FROM THE OFFICE OF PUBLIC AFFAIRS

Today the Treasury Department and the Internal Revenue Service issued guidance providing taxpayers relief from the application of the mid-quarter convention contained in the depreciation rules of the Internal Revenue Code.

The mid-quarter convention can limit taxpayers' depreciation if they acquire more than 40 percent of their depreciable property during the fourth quarter of their taxable year. Under the Notice issued today, taxpayers may elect not to apply the mid-quarter convention if their third quarter includes September 11, 2001.

The Internal Revenue Service and the Treasury Department noted that the September 11, 2001 terrorist attacks have disrupted many taxpayers' plans to complete the acquisition and placing in service of depreciable property prior to the beginning of their fourth quarter. The unintended decline in the acquisition of depreciable property prior to the fourth quarter could result in application of the mid-quarter convention, which would reduce incentives to invest in the final quarter of the year. This could cause taxpayers to decide to delay investments in depreciable property until next year.

"We want to remove any barriers to investment in depreciable property caused by disruptions resulting from September 11," stated Mark Weinberger, Treasury Assistant Secretary (Tax Policy). "Providing taxpayers with relief from the mid-quarter convention will eliminate any potential disincentive to invest caused by the mid-quarter convention by allowing taxpayers the full amount of depreciation they would have received had they been able to complete more acquisitions prior to their fourth quarter."

A copy of Notice 2001-70 is attached.

Part III - Administrative, Procedural, and Miscellaneous
Additional disaster relief for taxpayers affected by the September 11, 2001, terrorist attack - mid-quarter convention relief.

Notice 2001-70

This notice announces that the Treasury Department and the Internal Revenue Service intend to issue regulations permitting taxpayers to elect not to apply the mid-quarter convention rules contained in § 168(d)(3) of the Internal Revenue Code to certain property placed in service in the taxable year that includes September 11, 2001. This notice also provides taxpayers a mechanism for making the election before regulations are issued.

Section 168(d)(3) generally provides that, except as provided in regulations, if the aggregate basis of property placed in service during the last three months of the taxable year exceeds 40 percent of the aggregate basis of property (other than property described in § 168(d)(3)(B)) placed in service during the taxable year, the applicable depreciation convention for all property (other than property described in § 168(d)(2)) to which § 168 applies placed in service during the taxable year is the mid-quarter convention.

Many taxpayers time the acquisition and placing in service of property within a taxable year to avoid application of the mid-quarter convention. Treasury and the Service have been made aware that, as a result of events related to the September 11, 2001, terrorist attacks, many taxpayers have encountered difficulty completing the acquisition and placing in service of property in accordance with plans developed earlier in the year, and certain taxpayers would choose to delay acquisition and placing of property in service during the last quarter of their taxable year if failing to delay would result in application of the mid-quarter convention.

Accordingly, if the third quarter of the taxpayer's 2001 taxable year includes September 11, 2001, then the taxpayer may elect to apply the half-year convention to all property (other than property described in § 168(d)(2)) placed in service during the taxpayer's 2001 taxable year for purposes of § 168(d).

To make the election under this notice, a taxpayer must write "Election Pursuant to Notice 2001- 70" across the top of its Form 4562, Depreciation and Amortization, for the taxpayer's taxable year that includes September 11, 2001.

Treasury and the Service intend to amend the regulations under § 168 to incorporate the guidance set forth in this notice. Until the regulations are amended, taxpayers may rely on the guidance set forth in this notice.

The principal author of this notice is Bernard P. Harvey of the Office of Associate Chief Counsel, Passthroughs and Special Industries. For further information regarding this notice contact Mr. Harvey on (202) 622-3110 (not a toll-free call).