[Federal Register Volume 85, Number 100 (Friday, May 22, 2020)]
[Proposed Rules]
[Pages 31096-31099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-09879]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-124327-19]
RIN 1545-BP56


Rehabilitation Credit Allocated Over a 5-Year Period

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations concerning the 
rehabilitation credit, including rules to coordinate the new 5-year 
period over which the credit may be claimed with other special rules 
for investment credit property. These proposed regulations affect 
taxpayers that claim the rehabilitation credit.

DATES: Written or electronic comments and requests for a public hearing 
must be received by July 21, 2020. Requests for a public hearing must 
be submitted as prescribed in the ``Comments and Requests for a Public 
Hearing'' section.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-124327-
19) by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The IRS expects to have limited personnel available to 
process public comments that are submitted on paper through mail. Until 
further notice, any comments submitted on paper will be considered to 
the extent practicable. The Department of the Treasury (Treasury 
Department) and the IRS will publish for public availability any 
comment submitted electronically, and to the extent practicable on 
paper, to its public docket. Send paper submissions to: CC:PA:LPD:PR 
(REG-124327-19), Room 5203, Internal Revenue Service, P.O. Box 7604, 
Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
call Barbara J. Campbell, (202) 317-4137; concerning submissions of 
comments and requests for a public hearing, call Regina Johnson, (202) 
317-5177 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed amendments to Title 26 part 1 under 
section 47 of the Internal Revenue Code (Code). The rehabilitation 
credit under section 47 is listed as an investment credit under section 
46, and the investment credit under section 46 is a current year 
general business credit under section 38. On December 22, 2017, section 
47 was amended by section 13402 of Public Law 115-97, 131 Stat. 2054 
(2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA).
    Prior to the TCJA, former section 47(a) provided a two-tier credit 
for qualified rehabilitation expenditures (QREs) incurred in connection 
with the rehabilitation of a qualified rehabilitated building (QRB). 
Former section 47(a)(2) allowed a 20-percent credit for QREs with 
respect to a certified historic structure, and former section 47(a)(1) 
allowed a 10-percent credit for QREs with respect to a QRB other than a 
certified historic structure (for certain buildings first placed in 
service before 1936 (pre-1936 buildings)). Under former section 47, 
both the 20-percent and 10-percent credits were fully allowed in the 
taxable year the QRB was placed in service.
    Section 13402(a) of the TCJA repealed the 10-percent credit for 
pre-1936 buildings and modified the rules for claiming the 20-percent 
credit for certified historic structures. Section 13402(c)(1) of the 
TCJA provides that these amendments are generally applicable to QRE 
amounts paid or incurred after December 31, 2017, subject to a 
transition rule provided in section 13402(c)(2) of the TCJA. This 
statutory transition rule provides that in the case of QREs (for either 
a certified historic structure eligible for a 20-percent credit or a 
pre-1936 building eligible for a 10-percent credit prior to December 
31, 2017), with respect to any building owned or leased (as provided 
under present law) by the taxpayer at all times on and after January 1, 
2018, the

[[Page 31097]]

24-month period selected by the taxpayer (section 47(c)(1)(B)(i), as 
amended by section 13402(b)), or the 60-month period selected by the 
taxpayer under the rule for phased rehabilitation (section 
47(c)(1)(B)(ii), as amended by section 13402(b)), is to begin not later 
than the end of the 180-day period beginning on December 22, 2017, and 
the amendments made by section 13402 of the TCJA apply to such QREs 
paid or incurred after the end of the taxable year in which such 24-
month or 60-month period ends.
    As amended by the TCJA, section 47(a)(1) provides that for purposes 
of the investment credit under section 46, for any taxable year during 
the 5-year period beginning in the taxable year in which a QRB is 
placed in service, the rehabilitation credit for such taxable year is 
an amount equal to the ratable share for the year. Also, as amended by 
the TCJA, section 47(a)(2) defines the ratable share for any taxable 
year during the credit period as the amount equal to 20 percent of the 
QREs with respect to the QRB, as allocated ratably to each year during 
the credit period. Section 47(b)(1), which the TCJA did not amend, 
provides that QREs with respect to any QRB are taken into account for 
the taxable year in which the QRB is placed in service.

Explanation of Provisions

I. Overview

    As noted in the Background, the rehabilitation credit is no longer 
fully allowed in the taxable year the QRB is placed in service. 
Instead, the rehabilitation credit must be claimed ratably over the 5-
year period beginning in the taxable year in which a QRB is placed in 
service. The Treasury Department and the IRS are aware that taxpayers 
and practitioners have questioned how the 5-year period impacts 
taxpayers claiming the rehabilitation credit, including how to apply 
the special rules of section 50 relating to recapture, basis 
adjustment, and leased property. In particular, practitioners have 
questioned whether the rehabilitation credit is determined in the year 
the QRB is placed in service and allocated ratably over the 5-year 
period, or whether five separate rehabilitation credits are determined 
during each year of the 5-year period.
    As explained in Part II of this Explanation of Provisions, these 
proposed regulations provide that the rehabilitation credit is properly 
determined in the year the QRB is placed in service (consistent with 
prior law) but allocated ratably over the 5-year period as required by 
the TCJA, rather than resulting in the determination of five separate 
rehabilitation credits. Similarly, as explained in Part III of this 
Explanation of Provisions, these proposed regulations follow this same 
prior law approach for the determination of a single rehabilitation 
credit for purposes of applying the rules of section 50. Therefore, 
taxpayers claiming the rehabilitation credit under section 47 with 
respect to QREs paid or incurred after December 31, 2017, generally 
will have the same Federal income tax consequences from the rules under 
section 50 for recapture, basis adjustment, and leased property as 
taxpayers claiming the rehabilitation credit under prior law.
    The proposed regulations add Sec.  1.47-7(a) through (e) and 
include: A general rule for calculating the rehabilitation credit; 
definitions of ratable share and rehabilitation credit determined; and 
a rule coordinating the changes to section 47 with the special rules in 
section 50. The proposed regulations also contain examples, including 
examples illustrating the interaction of section 47 with rules in 
section 50(a) (recapture in case of dispositions, etc.), section 50(c) 
(basis adjustment to investment credit property), and section 50(d)(5) 
(relating to certain leased property when the lessee is treated as 
owner and subject to an income inclusion requirement).

II. Proposed Sec.  1.47-7(a), (b), and (c): Rehabilitation Credit 
Allocated Over a 5-Year Period

    Consistent with section 47(a)(1), proposed Sec.  1.47-7(a) provides 
a general rule that, for purposes of the investment credit under 
section 46, for any taxable year during the 5-year period the 
rehabilitation credit for the year is the ratable share.
    Proposed Sec.  1.47-7(b) generally follows the definition of 
ratable share in section 47(a)(2) but, for clarification, replaces 
``QREs'' with the term ``rehabilitation credit determined'' as defined 
in proposed Sec.  1.47-7(c). Specifically, proposed Sec.  1.47-7(b) 
defines the term ratable share as the amount equal to 20 percent of the 
rehabilitation credit determined with respect to the QRB, as allocated 
ratably to each taxable year during the 5-year credit period. Proposed 
Sec.  1.47-7(c) defines the term rehabilitation credit determined as 
the amount equal to 20 percent of the QREs, as defined in section 
47(c)(2) and Sec.  1.48-12(c) of the Income Tax Regulations, taken into 
account under section 47(b)(1) for the taxable year in which the QRB is 
placed in service. However, if the taxpayer claims the additional first 
year depreciation for the QREs pursuant to Sec.  1.168(k)-2(g)(9), 
proposed Sec.  1.47-7(c) defines the rehabilitation credit determined 
as the amount equal to 20 percent of the remaining rehabilitated basis, 
as defined in Sec.  1.168(k)-2(g)(9)(i)(B), of the QRB for the taxable 
year in which such building is placed in service. Proposed Sec.  1.47-
7(c) is included to clarify that the rehabilitation credit is 
determined in the year the QRB is placed in service and allocated 
ratably over the 5-year period under proposed Sec.  1.47-7(b).
    Determining the total amount of the credit in the first year the 
QRB is placed in service and allocating the credit over the 5-year 
period is consistent with the text of the statute, as well as the 
intent of Congress, because the determination does not change the total 
amount of rehabilitation credit over the 5-year period or the amount of 
rehabilitation credit for purposes of section 46 in any individual year 
of the 5-year period. The plain language in section 47(a)(1), (a)(2), 
and (b)(1) makes clear that one rehabilitation credit is allocated 
ratably over a 5-year period. First, section 47(a)(1) and (a)(2) 
effectively allocate the 20-percent rehabilitation credit over a 5-year 
period. Second, section 47(b)(1) requires that QREs are taken into 
account in the taxable year the QRB is placed in service, which is the 
first year in the 5-year period. Because QREs are taken into account in 
the first taxable year the QRB is placed in service under section 
47(b)(1), the rehabilitation credit for a QRB is effectively fixed, or 
determined, as of that first year. In sum, the overall structure of 
section 47(a) and (b)(1) functions to allocate the rehabilitation 
credit that is determined in the taxable year the QRB is placed in 
service over a 5-year period for each of those taxable years, rather 
than creating five separate rehabilitation credits for a single QRB.
    Further, this reading of the statutory text is consistent with the 
conference report accompanying the TCJA (H.R. Rept. No. 466, 115th 
Cong.435-436 (2017)) (Conference Report) and the Joint Committee on 
Taxation's General Explanation of Public Law 115-97, 210 (Staff of the 
Joint Committee on Taxation, 115th Cong., General Explanation of Public 
Law 115-97 (Comm. Print 2018) (Bluebook)). The Conference Report states 
that Congress ``intended that the sum of the ratable shares for the 
taxable years during the five-year period does not exceed 100 percent 
of the credit for qualified rehabilitation expenditures for the 
qualified rehabilitated building.'' See Conference Report, at 435-436; 
Bluebook, at 210. By determining the

[[Page 31098]]

rehabilitation credit based on 100 percent of the QREs in the year QREs 
are taken into account under section 47(b)(1), that is, the year in 
which the QRB is placed in service, and ratably allocating the amount 
determined over the 5-year period, the proposed regulations ensure that 
the sum of the ratable shares will never violate Congressional intent. 
Comments are requested with respect to any specific concerns taxpayers 
may have with this plain reading of the operative statutory text.

III. Proposed Sec.  1.47-7(d) and (e): Coordination With Section 50 and 
Examples

    Proposed Sec.  1.47-7(d) describes the coordination with the 
special rules of section 50 and makes clear that, for purposes of 
applying the rules in section 50, the full rehabilitation credit amount 
is determined in the first year of the 5-year period, and then 
allocated ratably over that 5-year period. Determining the credit in 
the same manner for purposes of sections 47 and 50 provides certainty 
and reduces the complexity under section 50 that would result if 
taxpayers were required to determine five separate rehabilitation 
credits. For example, if five separate rehabilitation credits were 
determined, then there would be five separate recapture periods under 
section 50(a) with respect to a single QRB. This would increase the 
length of the recapture period and increase the recapture amount as 
compared to results under section 50(a) prior to the TCJA changes to 
section 47. The proposed regulations ensure that this is not the result 
under section 50.
    Moreover, in coordinating the rules between sections 47 and 50, the 
Treasury Department and the IRS considered the fact that that there is 
no indication that, in changing section 47, Congress intended to modify 
the application of section 50. The Conference Report and the Bluebook 
explain that the TCJA's amendments to section 47 retain the 20-percent 
credit for QREs with respect to a certified historic structure while 
extending the credit period from one year to five years, but nowhere in 
the Conference Report or the Bluebook is there any suggestion that the 
results for taxpayers claiming the rehabilitation credit under the 
rules of section 50 were intended to be different. See Conference 
Report, at 435-436; Bluebook, at 210. Further, the TCJA made no changes 
to section 50. Accordingly, the proposed regulations generally place 
taxpayers claiming the rehabilitation credit after the TCJA in the same 
position with respect to the rules of section 50 as taxpayers prior to 
the TCJA. Comments are requested with respect to any specific concerns 
taxpayers may have with this plain reading of the operative statutory 
text.
    Proposed Sec.  1.47-7(e) provides examples that illustrate these 
rules with respect to the most relevant fact patterns. In addition to 
examples that show the general calculation for claiming the 
rehabilitation credit, proposed Sec.  1.47-7(e) demonstrates the 
interaction with section 50(a) (recapture in case of dispositions, 
etc.), section 50(c) (basis adjustment to investment credit property), 
and two examples to illustrate interaction with section 50(d)(5) 
(relating to certain leased property when the lessee is treated as 
owner and subject to an income inclusion requirement). The first 
example illustrating the interaction with section 50(d)(5) describes a 
transaction in which the lessee is a corporation, and in the second 
example the lessee is a partnership that is subject to special rules 
under Sec.  1.50-1(b)(3)(i).
    The Treasury Department and the IRS request comments on these 
examples and whether any additional examples illustrating the 
coordination of section 47 with other provisions of the Code and 
regulations are necessary. The Treasury Department and the IRS are 
aware that other provisions of the Code and regulations require 
computations that are impacted by the amount of the rehabilitation 
credit determined with respect to a QRB and the adjusted basis of a 
QRB. The Treasury Department and the IRS also request comments 
regarding whether special rules are needed to address how the amount of 
the rehabilitation credit determined and the adjusted basis of a QRB 
interact with those other provisions of the Code and regulations.

Proposed Applicability Date

    These regulations are proposed to apply to taxable years beginning 
on or after the date the Treasury decision adopting these regulations 
as final regulations is published in the Federal Register. Taxpayers 
may rely on these proposed regulations for QREs paid or incurred after 
December 31, 2017, in taxable years beginning before the date the 
Treasury decision adopting these regulations as final regulations is 
published in the Federal Register, provided the taxpayers follow the 
proposed regulations in their entirety and in a consistent manner.

Special Analyses

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations.
    In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter 
6), it is hereby certified that these proposed regulations will not 
have a significant economic impact on a substantial number of small 
entities. Although the rules may affect small entities, data are not 
readily available about the number of taxpayers affected. The economic 
impact of these regulations is not likely to be significant, however, 
because these proposed regulations substantially incorporate statutory 
changes made to section 47 by the TCJA that have been effective for 
QREs paid of incurred after December 31, 2017. The proposed regulations 
will assist taxpayers in understanding the changes to section 47 and 
make it easier for taxpayers to comply with those changes and section 
50, which was not changed by the TCJA. Notwithstanding this 
certification, the Treasury Department and the IRS welcome comments on 
the impact of these regulations on small entities.
    Pursuant to section 7805(f) of the Internal Revenue Code, these 
regulations will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their impact on small 
business.

Comments and Public Hearing

    Before these proposed amendments to the regulations are adopted as 
final regulations, consideration will be given to comments that are 
submitted timely to the IRS as prescribed in the preamble under the 
ADDRESSES section. The Treasury Department and the IRS request comments 
on all aspects of the proposed regulations. Any electronic comments 
submitted, and to the extent practicable any paper comments submitted, 
will be made available at www.regulations.gov or upon request.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a public hearing are also encouraged to be made electronically. If a 
public hearing is scheduled, notice of the date and time for the public 
hearing will be published in the Federal Register. Announcement 2020-4, 
2020-17 IRB 1, provides that until further notice, public hearings 
conducted by the IRS will be held telephonically. Any telephonic 
hearing will be made accessible to people with disabilities.

[[Page 31099]]

Drafting Information

    The principal author of these proposed regulations is Barbara J. 
Campbell, Office of the Associate Chief Counsel (Passthroughs and 
Special Industries), IRS. However, other personnel from the Treasury 
Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. Section 1.47-7 is added to read as follows:


Sec.  1.47-7   Rehabilitation credit allocated over a 5-year period.

    (a) In general. For purposes of section 46, for any taxable year 
during the 5-year period beginning in the taxable year in which a 
qualified rehabilitated building, as defined in section 47(c)(1) and 
Sec.  1.48-12(b), is placed in service, the rehabilitation credit for 
the taxable year is an amount equal to the ratable share for the 
taxable year, provided the requirements of section 47 are satisfied. 
Except as provided by section 13402(c)(2) of Public Law 115-97, 131 
Stat. 2054 (2017), this section applies with respect to qualified 
rehabilitation expenditures, as defined in section 47(c)(2) and Sec.  
1.48-12(c), paid or incurred after December 31, 2017.
    (b) Ratable share. For purposes of paragraph (a) of this section, 
the term ratable share means, for any taxable year during the 5-year 
period described in such paragraph, the amount equal to 20 percent of 
the rehabilitation credit determined with respect to the qualified 
rehabilitated building, allocated ratably to each year during such 
period.
    (c) Rehabilitation credit determined. The term rehabilitation 
credit determined means the amount equal to 20 percent of the qualified 
rehabilitation expenditures, as defined in section 47(c)(2) and Sec.  
1.48-12(c), taken into account under section 47(b)(1) for the taxable 
year in which the qualified rehabilitated building is placed in 
service. However, if the taxpayer claims the additional first year 
depreciation for the qualified rehabilitation expenditures pursuant to 
Sec.  1.168(k)-2(g)(9), the term rehabilitation credit determined means 
the amount equal to 20 percent of the remaining rehabilitated basis, as 
defined in Sec.  1.168(k)-2(g)(9)(i)(B), of the qualified 
rehabilitation building for the taxable year in which such building is 
placed in service.
    (d) Coordination with section 50. For purposes of section 50 and 
Sec.  1.50-1, the amount of the rehabilitation credit determined is the 
amount defined in paragraph (c) of this section.
    (e) Examples. The provisions of paragraphs (a) through (d) of this 
section are illustrated by the following examples. Assume that the 
additional first year depreciation deduction provided by section 168(k) 
is not allowed or allowable for the qualified rehabilitation 
expenditures.

    (1) Example 1: Rehabilitation Credit Determined and Ratable 
Share. Between February 1, 2021 and October 1, 2021, X, a calendar 
year C corporation, incurred qualified rehabilitation expenditures 
of $200,000 with respect to a qualified rehabilitated building. X 
placed the building in service on October 15, 2021. X's 
rehabilitation credit determined in 2021 under paragraph (c) of this 
section is $40,000 ($200,000 x 0.20). For purposes of section 46, 
for each taxable year during the 5-year period beginning in 2021, 
the ratable share allocated under paragraph (b) of this section for 
the year is $8,000 ($40,000 x 0.20).
    (2) Example 2: Coordination with section 50(c). The facts are 
the same as in paragraph (e)(1) of this section (Example 1). For 
purposes of determining the amount of X's basis adjustment in 2021 
under section 50(c), the amount of the rehabilitation credit 
determined under paragraph (c) of this section is $40,000.
    (3) Example 3: Coordination with section 50(a). The facts are 
the same as in paragraph (e)(1) of this section (Example 1). In 2021 
and 2022, X claimed the full amount of the ratable share allowed 
under section 46, or $8,000 per taxable year. X's total allowable 
ratable share for 2023 through 2025 is $24,000 ($8,000 allowable per 
taxable year). On November 1, 2023, X disposes of the qualified 
rehabilitated building. Under section 50(a)(1)(B)(iii), because the 
period of time between when the qualified rehabilitated building was 
placed in service is more than two, but less than 3 full years, the 
applicable recapture percentage is 60%. Based on these facts, X has 
an increase in tax of $9,600 under section 50(a) ($16,000 of credit 
claimed in 2021 and 2022 x 0.60) and has $3,200 of credits remaining 
in each of 2023 through 2025, after forgoing $4,800 in credits in 
each of the years 2023 through 2025 ($8,000 x 0.60).
    (4) Example 4: Coordination with section 50(d)(5) and Sec.  
1.50-1; C corporation lessee. X, a calendar year C corporation, 
leases nonresidential real property from Y. The property is a 
qualified rehabilitated building that is placed in service on 
October 15, 2021. Under paragraph (c) of this section, the amount of 
the rehabilitation credit determined is $100,000. Y elects under 
Sec.  1.48-4 to treat X as having acquired the property. The 
shortest recovery period that could be available to the property 
under section 168 is 39 years. Because Y has elected to treat X as 
having acquired the property, Y does not reduce its basis in the 
property under section 50(c). Instead, pursuant to section 50(d)(5) 
and Sec.  1.50-1, X, the lessee of the property, must include 
ratably in gross income over 39 years an amount equal to the 
rehabilitation credit determined with respect to such property.
    (5) Example 5: Coordination with section 50(d)(5) and Sec.  
1.50-1; partnership lessee. A and B, calendar year taxpayers, form a 
partnership, the AB partnership, that leases nonresidential real 
property from Y. The property is a qualified rehabilitation building 
that is placed in service on October 15, 2021. Under paragraph (c) 
of this section, the amount of the rehabilitation credit determined 
is $200,000. Y elects under Sec.  1.48-4 to treat the AB partnership 
as having acquired the property. The shortest recovery period that 
could be available to the property under section 168 is 39 years. 
Because Y has elected to treat the AB partnership as having acquired 
the property, Y does not reduce its basis in the building under 
section 50(c). Instead, A and B, the ultimate credit claimants, as 
defined in Sec.  1.50-(b)(3)(ii), must include the amount of the 
rehabilitation credit determined under paragraph (c) of this section 
with respect to A and B ratably in gross income over 39 years, the 
shortest recovery period available with respect to such property.

    (f) Applicability date. These regulations are proposed to apply to 
taxable years beginning on or after the date the Treasury decision 
adopting these regulations as final regulations is published in the 
Federal Register.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-09879 Filed 5-21-20; 8:45 am]
 BILLING CODE 4830-01-P