IRS Revenue Procedure
2002-33

 Code Secs. 56, 168, 179, 446, 1400L



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26 CFR 601.105: Examination of returns and claims for refund, credit or
abatement; determination of correct tax liability.
(Also Part I, sections 56, 168, 179, 446, 1400L.)


REV. PROC. 2002-33

SECTION 1. PURPOSE

This revenue procedure provides procedures for a taxpayer to claim the
additional 30 percent depreciation (additional first year depreciation)
provided by sections 168(k) and 1400L(b) of the Internal Revenue Code and
other deductions for qualified property or qualified New York Liberty Zone
(Liberty Zone) property that the taxpayer did not claim on the taxpayer's
federal tax return filed before June 1, 2002. This revenue procedure also
explains how a taxpayer may elect not to deduct the additional first year
depreciation for qualified property and Liberty Zone property.


SECTION 2. BACKGROUND

.01 Section 168(k), as added by section 101 of the Job Creation and
Worker Assistance Act of 2002 (the Act), Pub. L. No. 107-147, 116 Stat. 21
(March 9, 2002), and section 1400L(b), as added by section 301(a) of the
Act, generally allow an additional first year depreciation deduction for
qualified property or Liberty Zone property placed in service by the
taxpayer after September 10, 2001. The term "qualified property" is
defined in section 168(k)(2) and the term "Liberty Zone property" is
defined in section 1400L(b)(2). The additional first year depreciation
deduction is allowed for both regular tax and alternative minimum tax
purposes for the taxable year in which the qualified property or Liberty
Zone property is placed in service. If the property is described in both
section 168(k) and section 1400L(b), only one additional first year
depreciation deduction is allowable for the property.

.02 The additional first year depreciation deduction generally is
determined without any proration based on the length of the taxable year
in which the qualified property or Liberty Zone property is placed in
service. The additional first year depreciation is equal to 30 percent of
the adjusted basis of the qualified property or Liberty Zone property. The
adjusted basis of this property generally is its cost or other basis
multiplied by the percentage of business/investment use, reduced by the
amount of any section 179 expense deduction and adjusted to the extent
provided by other provisions of the Code and the regulations thereunder
(for example, reduced by the amount of the disabled access credit pursuant
to section 44(d)(7)).

.03 Before computing the amount otherwise allowable as a depreciation
deduction for the placed-in-service year and subsequent taxable years, the
adjusted basis of the qualified property or Liberty Zone property for
which the additional first year depreciation is deductible must be reduced
by the amount of the additional first year depreciation deduction. The
remaining adjusted basis of this property is depreciated using the
applicable depreciation provisions under the Code for the property (that
is, section 167(f)(1) for computer software and section 168 for other
property). This depreciation deduction for the remaining adjusted basis of
the qualified property or Liberty Zone property for which the additional
first year depreciation is deductible is allowed for both regular tax and
alternative minimum tax purposes.

.04 The additional first year depreciation must not be deducted for,
among other things: (1) property that is required to be depreciated under
the alternative depreciation system of section 168(g) pursuant to section
168(g)(1)(A) through (D) or other provisions of the Code (for example,
property described in section 263A(e)(2)(A) or section 280F(b)(1)); (2)
property described in section 168(f); or (3) any class of property for
which the taxpayer elects not to deduct the additional first year
depreciation (see section 3 of this revenue procedure for further details
about this election).

.05 Pursuant to sections 168(k)(2)(C)(ii) and 1400L(b)(2)(C)(iii),
Liberty Zone leasehold improvement property (as defined in section
1400L(c)(2)) is not eligible for the additional first year depreciation
deduction. However, in accordance with section 1400L(c), this property is
included as 5-year property for purposes of section 168. The straight-line
method of depreciation is required to be used under section 168 for
Liberty Zone leasehold improvement property and the class life for this
property for purposes of the alternative depreciation system of section
168(g) is 9 years.

.06 For section 179 property that is Liberty Zone property, section
1400L(f) increased the amount a taxpayer may elect to expense under
section 179 by the lesser of (1) $35,000, or (2) the cost of section 179
property that is Liberty Zone property placed in service during the
taxable year. Accordingly, the section 179 expense deduction that may be
elected for section 179 property that is Liberty Zone property placed in
service by the taxpayer after September 10, 2001, is increased (1) to a
maximum of $55,000 for a taxable year that began in 2000, and (2) to a
maximum of $59,000 for a taxable year that began in 2001.


SECTION 3. ELECTION NOT TO DEDUCT ADDITIONAL FIRST YEAR DEPRECIATION

.01 IN GENERAL. Pursuant to sections 168(k)(2)(C)(iii) and
1400L(b)(2)(C)(iv), a taxpayer may make an election not to deduct the
additional first year depreciation for any class of property placed in
service during the taxable year. If the taxpayer makes this election, it
applies to all qualified property or Liberty Zone property that is in the
same class and placed in service in the same taxable year. In addition,
the depreciation adjustments under section 56 apply to that property for
purposes of computing the taxpayer's alternative minimum taxable income.
The election not to deduct the additional first year depreciation for any
class of property placed in service during the taxable year is made
separately by each person owning qualified property or Liberty Zone
property (for example, by each member of a consolidated group, by the
partnership, or by the S corporation).

.02 DEFINITION OF CLASS OF PROPERTY.

(1) For purposes of the election under section 168(k)(2)(C)(iii) not to
deduct the additional first year depreciation for qualified property, the
term "class of property" means: (a) except for the property described in
this section 3.02(1)(b) and (d), each class of property described in
section 168(e) (for example, 5-year property); (b) water utility property
as defined in section 168(e)(5) and depreciated under section 168; (c)
computer software depreciated under section 167(f)(1); or (d) qualified
leasehold improvement property as defined in section 168(k)(3) and
depreciated under section 168.

(2) For purposes of the election under section 1400L(b)(2)(C)(iv) not
to deduct the additional first year depreciation for Liberty Zone
property, the term "class of property" means: (a) except for the property
described in this section 3.02(2)(b), (d), and (e), each class of property
described in section 168(e) (for example, 5-year property); (b) water
utility property as defined in section 168(e)(5) and depreciated under
section 168; (c) computer software depreciated under section 167(f)(1);
(d) nonresidential real property described in section 1400L(b)(2)(B) and
depreciated under section 168; or (e) residential rental property
described in section 1400L(b)(2)(B) and depreciated under section 168.


.03 TIME AND MANNER OF MAKING THE ELECTION.

(1) IN GENERAL. An election not to deduct the additional first year
depreciation for any class of property that is qualified property or
Liberty Zone property placed in service during the taxable year must be
made by the due date (including extensions) of the federal tax return for
the taxable year in which the qualified property or Liberty Zone property
is placed in service by the taxpayer. The election must be made in the
manner prescribed on Form 4562, Depreciation and Amortization, and its
instructions. However, see section 3.03(3) of this revenue procedure for
the procedures for making the election not to deduct the additional first
year depreciation for any class of property placed in service by the
taxpayer after September 10, 2001, during the taxable year beginning in
2000 or 2001 (2000 or 2001 taxable year).

(2) LIMITED RELIEF FOR LATE ELECTION.

(a) AUTOMATIC 6-MONTH EXTENSION. Pursuant to section 301.9100-2(b) of
the Procedure and Administration Regulations, an automatic extension of 6
months from the due date of the federal tax return (excluding extensions)
for the placed-in-service year of the qualified property or Liberty Zone
property is granted to make the election not to deduct the additional
first year depreciation, provided the taxpayer timely filed the taxpayer's
federal tax return for the placed-in-service year and the taxpayer
satisfies the requirements in section 301.9100-2(c) and section
301.9100-2(d).

(b) OTHER EXTENSIONS. A taxpayer that fails to make the election not to
deduct the additional first year depreciation for the placed-in-service
year for the qualified property or Liberty Zone property as provided in
section 3.03(1), 3.03(2)(a), 3.03(3), or 4.02 of this revenue procedure
but wants to do so must file a request for an extension of time to make
the election under the rules in section 301.9100-3.


(3) SPECIAL RULES FOR 2000 OR 2001 RETURN.

(a) RETURN FILED ON OR AFTER JUNE 1, 2002. If a taxpayer files the 2000
or 2001 federal tax return on or after June 1, 2002, the procedures in
section 3.03(1) of this revenue procedure apply for making the election
not to deduct the additional first year depreciation for any class of
property that is qualified property or Liberty Zone property placed in
service by the taxpayer after September 10, 2001, during the 2000 or 2001
taxable year. However, the taxpayer must follow the instructions for the
2001 Form 4562 (Rev. March 2002). These instructions require the taxpayer
to attach to the federal tax return a statement indicating the class of
property for which the taxpayer is electing not to deduct the additional
first year depreciation.

(b) RETURN FILED BEFORE JUNE 1, 2002. If a taxpayer has filed the 2000
or 2001 federal tax return before June 1, 2002, see section 4.02 of this
revenue procedure for the procedures for making the election not to deduct
the additional first year depreciation for any class of property that is
qualified property or Liberty Zone property placed in service by the
taxpayer after September 10, 2001, during the 2000 or 2001 taxable year.


.04 REVOCATION. An election not to deduct the additional first year
depreciation for a class of property that is qualified property or Liberty
Zone property placed in service during the taxable year is revocable only
with the prior written consent of the Commissioner of Internal Revenue. To
seek the Commissioner's consent, the taxpayer must submit a request for a
letter ruling in accordance with the provisions of Rev. Proc. 2002-1
(2002-1 I.R.B. 1) (or any successor).

.05 FAILURE TO MAKE ELECTION NOT TO DEDUCT ADDITIONAL FIRST YEAR
DEPRECIATION. If a taxpayer does not make the election not to deduct the
additional first year depreciation for a class of property that is
qualified property or Liberty Zone property within the time and in the
manner prescribed in section 3.03 or 4.02 of this revenue procedure, the
amount of depreciation allowable for that property under section 167(f)(1)
or under section 168, as applicable, must be determined for the
placed-in-service year and for all subsequent years by taking into account
the additional first year depreciation deduction. Thus, the election not
to deduct the additional first year depreciation cannot be made by the
taxpayer in any other manner (for example, through a request under section
446(e) to change the taxpayer's method of accounting).


SECTION 4. PROCEDURES FOR RETURNS FILED BEFORE JUNE 1, 2002

.01 ADDITIONAL FIRST YEAR DEPRECIATION. If a taxpayer has filed a 2000
or 2001 federal tax return before June 1, 2002, and did not claim on that
return the additional first year depreciation for a class of property that
is qualified property or Liberty Zone property placed in service by the
taxpayer after September 10, 2001, during the 2000 or 2001 taxable year
but wants to do so, the taxpayer may claim the additional first year
depreciation for that class of property under this section 4.01, provided
the taxpayer did not make an election not to deduct the additional first
year depreciation for the class of property pursuant to section 4.02(1) or
(2) of this revenue procedure. The taxpayer has the option of claiming
this additional first year depreciation either by:

(1) filing an amended federal tax return (or a qualified amended return
under Rev. Proc. 94-69 (1994-2 C.B. 804), if applicable) on or before the
due date (excluding extensions) of the federal tax return for the next
succeeding taxable year. The amended return (or qualified amended return)
should include the statement "Filed Pursuant to Rev. Proc. 2002-33" at the
top of the amended return (or qualified amended return); or

(2) Filing a Form 3115, Application for Change in Accounting Method,
with the taxpayer's federal tax return for the next succeeding taxable
year. This Form 3115 is to be filed in accordance with the automatic
change in method of accounting provisions in Rev. Proc. 2002-9 (2002-3
I.R.B. 327), as modified by Rev. Proc. 2002-19 (2002-13 I.R.B. 696), and
as modified and clarified by Announcement 2002-17 (2002-8 I.R.B. 561) (or
any successor) with the following modifications:

(a) The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not
apply, and

(b) To assist the Service in processing changes in method of accounting
under this section of the revenue procedure, and to ensure proper
handling, section 6.02(4)(a) of Rev. Proc. 2002-9 is modified to require
that a Form 3115 filed under this revenue procedure include the statement:
"Automatic Change Filed Under Rev. Proc. 2002-33." This statement should
be legibly printed or typed on the appropriate line on any Form 3115 filed
under this revenue procedure.


.02 ELECTION NOT TO DEDUCT ADDITIONAL FIRST YEAR DEPRECIATION.

(1) IN GENERAL. A taxpayer that has filed a 2000 or 2001 federal tax
return before June 1, 2002, has made the election not to deduct the
additional first year depreciation for a class of property that is
qualified property or Liberty Zone property placed in service by the
taxpayer after September 10, 2001, during the 2000 or 2001 taxable year,
if:

(a) the taxpayer made the election within the time prescribed in
section 3.03(1) or 3.03(2)(a) of this revenue procedure and in the manner
prescribed in the instructions for the 2001 Form 4562 (Rev. March 2002);
or

(b) the taxpayer made the election within the time prescribed in
section 3.03(1) or 3.03(2)(a) of this revenue procedure and included with
the taxpayer's 2000 or 2001 federal tax return an affirmative statement to
the effect that the taxpayer is not deducting the additional first year
depreciation for the class of property. The affirmative statement may be a
statement attached to, or written on, the return (for example, writing on
the Form 4562 "not deducting 30 percent").


(2) DEEMED ELECTION. If section 4.02(1) of this revenue procedure does
not apply, a taxpayer that has filed a 2000 or 2001 federal tax return
before June 1, 2002, will also be treated as making the election not to
deduct the additional first year depreciation for a class of property that
is qualified property or Liberty Zone property placed in service by the
taxpayer after September 10, 2001, during the 2000 or 2001 taxable year,
if the taxpayer:

(a) on that return, did not claim the additional first year
depreciation for that class of property but did claim depreciation; and

(b) does not file an amended federal tax return (or a qualified amended
return) or a Form 3115 within the time prescribed in section 4.01 of this
revenue procedure to claim the additional first year depreciation for the
class of property.


.03 INCREASED SECTION 179 EXPENSING FOR LIBERTY ZONE PROPERTY. If a
taxpayer has filed a 2000 or 2001 federal tax return before June 1, 2002,
and did not elect on that return to expense the increased section 179
amount for section 179 property that is Liberty Zone property placed in
service by the taxpayer after September 10, 2001, during the 2000 or 2001
taxable year, the taxpayer must file an amended return (or a qualified
amended return under Rev. Proc. 94-69, if applicable) on or before the due
date (excluding extensions) of the federal tax return for the next
succeeding taxable year to make this election. This amended return (or
qualified amended return) should include the statement "Filed Pursuant to
Rev. Proc. 2002-33" at the top of the amended return (or qualified amended
return).

.04 LIBERTY ZONE LEASEHOLD IMPROVEMENT PROPERTY. If a taxpayer has
filed a 2000 or 2001 federal tax return before June 1, 2002, and did not
depreciate on that return Liberty Zone leasehold improvement property
placed in service by the taxpayer after September 10, 2001, during the
2000 or 2001 taxable year as 5-year property for purposes of section 168
using the straight-line method of depreciation, the taxpayer should file
an amended tax return (or a qualified amended return under Rev. Proc.
94-69, if applicable) before the taxpayer files the federal tax return for
the next succeeding taxable year. The amended return (or qualified amended
return) should include the statement "Filed Pursuant to Rev. Proc.
2002-33" at the top of the amended return (or qualified amended return).


SECTION 5. EFFECT ON OTHER DOCUMENTS

.01 Rev. Proc. 2002-9 is modified and amplified to include the
accounting method change provided in section 4.01 of this revenue
procedure in section 2 of the APPENDIX.

.02 Section 2.01 of the APPENDIX of Rev. Proc. 2002-9 is modified as
follows:

(1) Section 2.01(2)(a)(ii) of the APPENDIX is modified to read as
follows:

"(ii) for which depreciation is determined under section 56(a)(1),
section 56(g)(4)(A), section 167, section 168, section 197, section
1400L(b), or section 1400L(c), or under section 168 prior to its amendment
in 1986 (former section 168); and"


(2) Section 2.01(2)(c)(vi) of the APPENDIX is modified to read as
follows:

"(vi) any property for which a taxpayer is revoking a timely valid
election, or making a late election, under section 167, section 168,
section 1400L(b), former section 168, or section 13261(g)(2) or (3) of the
Revenue Reconciliation Act of 1993 (1993 Act), 1993-3 C.B. 1, 128
(relating to amortizable section 197 intangibles). A taxpayer may request
consent to revoke or make the election by submitting a request for a
letter ruling under Rev. Proc. 2002-1 (2002-1 I.R.B. 1) (or any
successor);"


(3) Section 2.01(2)(c)(xii) of the APPENDIX is modified to read as
follows:

"(xii) any change in method of accounting involving both a change from
treating the cost or other basis of the property as nondepreciable
property to treating the cost or other basis of the property as
depreciable property and the adoption of a method of accounting for
depreciation requiring an election under section 167, section 168, section
1400L(b), former section 168, or section 13261(g)(2) or (3) of the 1993
Act (for example, a change in the treatment of the space consumed in
landfills placed in service in 1990 from nondepreciable to depreciable
property (assuming section 2.01(2)(c)(xiii) of the APPENDIX does not
apply) and the making of an election under section 168(f)(1) to depreciate
this property under the unit-of-production method of depreciation under
section 167);"


(4) Section 2.01(6)(d) of the APPENDIX is modified to read as follows:

"(d) Section 167 property. Generally, for any taxable year, the
depreciation allowable for property for which depreciation is determined
under section 167, is determined either:

(i) under the depreciation method adopted by a taxpayer for the
property; or

(ii) if that depreciation method does not result in a reasonable
allowance for depreciation or a taxpayer has not adopted a depreciation
method for the property, under the straight-line depreciation method.


For determining the estimated useful life and salvage value of the
property, see section 1.167(a)-1(b) and (c), respectively.

The depreciation allowable for any taxable year for property subject to
section 167(f) (regarding certain property excluded from section 197) is
determined by using the depreciation method and useful life prescribed in
section 167(f). If computer software is depreciated under section
167(f)(1) and is qualified property (as defined in section 168(k)(2)) or
qualified New York Liberty Zone (Liberty Zone) property (as defined in
section 1400L(b)(2)), the depreciation allowable for that computer
software under section 167(f)(1) is also determined by taking into account
the additional 30 percent depreciation (additional first year
depreciation) deduction provided by section 168(k) or section 1400L(b), as
applicable, unless the taxpayer made a timely valid election not to deduct
the additional first year depreciation for the property."

(5) Section 2.01(6)(e) of the APPENDIX is modified to read as follows:

"(e) Section 168 property. The depreciation allowable for any taxable
year for property for which depreciation is determined under section 168,
is determined as follows:

(i) by using either:

(A) the general depreciation system in section 168(a); or

(B) the alternative depreciation system in section 168(g) if the
property is required to be depreciated under the alternative depreciation
system pursuant to section 168(g)(1) or other provisions of the Code (for
example, property described in section 263A (e)(2)(A) or section
280F(b)(1)). Property required to be depreciated under the alternative
depreciation system pursuant to section 168(g)(1) includes property in a
class (as set out in section 168(e)) for which the taxpayer made a timely
election under section 168(g)(7); and


(ii) if the property is qualified property or Liberty Zone property, by
taking into account the additional first year depreciation deduction
provided by section 168(k) or section 1400L(b), as applicable, unless the
taxpayer made a timely valid election not to deduct the additional first
year depreciation for the property."


(6) Section 2.01(6) of the APPENDIX is modified by adding a new
paragraph (h) to read as follows:

"(h) Qualified New York Liberty Zone leasehold improvement property.
The depreciation allowable for any taxable year for qualified New York
Liberty Zone leasehold improvement property (as defined in section
1400L(c)(2)) is determined by using the depreciation method and recovery
period prescribed in section 1400L(c)."


.03 Section 2.02(2)(c)(vi) of the APPENDIX of Rev. Proc. 2002-9 is
modified as follows:

"(vi) any property for which depreciation is determined under section
56(a)(1), section 56(g)(4)(A)(i), (ii), (iii), or (v), section 168,
section 1400L(b), or section 1400L(c), or under section 168 prior to its
amendment in 1986 (former section 168);"


SECTION 6. EFFECTIVE DATE

This revenue procedure is effective for qualified property, Liberty
Zone property, and Liberty Zone leasehold improvement property placed in
service after September 10, 2001.


DRAFTING INFORMATION

The principal authors of this revenue procedure are Douglas Kim and
Kathleen Reed of the Office of Associate Chief Counsel (Passthroughs and
Special Industries). For further information regarding this revenue
procedure, contact Mr. Kim at (202) 622-3110 (not a toll-free call).

<<END RULING>>



 

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