead-
line set forth in this notice. Projects for
governmental bodies and mutual or co-
operative electric companies described in
sections 501(c)(12) or 1381(a)(2)(C) will
be allocated the full amount of volume cap
requested beginning with the project(s)
for which the smallest dollar amount of
volume cap has been requested and con-
tinuing with the project(s) for which the
next-smallest dollar amount of volume cap
has been requested until the total amount
of volume cap has been exhausted. For
this purpose, any amount of the volume
cap previously allocated to a project will
be taken into account by increasing the
amount requested for the project in the
Application submitted pursuant to this
notice by the amount previously allo-
cated to the project. All applications that
meet the requirements described in this
notice will be granted according to the
methodology set forth above until all ap-
plications from governmental bodies have
been granted, or up to a maximum of $750
million has been allocated to projects of
qualified borrowers that are governmen-
tal bodies, whichever occurs first. The
remaining volume cap will be allocated
under the smallest-to-largest methodol-
ogy described above to qualified projects
of qualified borrowers that are not gov-
ernmental bodies. For purposes of this
section, all Related Projects will be treated
as a single project.
b.Relinquished volume cap. For pur-
poses of this notice, “relinquished volume
cap” means volume cap previously allo-
cated to a qualified issuer to finance a qual-
ified project for which the IRS has re-
ceived written notice from a duly autho-
rized official of the qualified issuer before
the due date for Applications under this no-
tice which states that the qualified issuer
will not issue CREBs pursuant to the allo-
cation and is relinquishing such allocation.
SECTION 7. EXPECTED
TEMPORARY REGULATIONS;
EFFECTIVE DATES; RELIANCE ON
NOTICE
The Treasury Department and the IRS
expect to issue temporary and proposed
regulations (the “Temporary Regulations”)
under section 54 to provide guidance to
holders and issuers of CREBs on selected
issues regarding the CREBs program, in-
cluding potentially, among other matters,
certain definitions, general CREBs pro-
gram requirements, qualified projects, use
and expenditure ofproceeds, remedial
actions, arbitrage investment restrictions,
and information reporting applicable to
CREBs. The Treasury Department and
the IRS expect that the Temporary Reg-
ulations will apply to CREBs sold on or
after June 13, 2007 with respect to interim
guidance provided in this notice. Prior to
the promulgation and effective date of the
Temporary Regulations on CREBs under
section54,taxpayersmayrelyonthein-
terim guidance provided in this notice and
Notice 2006–7.
SECTION 8. MAXIMUM TERM
The maximum term for a CREB is de-
termined under section 54(e)(2) by using
a discount rate equal to 110 percent of
the long-term adjusted AFR, compounded
semi-annually, for the month in which
the bond is sold. For purposes of this
notice, a bond is “sold” on the first day
on which there is a binding contract in
writing for the sale or exchange of the
bond. The maximum term for a CREB
will be published daily by the Bureau of
Public Debt on its Internet site for State
and Local Government Series securities
at:https://www.treasurydirect.gov.
SECTION 9. CREDIT RATE
For each issue of CREBs, a separate
credit rate will apply to each of the level
annual repayments of principal of the is-
sue (each, a “principal maturity”). The
credit rate for a principal maturity of an
issue of CREBs is the applicable CREB
credit rate for that principal maturity on
thedatethattheissueofCREBsissold,
which applicable CREB credit rate is pub-
lished for that day by the Bureau of Public
Debt on its Internet site for State and
Local Government Series securities at:
https://www.treasurydirect.gov. The credit
rates will be determined by the Treasury
Department based on its estimate of the
yieldonoutstandingAAratedcorporate
bonds of a similar maturity for the busi-
ness day immediately prior to the date on
which the issue is sold.
SECTION 10. INFORMATION
REPORTING
Section 54(l)(6) requires issuers of
CREBs to submit information reporting
returns to the IRS similar to those required
to be submitted under section 149(e) for
tax-exempt State or local governmental
bonds. These information reporting re-
turns are required to be submitted at the
same time and in the same manner as those
under section 149(e) on such forms as
shall be prescribed by the Commissioner
of the IRS for such purpose. Pending
further guidance from the IRS regarding
the applicable forms to be used for such
information reporting for CREBs, in the
case of an issue of CREBs, the issuer must
submit to the IRS an information return
on Form 8038,Information Return for
Tax-Exempt Private Activity Bond Issues,
at the same time and in the same manner
as required under section 149(e), with
modifications as described below. Issuers
of CREBs should complete Part II of Form
8038 by checking the box on Line 20(c)
(Other) and writing “CREBs” in the space
provided for the bond description. For
purposes of this notice, the term “issue”
has the meaning used for tax-exempt bond
purposes in § 1.150–1(c).
SECTION 11. REMEDIAL ACTIONS
The Treasury Department and the IRS
expect that the Temporary Regulations will
provide that, for purposes of the require-
ment of section 54(d)(1)(B) that qualified
borrowers use at least 95 percent of the
proceeds of an issue of CREBs for cap-
ital expenditures for qualified projects, a
“deliberate action” taken by a qualified is-
suer or qualified borrower may cause such
proceeds to fail to be used for such qual-
ified use. For this purpose, the term “de-
liberate action” will have the same mean-
ingasusedin§1.141–2(d)(3),exceptthat
“section 54” will be substituted for “sec-
tion 141” in § 1.141–2(d)(3)(i). The Trea-
sury Department and the IRS further ex-
pect that the Temporary Regulations will
2007–14 I.R.B.873April 2, 2007

provide that a deliberate action that other-
wise would cause an issue of CREBs to
fail to meet the requirements of section
54(d)(1)(B) will not be treated as a delib-
erate action if the issuer takes a “reme-
dial action” which meets the requirements
specified in the Temporary Regulations.
In addition, the Treasury Department and
the IRS expect that the Temporary Regu-
lations will contain a “redemption or de-
feasance” remedial action and an “alterna-
tive use of disposition proceeds” remedial
action similar, but not identical to, the re-
medial actions contained in § 1.141–12(d)
and § 1.141–12(e).
SECTION 12. ARBITRAGE
REQUIREMENTS
Section 54(i) generally requires that an
issue of CREBs must satisfy the arbitrage
investment restrictions under section 148
applicable to tax-exempt bonds with re-
spect to proceeds of the issue. In gen-
eral, under section 148, subject to various
specific prompt spending exceptions and
other exceptions, the arbitrage investment
restrictions, including the yield restrictions
and the arbitrage rebate requirement, ap-
ply broadly to gross proceeds of tax-ex-
empt bonds. The Treasury Department and
the IRS expect that, except as otherwise
provided in this section 12, the arbitrage
investment restrictions under section 148
and § 1.148–1 to § 1.148–11, inclusive,
and the exceptions to those restrictions will
apply to gross proceeds of CREBs to the
same extent and in the same manner as
they apply to gross proceeds of tax-exempt
state or local governmental bonds the in-
terest on which is excludable from gross
income under section 103.
The Treasury Department and the IRS
further expect that, in applying the arbi-
trage investment restrictions under section
148 to CREBs, the modifications to the
general rules described in paragraphs a.
through e. of this section 12, below, will
apply.
a.Cooperative electric companies
treated like state or local governmen-
tal entities. Cooperative electric com-
panies under section 54(j)(1) will be
treated as “governmental persons” under
§ 1.141–1(b) for purposes of (1) apply-
ing the arbitrage investment restrictions
under section 148, including the program
investment definition under § 1.148–1(b),
and (2) determining whether CREBs are
private activity bonds under section 141 in
applying any particular arbitrage invest-
ment restriction that depends on whether
bonds are private activity bonds,
b.5-year temporary period exception
to arbitrage yield restriction. If an issue of
CREBs meets the spending requirements
of section 54(h)(1),then the proceeds of
the issue of CREBs will be treated as qual-
ifying for a 5-year temporary period ex-
ception to arbitrage yield restriction under
§ 1.148–2(e)(2) beginning on issue date of
the issue.
c.CREB credit disregarded in deter-
mining CREB yield for arbitrage pur-
poses. In determining the yield on an issue
of CREBs for arbitrage purposes under
§ 1.148–4, the CREBs credit allowed un-
der section 54(a) and the credit rate under
section 54(b)(2)(A) will be disregarded.
d.Non-AMT tax-exempt bond invest-
ment exception inapplicable. In applying
the arbitrage restrictions against investing
gross proceeds of an issue of CREBs in
higher yielding investments under sec-
tion 148(a) and § 1.148–2, the exception
to arbitrage yield restriction for invest-
ments of gross proceeds of tax-exempt
bonds in specified non-AMT tax-ex-
empt bond investments under section
148(b)(3) (relating to an exception to the
definition of “investment property” for
specified non-AMT tax-exempt bonds)
and § 1.148–2(d)(2)(v) (relating to a cor-
responding exception to arbitrage yield
limitations) will be inapplicable.
e.Application of small issuer exception
to the arbitrage rebate requirement.In
determining whether an issue of CREBs
qualifies for the $5 million small issuer
exception to the arbitrage rebate require-
ment (increased to $10 million for certain
public school facilities) under section
148(f)(4)(D) and § 1.148–8, both CREBs
and tax-exempt bonds the interest on
which is excludable from gross income
under section 103 (other than private ac-
tivity bonds) that are reasonably expected
to be issued or actually issued by the
CREB issuer (and other applicable on-be-
half-of entities and subordinate entities
taken into account under that section)
within a calendar year will be taken into
account in measuring the applicable size
limitation.
SECTION 13. MISCELLANEOUS
REGULATORY GUIDANCE
The Treasury Department and the IRS
expect that the Temporary Regulations
will provide guidance on selected discrete
issues that have arisen with respect to
CREBs, including clarifying that: (1) in
applying the reimbursement restrictions
under section 54(d)(1)(C), the general
reimbursement rules and exceptions in
§ 1.150–2 will apply; (2) joint ownership
of projects financed with CREBs will
be recognized in a manner similar to the
recognition of joint ownership of output
projects under the private activity bond
restrictions on tax-exempt bonds under
section 141; (3) in determining whether all
or a part of a facility will be eligible to be
a qualified project for CREBs purposes,
allocation and accounting rules similar
to those employed under section 141 for
mixed-use projects will be applied; (4) for
purposes of the requirement under section
54(d) to use 95 percent of the proceeds
of an issue of CREBs for qualified costs
to finance capital expenditures for quali-
fied projects, proceeds used to finance a
reserve or replacement fund (e.g.,adebt
service reserve fund to secure the CREBs)
will be treated as nonqualified costs and
will be eligible for financing with CREBs
only from the five percent nonqualified
portion of the proceeds; and (5) except in
limited circumstances involving certain
refinancings to which section 54(d)(2)(B)
applies and reimbursements to which sec-
tion 54(d)(2)(C) applies, costs of acquiring
existing facilities (as contrasted with costs
of enhancements, repair, or rehabilitation
of existing facilities) generally will be
treated as nonqualified costs for purposes
of the 95 percent use of proceeds test un-
der section 54(d).
SECTION 14. EFFECT ON OTHER
DOCUMENTS
This noticemodifiesandsupersedes
Notice 2005–98, 2005–2 C.B. 1211 (De-
cember 11, 2005), which provided guid-
ance on CREBs in connection with the
allocation process for the original volume
cap authorization under section 54.
April 2, 20078742007–14 I.R.B.

SECTION 15. DRAFTING
INFORMATION
The principal authors of this notice are
Zoran Stojanovic and Timothy Jones of the
Office of Associate Chief Counsel (Tax
Exempt & Government Entities). How-
ever, other personnel from the IRS and
the Treasury Department participated in its
development. For further information re-
garding this notice and the Application,
contact Tina Hill at (202) 283–9774 (not
a toll-free call).
APPENDIX A
APPLICATION FOR ALLOCATION OF CLEAN ENERGY RENEWABLE BOND VOLUME CAP
Internal Revenue Service
Washington, D.C.
Dear Sir or Madam:
The following constitutes the application (“Application”) of (Name) (the “Applicant”) for allocation of clean renewable energy bond
(“CREB”) volume cap under Section 54(f) of the Internal Revenue Code (the “Code”) (unless otherwise noted, section references
herein are to the Code) to finance the project described below.(If a single Application is used to request CREB volume cap for more
than one project, then all of the required information in the Application must be provided separately for each project.)
1. Name of Applicant/Issuer
Street Address
CityStateZip
Telephone NumberFax Number
2. Status of Issuer–(Select as appropriate)
The Applicant/Issuer is a “qualified issuer ” under section 54(j)(4) because it is—
(i)a “clean renewable energy lender” that is a cooperative owned by, or has outstanding loans to, 100 or
more cooperative electrical companies and was in existence on February 1, 2002 or is an affiliate that
is owned by such a lender, as demonstrated by the attached documents included as Exhibit D.
(ii) a “cooperative electric company” that is a mutual or cooperative electric company described in
section 501(c)(12) or section 1381(a)(2)(C), asdemonstrated by the attached documents included
as Exhibit D, including a copy of the determination letter previously obtained from the IRS, if
any (or other relevant documents).
(iii) a “governmental body” that is a State, territory, possession of the United States, District of Columbia,
Indian tribal government, or any political subdivision of the foregoing, as demonstrated by the
attached documents included as Exhibit D.(Supporting documents are not required to be attached for
governmental bodies that are general purpose governmental entities with substantial taxing, eminent
domain,andpolice powers such as generally a county, city, municipality, township, or borough.)
3. Name of Borrower
Street Address
CityStateZip
Telephone NumberFax Number
4. Status of Borrower–(Select as appropriate)The Borrower is a “qualified borrower” under section 54(j)(5)
because it is—
(i)a qualified borrower under section 54(j)(5)(A) that is a mutual or cooperative electric company under
section 501(c)(12) or section 1381(a)(2)(C), asdemonstrated by the attached documents included
as Exhibit D, including a copy of the determination letter previously obtained from the IRS, if
any (or other relevant documents).
2007–14 I.R.B.875April 2, 2007

(ii) a qualified borrower under section 54(j)(5)(B) that is a “governmental body” under section
54(j)(3)(B) and is a State, territory, possession of the United States, District of Columbia, Indian
tribal government, or any political subdivision of the foregoing, as demonstrated by the attached
documents included as Exhibit D.(Supporting documents are not required to be attached for
governmental bodies that are general purpose governmental entities with substantial taxing, eminent
domain,andpolice powers such as generally a county, city, municipality, township, or borough.)
5. Name of Project.
6. Detailed Description of Project.A reasonably detailed description of the project (the “Project”) is set forth below
or in attached Exhibit A, including reasonably expected costs of components, such as land, site prep, equipment,
installation, other dedicated facilities such as transmission, and capacity:
7. Qualified Project.The Project is a “qualified project” within the meaning of section 54(d)(2)(A) of the Code,
because it is a “qualified facility” (as determined under section 45(d) of the Code without regard to section 45(d)(10)
and to any placed in service date) that is(select as appropriate)—
(1) a wind facility – a facility using wind to produce electricity;
(2) a closed-loop biomass facility – a facility using closed-loop biomass (as defined in section 45(c)) to
produce electricity or, if owned by the taxpayer prior toJanuary 1, 2008, a facility using closed-loop biomass
to produce electricity which is modified to use closed-loop biomass to co-fire with coal, with other biomass,
or with both, but only if the modification is approved under the Biomass Power for Rural Development
Programs or is part of a pilot project of the Commodity Credit Corporation;
(3) an open-loop biomass facility –a facility using open-loop biomass(as defined in section 45(c)) to
produce electricity and in the case of a facility using agricultural livestock waste nutrients, the nameplate
capacity rating of which is not less than 150 kilowatts;
(4) a geothermal or solar energy facility – a facility using geothermal energy (as defined in section 45(c)) or
solar energy to produce electricity (not including a facility described in section 48(a)(3) the basis of which
is taken into account by the taxpayer for purposes of determining the energy credit under section 48 of
the Code);
(5) a small irrigation powerfacility – a facility using small irrigation power (as defined in section 45(c))
to produce electricity;
(6) a landfill gas facility – a facility producing electricity from gas derived from the biodegradation of
municipal solid waste (as defined in section 45(c));
(7) a trash combustion facility – a facility that burns municipal solid waste (as defined in section 45(c))
to produce electricity;
(8) a refined coal production facility – a facility producing refined coal (as defined in section 45(c)); or
(9) a qualified hydropower facility – a facility engaged in qualified hydropower production (as defined in
section 45).
8. Construction Commencement Date and Placed in Service Date.The Borrower begun orexpects to begin the
construction, installation and equipping of the Project on
. The Borrower expects that the
Project will be placed into service on or before
.
9. Independent Engineer’s Certificate:(If the Application is for more than one Project, a separate certificate must be
included for each Project.)Attached as Exhibit B hereto is a certification by an independent, licensed engineer to
the effect that the Project will be a “qualified project” within the meaning of section 54(d)(2)(A) and a “qualified
facility” within the meaning of section 45(d) of the Code (without regard to section 45(d)(10) of the Code and to any
placed in service date) and that the project is technically viable and will produce electricity.
If the project is aqualified hydropower facility —
a.producing incremental hydropower production, then the engineering certificate also must state that
the project consists only of efficiency improvements or additions to capacitythat produce additional
production as described in section 45(c)(8)(B) based on a methodology that would meet Federal
Energy Regulatory Commission (FERC) standards; or
April 2, 20078762007–14 I.R.B.

b.that is a nonhydroelectric dam under section 45(c)(8)(C), then the engineering certificate also must
state that the facility, when constructed, will meetFERC licensing requirements and other applicable
environmental, licensing and regulatory requirements.
10. Location of the Project:
Project address or physical location (do not include postalbox numbers or mailing address)
CityStateZip
County where Project is located
11. Individual to contactfor more information about the Project:
Individual Name
Company Name
Street Address
CityStateZip
Telephone Number
Fax Number
(Include as appropriate)The contact person is not an authorized official or officer of the Issuer and a properly
executed Form 8821 is included with this Application that authorizes the disclosure by the IRS of information that
relates to this Application and the Project(s) described above to the contact person.
12. Regulatory Approvals.Identify each regulatory body, the action that must be taken, status of any pending action
and the remaining timeframe required to obtain each required approval such as a FERC approval, or siting permits.
The plan of the Applicant for obtaining such approvals is as follows:(or attach an Exhibit)
13. Plan of Financing.Include a reasonably detailed description of the plan of financing for the Project, including all
reasonably expected sources and uses of financing and other funds, the status of such financing, the anticipated
date of bond issuance, the sources of security and repayment for the bonds, the aggregate face amount of bonds
expected to be issued for the Project, and the issuer’s reasonably expected schedule for spending proceeds of CREBs.
Attached as Exhibit C is a plan of financing for the Project.
14. Refinancings and Reimbursements.(Include the following statements, as applicable.) [(For refinancings, include
the following statement.)The Issuer intends to use the proceeds of CREBs to refinance qualified projects in
accordance with section 54(d)(2)(B).] [(For reimbursements, include the following statement.)The Issuer intends to
use the proceeds of CREBs to reimburse costs of a qualified project in accordance with section 54(d)(2)(C).](In
addition, the Issuer must demonstrate that the requirements of § 54(d)(2)(B) or (C), as applicable, will be met.)
15. Dollar Amount of Allocation Requested for the Project.To finance the Project, the Applicant hereby requests
a CREB allocation in the amount of $
.
16. Prior Allocations for the Project or Related Project.(If the Project or any Related Project (as defined in section
3.f(iii) of this Notice) previously received an allocation of CREBs volume cap, then this paragraph must include a
statement to that effect.)
[If applicable, include the following statement:On(Insert date), the Project previously received a CREBs volume
cap allocation in the amount of $
. A copy of the IRS allocation letter for that allocation is attached.]
[If applicable, include the following statement:On(Insert date), a Related Project previously received a CREBs
volume cap allocation in the amount of $
. A copy of the IRS allocation letter for that allocation
is attached.]
17. Other allocation requests for Related Projects to the Project.Included below are descriptions of other projects
that are Related Projects (as defined in paragraph 16 above) to the Project for which the applicant or other entities
are applying for a CREB volume cap allocation. With respect to an applicant on a Related Project other than the
Applicant, set forth below are the names, addresses, contact persons, and telephone numbers for any such applicant.
2007–14 I.R.B.877April 2, 2007

18. Pooled Financing Bonds.(If the issuer expects to use the requestedallocation of CREB volume cap as part of a
pooled financing bond within the meaning of section 54(l)(2), then the issuer should include the undertaking
noted below.)
[The Applicant Issuer expects to use the requested allocation for CREBs volume cap in a pooled financing bond
within the meaning of section 54(i)(2),and the Issuer expressly agrees that it will obtain a written loan commitment
for all borrowers from the issue of CREBs to which the requested allocation relates before the issue date of that issue.]
I hereby certify that I am an authorized officer or official of the Applicant and am duly authorized to execute legal documents
on behalf of the Applicant in connection with incurring debt and that I am duly authorized to execute legal documents on behalf
of the Application in making this Application. Under penalties of perjury, I declare that (i) I have knowledge of the relevant facts
and circumstances relating to this Application and the Project(s), (ii) I have examined this Application, and (iii) to the best of my
knowledge and belief, all of the facts contained in this Application are true, correct and complete.
By:
Name and Title:
Date:
EXHIBIT A
DESCRIPTION OF THE PROJECT
(RESPONSE TO QUESTION 6 OF THE APPLICATION)
(Attached hereto)
EXHIBIT B
ENGINEER’S CERTIFICATE
(RESPONSE TO QUESTION 9 OF THE APPLICATION)
(Attached hereto in substantially the form below)
Dated:
,2007
This certificate is being provided to the Internal Revenue Service (“IRS”) in connection with an application (the “Application”)
by [Name of Applicant Issuer:
] (the “Issuer”) to the IRS requesting an allocation of volume
cap authority to issue clean renewable energy bonds (“CREBs”)under section 54 of the Internal Revenue Code, as amended (the
“Code”). The CREBs are being issued to make a loan to [Name of qualified borrower:
(the “Borrower”), to
finance the costs of certain clean renewable energy facilities described more particularly in the Application (the “Project”). The
undersigned hereby certifies as follows:
1. I am an independent, licensed engineer, duly qualified topractice the profession of engineering under the laws of the
State of
, and I am not an officer or employee of the Issuer or the Borrower.
2. I have reviewed the Application for a CREBs volume cap allocation (including the exhibits thereto) of the Issuer of
even date herewith describing the Project. To the best of my knowledge, information, and belief, the Project will meet the
requirements to be a “qualified project” under section 54(d)(2)(A) of the Code and correspondingly a “qualified facility”
under section 45(d) of the Code, determined without regard to section 45(d)(10) of the Code and without regard to any
placed in service date).
[(Include as appropriate)To the best of my knowledge, information, and belief, the Project is a qualified hydropower
facility under section 45(d)(9)—
April 2, 20078782007–14 I.R.B.

a.producing incremental hydropower production consistingonly of efficiency improvements or additions to capacity
that produce additional production as described in section 45(c)(8)(B) based on a methodology that would meet
Federal Energy Regulatory Commission (FERC) standards. or
b.that is a nonhydroelectric dam under section 45(c)(8)(C) and the facility, when constructed, will meet FERC
licensing requirements and other applicable environmental, licensingand regulatory requirements.]
3. To the best of my knowledge, information and belief, the Project is technically viable and when constructed will
produce electricity.
IN WITNESS WHEREOF, I have hereunto affixed my official signature on the date of this Engineer’s Certificate.
By:
Seal and/or License number:
Name and Title:
Company:
EXHIBIT C
PLAN OF FINANCING
(RESPONSE TO QUESTION 13 OF THE APPLICATION)
(Attached hereto)
EXHIBIT D
DOCUMENTS REGARDING ISSUER OR BORROWER ORGANIZATIONAL STATUS
(RESPONSE TO QUESTION 2 OR 4 OF THE APPLICATION, AS APPLICABLE)
(Attached hereto)
APPENDIX B
CONSENT TO PUBLIC DISCLOSURE
OF CERTAIN CLEAN RENEWABLE ENERGY BOND
APPLICATION INFORMATION
In the event that the Application of [(Insert name of applicant here):
] (the “Applicant”) for
an allocation of authority to issue clean renewable energy bonds (“CREBs”) under section 54 of the Internal Revenue Code is
approved, the undersigned authorized representative of the Applicant hereby consents to the disclosure by the Internal Revenue
Service through publication of a Notice in the Internal Revenue Bulletin or a press release of the name of applicant (issuer), the
name of the borrower (if other than the issuer), the type and location of the project that is the subject of the Application, and the
amount of the allocation, if any, of volume cap authority to issue CREBs for such project. The undersigned understands that this
information might be published, broadcast, discussed or otherwise disseminated in the public record.
This authorization shall becomeeffective upon the execution thereof. Except to the extent disclosure is authorized herein,
the returns and return information of the undersigned taxpayer are confidential and are protected by law under the Internal
Revenue Code.
2007–14 I.R.B.879April 2, 2007

I certify that I have the authority toexecute this consent to disclose on behalf of the taxpayer named below.
Date:
Signature:
Print name:
Title:
Name of Applicant-Taxpayer:
Taxpayer Identification Number:
Taxpayer’s Address:
Note: Treasury Regulations require that the Internal Revenue Service must receive this consent within 60 days after it is signed
and dated.
Certain Deduction Limits
Under the Pension Protection
Act of 2006
Notice 2007–28
This notice provides guidance on cer-
tain of the changes made by the Pension
Protection Act of 2006, Pub. L. 109–280
(PPA ’06), to § 404 of the Internal Rev-
enue Code (Code). Section 404 generally
provides rules concerning the deduction
for contributions to plans of deferred com-
pensation. Some of the PPA ’06 amend-
ments to § 404 are effective for years be-
ginning after December 31, 2005 (the 2006
changes) and others are effective for years
beginning after December 31, 2007 (the
2008 changes). This notice provides guid-
ance with respect to the 2006 changes and
one related issue. Future guidance will be
provided with respect to the 2008 changes.
Q–1. What changes to the rules of § 404
oftheCodeweremadebyPPA’06for
years beginning after December 31, 2005?
A–1. In general, PPA ’06 amended
§ 404 to modify the deduction permitted
for defined benefit pension plans under
§ 404(a)(1). PPA ’06 also modified the
combined limit on deductions for contribu-
tions to defined benefit plans and defined
contribution plans with overlapping cover-
age as set forth in § 404(a)(7).
Q–2. To what years do the 2006
changes apply when the taxable year
of the employer differs from the plan year
of the plan?
A–2. The 2006 changes apply to tax-
able years of the employer beginning after
December 31, 2005.
Under § 1.404(a)–14(c) of the Income
Tax Regulations (regulations), if the plan
year of the plan and the taxable year of the
employer do not coincide, the deductible
limit for the taxable year of the employer
ispermittedtobedeterminedasanyone
of the following alternatives: (1) the de-
ductible limit determined for the plan
year beginning in the taxable year, (2) the
deductible limit determined for the plan
year ending in the taxable year, or (3) a
weighted average of alternatives (1) and
(2). A plan year used under any of these
alternatives is referred to in this notice as
an associated plan year.
The calculations of the deductible limit
for a taxable year are based on the calcu-
lations with respect to an associated plan
year or years and must reflect the law in
effect for the taxable year. For example,
with respect to the 2006 calendar taxable
year, any associated plan year (i.e.,aplan
year beginning in 2006 or plan year end-
ingin2006thatisusedtodeterminethe
deductible limit for the 2006 taxable year)
must reflect the 2006 changes. Thus, if the
deductible limit is determined with respect
to the plan year ending in 2006 (which be-
gins in 2005), the calculation of the limit
with respect to that plan year must reflect
the use of an interest rate within the per-
missible corporate rate range (instead of an
interest rate within the permissible 30-year
Treasury rate range) (see Q&A–3 below)
that was used for purposes of § 412, and
must reflect the limitation based upon 150
percent of current liability (in place of the
limitation based on 100 percent of current
liability) under § 404(a)(1)(D). The fund-
ing method and other actuarial assump-
tions that were used for purposes of § 412
for that plan year must also be used for the
calculations of the deductible limit.
As another example, in the case of a tax-
able year that is not the calendar year and
that begins in 2005 and ends in 2006, and a
plan year that is the calendar year, the de-
ductible limit for any associated plan year
must not reflect the 2006 changes. Thus,
if the deductible limit for the taxable year
beginning July 1, 2005, and ending June
30, 2006, is determined based upon the
plan year beginning in the taxable year (the
2006 calendar plan year), the calculations
of such limit must not reflect the limitation
based on 150 percent of current liability
(i.e., must be limited to 100 percent of un-
funded current liability) and may use the
30-year Treasury rate in place of the cor-
porate rate.
Q–3. What changes to § 404(a)(1) of
the Code were made by PPA ’06 for years
beginning after December 31, 2005?
A–3. In general, PPA ’06 amended
§ 404(a)(1) of the Code for years begin-
ning after December 31, 2005, to replace
the limitation of § 404(a)(1)(D) based
upon unfunded current liability with a
limitation based on 150 percent of cur-
rent liability (140 percent in the case
of a multiemployer plan). In addition,
PPA ’06 eliminated the § 404(a)(1)(F)
option to use any interest rate within 90
percent to 110 percent of the weighted
average of the rates of interest on 30-year
Treasury securities during the 4-year pe-
riod ending on the last day before the
beginning of the plan year (the permis-
sible 30-year Treasury rate range) for
purposes of determining current liability
in determining the maximum deduction
under § 404(a)(1) rather than an interest
rate within the 90 percent to 100 percent
of the weighted average of the rates of in-
terest on amounts invested conservatively
in long-term investment grade corporate
April 2, 20078802007–14 I.R.B.

bonds (the permissible corporate rate
range). The current liability is determined
pursuant to existing guidance, including,
for example, Notice 90–11, 1990–1 C.B.
319.
Q–4. When determining the deductible
limit in accordance with the 2006 changes,
is the deductible limit determined as of the
valuation date for the plan year?
A–4. Yes, the deductible limit is de-
termined as of the valuation date for the
plan year and is adjusted for interest to the
earlier of the end of the plan year or the
end of the taxable year of the employer
(the “relevant date”). See, for example,
§ 1.404(a)–14(f)(3) of the regulations.
Q–5. What does § 404(a)(1)(D)(ii) pro-
vide and is the adoption of a new plan
treated as a plan amendment for purposes
of § 404(a)(1)(D)(ii)?
A–5. Section 404(a)(1)(D)(ii) provides
that, in the case of a plan which has 100
or fewer participants for the plan year,
unfunded current liability shall not in-
clude the liability attributable to benefit
increases for highly compensated em-
ployees (as defined in § 414(q), “HCEs”)
resulting from a plan amendment which
is made or becomes effective, whichever
is later, within the last two years. For
purposes of § 404(a)(1)(D)(ii), the adop-
tion of a new plan will not be treated as
a plan amendment only if the employer
did not maintain a defined benefit plan
covering any HCE covered by the new
plan during the past 2 years. Thus, for an
employer with a taxable year that is the
calendar year, if an HCE was covered by
a defined benefit plan of the employer at
any time during 2004 or 2005, a new plan
established during the 2006 taxable year
that covers that HCE would be consid-
ered a plan amendment for purposes of
§ 404(a)(1)(D)(ii).
Q–6. What changes to § 404(a)(7) were
made by PPA ’06 for years beginning after
December 31, 2005?
A–6. In general, PPA ’06 amended
§ 404(a)(7) of the Code for years begin-
ning after December 31, 2005, to exclude
multiemployer plans from consideration
and to provide that the combined limit
of § 404(a)(7) only applies in the case of
employer contributions to one or more de-
fined contribution plans to the extent that
such contributions exceed 6 percent of the
compensation otherwise paid or accrued
during the taxable year to the beneficiaries
under the plan.
Q–7. Is a plan that contains a qualified
cash or deferred arrangement described in
§ 401(k) taken into account for purposes of
the combined limit of § 404(a)(7)?
A–7. Yes, a plan that contains a
qualified cash or deferred arrangement
described in § 401(k) is taken into ac-
count for purposes of the combined limit
of § 404(a)(7). However, pursuant to
§ 404(n), elective deferrals as defined in
§ 402(g)(3) are not taken into account.
Thus, matching contributions and non-
elective employer contributions are taken
into account in applying the limits of
§ 404(a), including the combined limit
of § 404(a)(7). If elective deferrals are
the only contributions under a defined
contribution plan, then the plan is not
taken into account in applying the limits
of § 404(a)(7).
Q–8. How does the combined limit
of § 404(a)(7) apply when employer con-
tributions to defined contribution plans
(other than elective deferrals) exceed 6
percent of compensation of participants in
those plans?
A–8. When employer contributions
to defined contribution plans (other than
elective deferrals) exceed 6 percent of
compensation of participants in those
plans, the amount of employer contri-
butions to defined contribution plans to
which the combined limit of § 404(a)(7)
applies is equal to the amount of employer
contributions for theplan year less 6 per-
cent of compensation of participants in
those plans. Thus, the combined limit of
§ 404(a)(7) (i.e., the greater of 25 percent
of compensation, or the contributions to
the defined benefit plan or plans to the ex-
tent such contributions do not exceed the
amount necessary to satisfy the minimum
funding standard for the defined benefit
plans, treating a contribution that does not
exceed the unfunded current liability as an
amount necessary to satisfy the minimum
funding standard for each defined bene-
fit plan) applies to the total of employer
contributions to defined benefit plans and
employer contributions to defined contri-
bution plans (other than elective deferrals),
less 6 percent of compensation of partici-
pants in the defined contribution plans.
Q–9. How does the combined limit
of § 404(a)(7) apply when employer con-
tributions to defined contribution plans
(other than elective deferrals) do not ex-
ceed 6 percent of compensation of partici-
pants in those plans?
A–9. When employer contributions
to defined contribution plans (other than
elective deferrals) do not exceed 6 percent
of compensation of participants in those
plans, the combined limit of § 404(a)(7)
does not apply to any employer contribu-
tions to defined contribution plans. In such
a case, the combined limit of § 404(a)(7)
(i.e., the greater of 25 percent of compen-
sation, or the contributions to the defined
benefit plan or plans to the extent such
contributions do not exceed the amount
necessary to satisfy the minimum fund-
ing standard for the defined benefit plans,
treating a contribution that does not ex-
ceed the unfunded current liability as an
amount necessary to satisfy the minimum
funding standard for each defined benefit
plan) applies only to contributions to the
defined benefit plans.
Drafting Information
The principal author of this notice is
James E. Holland, Jr. of the Employee
Plans, Tax Exempt and Government Enti-
ties Division. For further information re-
garding this notice, contact Mr. Holland at
(202) 283–9699 (not a toll-free number).
Request for Comments and
Interim Guidance Regarding
Allocation of Costs Under
the Simplified Methods of
Accounting Under § 263A
Notice 2007–29
The Internal Revenue Service and
Treasury Department are studying the
appropriateness of the use of negative
amounts in computing additional costs
for purposes of the simplified methods of
accounting under § 263A of the Internal
Revenue Code. This notice invites public
comment on changes to the simplified
production method under § 1.263A–2(b)
and the simplified resale method under
§ 1.263A–3(d) of the Income Tax Regu-
lations. This notice also provides interim
guidance pending the publication of future
guidance.
2007–14 I.R.B.881April 2, 2007

BACKGROUND
Section 471 provides the general rules
for inventories and authorizes the Secre-
tary to determine when the use of inven-
tories are necessary to clearly reflect in-
come and to determinethe valuation meth-
ods that are acceptable for tax purposes.
The regulations under § 471 provide the
general rules for the valuation of invento-
ries.
Section 263A was enacted under the
Tax Reform Act of 1986, and prescribes
uniform capitalization rules for prop-
erty produced or held for resale. Under
§ 263A, producers of real or tangible
personal property and resellers of real
or personal property must capitalize the
direct costs and a proper share of the in-
direct costs of the property. Section 263A
requires capitalization of indirect costs
but generally does not set forth methods
for allocating indirect costs. Instead, in
accordance with the legislative history, the
regulations under § 263A generally pro-
vide that taxpayers must allocate indirect
costs to property usingdetailed or specific
cost allocation methods, including a spe-
cific identification method, the standard
cost method, and methods using burden
rates. Alternatively, taxpayers may use the
simplified production method or simpli-
fied resale method (simplified methods),
as applicable.
The legislative history to § 263A indi-
cates that Congress desired the Service to
adopt a flexible approach in the § 263A
regulations by providing simplified meth-
ods and assumptions when the costs and
burdens of compliance may outweigh
the benefits. Accordingly, the simplified
methods are intended to alleviate the ad-
ministrative burden of complying with the
capitalization rules of § 263A.
In general, the simplified methods de-
termine aggregate amounts of additional
§ 263A costs allocable to ending inven-
tory. Additional § 263A costs generally
are those costs, other than interest, that
were not capitalized under the taxpayer’s
method of accounting immediately prior to
the effective date of § 263A, but that are
required to be capitalized under § 263A.
Under the simplified methods, additional
§ 263A costs allocable to ending inventory
are determined by multiplying § 471 costs
(generally, the costs other than interest the
taxpayer capitalized under its method of
accounting immediately prior to the effec-
tive date of § 263A) remaining on hand at
year end by an absorption ratio consisting
of a numerator of additional § 263A costs
incurred during the taxable year over a de-
nominator of § 471 costs incurred during
the taxable year.
At the time the § 263A regulations
were issued, some commentators ex-
pressed concern that the simplified meth-
ods, in particular the simplified production
method, would result in allocation of an
excessive amount of § 263A costs to raw
materials inventories. They suggested that
this result occurs because the simplified
production method does not take into ac-
count the fact that fewer indirect costs are
incurred with respect to raw materials that
are normally held only a short period of
time, compared to other items of inven-
tory held longer. The final regulations did
not adopt these recommendations because
the simplified production method formula
properly reflects the costs of raw materials
that are purchased on the last day of the
year, and incorporating the suggestions
would have reduced the simplicity that
the simplified production method was in-
tended to provide.
More recently, controversy has arisen
regarding the inclusion of negative
amounts in additional § 263A costs and
whether aggregate additional § 263A costs
may be a negative number. A negative
amount may occur, for example, when
a taxpayer includes book costs greater
than those required for tax purposes in
the § 471 cost of inventory. For example,
if a taxpayer included book deprecia-
tion in § 471 costs in accordance with
§ 1.471–11(c)(2)(iii)(b) and the book de-
preciation is greater than tax depreciation
for the year, the taxpayer may have capi-
talized too much depreciation for purposes
of § 263A and must reduce total § 263A
costs by the excess. A negative amount
may result if the taxpayer does not adjust
its § 471 costs to remove this excess depre-
ciation amount but instead makes a neg-
ative adjustment to its additional § 263A
costs. Some taxpayers have reasoned that
allowing negative amounts is consistent
with the purpose of the simplified methods
to alleviate the administrative burden of
complying with the capitalization rules of
§ 263A and may reduce overcapitalization
that sometimes results.
The Service and Treasury Department
are aware of this viewpoint but are con-
cerned that including negative amounts
in additional § 263A costs may result in
significant distortions in some situations.
Including negative amounts in additional
§ 263A costs may undercapitalize amounts
because the simplified production method
formula may remove more of the cost
from ending inventory than was actually
remaining in ending inventory. Gener-
ally,thisdistortioniscausedbytheuse
of a different formula for removing the
cost from ending inventory than the for-
mula by which the cost was originally
capitalized under § 471. The inclusion of
raw materials in the simplified production
method formula also may cause distor-
tions. For example, including a negative
amount for book depreciation greater than
tax depreciation (excess depreciation) in
the simplified production method formula
may reduce ending inventory by more
than the amount of excess depreciation
actually remaining in ending inventory. In
some circumstances this distortion may
be a reversal of the overcapitalization of
excess tax depreciation over book depreci-
ation in prior years, and thus, may not be a
cause for concern. However, the inclusion
can cause significant, lasting distortion
in situations in which the taxpayer has a
tax basis much lower than book basis in
depreciable property.
The Service and Treasury Department
are considering amending the regulations
under § 263A to prohibit the use of some
or all negative amounts in computing addi-
tional § 263A costs under the existing sim-
plified methods and to provide a new alter-
native simplified method of cost allocation
under § 263A. The Service and Treasury
Department will consider a new method
that would allow negative amounts in com-
puting additional § 263A costs, avoid re-
quiring changes to existing systems for
determining § 471 costs, but reduce dis-
tortions. One option under consideration
would treat costs related to raw materials
differently from those related to work-in-
process or finished goods. Another option
would create distinctions based upon the
type of cost, with certain permanent items
such as basis differences being allocated
using a separate formula. Additionally, the
Service and Treasury Department are con-
sidering whether special rules should be
April 2, 20078822007–14 I.R.B.

provided for smaller taxpayers to compute
additional § 263A costs.
INTERIM GUIDANCE
Pending the issuance of additional pub-
lished guidance, the Service will not chal-
lenge the inclusion of negative amounts in
computing additional costs under § 263A
or the permissibility of aggregate negative
additional § 263A costs. These issues will
not be raised in any taxable year ending on
or before publication of the guidance, and,
if already raised as an issue in examina-
tion or before Appeals or the Tax Court in
a taxable year ending on or before March
12, 2007, the issue will not be pursued
by the Service. In addition, pending fur-
ther published guidance, the Service will
not deny consent for changes in method
of accounting solely on the basis that the
proposed method involves the inclusion of
negative amounts in computing additional
costs under § 263A or the permissibility
of aggregate negative additional § 263A
costs. However, the Service will not grant
a taxpayer permission to treat a cost as a
negative additional § 263A cost unless the
taxpayer already treats that cost as a § 471
cost. In other words, the Service will not
approve a change in method of accounting
to change the costs capitalized under § 471
to begin capitalizing a cost under § 471
and to remove the same cost from end-
ing inventory by treating it as a negative
additional § 263A cost. In addition, any
taxpayers granted consent to make these
changes will be required to conform their
methods of accounting to any future pub-
lished guidance.
REQUEST FOR COMMENTS
The Service and Treasury Department
specifically request public comments on
the following issues:
1. If only some negative amounts
are appropriate in computing additional
§ 263A costs under the existing simplified
methods, which costs should be allowed
and under what circumstances? For ex-
ample, should variances that were treated
as top-side adjustments (aggregate adjust-
ments to total ending inventory that are
not allocated to each item or unit in ending
inventory) before enactment of § 263A
be treated differently from variances that
first arose after enactment of § 263A?
If negative amounts may be included in
the numerator of the existing methods for
some costs, should aggregate negative
additional § 263A costs be prohibited or
restricted? Should items that generate a
permanent difference, such as basis dif-
ferences, be allowed under the existing
simplified methods, or should they be al-
located using a different method?
2. If the use of negative amounts is re-
stricted for certain costs or in certain situ-
ations as described in (1) above, what spe-
cific modifications should be made to the
existing simplified methods to effect this
result and how should the negative costs
be allocated? Should a new, alternative
simplified method be created to allocate
the negative costs or all additional § 263A
costs?
3. How might a new, alternative sim-
plified method of allocating costs under
§ 263A be designed that could be used
for all additional § 263A costs, positive
or negative, in lieu of the existing sim-
plified methods, that would treat costs re-
lated to raw materials (including raw ma-
terial content of work-in-process and fin-
ished goods) differently from those related
to work-in-process or finished goods (ex-
cluding raw material content) and achieve
maximum simplicity while reducing dis-
tortions? In particular, comments are re-
quested on (a) how costs, including vari-
ances and book-tax differences, should be
allocated between raw materials, work-in-
process and finished goods, (b) whether
only purchasing costs should be allocated
to raw materials, (c) whether purchasing,
storage, and handling costs of raw mate-
rials should be allocated to raw materials,
(d) whether § 471 costs should be adjusted
for purchased raw materials in transit and
beginning inventory, and (e) whether sepa-
rate absorption ratios should be calculated
for raw materials, work-in-process and fin-
ished goods, and, if so, how those ratios
should be calculated.
4. Should the simplified methods
be modified for small taxpayers and if
so, how? In particular, how should any
changes described above be applied to
small taxpayers? What criteria should be
used for determining whether a taxpayer
is a small taxpayer?
Comments should be submitted in writ-
ing on or before July 2, 2007, and should
include a reference to Notice 2007–29.
Send submissions to: CC:PA:LDP:PR
(Notice 2007–29), Room 5203, Internal
Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand delivered Mon-
day through Friday between the hours of
8 a.m. and 4 p.m. to: CC:PA:LPD:PR
(Notice 2007–29), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitu-
tion Avenue, N.W., Washington, DC.
Alternatively, comments may be sub-
mitted electronically directly to the Ser-
vice via the following e-mail address:
Notice.comments@irscounsel.treas.gov.
Please include “Notice 2007–29” in the
subject line of any electronic communi-
cation. All materials submitted will be
available for public inspection and copy-
ing.
DRAFTING INFORMATION
The principal author of this notice is
W. Thomas McElroy, Jr. of the Office
of the Associate Chief Counsel (Income
Tax and Accounting). For further infor-
mation concerning this notice, contact
Mr. McElroy at (202) 622–4970 (not a
toll-free number).
Frivolous Positions
Notice 2007–30
PURPOSE
Positions that are the same as or sim-
ilar to the positions listed in this notice
are identified as frivolous for purposes
of the penalty for a “frivolous tax re-
turn” under section 6702(a) of the Inter-
nal Revenue Code and the penalty for
a “specified frivolous submission” un-
der section 6702(b). Persons who file a
purported return of tax, including an orig-
inal or amended return, based on one or
more of these positions are subject to a
penalty of $5,000 if the purported return
of tax does not contain information on
which the substantial correctness of the
self-assessed determination of tax may
be judged or contains information that on
its face indicates the self-assessed deter-
mination of tax is substantially incorrect.
Likewise, persons who submit a “speci-
fied submission” (namely, a request for
a collection due process hearing or an
application for an installment agreement,
offer-in-compromise, or Taxpayer Assis-
tance Order) based on one or more of the
2007–14 I.R.B.883April 2, 2007

positions listed in this notice are subject
to a penalty of $5,000. The penalty may
also be applied if the purported return or
any portion of the specified submission
is not based on a position set forth in this
notice, yet reflects a desire to delay or
impede the administration of Federal tax
laws for purposes of section 6702(a)(2)(B)
or 6702(b)(2)(A)(ii).
BACKGROUND
Section 407 of Tax Relief and Health
Care Act of 2006, Pub. L. No. 109–432,
120 Stat. 2922 (2006), amended section
6702 to increase the amount of the penalty
for frivolous tax returns from $500 to
$5,000 and to impose a penalty of $5,000
on any person who submits a “specified
frivolous submission.” A submission is
a “specified frivolous submission” if it
is a “specified submission” (defined in
section 6702(b)(2)(B) as a request for a
hearing under section 6320 or 6330 or an
application under section 6159, 7122 or
7811) and any portion of the submission
(i) is based on a position identified by
the Secretary as frivolous or (ii) reflects a
desire to delay or impede administration
of the Federal tax laws. Section 6702 was
further amended to add a new subsection
(c) requiring the Secretary to prescribe
a list of positions identified as frivolous.
This notice contains the prescribed list.
DISCUSSION
Frivolous Positions. Positions that are
the same as or similar to the following are
frivolous.
1. Compliance with the internal revenue
laws is voluntary or optional and not
required by law, including arguments
that:
a. Filing a Federal tax or infor-
mation return or paying tax is
purely voluntary under the law,
or similar arguments described as
frivolous in Rev. Rul. 2007–20,
2007–14 I.R.B. 863.
b. Nothing in the Internal Revenue
Code imposes a requirement to
file a return or pay tax, or that a
person is not required to file a tax
return or pay a tax unless the In-
ternal Revenue Service responds
to the person’s questions, corre-
spondence, or a request to iden-
tify a provision in the Code re-
quiring the filing of a return or the
payment of tax.
c. There is no legal requirement to
file a Federal income tax return
because the instructions to Forms
1040, 1040A, or 1040EZ or the
Treasury regulations associated
with the filing of the forms do not
display an OMB control number
as required by the Paperwork Re-
duction Act of 1980, 44 U.S.C.
§ 3501et seq., or similar argu-
ments described as frivolous in
Rev. Rul. 2006–21, 2006–15
I.R.B. 745.
d. Because filing a tax return is not
required by law, the Service must
prepare a return for a taxpayer
who does not file one in order to
assess and collect tax.
e. A taxpayer has an option under
the law to file a document or set
of documents in lieu of a return
or elect to file a tax return report-
ing zero taxable income and zero
tax liability even if the taxpayer
received taxable income during
the taxable period for which the
return is filed, or similar argu-
ments described as frivolous in
Rev. Rul. 2004–34, 2004–1 C.B.
619.
f. An employer is not legally ob-
ligated to withhold income or
employment taxes on employ-
ees’ wages.
g. A taxpayer may “untax” himself
or herself at any time or revoke
the consent to be taxed and there-
after not be subject to internal
revenue taxes.
h. Only persons who have con-
tracted with the government by
applying for a governmental priv-
ilege or benefit, such as holding a
Social Security number, are sub-
ject to tax, and those who have
contracted with the government
may choose to revoke the con-
tract at will.
i. A taxpayer may lawfully decline
to pay taxes if the taxpayer dis-
agrees with the government’s use
of tax revenues, or similar argu-
ments described as frivolous in
Rev. Rul. 2005–20, 2005–1 C.B.
821.
j. An administrative summons is-
sued by the Service isper sein-
valid and compliance with a sum-
mons is not legally required.
2. The Internal Revenue Code is not law
(or “positive law”) or its provisions
are ineffective or inoperative, includ-
ing the sections imposing an income
tax or requiring the filing of tax re-
turns, because the provisions have
not been implemented by regulations
even though the provisions in ques-
tion either (a) do not expressly require
the Secretary to issue implementing
regulations to become effective or (b)
expressly require implementing regu-
lations which have been issued.
3. A taxpayer’s income is excluded from
taxation when the taxpayer rejects
or renounces United States citizen-
ship because the taxpayer is a citizen
exclusively of a State (sometimes
characterized as a “natural-born cit-
izen” of a “sovereign state”), that is
claimed to be a separate country or
otherwise not subject to the laws of
the United States. This position in-
cludes the argument that the United
States does not include all or a part of
the physical territory of the 50 States
and instead consists of only places
such as the District of Columbia,
Commonwealths and Territories (e.g.,
Puerto Rico), and Federal enclaves
(e.g., Native American reservations
and military installations), or similar
arguments described as frivolous in
Rev. Rul. 2004–28, 2004–1 C.B.
624, or Rev. Rul. 2007–22, 2007–14
I.R.B. 866.
4. Wages, tips, and other compensa-
tion received for the performance of
personal services are not taxable in-
come or are offset by an equivalent
deduction for the personal services
rendered, including an argument that
a taxpayer has a “claim of right” to
exclude the cost or value of the tax-
payer’s labor from income or that
taxpayers have a basis in their labor
equal to the fair market value of the
wages they receive, or similar argu-
ments described as frivolous in Rev.
Rul. 2004–29, 2004–1 C.B. 627, or
Rev. Rul. 2007–19, 2007–14 I.R.B.
843.
5. United States citizens and residents
are not subject to tax on their wages
April 2, 20078842007–14 I.R.B.

or other income derived from sources
within the United States, as only
foreign-based income or income re-
ceived by nonresident aliens and for-
eign corporations from sources within
the United States is taxable, and sim-
ilar arguments described as frivolous
in Rev. Rul. 2004–30, 2004–1 C.B.
622.
6. A taxpayer has been removed or re-
deemed from the Federal tax system
though the taxpayer remains a United
States citizen or resident, or similar ar-
guments described as frivolous in Rev.
Rul. 2004–31, 2004–1 C.B. 617.
7. Only certain types of taxpayers are
subject to income and employment
taxes, such as employees of the Fed-
eral government, corporations, non-
resident aliens, or residents of the
District of Columbia or the Federal
territories, or similar arguments de-
scribed as frivolous in Rev. Rul.
2006–18, 2006–15 I.R.B. 743.
8. Only certain types of income are tax-
able, for example, income that results
from the sale of alcohol, tobacco, or
firearms or from transactions or activ-
ities that take place in interstate com-
merce.
9. Federal income taxes are unconstitu-
tional or a taxpayer has a constitu-
tional right not to comply with the
Federal tax laws for one of the follow-
ing reasons:
a. The First Amendment permits a
taxpayer to refuse to pay taxes
based on religious or moral be-
liefs.
b. A taxpayer may withhold pay-
ment of taxes or the filing of a tax
return until the Service or other
government entity responds to a
First Amendment petition for re-
dress of grievances.
c. Mandatory compliance with, or
enforcement of, the tax laws in-
vades a taxpayer’s right to pri-
vacy under the Fourth Amend-
ment.
d. The requirement to file a tax re-
turn is an unreasonable search
and seizure contrary to the Fourth
Amendment.
e. Income taxation, tax withhold-
ing, or the assessment or collec-
tion of tax is a “taking” of prop-
erty without due process of law or
just compensation in violation of
the Fifth Amendment.
f. The Fifth Amendment privilege
against self-incrimination grants
taxpayers the right not to file re-
turns or the right to withhold all
financial information from the
Service.
g. Mandatory or compelled com-
pliance with the internal revenue
laws is a form of involuntary
servitude prohibited by the Thir-
teenth Amendment.
h. Individuals may not be taxed un-
less they are “citizens” within
the meaning of the Fourteenth
Amendment.
i. The Sixteenth Amendment was
not ratified, has no effect, con-
tradicts the Constitution as orig-
inally ratified, lacks an enabling
clause, or does not authorize a
non-apportioned, direct income
tax.
j. Taxation of income attributed to a
trust, which is a form of contract,
violates the constitutional prohi-
bition against impairment of con-
tracts.
k. Similar constitutional arguments
described as frivolous in Rev.
Rul. 2005–19, 2005–1 C.B. 819.
10. A taxpayer is not a “person” within
the meaning of section 7701(a)(14)
or other provisions of the Internal
Revenue Code, or similar arguments
described as frivolous in Rev. Rul.
2007–22, 2007–14 I.R.B. 866.
11. Federal Reserve Notes are not taxable
income when paid to a taxpayer be-
cause they are not gold or silver and
may not be redeemed for gold or sil-
ver.
12.Inatransactionusinggoldandsil-
ver coins, the value of the coins is
excluded from income or the amount
realized in the transaction is the face
value of the coins and not their fair
market value for purposes of deter-
mining taxable income.
13. A taxpayer with a home-based busi-
ness may deduct as business ex-
penses the costs of maintaining the
taxpayer’s household along with per-
sonal expenses, or similar arguments
described as frivolous by Rev. Rul.
2004–32, 2004–1 C.B. 621.
14. A “reparations” tax credit ex-
ists, including arguments that
African-American taxpayers may
claim a tax credit on their Federal
income tax returns as reparations
for slavery or other historical mis-
treatment, that Native Americans are
entitled to an analogous credit (or are
exempt from Federal income tax on
the basis of a treaty), or similar argu-
ments described as frivolous in Rev.
Rul. 2004–33, 2004–1 C.B. 628, or
Rev. Rul. 2006–20, 2006–15 I.R.B.
746.
15. A Native American or other taxpayer
who is not an employer engaged in
a trade or business may nevertheless
claim (for example, in an amount ex-
ceeding all reported income) the In-
dian Employment Credit under sec-
tion 45A, which explicitly requires,
among other criteria, that the taxpayer
be an employer engaged in a trade or
business to claim the credit.
16. A taxpayer’s wages are excluded from
Social Security taxes if the taxpayer
waives the right to receive Social Se-
curity benefits, or a taxpayer is enti-
tled to a refund of, or may claim a
charitable-contribution deduction for,
the Social Security taxes that the tax-
payer has paid, or similar arguments
described as frivolous in Rev. Rul.
2005–17, 2005–1 C.B. 823.
17. Taxpayers may reduce or eliminate
their Federal tax liability by altering a
tax return, including striking out the
penalty-of-perjury declaration, or at-
taching documents to the return, such
as a disclaimer of liability, or simi-
lar arguments described as frivolous
in Rev. Rul. 2005–18, 2005–1 C.B.
817.
18. A taxpayer is not obligated to pay
income tax because the government
has created an entity separate and
distinct from the taxpayer—a “straw
man”—that is distinguishable from
the taxpayer by some variation of the
taxpayer’s name, and any tax obli-
gations are exclusively those of the
“straw man,” or similar arguments
described as frivolous in Rev. Rul.
2005–21, 2005–1 C.B. 822.
19. Inserting the phrase “nunc pro tunc”
on a return or other document filed
with or submitted to the Service has
a legal effect, such as reducing a tax-
2007–14 I.R.B.885April 2, 2007

payer’s tax liability, or similar argu-
ments described as frivolous in Rev.
Rul. 2006–17, 2006–15 I.R.B. 748.
20. A taxpayer may avoid tax on income
by attributing the income to a trust, in-
cluding the argument that a taxpayer
can put all of the taxpayer’s assets into
a trust to avoid income tax while still
retaining substantial powers of own-
ership and control over those assets or
that a taxpayer may claim an expense
deduction for the income attributed to
a trust, or similar arguments described
as frivolous in Rev. Rul. 2006–19,
2006–15 I.R.B. 749.
21. A taxpayer may lawfully avoid in-
come tax by sending income offshore,
including depositing income into a
foreign bank account.
22. By purchasing equipment and ser-
vices for an inflated price (which
may or may not have been actually
paid), a taxpayer can use the section
44 Disabled Access Credit to reduce
tax or generate a refund irrespective
of whether the taxpayer is a small
business that purchased the equip-
ment or services to comply with the
requirements of the Americans with
Disabilities Act.
23. A taxpayer is allowed to buy or sell
the right to claim a child as a quali-
fying child for purposes of the Earned
Income Tax Credit.
24. An IRS Form 23C,Assessment Cer-
tificate — Summary Record of As-
sessments, is an invalid record of as-
sessment for purposes of section 6203
and Treas. Reg. § 301.6203–1, the
Form 23C must be personally signed
by the Secretary of the Treasury for
an assessment to be valid, the Ser-
vice must provide a copy of the Form
23C to a taxpayer if requested before
taking collection action, or similar
arguments described as frivolous in
Rev. Rul. 2007–21, 2007–14 I.R.B.
865.
25. A tax assessment is invalid because
the assessment was made from a sec-
tion 6020(b) substitute for return,
which is not a valid return.
26. A statutory notice of deficiency is in-
valid because the taxpayer to whom
the notice was sent did not file an
income tax return reporting the de-
ficiency or because the statutory no-
tice of deficiency was unsigned or not
signed by the Secretary of the Trea-
sury or by someone with delegated au-
thority.
27. A Notice of Federal Tax Lien is in-
valid because it is not signed by a par-
ticular official (such as by the Secre-
tary of the Treasury), or because it was
filed by someone without delegated
authority.
28. The form or content of a Notice of
Federal Tax Lien is controlled by or
subject to a state or local law, and a
Notice of Federal Tax Lien that does
not comply in form or content with a
state or local law is invalid.
29. A collection due process notice under
section6320or6330isinvalidifit
is not signed by the Secretary of the
Treasury or other particular official,
or if no certificate of assessment is
attached.
30. Verification under section 6330 that
the requirements of any applicable
law or administrative procedure have
been met may only be based on one or
more particular forms or documents
(which must be in a certain format),
such as a summary record of assess-
ment, or that the particular forms or
documents or the ones on which veri-
fication was actually determined must
be provided to a taxpayer at a collec-
tion due process hearing.
31. A Notice and Demand is invalid be-
cause it was not signed, was not on the
correct form (e.g.,aForm17),orwas
not accompanied by a certificate of as-
sessment when mailed.
32. The United States Tax Court is an il-
legitimate court or does not, for any
purported constitutional or other rea-
son, have the authority to hear and de-
cide matters within its jurisdiction.
33. Federal courts may not enforce the in-
ternal revenue laws because their ju-
risdiction is limited to admiralty or
maritime cases or issues.
34. Revenue Officers are not authorized
to issue levies or Notices of Federal
TaxLienortoseizepropertyinsatis-
faction of unpaid taxes.
35. A Service employee lacks the author-
ity to carry out the employee’s duties
because the employee does not pos-
sess a certain type of identification or
credential, for example, a pocket com-
mission or a badge, or it is not in the
correct form or on the right medium.
36. A person may represent a taxpayer be-
fore the Service or in court proceed-
ings even if the person does not have
a power of attorney from the taxpayer,
has not been enrolled to practice be-
fore the Service, or has not been ad-
mitted to practice before the court.
37. A civil action to collect unpaid taxes
or penalties must be personally autho-
rized by the Secretary of the Treasury
and the Attorney General.
38. A taxpayer’s income is not taxable if
the taxpayer assigns or attributes the
income to a religious organization (a
“corporation sole” orministerial trust)
claimed to be tax-exempt under sec-
tion 501(c)(3), or similar arguments
described as frivolous in Rev. Rul.
2004–27, 2004–1 C.B. 625.
39. The Service is not an agency of the
United States government but rather
a private-sector corporation or an
agency of a State or Territory without
authority to administer the internal
revenue laws.
40. Any position described as frivolous in
any revenue ruling or other published
guidance in existence when the return
adopting the position is filed with or
the specified submission adopting the
position is submitted to the Service.
Returns or submissions that contain po-
sitions not listed above, which on their face
have no basis for validity in existing law,
or which have been deemed frivolous in a
published opinion of the United States Tax
Court or other court of competent jurisdic-
tion, may be determined to reflect a desire
to delay or impede the administration of
Federal tax laws and thereby subject to the
$5,000 penalty.
The list of frivolous positions above
will be periodically revised as required by
section 6702(c).
DRAFTING INFORMATION
The principal author of this notice is the
Office of Associate Chief Counsel (Pro-
cedure & Administration). For further
information regarding this notice, contact
the Office of Associate Chief Counsel
(Procedure & Administration), Admin-
istrative Provisions & Judicial Practice
Division, Branch 2, at (202) 622–4940
(not a toll-free call).
April 2, 20078862007–14 I.R.B.

26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of cor-
rect tax liability.
(AlsoPartI,§527.)
Rev. Proc. 2007–27
SECTION 1. BACKGROUND
.01 Section 527 of the Internal Rev-
enue Code provides for the tax treatment of
all political organizations. Section 527(e)
provides that a political organization is an
organization (whether or not incorporated)
organized and operated primarily for the
purpose of accepting contributions or mak-
ing expenditures to influence, or attempt to
influence, the selection, nomination, elec-
tion, or appointment of any individual to
any Federal, State, or local public office,
office in a political party or the election of
Presidential or Vice-Presidential electors.
.02 Under § 527(i), certain political or-
ganizations must file Form 8871,Political
Organization Notice of Section 527 Sta-
tus, within 24 hours of being established
and within 30 days of any material change
to information reported on Form 8871 to
be treated as tax-exempt § 527 organiza-
tions. Until these political organizations
file the form, their income (including in-
come that would otherwise be treated as
exempt function income) is subject to tax-
ation pursuant to § 527(i)(4). See Section
I of Rev. Rul. 2003–49, 2003–1 C.B. 903.
.03 Under § 527(j), certain tax-ex-
empt political organizations must report
periodically on Form 8872,Political Or-
ganization Report of Contributions and
Expenditures, information about contri-
butions received and expenditures made
by the organizations. These reports are
due either monthly or semi-annually in
odd-numbered years and either monthly
or quarterly in even-numbered years. In
addition, certain pre- and post-election
reports are required. Information required
to be reported includes the names and
addresses of contributors, and, for indi-
vidual contributors, their occupations and
employers. A tax-exempt political organ-
ization that fails to include the required
information is liable under § 527(j)(1) for
the payment of an amount equal to the
amount of the contribution or expenditure
multiplied by the highest corporate tax
rate (currently 35%). See Section II of
Rev. Rul. 2003–49, 2003–1 C.B. 903.
.04 Section 527(l) provides that the In-
ternal Revenue Service may waive all or
anyportionofthetaxassessedduetoafail-
ure to comply with § 527(i) or the amount
imposed under § 527(j) if the failure was
due to reasonable cause and not due to
willful neglect. In establishing reasonable
cause, the key factor to consider is the ex-
tent of the organization’s effort to obtain
and report the required information. If the
organization establishes to the Service’s
satisfaction that there are significant mit-
igating factors with respect to the failure,
the failure arose from events beyond the
organization’s control, or the organization
has exercised the appropriate level of due
diligence to obtain and report the required
information, waiver is appropriate.
.05 Political organizations have re-
quested guidance on what steps a political
organization needs to take to establish that
its failure to disclose required information
was due to reasonable cause and not due
to willful neglect.
SECTION 2. FORM 8872 SCHEDULE
A SAFE HARBOR
.01 This revenue procedure provides a
“safe harbor” for establishing that failure
to report certain contributor information
on Form 8872 was due to reasonable cause
and not due to willful neglect, and there-
fore qualifies for relief under § 527(l)(2)
of the Code. The safe harbor will apply
only to those contributions for which a po-
litical organization establishes that it meets
the requirements of the safe harbor. For
example, if a political organization fails
to report required information with respect
to contribution X and contribution Y on a
Form 8872, and the political organization
meets the safe harbor criteria for contri-
bution X, but not contribution Y, the or-
ganization qualifies for relief pursuant to
the safe harbor with respect to contribu-
tion X, but not contribution Y. In addition,
the safe harbor will not apply in situations
where the organization fails to report the
name of the contributor on Form 8872 by
the time prescribed. For each contribution
for which the requirements of the safe har-
bor are satisfied, the Service will waive the
full amount imposed under section 527(j)
with respect to the contribution.
.02 A failure to report the address of
a contributor and, if the contributor is an
individual, the occupation and employer of
the contributor will be considered to be due
to reasonable cause and not due to willful
neglect provided that all of the following
requirements are met:
(1) All fundraising solicitations by
(or on behalf of) the tax-exempt politi-
cal organization contain a clear request
(in a conspicuous and easily recogniz-
able format) for the contributor’s address
and, if the contributor is an individual,
the contributor’s occupation and em-
ployer (consistent with the instructions
for Form 8872) and include a statement
that the political organization is subject
to Federal taxes and penalties if it fails to
disclose this information to the Service.
A fundraising solicitation includes any
solicitation of contributions or gifts in
written (including electronically such as
via the internet or by facsimile or email)
or printed form, by television or radio, or
by telephone.
(2) For each contribution for which the
contributor has not provided the required
information, such as the contributor’s
address, occupation and employer, the
tax-exempt political organization makes a
written (including electronically such as
via the internet or by facsimile or email)
request, or an oral request memorialized in
writing, to the contributor for the required
information within 30 days of receipt of
the contribution. The information request
may thank the contributor for the contribu-
tion, but must not include material on any
other subject or an additional solicitation.
Each information request must include
a statement that the tax-exempt political
organization is subject to Federal taxes
and penalties if it fails to disclose this
information to the Service. In addition,
each information request that is not oral
or electronic must include a pre-addressed
return envelope or postcard. Each oral
or electronic information request must
include the mailing or Internet address
to which the required information should
be submitted instead of a pre-addressed
return envelope or postcard.
(3) If the contributor has not re-
spondedtotheinformationrequestby
the due date of the Form 8872 and in
the tax-exempt political organization’s
records, including contributor records,
fundraising records or previously filed
Forms 8872, the tax-exempt political
organization has information about the
contributor that is requested by the Form
2007–14 I.R.B.887April 2, 2007

8872, the organization must report such
information on the Form 8872.
(4) If any missing or corrected contrib-
utor information is received after the con-
tribution has been disclosed on Form 8872,
the tax-exempt political organization files
an amended Form 8872 including the ad-
ditional information within 30 days of
receipt of the information, unless the in-
formation is received less than 30 days
and more than 2 business days before an
election, in which case the tax-exempt
political organization files an amended
Form 8872 including the additional in-
formation no later than 2 business days
before the election.
(5) The tax-exempt political organiza-
tion discloses all the required information
on Forms 8872 with respect to at least 85
percent of the total dollar amount of con-
tributions it received during the calendar
year.
(6) The political organization keeps
contemporaneous records sufficient to
substantiate that it has complied with sub-
paragraphs (1) through (5) in this section.
.03 Even if a tax-exempt political or-
ganization does not meet the requirements
of the safe harbor, the Service still may ex-
ercise its authority under section 527(l) if
it determines that the failure is due to rea-
sonable cause and notwillful neglect.
SECTION 3. REQUEST FOR
COMMENTS
.01 The Service is considering whether
to publish additional guidance concerning
the application of § 527(l) to a political
organization that fails to file a completed
Form 8871 or Form 8872 in the time and
manner prescribed. The Service requests
public comment concerning (1) the need
for additional guidance and (2) circum-
stances in which such a failure should be
deemed to be due to reasonable cause and
not due to willful neglect. For example,
under § 6724 and the regulations thereun-
der, a failure to comply with certain infor-
mation reporting requirements is deemed
to be due to reasonable cause and not due
to willful neglect if the filer acted in a re-
sponsible manner and either there are sig-
nificant mitigating factors with respect to
the failure or the failure arose from events
beyond the filer’s control. The regulations
under § 6724 provide examples of acting
in a responsible manner, significant miti-
gating factors and events beyond the or-
ganization’s control. However, the Ser-
vice recognizes that the reporting require-
ments under § 527 have significant public
disclosure and timeliness concerns (partic-
ularly in relation to public disclosure prior
to elections) that may differentiate them
from other information reporting require-
ments. Thus, comments should address the
following questions:
(1) In applying § 527(l), how might the
factors similar to those in the regulations
under § 6724 be adapted for purposes of
§ 527(l)?
(a) Are there any significant mitigating
factors that are unique to failures to file
Form 8871 or Form 8872 in the time and
manner prescribed?
(b) Are there any events beyond the
political organization’s control that are
unique to failures to file Form 8871 or
Form 8872 in the time and manner pre-
scribed?
(c) Are there any factors unique to po-
litical organizations that should be con-
sidered in determining whether a political
organization acted in a responsible man-
ner, both before and after a failure to file
Form 8871 or Form 8872 in the time and
manner prescribed?
(2) Are there any factors relevant to de-
termining whether all or only a portion of
the amounts assessed should be waived?
(3) What documentation should the
political organization maintain to estab-
lish that any failure to file Form 8871 or
Form 8872 in the time and manner pre-
scribed was due to reasonable cause and
not due to willful neglect?
(4) Are there factors that indicate relief
under § 527(l) should not be granted?
.02 Public comments should be submit-
ted in writing on or before July 2, 2007.
Comments should be sent to the following
address:
Internal Revenue Service
SE:T:EO:RA:G (Rev. Proc. 2007–27)
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Comments may be hand delivered to:
SE:T:EO:RA:G (Rev. Proc. 2007–27)
Courier’s Desk
Internal Revenue Service
1111 Constitution Ave., NW
Washington, DC 20224
Comments may also be sent elec-
tronically via the Internet to
notice.comments@irscounsel.treas.gov.
Please include “Rev. Proc. 2007–27” in
the subject line.
All comments will be available for public
inspection.
SECTION 4. DRAFTING
INFORMATION
The principal author of this notice
is Judith E. Kindell of Exempt Organi-
zations, Tax Exempt and Government
Entities Division. For further infor-
mation regarding this notice, contact
Judith E. Kindell at (202) 283–8964 (not a
toll-free call).
April 2, 20078882007–14 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
2007–14 I.R.B.iApril 2, 2007

Numerical Finding List
1
Bulletins 2007–1 through 2007–14
Announcements:
2007-1, 2007-1 I.R.B.243
2007-2, 2007-2 I.R.B.263
2007-3, 2007-4 I.R.B.376
2007-4, 2007-7 I.R.B.518
2007-5, 2007-4 I.R.B.376
2007-6, 2007-4 I.R.B.376
2007-7, 2007-4 I.R.B.377
2007-8, 2007-5 I.R.B.416
2007-9, 2007-5 I.R.B.417
2007-10, 2007-6 I.R.B.464
2007-11, 2007-6 I.R.B.464
2007-12, 2007-6 I.R.B.465
2007-13, 2007-7 I.R.B.519
2007-14, 2007-7 I.R.B.519
2007-15, 2007-8 I.R.B.596
2007-16, 2007-8 I.R.B.597
2007-17, 2007-8 I.R.B.597
2007-18, 2007-9 I.R.B.625
2007-19, 2007-7 I.R.B.521
2007-20, 2007-8 I.R.B.599
2007-21, 2007-9 I.R.B.630
2007-22, 2007-9 I.R.B.631
2007-23, 2007-10 I.R.B.665
2007-24, 2007-10 I.R.B.681
2007-25, 2007-10 I.R.B.682
2007-26, 2007-10 I.R.B.682
2007-27, 2007-11 I.R.B.733
2007-28, 2007-10 I.R.B.683
2007-29, 2007-11 I.R.B.733
2007-30, 2007-11 I.R.B.734
2007-31, 2007-12 I.R.B.769
2007-32, 2007-11 I.R.B.734
2007-33, 2007-13 I.R.B.841
2007-34, 2007-13 I.R.B.842
Notices:
2007-1, 2007-2 I.R.B.254
2007-2, 2007-2 I.R.B.254
2007-3, 2007-2 I.R.B.255
2007-4, 2007-2 I.R.B.260
2007-5, 2007-3 I.R.B.269
2007-6, 2007-3 I.R.B.272
2007-7, 2007-5 I.R.B.395
2007-8, 2007-3 I.R.B.276
2007-9, 2007-5 I.R.B.401
2007-10, 2007-4 I.R.B.354
2007-11, 2007-5 I.R.B.405
2007-12, 2007-5 I.R.B.409
2007-13, 2007-5 I.R.B.410
2007-14, 2007-7 I.R.B.501
2007-15, 2007-7 I.R.B.503
Notices— Continued:
2007-16, 2007-8 I.R.B.536
2007-17, 2007-12 I.R.B.748
2007-18, 2007-9 I.R.B.608
2007-19, 2007-11 I.R.B.689
2007-20, 2007-9 I.R.B.610
2007-21, 2007-9 I.R.B.611
2007-22, 2007-10 I.R.B.670
2007-23, 2007-11 I.R.B.690
2007-24, 2007-12 I.R.B.750
2007-25, 2007-12 I.R.B.760
2007-26, 2007-14 I.R.B.870
2007-27, 2007-13 I.R.B.814
2007-28, 2007-14 I.R.B.880
2007-29, 2007-14 I.R.B.881
2007-30, 2007-14 I.R.B.883
Proposed Regulations:
REG-100841-97, 2007-12 I.R.B.763
REG-157711-02, 2007-8 I.R.B.537
REG-159444-04, 2007-9 I.R.B.618
REG-115403-05, 2007-12 I.R.B.767
REG-152043-05, 2007-2 I.R.B.263
REG-161919-05, 2007-6 I.R.B.463
REG-125632-06, 2007-5 I.R.B.415
REG-147144-06, 2007-10 I.R.B.680
REG-157834-06, 2007-13 I.R.B.840
Revenue Procedures:
2007-1, 2007-1 I.R.B.1
2007-2, 2007-1 I.R.B.88
2007-3, 2007-1 I.R.B.108
2007-4, 2007-1 I.R.B.118
2007-5, 2007-1 I.R.B.161
2007-6, 2007-1 I.R.B.189
2007-7, 2007-1 I.R.B.227
2007-8, 2007-1 I.R.B.230
2007-9, 2007-3 I.R.B.278
2007-10, 2007-3 I.R.B.289
2007-11, 2007-2 I.R.B.261
2007-12, 2007-4 I.R.B.354
2007-13, 2007-3 I.R.B.295
2007-14, 2007-4 I.R.B.357
2007-15, 2007-3 I.R.B.300
2007-16, 2007-4 I.R.B.358
2007-17, 2007-4 I.R.B.368
2007-18, 2007-5 I.R.B.413
2007-19, 2007-7 I.R.B.515
2007-20, 2007-7 I.R.B.517
2007-21, 2007-9 I.R.B.613
2007-22, 2007-10 I.R.B.675
2007-23, 2007-10 I.R.B.675
2007-24, 2007-11 I.R.B.692
2007-25, 2007-12 I.R.B.761
2007-26, 2007-13 I.R.B.814
2007-27, 2007-14 I.R.B.887
Revenue Rulings:
2007-1, 2007-3 I.R.B.265
2007-2, 2007-3 I.R.B.266
2007-3, 2007-4 I.R.B.350
2007-4, 2007-4 I.R.B.351
2007-5, 2007-5 I.R.B.378
2007-6, 2007-5 I.R.B.393
2007-7, 2007-7 I.R.B.468
2007-8, 2007-7 I.R.B.469
2007-9, 2007-6 I.R.B.422
2007-10, 2007-10 I.R.B.660
2007-11, 2007-9 I.R.B.606
2007-12, 2007-11 I.R.B.685
2007-13, 2007-11 I.R.B.684
2007-14, 2007-12 I.R.B.747
2007-15, 2007-11 I.R.B.687
2007-16, 2007-13 I.R.B.807
2007-17, 2007-13 I.R.B.805
2007-18, 2007-13 I.R.B.806
2007-19, 2007-14 I.R.B.843
2007-20, 2007-14 I.R.B.863
2007-21, 2007-14 I.R.B.865
2007-22, 2007-14 I.R.B.866
Tax Conventions:
2007-23, 2007-10 I.R.B.665
Treasury Decisions:
9298, 2007-6 I.R.B.434
9299, 2007-6 I.R.B.460
9300, 2007-2 I.R.B.246
9301, 2007-2 I.R.B.244
9302, 2007-5 I.R.B.382
9303, 2007-5 I.R.B.379
9304, 2007-6 I.R.B.423
9305, 2007-7 I.R.B.479
9306, 2007-6 I.R.B.420
9307, 2007-7 I.R.B.470
9308, 2007-8 I.R.B.523
9309, 2007-7 I.R.B.497
9310, 2007-9 I.R.B.601
9311, 2007-10 I.R.B.635
9312, 2007-12 I.R.B.736
9313, 2007-13 I.R.B.805
9314, 2007-14 I.R.B.845
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2006–27 through 2006–52 is in Internal Revenue Bulletin
2006–52, dated December 26, 2006.
April 2, 2007ii2007–14 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2007–1 through 2007–14
Notices:
2002-45
Modified by
Notice 2007-22, 2007-10 I.R.B.670
2005-29
Modified and superseded by
Notice 2007-4, 2007-2 I.R.B.260
2005-86
Modified by
Notice 2007-22, 2007-10 I.R.B.670
2005-98
Modified and superseded by
Notice 2007-26, 2007-14 I.R.B.870
2006-2
Modified and superseded by
Notice 2007-4, 2007-2 I.R.B.260
2006-50
Amplified, clarified, and modified by
Notice 2007-11, 2007-5 I.R.B.405
2006-87
Modified and supplemented by
Notice 2007-25, 2007-12 I.R.B.760
Proposed Regulations:
REG-208270-86
Corrected by
Ann. 2007-4, 2007-7 I.R.B.518
REG-121509-00
Corrected by
Ann. 2007-17, 2007-8 I.R.B.597
REG-141901-05
Corrected by
Ann. 2007-7, 2007-4 I.R.B.377
REG-142270-05
Corrected by
Ann. 2007-2, 2007-2 I.R.B.263
REG-125632-06
Corrected by
Ann. 2007-26, 2007-10 I.R.B.682
REG-127819-06
Corrected by
Ann. 2007-5, 2007-4 I.R.B.376
REG-136806-06
Corrected by
Ann. 2007-6, 2007-4 I.R.B.376
Hearing cancelled by
Ann. 2007-19, 2007-7 I.R.B.521
Revenue Procedures:
98-20
Superseded by
Rev. Proc. 2007-12, 2007-4 I.R.B.354
2000-38
Modified by
Rev. Proc. 2007-16, 2007-4 I.R.B.358
2000-50
Modified by
Rev. Proc. 2007-16, 2007-4 I.R.B.358
2001-42
Modified and amplified by
Rev. Proc. 2007-19, 2007-7 I.R.B.515
2002-9
Modified and amplified by
Rev. Proc. 2007-14, 2007-4 I.R.B.357
Modified by
Rev. Proc. 2007-16, 2007-4 I.R.B.358
2004-11
Superseded by
Rev. Proc. 2007-16, 2007-4 I.R.B.358
2004-65
Modified and superseded by
Rev. Proc. 2007-20, 2007-7 I.R.B.517
2005-12
Superseded by
Rev. Proc. 2007-17, 2007-4 I.R.B.368
2005-51
Amplified by
Rev. Proc. 2007-25, 2007-12 I.R.B.761
2005-69
Superseded by
Rev. Proc. 2007-15, 2007-3 I.R.B.300
2005-74
Superseded by
Rev. Proc. 2007-24, 2007-11 I.R.B.692
2006-1
Superseded by
Rev. Proc. 2007-1, 2007-1 I.R.B.1
2006-2
Superseded by
Rev. Proc. 2007-2, 2007-1 I.R.B.88
2006-3
Superseded by
Rev. Proc. 2007-3, 2007-1 I.R.B.108
2006-4
Superseded by
Rev. Proc. 2007-4, 2007-1 I.R.B.118
Revenue Procedures— Continued:
2006-5
Superseded by
Rev. Proc. 2007-5, 2007-1 I.R.B.161
2006-6
Superseded by
Rev. Proc. 2007-6, 2007-1 I.R.B.189
2006-7
Superseded by
Rev. Proc. 2007-7, 2007-1 I.R.B.227
2006-8
Superseded by
Rev. Proc. 2007-8, 2007-1 I.R.B.230
2006-17
Obsoleted in part by
Rev. Proc. 2007-26, 2007-13 I.R.B.814
2006-35
Modified by
Rev. Proc. 2007-22, 2007-10 I.R.B.675
Revenue Rulings:
54-19
Obsoleted in part by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
55-132
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
56-462
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
56-518
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
57-505
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
58-370
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
58-500
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
69-141
Modified by
Notice 2007-22, 2007-10 I.R.B.670
69-212
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
69-587
Revoked by
Rev. Rul. 2007-12, 2007-11 I.R.B.685
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2006–27 through 2006–52 is in Internal Revenue Bulletin 2006–52, dated December 26,
2006.
2007–14 I.R.B.iiiApril 2, 2007

Revenue Rulings— Continued:
71-477
Obsoleted by
Rev. Rul. 2007-14, 2007-12 I.R.B.747
75-161
Obsoleted by
Rev. Rul. 2007-8, 2007-7 I.R.B.469
76-188
Obsoleted by
Rev. Rul. 2007-8, 2007-7 I.R.B.469
78-330
Modified by
Rev. Rul. 2007-8, 2007-7 I.R.B.469
81-225
Clarified and amplified by
Rev. Rul. 2007-7, 2007-7 I.R.B.468
92-19
Supplemented in part by
Rev. Rul. 2007-10, 2007-10 I.R.B.660
96-51
Amplified by
Rev. Rul. 2007-12, 2007-11 I.R.B.685
2002-41
Modified by
Notice 2007-22, 2007-10 I.R.B.670
2003-43
Modified by
Notice 2007-2, 2007-2 I.R.B.254
2003-92
Clarified and amplified by
Rev. Rul. 2007-7, 2007-7 I.R.B.468
2003-102
Modified by
Notice 2007-22, 2007-10 I.R.B.670
2005-24
Modified by
Notice 2007-22, 2007-10 I.R.B.670
2005-76
Supplemented and superseded by
Rev. Rul. 2007-4, 2007-4 I.R.B.351
2006-36
Modified by
Notice 2007-22, 2007-10 I.R.B.670
Treasury Decisions:
9263
Corrected by
Ann. 2007-22, 2007-9 I.R.B.631
9276
Corrected by
Ann. 2007-20, 2007-8 I.R.B.599
Ann. 2007-21, 2007-9 I.R.B.630
Treasury Decisions— Continued:
9278
Corrected by
Ann. 2007-9, 2007-5 I.R.B.417
Ann. 2007-10, 2007-6 I.R.B.464
9286
Corrected by
Ann. 2007-8, 2007-5 I.R.B.416
9298
Corrected by
Ann. 2007-32, 2007-11 I.R.B.734
9303
Corrected by
Ann. 2007-25, 2007-10 I.R.B.682
April 2, 2007iv2007–14 I.R.B.

INTERNAL REVENUE BULLETIN
The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin-
tendent of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis andare notincluded as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly
Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
Superintendent of Documents.
ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET
You may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Under information for: select Businesses. Under
related topics, select More Topics. Then select Internal Revenue Bulletins.
INTERNAL REVENUE BULLETINS ON CD-ROM
Internal Revenue Bulletins are available annually as part ofPublication 1796 (Tax Products CD-ROM). The CD-ROM can be
purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)
or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954. Please allow two to
six weeks, plus mailing time, for delivery.
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REVENUE BUL
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omments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it,
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