Bulletin No. 1997–37

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September 15, 1997

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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. 97–37, page 15.

LIFO; price indexes; department stores. The July 1997

Bureau of Labor Statistics price indexes are accepted for

use by department stores employing the retail inventory and

last-in, first-out inventory methods for valuing inventories for

tax years ended on, or with reference to, July 31, 1997.

T.D. 8725, page 16.

This final regulation contains miscellaneous sections of the

Code affected by the Taxpayer Bill of Rights 2 and the

Personal Responsibility and Work Opportunity Reconciliation

Act of 1996.

T.D. 8728, page 4.

Final and temporary regulations relate to the requirements

for changing a method of accounting for costs subject to

section 263A of the Code.

REG–105160–97, page 22.

The proposed regulations relate to qualified nonrecourse

financing under section 465 of the Code. A public hearing

will be held on December 10, 1997.

EMPLOYEE PLANS

REG–106043–97, page 24.

Proposed regulations under section 401 of the Code relate

to the remedial amendment period during which a sponsor

of a qualified retirement plan or an employer maintaining a

Finding Lists begin on page 29.

Department of the Treasury

Internal Revenue Service

qualified retirement plan can make retroactive amendments

to the plan to eliminate certain qualification defects for the

entire period.

EXEMPT ORGANIZATIONS

Announcement 97–92, page 26.

A list is given of organizations now classified as private foundations.

EXCISE TAX

Announcement 97–91, page 25.

This announcement provides additional excise tax changes

made by the Taxpayer Relief Act of 1997. These changes

affect taxes on fuels, communications, air transportation,

heavy highway vehicles, luxury automobiles, and arrow components.

ADMINISTRATIVE

Notice 97–50, page 21.

Timely filing or payment; private delivery services.

Taxpayers are informed that the list of private delivery services designed under section 7502 of the Code in Notice

97–26, 1997–17 I.R.B. 6, will remain in effect until further

notice. The rules for application periods and issuance of

new designation lists by the Service are modified.

Mission of the Service

ucts and services; and perform in a manner warranting

the highest degree of public confidence in our integrity, efficiency, and fairness.

The purpose of the Internal Revenue Service is to collect

the proper amount of tax revenue at the least cost; serve

the public by continually improving the quality of our prod-

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying and

administering the law in a reasonable, practical manner.

Issues should only be raised by examining officers when

they have merit, never arbitrarily or for trading purposes.

At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that

care be exercised not to raise an issue or to ask a court to

adopt a position inconsistent with an established Service

position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue

is determined by Congress.

With this in mind, it is the duty of the Service to carry out that

policy by correctly applying the laws enacted by Congress;

to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;

and to perform this work in a fair and impartial manner, with

neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It

should be conducted with as little delay as possible and

with great courtesy and considerateness. It should never

try to overreach, and should be reasonable within the

bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax devices and

fraud.

At the heart of administration is interpretation of the Code. It

is the responsibility of each person in the Service, charged

with the duty of interpreting the law, to try to find the true

meaning of the statutory provision and not to adopt a

strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only

when we ascertain and apply the true meaning of the statute.

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

Conventions, 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 of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold

on a single-copy basis.

dures 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.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements

of internal practices and procedures that affect the rights

and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions, and Subpart B, Legislation 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 Rulings. Bank Secrecy Act Administrative Rulings

are issued by the Department of the Treasury’s Office of the

Assistant Secretary (Enforcement).

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.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking

and the disbarment and suspension list included in this part,

none of these announcements are consolidated in the Cumulative Bulletins.

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 proce-

The first Bulletin for each month includes a cumulative index

for the matters published during the preceding months.

These monthly indexes are cumulated on a quarterly and

semiannual basis, and are published in the first Bulletin of the

succeeding quarterly and semiannual period, respectively.

The contents 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.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 263A.—Capitalization

and Inclusion in Inventory Costs

of Certain Expenses

26 CFR 1.263A–7: Changing a method of accounting under section 263A.

T.D. 8728

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Procedure for Changing a

Method of Accounting under

Section 263A

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains

final regulations relating to the requirements for changing a method of accounting for costs subject to section 263A. The

regulations provide guidance regarding

changes in method of accounting for costs

incurred in producing property and acquiring property for resale. The regulations affect taxpayers changing their

method of accounting for costs subject to

section 263A.

DATES: These regulations are effective

August 5, 1997.

FOR FURTHER INFORMATION CONTACT: Cheryl Lynn Oseekey, (202) 6224970 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On March 30, 1987 and August 7,

1987, temporary regulations under section 263A were published in the Federal

[1987–1 C.B. 98] and T.D. 8148, 52 F.R.

29375 [1987–2 C.B. 70]), and cross-referenced to notices of proposed rulemaking

published in the Federal Register on the

same date (52 F.R. 10118 [LR–168–86,

1987–1 C.B. 808]and 52 F.R. 29391

[LR–37–87, 1987–2 C.B. 1054]). The

temporary regulations contain rules for

September 15, 1997

taxpayers changing their method of accounting to comply with the capitalization

rules of section 263A. A public hearing

on these temporary and proposed regulations was held on December 7, 1987.

On August 9, 1993, final regulations

under section 263A were published in the

Federal Register (T.D. 8482, 58 F.R.

42198 [1993 C.B. 77]). These final regulations did not address the accounting

method provisions in the 1987 temporary

regulations, which continued in effect.

On August 5, 1994, final and temporary

regulations were published in the Federal

[1994–2 C.B. 32]). These final regulations address “pick and pack costs” and

other expenses. The August 5, 1994 temporary regulations renumbered the accounting method provisions in the 1987

temporary regulations from §1.263A–

1T(e) to §1.263A–7T.

This document adopts, with modifications, §1.263A–7T as final regulations.

Explanation of Provisions

In 1987, the IRS and the Treasury Department issued temporary regulations

that provide guidance to taxpayers changing their method of accounting to comply

with the capitalization rules of section

263A. The regulations provide automatic

consent for taxpayers required to change

their method of accounting for the first

taxable year section 263A was effective.

Subsequent to promulgation of the

1987 temporary regulations, the IRS and

the Treasury Department issued various

revenue procedures that set forth rules

and procedures applicable to certain

changes in method of accounting for costs

subject to section 263A for which taxpayers can obtain automatic consent. These

revenue procedures provide automatic

consent to change the method of accounting in years other than the first taxable

year section 263A was effective. Where

automatic consent is not available by revenue procedure, taxpayers can obtain the

Commissioner’s consent to change a

method of accounting for costs subject to

section 263A under Rev. Proc. 97–27

(1997–21 I.R.B. 10).

Rev. Proc. 97–27 and the automatic

change revenue procedures describe how

a change in method of accounting may be

effected, but they do not describe how inventory and other property on hand at the

beginning of the year of change should be

revalued. These final regulations provide

guidance regarding how taxpayers must

revalue property in connection with a

change in method of accounting for costs

subject to section 263A. The revaluation

rules for inventory are substantially similar to the revaluation rules contained in

the 1987 temporary regulations. Section

1.263A–7(c) provides guidance regarding

how items or costs included in beginning

inventory in the year of change must be

revalued. Section 1.263A–7(d) provides

guidance regarding how non-inventory

property on hand at the beginning of the

year of change must be revalued.

The regulations also provide certain

rules that apply to changes in method of

accounting for costs subject to section

263A, in addition to the rules and procedures that apply under the applicable revenue procedures. See, §1.263A–7(b).

In addition, the regulations clarify

whether certain changes are changes in

method of accounting under section 263A

and therefore are within the scope of the

regulations. For example, a change from

one permissible capitalization method,

such as the simplified resale method in

former §1.263A–1T(d)(4), to another permissible capitalization method, such as

the simplified resale method in §1.263A3(d), is a change in method of accounting

under section 263A and is therefore

within the scope of the regulations. See

§1.263A–7(a)(5).

The final regulations delete certain provisions of §1.263A–7T that were primarily applicable to accounting method

changes made in 1987. For example, the

final regulations do not incorporate provisions such as §1.263A–7T(e)(2), which

provide automatic consent to make the

change in method of accounting for the

first taxable year section 263A was effective, and §1.263A–7T(e)(7)(iii), (iv) and

(v) and §1.263A–7T(e)(8), which provide

special rules for adjusting the revaluation

factor for costs attributable to different

methods of accounting for depreciation

(including cost recovery) and differences

in the percentage of fixed indirect production costs that were expensed by taxpayers using the practical capacity concept.

1997–37 I.R.B.

Certain Administrative Guidance

The final regulations incorporate the

provisions of Notice 88–23 (1988–1 C.B.

490) (ordering rules for accounting

method changes), and sections IV (A)

(guidance regarding deferred intercompany exchanges) and IV (B) (permission

to elect a new base year for taxpayers

using the last-in, first-out (LIFO) inventory method) of Notice 88-86 (1988–2

C.B. 401). These notices or portions

thereof are withdrawn for taxable years to

which this Treasury decision applies.

Effect on other documents

The following publications are obsolete

as of August 5, 1997:

Notice 88–23 (1988–1 C.B. 490).

Notice 88–86 (1988–2 C.B. 401), sections IV (A) and IV (B).

Public Comments

The IRS and the Treasury Department

received a number of comments in response to the 1987 temporary and proposed regulations. Most of the comments

received in response to the temporary regulations issued in March 1987 were considered in connection with the temporary

regulations issued in August 1987. In

general, those comments are not discussed again here.

REVALUING BEGINNING

INVENTORY—THE 3-YEAR

AVERAGE METHOD

A. Extending availability of the method

Under the temporary regulations, taxpayers using the dollar-value LIFO inventory method were permitted to use a 3year average method for revaluing their

beginning inventory in the year they

changed their method of accounting to

comply with section 263A. Several commentators suggested that taxpayers other

than those on the dollar-value LIFO inventory method should also be permitted

to use this 3-year average method for

revaluing beginning inventory in the year

of change. Specifically, commentators

suggested that the 3-year average method

be made available to taxpayers using the

specific goods LIFO inventory method.

Another suggestion was that taxpayers

using the first-in, first-out (FIFO) inven-

1997–37 I.R.B.

tory method should be permitted to use

the 3-year average method even though

those taxpayers may have sufficient information to revalue their inventory under

the facts and circumstances method.

The final regulations do not adopt these

suggestions. The House and Senate Reports to the Tax Reform Act of 1986 indicate Congress intended that taxpayers

generally revalue their inventory in the

year of change using the facts and circumstances method. Because Congress realized that dollar-value LIFO taxpayers

may not have the data needed to use the

facts and circumstances method, it suggested two other revaluation methods that

could be used in conjunction with, or in

lieu of, the facts and circumstances

method. The 3-year average method was

one of those other methods. H.R. Rep.

No. 426, 99th Cong., 1st Sess. 633–637

(1985), 1986–3 (Vol. 2) C.B. 633–637

and S. Rep. No. 313, 99th Cong., 2nd

Sess. 147–152 (1986), 1986–3 (Vol. 3)

C.B. 147–152. The IRS and the Treasury

Department believe that limiting the 3year average method to dollar-value LIFO

taxpayers is more consistent with legislative history which expresses Congress’

concern that dollar-value LIFO taxpayers

may have particular problems in revaluing inventory. H.R. Rep. No. 426, 633,

1986–3 (Vol. 2) C.B. 633 and S. Rep. No.

313, 147, 1986–3 (Vol.3) C.B. 147.

B. Altering the mechanics of the method

One commentator suggested that taxpayers be permitted to revalue items or

costs included in beginning inventory in

the year of change by using data from the

year of change instead of data from the

prior three years, and calculate a section

481(a) adjustment accordingly. This

commentator further suggested that three

years after the year of change, the taxpayer would recompute the section 481(a)

adjustment using data from the three new

years to test its original adjustment under

section 481(a). If the new adjustment

were larger than the original adjustment

by a substantial amount, the taxpayer

would be required to amend its federal income tax returns. The final regulations

do not adopt this suggestion. Requiring

taxpayers to compute two adjustments

under section 481(a) would unnecessarily

complicate application of the 3-year average method.

Another commentator suggested that

some taxpayers be permitted to revalue

items or costs included in beginning inventory in the year of change by using

data from the immediately preceding year

rather than the prior three years. This

proposal to use only the prior year’s data

would be limited to taxpayers that can

show they have not had a significant

change in costs over the preceding three

years. This suggested modification to the

3-year average method was not adopted.

The suggested modification would not

substantially simplify the process of

revaluing beginning inventory because

taxpayers would be required to determine

whether their costs significantly changed

during the preceding three-year period.

C. Limiting costs subject to revaluation

One commentator suggested that LIFO

layers should be revalued only if the items

of inventory comprising those layers are

still in existence in the year of change.

This suggestion was not adopted. However, the final regulations continue the

rule in the temporary regulations that taxpayers may adjust the revaluation factor

(under either the 3-year average method

or the weighted average method) to the

extent they can show that additional section 263A costs included in the calculation of the revaluation factor were not incurred in the prior years in which the

LIFO layers were accumulated.

D. New base year

Under the 3-year average method, taxpayers generally are required to establish a

new base year. Several commentators

commented that requiring link-chain

LIFO taxpayers to establish a new base

year is costly and pointless and suggested

that these taxpayers be excluded from the

general requirement that all dollar-value

LIFO taxpayers establish a new base year.

The IRS and the Treasury Department did

not adopt this suggestion. If a new base

year is not established, the current-year

index, determined under the taxpayer’s

new method of accounting, would be

multiplied by the prior-year cumulative

index, determined under the taxpayer’s

former method of accounting, and could

distort the taxpayer’s LIFO inventory valuation. This distortion is eliminated when

the taxpayer establishes a new base year

September 15, 1997

and establishes a new index. Accordingly, the final regulations provide that all

dollar-value LIFO taxpayers (whether

using double extension or link-chain)

should generally establish a new base

year when they use the 3-year average

method to revalue their inventories under

section 263A.

Commentators also suggested that taxpayers using the 3-year average method

and either the simplified production

method or the simplified resale method be

allowed, but not required, to establish a

new base year. Section IV (B) of Notice

88-86 permits these taxpayers to choose

whether to establish a new base year.

This rule is incorporated into the final

regulations.

One commentator noted that the example in the 1987 temporary regulations illustrating the 3-year average method did

not use the current year revaluation factor

in computing the updated base year cost

of inventory. The example has been revised to use the current year revaluation

factor.

REVALUING BEGINNING

INVENTORY—FACTS AND

CIRCUMSTANCES METHOD

One commentator suggested that specific rules or guidelines be adopted to

clarify what is a reasonable estimate or

procedure for revaluing beginning inventory in connection with a change in

method of accounting. This suggestion

was not adopted. What is a reasonable estimate or procedure must be decided on a

case-by-case basis in light of all applicable facts and circumstances. The final

regulations continue the provision in the

temporary regulations that permissible estimates and procedures include using information from a more recent period to

estimate the amount and nature of inventory costs applicable to earlier periods,

and using information with respect to

comparable items of inventory to estimate

the costs associated with other items of

inventory.

NEW BASE YEAR WHEN THE 3-YEAR

AVERAGE METHOD IS NOT USED

Several commentators suggested that

dollar-value LIFO taxpayers not using the

3-year average method to revalue beginning inventory be permitted to update

their base year if they so choose. Section

September 15, 1997

IV (B) of Notice 88–86 permits these taxpayers to establish a new base year. The

final regulations adopt this rule.

SCOPE OF ACCOUNTING METHOD

CHANGE

Several commentators suggested that

the regulations should allow taxpayers to

change from the specific goods LIFO inventory method to the dollar-value LIFO

inventory method in connection with

changing their method of accounting for

costs under section 263A without obtaining the Commissioner’s consent. Generally, taxpayers must secure the Commissioner’s consent before effecting a change

in method of accounting under section

446(e) unless this requirement is specifically waived. The IRS and the Treasury

Department do not believe an exception

from this general rule is warranted for

changes from the specific goods LIFO inventory method to the dollar-value LIFO

inventory method except to the extent

permitted by §1.472–8(f)(1).

Several commentators also suggested

that taxpayers that change their method of

accounting for costs subject to section

263A be permitted to make additional

changes in their methods of accounting in

future tax years under section 263A without obtaining additional consents from the

Commissioner. The IRS and the Treasury

Department have issued various revenue

procedures that provide automatic consent procedures for taxpayers to change

their method of accounting for costs

under section 263A.

One commentator suggested that the

regulations provide that when making the

change from the full absorption rules of

§1.471–11 to the uniform capitalization

rules of section 263A, taxpayers may

cease taking into account any costs not

treated as inventoriable under section

263A that may have been erroneously inventoried under prior law. The temporary

regulations issued in August 1987 and the

final regulations permit this result. In

revaluing beginning inventory to include

additional section 263A costs, taxpayers

may cease capitalizing costs that had been

capitalized but are not required to be capitalized under section 263A.

AUDIT PROTECTION

Several commentators noted that taxpayers should be guaranteed audit protec-

tion for costs or items that are part of a

change in method of accounting under

section 263A. The IRS’ long-standing administrative position is that if a taxpayer

files an application to change its method

of accounting in accordance with the applicable administrative guidance, for example, Rev. Proc. 97–27, an examining

agent may not later propose that the taxpayer change its method of accounting for

the same item for a taxable year prior to

the year of change.

ORDERING RULES

One commentator suggested that overall accounting method changes (for example, the cash receipts and disbursements

method to an accrual method) should be

implemented prior to any change in

method of accounting for costs under section 263A. The temporary regulations

generally provide that a change in method

of accounting for costs under section

263A is deemed to occur prior to any

other change in method of accounting effected during the year of change. The

final regulations continue that general

rule with four modifications. Taxpayers

that are discontinuing the LIFO inventory

method may make that change prior to a

change in method of accounting under

section 263A. Additionally, taxpayers

that are changing from the specific goods

LIFO inventory method to the dollarvalue LIFO inventory method may make

that change prior to a change in method of

accounting under section 263A. Also,

taxpayers that are changing their overall

method of accounting from the cash

method to an accrual method must make

the change to an accrual method prior to a

change in method of accounting under

section 263A. Finally, taxpayers that are

changing their method of accounting for

depreciation when any portion of the depreciation is subject to section 263A must

make the method change for depreciation

prior to a change in method of accounting

under section 263A.

COST ALLOCATION METHOD

Several commentators suggested that

the regulations be clarified to provide that

a taxpayer must use the same cost allocation method to restate its beginning inventory and to value its ongoing inventory.

The final regulations clarify this point.

Inventory on hand at the beginning of the

1997–37 I.R.B.

year of change is revalued as if the taxpayer’s new method had applied to all

prior periods. The same cost allocation

method must be used both retroactively

(for purposes of restating beginning inventory) and prospectively (for purposes

of the current year and all subsequent

years, unless the taxpayer seeks specific

consent from the Commissioner to change

this method of accounting).

INTERCOMPANY ITEMS

One commentator suggested that taxpayers be given automatic consent to discontinue filing consolidated federal income tax returns so that they could avoid

the need to revalue the amount of intercompany items resulting from the sale or

exchange of inventory property in intercompany transactions. The regulations do

not adopt this suggestion. Generally, taxpayers must secure the Commissioner’s

consent before discontinuing the filing of

consolidated tax returns. The IRS and the

Treasury Department do not think an exception from this general rule is warranted in this situation.

Effective Date

These regulations are effective for taxable years beginning on or after August 5,

1997.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866.

Therefore, a regulatory assessment is not

required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not

apply to these regulations, and because

the notice of proposed rulemaking preceding the regulations was issued prior to

March 29, 1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not

apply. Pursuant to section 7805(f) of the

Internal Revenue Code, these regulations

were submitted to the Small Business Administration for comment on their impact

on small business.

Drafting Information

The principal author of these regulations is Cheryl Lynn Oseekey, Office of

Assistant Chief Counsel (Income Tax and

Accounting). However, other personnel

1997–37 I.R.B.

from the IRS and the Treasury Department participated in their development.

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 * * *

Par. 2. Section 1.263A–0 is amended

by revising the introductory text and

adding entries for §1.263A–7 to read as

follows:

§1.263A–0 Outline of regulations under

section 263A.

This section lists the paragraphs in

§§1.263A–1 through 1.263A–3 and

§1.263A–7 through 1.263A-15.

§1.263A–7 Changing a method of accounting under section 263A.

(a) Introduction.

(1) Purpose.

(2) Taxpayers that adopt a method of

accounting under section 263A.

(3) Taxpayers that change a method

of accounting under section 263A.

(4) Effective date.

(5) Definition of change in method of

accounting.

(b) Rules applicable to a change in

method of accounting.

(1) General rules.

(2) Special rules.

(i) Ordering rules when multiple

changes in method of accounting occur in

the year of change.

(A) In general.

(B) Exceptions to the general ordering

rule.

(1) Change from the LIFO inventory

method.

(2) Change from the specific goods

LIFO inventory method.

(3) Change in overall method of accounting.

(4) Change in method of accounting

for depreciation.

(ii) Adjustment required by section

481(a).

(iii) Base year.

(A) Need for a new base year.

(1) Facts and circumstances revaluation method used.

(2) 3-year average method used.

(i) Simplified method not used.

(ii) Simplified method used.

(B) Computing a new base year.

(1) Need for adjustments.

(2) Revaluing beginning inventory.

(i) In general.

(ii) Methods to revalue inventory.

(iii) Facts and circumstances revaluation method.

(A) In general.

(B) Exception.

(D) Use by dollar-value LIFO taxpayers.

(E) Examples.

(iv) Weighted average method.

(A) In general.

(B) Weighted average method for

FIFO taxpayers.

(1) In general.

(2) Example.

(1) In general.

(2) Example.

(D) Adjustments to inventory costs

from prior years.

(v) 3-year average method.

(A) In general.

(B) Consecutive year requirement.

(D) Short taxable years.

(E) Adjustments to inventory costs

from prior years.

(1) General rule.

(2) Examples of costs eligible for restatement adjustment procedure.

(F) Restatement adjustment procedure.

(1) In general.

(2) Examples of restatement adjustment procedure.

(3) Intercompany items.

(i) Revaluing intercompany transactions.

(ii) Example.

(iii) Availability of revaluation methods.

(4) Anti-abuse rule.

(i) In general.

September 15, 1997

(ii) Deemed avoidance of this section.

(A) Scope.

(B) General rule.

(iii) Election to use transferor’s LIFO

layers.

(iv) Tax avoidance intent not required.

(v) Related corporation.

(d) Non-inventory property.

(1) Need for adjustments.

(2) Revaluing property.

§1.263A–1 [Amended]

Par. 3. Section 1.263A–1 is amended

by removing “1.263A–7T (e) generally”

from the last sentence in paragraph

(a)(2)(i) and replacing it with

“1.263A–7”.

Par. 4. Section 1.263A–7 is added to

read as follows:

§1.263A–7 Changing a method of

accounting under section 263A.

(a) Introduction—(1) Purpose. These

regulations provide guidance to taxpayers

changing their methods of accounting for

costs subject to section 263A. The principal purpose of these regulations is to provide guidance regarding how taxpayers

are to revalue property on hand at the beginning of the taxable year in which they

change their method of accounting for

costs subject to section 263A. Paragraph

beginning inventory in the year of change

must be revalued. Paragraph (d) of this

section provides guidance regarding how

non-inventory property should be revalued in the year of change.

(2) Taxpayers that adopt a method of

accounting under section 263A. Taxpayers may adopt a method of accounting for

costs subject to section 263A in the first

taxable year in which they engage in resale or production activities. For purposes of this section, the adoption of a

method of accounting has the same meaning as provided in §1.446–1(e)(1). Taxpayers are not subject to the provisions of

these regulations to the extent they adopt,

as opposed to change, a method of accounting.

(3) Taxpayers that change a method of

accounting under section 263A. Taxpayers changing their method of accounting

for costs subject to section 263A are subject to the revaluation and other provisions of this section. Taxpayers subject to

September 15, 1997

these regulations include, but are not limited to—

(i) Resellers of personal property

whose average annual gross receipts for

the immediately preceding 3-year period

(or lesser period if the taxpayer was not in

existence for the three preceding taxable

years) exceed $10,000,000 where the taxpayer was not subject to section 263A in

the prior taxable year;

(ii) Resellers of real or personal property that are using a method that fails to

comply with section 263A and desire to

change to a method of accounting that

complies with section 263A;

(iii) Producers of real or tangible personal property that are using a method

that fails to comply with section 263A and

desire to change to a method of accounting that complies with section 263A; and

(iv) Resellers and producers that desire

to change from one permissible method of

accounting for costs subject to section

263A to another permissible method.

(4) Effective date. The provisions of

this section are effective for taxable years

beginning on or after August 5, 1997. For

taxable years beginning before August 5,

1997, the rules of §1.263A–7T contained

in the 26 CFR part 1 edition revised as of

April 1, 1997, as modified by other administrative guidance, will apply.

(5) Definition of change in method of

accounting. For purposes of this section,

a change in method of accounting has the

same meaning as provided in §1.446–

1(e)(2)(ii). Changes in method of accounting for costs subject to section 263A

include changes to methods required or

permitted by section 263A and the regulations thereunder. Changes in method of

accounting may be described in the preceding sentence irrespective of whether

the taxpayer’s previous method of accounting resulted in the capitalization of

more (or fewer) costs than the costs required to be capitalized under section

263A and the regulations thereunder, and

irrespective of whether the taxpayer’s

previous method of accounting was a permissible method under the law in effect

when the method was being used. However, changes in method of accounting for

costs subject to section 263A do not include changes relating to factors other

than those described therein. For example, a change in method of accounting for

costs subject to section 263A does not in-

clude a change from one inventory identification method to another inventory

identification method, such as a change

from the last-in, first-out (LIFO) method

to the first-in, first-out (FIFO) method, or

vice versa, or a change from one inventory valuation method to another inventory valuation method under section 471,

such as a change from valuing inventory

at cost to valuing the inventory at cost or

market, whichever is lower, or vice versa.

In addition, a change in method of accounting for costs subject to section 263A

does not include a change within the

LIFO inventory method, such as a change

from the double extension method to the

link-chain method, or a change in the

method used for determining the number

of pools. Further, a change from the modified resale method set forth in Notice 8967 (1989–1 C.B. 723), see §601.601(d)(2)

of this chapter, to the simplified resale

method set forth in §1.263A–3(d) is not a

change in method of accounting within the

meaning of §1.446–1(e)(2)(ii) and is

therefore not subject to the provisions of

this section. However, a change from the

simplified resale method set forth in former §1.263A–1T(d)(4) to the simplified

resale method set forth in §1.263A–3(d) is

a change in method of accounting within

the meaning of §1.446–1(e)(2)(ii) and is

subject to the provisions of this section.

(b) Rules applicable to a change in

method of accounting—(1) General

rules. All changes in method of accounting for costs subject to section 263A are

subject to the rules and procedures provided by the Code, regulations, and administrative procedures applicable to such

changes. The Internal Revenue Service

has issued specific revenue procedures

that govern certain accounting method

changes for costs subject to section 263A.

Where a specific revenue procedure is not

applicable, changes in method of accounting for costs subject to section 263A are

subject to the same rules and procedures

that govern other accounting method

changes. See Rev. Proc. 97–27 (1997–21

I.R.B. 10) and §601.601(d)(2) of this

chapter.

(2) Special rules—(i) Ordering rules

when multiple changes in method of accounting occur in the year of change.

(A) In general. A change in method of

accounting for costs subject to section

263A is generally deemed to occur (in-

1997–37 I.R.B.

cluding the computation of the adjustment

under section 481(a)) before any other

change in method of accounting is

deemed to occur for that same taxable

year.

(B) Exceptions to the general ordering

rule—(1) Change from the LIFO inventory method. In the case of a taxpayer

that is discontinuing its use of the LIFO

inventory method in the same taxable

year it is changing its method of accounting for costs subject to section 263A, the

change from the LIFO method may be

made before the change in method of accounting (and the computation of the corresponding adjustment under section 481

(a)) under section 263A is made.

(2) Change from the specific goods

LIFO inventory method. In the case of a

taxpayer that is changing from the specific goods LIFO inventory method to the

dollar-value LIFO inventory method in

the same taxable year it is changing its

method of accounting for costs subject to

section 263A, the change from the specific goods LIFO inventory method may

be made before the change in method of

accounting under section 263A is made.

(3) Change in overall method of accounting. In the case of a taxpayer that is

changing its overall method of accounting

from the cash receipts and disbursements

method to an accrual method in the same

taxable year it is changing its method of

accounting for costs subject to section

263A, the taxpayer must change to an accrual method for capitalizable costs (see

§1.263A–1(c)(2)(ii)) before the change in

method of accounting (and the computation of the corresponding adjustment

under section 481(a)) under section 263A

is made.

(4) Change in method of accounting

for depreciation. In the case of a taxpayer

that is changing its method of accounting

for depreciation in the same taxable year

it is changing its method of accounting for

costs subject to section 263A and any portion of the depreciation is subject to section 263A, the change in method of accounting for depreciation must be made

before the change in method of accounting (and the computation of the corresponding adjustment under section

481(a)) under section 263A is made.

(ii) Adjustment required by section

481(a). In the case of any taxpayer required or permitted to change its method

1997–37 I.R.B.

of accounting for any taxable year under

section 263A and the regulations thereunder, the change will be treated as initiated

by the taxpayer for purposes of the adjustment required by section 481(a). The adjustment required by section 481(a) is to

be taken into account in computing taxable income over a period not to exceed 4

taxable years.

(iii) Base year—(A) Need for a new

base year. Certain dollar-value LIFO taxpayers (whether using double extension

or link-chain) must establish a new base

year when they revalue their inventories

under section 263A.

(1) Facts and circumstances revaluation method used. A dollar-value LIFO

taxpayer that uses the facts and circumstances revaluation method is permitted,

but not required, to establish a new base

year.

(2) 3-year average method used—(i)

Simplified method not used. A dollarvalue LIFO taxpayer using the 3-year average method but not the simplified production method or the simplified resale

method to revalue its inventory is required to establish a new base year.

(ii) Simplified method used. A dollarvalue LIFO taxpayer using the 3-year average method and either the simplified

production method or the simplified resale method to revalue its inventory is

permitted, but not required, to establish a

new base year.

(B) Computing a new base year. For

purposes of determining future indexes,

the year of change becomes the new base

year (that is, the index at the beginning of

the year of change generally must be

1.00) and all costs are restated in new

base year costs for purposes of extending

such costs in future years. However,

when a new base year is established, costs

associated with old layers retain their separate identity within the base year, with

such layers being restated in terms of the

new base year index. For example, for

purposes of determining whether a particular layer has been invaded, each layer

must retain its separate identity. Thus, if a

decrement in an inventory pool occurs,

layers accumulated in more recent years

must be viewed as invaded first, in order

of priority.

method of accounting for costs subject to

section 263A, the taxpayer generally

must, in computing its taxable income for

the year of change, take into account the

adjustments required by section 481(a).

The adjustments required by section

481(a) relate to revaluations of inventory

property, whether the taxpayer produces

the inventory or acquires it for resale. See

paragraph (d) of this section in regard to

the adjustments required by section 481(a)

that relate to non-inventory property.

(2) Revaluing beginning inventory—

(i) In general. If a taxpayer changes its

method of accounting for costs subject to

section 263A, the taxpayer must revalue

the items or costs included in its beginning inventory in the year of change as if

the new method (that is, the method to

which the taxpayer is changing) had been

in effect during all prior years. In revaluing inventory costs under this procedure,

all of the capitalization provisions of section 263A and the regulations thereunder

apply to all inventory costs accumulated

in prior years. The necessity to revalue

beginning inventory as if these capitalization rules had been in effect for all prior

years includes, for example, the revaluation of costs or layers incurred in taxable

years preceding the transition period to

the full absorption method of inventory

costing as described in §1.471–11(e), regardless of whether a taxpayer employed

a cut-off method under those regulations.

The difference between the inventory as

originally valued using the former method

(that is, the method from which the taxpayer is changing) and the inventory as

revalued using the new method is equal to

the amount of the adjustment required

under section 481(a).

(ii) Methods to revalue inventory.

There are three methods available to

revalue inventory. The first method, the

facts and circumstances revaluation

method, may be used by all taxpayers.

Under this method, a taxpayer determines

the direct and indirect costs that must be

assigned to each item of inventory based

on all the facts and circumstances. This

method is described in paragraph

(c)(2)(iii) of this section. The second

method, the weighted average method, is

available only in certain situations to taxpayers using the FIFO inventory method

or the specific goods LIFO inventory

method. This method is described in

paragraph (c)(2)(iv) of this section. The

September 15, 1997

third method, the 3-year average method,

is available to all taxpayers using the dollar-value LIFO inventory method of accounting. This method is described in

paragraph (c)(2)(v) of this section. The

weighted average method and the 3-year

average method revalue inventory

through processes of estimation and extrapolation, rather than based on the facts

and circumstances of a particular year’s

data. All three methods are available regardless of whether the taxpayer elects to

use a simplified method to capitalize costs

under section 263A.

(iii) Facts and circumstances revaluation method—(A) In general. Under the

facts and circumstances revaluation

method, a taxpayer generally is required

to revalue inventories by applying the

capitalization rules of section 263A and

the regulations thereunder to the production and resale activities of the taxpayer,

with the same degree of specificity as required of inventory manufacturers under

the law immediately prior to the effective

date of the Tax Reform Act of 1986 (Public Law 99–514, 100 Stat. 2085, 1986–3

C.B. (Vol. 1)). Thus, for example, with

respect to any prior year that is relevant in

determining the total amount of the revalued balance as of the beginning of the

year of change, the taxpayer must analyze

the production and resale data for that

particular year and apply the rules and

principles of section 263A and the regulations thereunder to determine the appropriate revalued inventory costs. However,

under the facts and circumstances revaluation method, a taxpayer may utilize reasonable estimates and procedures in valuing inventory costs if—

(1) The taxpayer lacks, and is not able

to reconstruct from its books and records,

actual financial and accounting data

which is required to apply the capitalization rules of section 263A and the regulations thereunder to the relevant facts and

circumstances surrounding a particular

item of inventory or cost; and

(2) The total amounts of costs for

which reasonable estimates and procedures are employed are not significant in

comparison to the total restated value (including costs previously capitalized under

the taxpayer’s former method) of the

items or costs for the period in question.

(B) Exception. A taxpayer that is not

able to comply with the requirement of

September 15, 1997

paragraph (c)(2)(iii)(A)(2) of this section

because of the existence of a significant

amount of costs that would require the use

of estimates and procedures must revalue

its inventories under the procedures provided in paragraph (c)(2)(iv) or (v) of this

section.

The estimates and procedures of this paragraph (c)(2)(iii) include—

(1) The use of available information

from more recent years to estimate the

amount and nature of inventory costs applicable to earlier years; and

(2) The use of available information

with respect to comparable items of inventory produced or acquired during the

same year in order to estimate the costs

associated with other items of inventory.

(D) Use by dollar-value LIFO taxpayers. Generally, a dollar-value LIFO taxpayer must recompute its LIFO inventory

for each taxable year that the LIFO inventory method was used.

(E) Examples. The provisions of this

paragraph (c)(2)(iii) are illustrated by the

following three examples. The principles

set forth in these examples are applicable

both to production and resale activities and

the year of change in all three examples is

1997. The examples read as follows:

Example 1. Taxpayer X lacks information for the

years 1993 and earlier, regarding the amount of

costs incurred in transporting finished goods from

X’s factory to X’s warehouse and in storing those

goods at the warehouse until their sale to customers.

X determines that, for 1994 and subsequent years,

these transportation and storage costs constitute 4

percent of the total costs of comparable goods under

X’s method of accounting for such years. Under this

paragraph (c)(2)(iii), X may assume that transportation and storage costs for the years 1993 and earlier

constitute 4 percent of the total costs of such goods.

Example 2. Assume the same facts as in Example

1, except that for the year 1993 and earlier, X used a

different method of accounting for inventory costs

whereunder significantly fewer costs were capitalized than amounts capitalized in later years. Thus,

the application of transportation and storage based

on a percentage of costs for 1994 and later years

would not constitute a reasonable estimate for use in

earlier years. X may use the information from 1994

and later years, if appropriate adjustments are made

to reflect the differences in inventory costs for the

applicable years, including, for example—

(i) Increasing the percentage of costs that are intended to represent transportation and storage costs

to reflect the aggregate differences in capitalized

amounts under the two methods of accounting; or

(ii) Taking the absolute dollar amount of transportation and storage costs for comparable goods in

inventory and applying that amount (adjusted for

changes in general price levels, where appropriate)

to goods associated with 1993 and prior periods.

Example 3. Taxpayer Z lacks information for

certain years with respect to factory administrative

costs, subject to capitalization under section 263A

and the regulations thereunder, incurred in the production of inventory in factory A. Z does have sufficient information to determine factory administrative costs with respect to production of inventory in

factory B, wherein inventory items were produced

during the same years as factory A. Z may use the

information from factory B to determine the appropriate amount of factory administrative costs to capitalize as inventory costs for comparable items produced in factory A during the same years.

(iv) Weighted average method—(A)

In general. A taxpayer using the FIFO

method or the specific goods LIFO

method of accounting for inventories may

use the weighted average method as provided in this paragraph (c)(2)(iv) to estimate the change in the amount of costs

that must be allocated to inventories for

prior years. The weighted average

method under this paragraph (c)(2)(iv) is

only available to a taxpayer that lacks sufficient data to revalue its inventory costs

under the facts and circumstances revaluation method provided for in paragraph

(c)(2)(iii) of this section. Moreover, a

taxpayer that qualifies for the use of the

weighted average method under this paragraph (c)(2)(iv) must utilize such method

only with respect to items or costs for

which it lacks sufficient information to

revalue under the facts and circumstances

revaluation method. Particular items or

costs must be revalued under the facts and

circumstances revaluation method if sufficient information exists to make such a

revaluation. If a taxpayer lacks sufficient

information to otherwise apply the

weighted average method under this paragraph (c)(2)(iv) (for example, the taxpayer is unable to revalue the costs of any

of its items in inventory due to a lack of

information), then the taxpayer must use

reasonable estimates and procedures, as

described in the facts and circumstances

revaluation method, to whatever extent is

necessary to allow the taxpayer to apply

the weighted average method.

(B) Weighted average method for

FIFO taxpayers—(1) In general. This

paragraph (c)(2)(iv)(B) sets forth the mechanics of the weighted average method

as applicable to FIFO taxpayers. Under

the weighted average method, an item in

ending inventory for which sufficient data

is not available for revaluation under section 263A and the regulations thereunder

must be revalued by using the weighted

average percentage increase or decrease

with respect to such item for the earliest

subsequent taxable year for which suffi-

1997–37 I.R.B.

cient data is available. With respect to an

item for which no subsequent data exists,

such item must be revalued by using the

weighted average percentage increase or

decrease with respect to all reasonably

comparable items in the taxpayer’s inventory for the same year or the earliest subsequent taxable year for which sufficient

data is available.

(2) Example. The provisions of this

paragraph (c)(2)(iv)(B) are illustrated by

the following example. The principles set

forth in this example are applicable both

to production and resale activities and the

year of change in the example is 1997.

The example reads as follows:

Example. Taxpayer A manufactures bolts and

uses the FIFO method to identify inventories. Under

A’s former method, A did not capitalize all of the

costs required to be capitalized under section 263A.

A maintains inventories of bolts, two types of which

it no longer produces. Bolt A was last produced in

1994. The revaluation of the costs of Bolt A under

this section for bolts produced in 1994 results in a 20

percent increase of the costs of Bolt A. A portion of

the inventory of Bolt A, however, is attributable to

1993. A does not have sufficient data for revaluation

of the 1993 cost for Bolt A. With respect to Bolt A,

A may apply the 20 percent increase determined for

1994 to the 1993 production as an acceptable estimate. Bolt B was last produced in 1992 and no data

exists that would allow revaluation of the inventory

cost of Bolt B. The inventories of all other bolts for

which information is available are attributable to

1994 and 1995. Revaluation of the costs of these

other bolts using available data results in an average

increase in inventory costs of 15 percent for 1994

production. With respect to Bolt B, the overall 15

percent increase for A’s inventory for 1994 may be

used in revaluing the cost of Bolt B.

forth the mechanics of the weighted average method as applicable to LIFO taxpayers using the specific goods method of

valuing inventories. Under the weighted

average method, the inventory layers with

respect to an item for which data is available are revalued under this section and

the increase or decrease in amount for

each layer is expressed as a percentage of

change from the cost in the layer as originally valued. A weighted average of the

percentage of change for all layers for

each type of good is computed and applied to all earlier layers for each type of

good that lack sufficient data to allow for

revaluation. In the case of earlier layers

for which sufficient data exists, such layers are to be revalued using actual data.

In cases where sufficient data is not available to make a weighted average estimate

1997–37 I.R.B.

with respect to a particular item of inventory, a weighted average increase or decrease is to be determined using all other

inventory items revalued by the taxpayer

in the same specific goods grouping. This

percentage increase or decrease is then

used to revalue the cost of the item for

which data is lacking. If the taxpayer

lacks sufficient data to revalue any of the

inventory items contained in a specific

goods grouping, then the weighted average increase or decrease of substantially

similar items (as determined by principles

similar to the rules applicable to dollarvalue LIFO taxpayers in §1.472–8(b)(3))

must be applied in the revaluation of the

items in such grouping. If insufficient

data exists with respect to all the items in

a specific goods grouping and to all items

that are substantially similar (or such

items do not exist), then the weighted average for all revalued items in the taxpayer’s inventory must be applied in

revaluing items for which data is lacking.

(2) Example. The provisions of this

paragraph (c)(2)(iv)(C) are illustrated by

the following example. The principles set

forth in this example are applicable both

to production and resale activities and the

year of change in the example is 1997.

The example reads as follows:

Example. (i) Taxpayer M is a manufacturer that

produces two different parts. Under M’s former

method, M did not capitalize all of the costs required

to be capitalized under section 263A. Work-inprocess inventory is recorded in terms of equivalent

units of finished goods. M’s records show the following at the end of 1996 under the specific goods

LIFO inventory method:

LIFO

Product and layer

Number

Product #1:

1993 . . . . . . . . . . . . .150

1994 . . . . . . . . . . . . .100

1995 . . . . . . . . . . . . .100

1996 . . . . . . . . . . . . . 50

$5.00

6.00

6.50

7.00

$750

600

650

350

$2,350

Product #2:

1993 . . . . . . . . . . . . .200

1994 . . . . . . . . . . . . .200

1995 . . . . . . . . . . . . .100

1996 . . . . . . . . . . . . .100

$4.00

4.50

5.00

6.00

$800

900

500

600

$2,800

Cost

Carrying

values

Total carrying value of

Products #1 and #2 under

M’s former method . . . . . . . . . . . . . . . . . .$5,150

(ii) M has sufficient data to revalue the unit costs

of Product #1 using its new method for 1994, 1995

and 1996. These costs are: $7.00 in 1994, $7.75 in

1995, and $9.00 in 1996. This data for Product #1

results in a weighted average percentage change of

20.31 percent [(100 x ($7.00 – $6.00)) + (100 x

($7.75 – $6.50)) + (50 x ($9.00 – $7.00)) divided by

(100 x $6.00) + (100 x $6.50) + (50 3 $7.00)]. M

has sufficient data to revalue the unit costs of Product #2 only in 1995 and 1996. These costs are:

$6.00 in 1995 and $7.00 in 1996. This data for

Product #2 results in a weighted average percentage

change of 18.18 percent [(100 3 ($6.00 – $5.00)) +

(100 3 ($7.00 – $6.00)) divided by (100 3 $5.00) +

(100 3 $6.00)].

(iii) M can estimate its revalued costs for Product

#1 for 1993 by applying the weighted average increase computed for Product #1 (20.31 percent) to

the unit costs originally carried on M’s records for

1993 under M’s former method. The estimated

revalued unit cost of Product #1 would be $6.02

($5.00 3 1.2031). M estimates its revalued costs for

Product #2 for 1993 and 1994 in a similar fashion.

M applies the weighted average increase determined

for Product #2 (18.18 percent) to the unit costs of

$4.00 and $4.50 for 1993 and 1994 respectively.

The revalued unit costs of Product #2 are $4.73 for

1993 ($4.00 3 1.1818) and $5.32 for 1994 ($4.50 3

1.1818).

(iv) M’s inventory would be revalued as follows:

LIFO

Product and layer

Number Cost

Product #1:

1993 . . . . . . . . . . . . 150

$6.02

1994 . . . . . . . . . . . . 100

7.00

1995 . . . . . . . . . . . . 100

7.75

1996. . . . . . . . . . . . . 50

9.00

Product #2:

1993 . . . . . . . . . . . . 200

1994 . . . . . . . . . . . . 200

1995 . . . . . . . . . . . . 100

1996 . . . . . . . . . . . . 100

$4.73

5.32

6.00

7.00

Carrying

values

$903

700

775

450

$2,828

$946

1,064

600

700

$3,310

Total value of Products #1 and #2

as revalued under M’s new method . . . . . $6,138

Total amount of adjustment required under

section 481(a) [$6,138 – $5,150] . . . . . . . . . $988

(D) Adjustments to inventory costs

from prior years. For special rules applicable when a revaluation using the

weighted average method includes costs

not incurred in prior years, see paragraph

(c)(2)(v)(E) of this section.

(v) 3-year average method—(A) In

general. A taxpayer using the dollarvalue LIFO method of accounting for inventories may revalue all existing LIFO

layers of a trade or business based on the

3-year average method as provided in this

paragraph (c)(2)(v). The 3-year average

method is based on the average percentage change (the 3-year revaluation factor)

in the current costs of inventory for each

LIFO pool based on the three most recent

taxable years for which the taxpayer has

sufficient information (typically, the three

most recent taxable years of such trade or

business). The 3-year revaluation factor

is applied to all layers for each pool in beginning inventory in the year of change.

The 3-year average method is available to

September 15, 1997

any dollar-value taxpayer that complies

with the requirements of this paragraph

(c)(2)(v) regardless of whether such taxpayer lacks sufficient data to revalue its

inventory costs under the facts and circumstances revaluation method prescribed

in paragraph (c)(2)(iii) of this section. The

3-year average method must be applied

with respect to all inventory in a taxpayer’s trade or business. A taxpayer is

not permitted to apply the method for the

revaluation of some, but not all, inventory

costs on the basis of pools, business units,

or other measures of inventory amounts

that do not constitute a separate trade or

business. Generally, a taxpayer revaluing

its inventory using the 3-year average

method must establish a new base year.

See, paragraph (b)(2)(iii)(A)(2)(i) of this

section. However, a dollar-value LIFO

taxpayer using the 3-year average method

and either the simplified production

method or the simplified resale method to

revalue its inventory is permitted, but not

required, to establish a new base year.

See, paragraph (b)(2)(iii)(A)(2)(ii) of this

section. If a taxpayer lacks sufficient information to otherwise apply the 3-year

average method under this paragraph

(c)(2)(v) (for example, the taxpayer is unable to revalue the costs of any of its LIFO

pools for three years due to a lack of information), then the taxpayer must use reasonable estimates and procedures, as described in the facts and circumstances

revaluation method under paragraph

(c)(2)(iii) of this section, to whatever extent is necessary to allow the taxpayer to

apply the 3-year average method.

(B) Consecutive year requirement.

Under the 3-year average method, if sufficient data is available to calculate the

revaluation factor for more than three

years, the taxpayer may use data from

such additional years in determining the

average percentage increase or decrease

only if the additional years are consecutive to and prior to the year of change.

The requirement under the preceding sentence to use consecutive years is applicable under this method regardless of

whether any inventory costs in beginning

inventory as of the year of change are

viewed as incurred in, or attributable to,

those consecutive years under the LIFO

inventory method. Thus, the requirement

to use data from consecutive years may

September 15, 1997

result in using information from a year in

which no LIFO increment occurred. For

example, if a taxpayer is changing its

method of accounting in 1997 and has sufficient data to revalue its inventory for the

years 1991 through 1996, the taxpayer

may calculate the revaluation factor using

all six years. If, however, the taxpayer has

sufficient data to revalue its inventory for

the years 1990 through 1992, and 1994

through 1996, only the three years consecutive to the year of change, that is, 1994

through 1996, may be used in determining

the revaluation factor. Similarly, for example, a taxpayer with LIFO increments

in 1995, 1993, and 1992 may not calculate

the revaluation factor based on the data

from those years alone, but instead must

use the data from consecutive years for

which the taxpayer has information.

paragraph (c)(2)(v) are illustrated by the

following example. The principles set

forth in this example are applicable both

to production and resale activities and the

year of change in the example is 1997.

The example reads as follows:

Example. (i) Taxpayer G, a calendar year taxpayer, is a reseller that is required to change its

method of accounting under section 263A. G will

not use either the simplified production method or

the simplified resale method. G adopted the dollarvalue LIFO inventory method in 1991, using a single pool and the double extension method. G’s beginning LIFO inventory as of January 1, 1997,

computed using its former method, for the year of

change is as follows:

Base year

costs

Base layer . . . $14,000

1991 layer . . . . . 4,000

1992 layer . . . . . 5,000

1993 layer . . . . . 2,000

1994 layer. . . . . . . . . 0

1995 layer . . . . . 4,000

1996 layer . . . . . 5,000

Total. . . . . . . . $34,000

LIFO

Index carrying value

1.00

$14,000

1.20

4,800

1.30

6,500

1.35

2,700

1.40

1.50

6,000

1.60

8,000

....

$42,000

(ii) G is able to recompute total inventoriable

costs incurred under its new method for the three

preceding taxable years as follows:

Current

cost as

recorded

(former

method)

1994 . . . . . . .$35,000

1995 . . . . . . . .43,500

1996 . . . . . . . .54,400

Total . . . . . .$132,900

Current

cost as

adjusted

(new

method)

$45,150

54,375

70,720

$170,245

Percentage

change

.29

.25

.30

.28

(iii) Applying the average revaluation factor of

.28 to each layer, G’s inventory is restated as follows:

Restated

base year

costs

Base layer . . .$17,920

1991 layer . . . . .5,120

1992 layer . . . . .6,400

1993 layer . . . . 2,560

1994 layer . . . . . . . .0

1995 layer . . . . .5,120

1996 layer . . . . 6,400

Total . . . . . . .$43,520

Index

1.00

1.20

1.30

1.35

1.40

1.50

1.60

....

Restated

LIFO carrying

value

$17,920

6,144

8,320

3,456

7,680

10,240

$53,760

(iv) The adjustment required by section 481(a) is

$11,760. This amount may be computed by multiplying the average percentage of .28 by the LIFO

carrying value of G’s inventory valued using its former method ($42,000). Alternatively, the adjustment required by section 481(a) may be computed

by the difference between—

(A) The revalued costs of the taxpayer’s inventory under its new method ($53,760), and

(B) The costs of the taxpayer’s inventory using its

former method ($42,000).

(v) In addition, the inventory as of the first day of

the year of change (January 1, 1997) becomes the

new base year cost for purposes of determining the

LIFO index in future years. See, paragraphs

(b)(2)(iii)(A)(2)(i) and (b)(2)(iii)(B) of this section.

This requires that layers in years prior to the base

year be restated in terms of the new base year index.

The current year cost of G’s inventory, as adjusted,

is $70,720. Such cost must be apportioned to each

layer in proportion to the restated base year cost of

that layer to total restated base year costs ($43,520),

as follows:

Restated

base year

costs

Old base layer $29,120

1991 layer . . . . .8,320

1992 layer . . . .10,400

1993 layer . . . . .4,160

1994 layer . . . . . . . . 0

1995 layer . . . . .8,320

1996 layer . . . .10,400

Total . . . . . . . .$70,720

Restated

index

.615

.738

.80

.831

—

.923

.985

....

Restated

LIFO carrying

value

$17,920

6,144

8,320

3,456

7,680

10,240

$53,760

(D) Short taxable years. A short taxable year is treated as a full 12 months.

(E) Adjustments to inventory costs

from prior years—(1) General rule—(i)

The use of the revaluation factor, based

on current costs, to estimate the revaluation of prior inventory layers under the 3year average method, as described in

paragraph (c)(2)(v) of this section, may

result in an allocation of costs that include

amounts attributable to costs not incurred

during the year in which the layer arose.

To the extent a taxpayer can demonstrate

that costs that contributed to the determination of the revaluation factor could not

have affected a prior year, the revaluation

factor as applied to that year may be adjusted under the restatement adjustment

procedure, as described in paragraph

(c)(2)(v)(F) of this section. The determination that a cost could not have affected

1997–37 I.R.B.

a prior year must be made by a taxpayer

only upon showing that the type of cost

incurred during the years used to calculate

the revaluation factor (revaluation years)

was not present during such prior year.

An item of cost will not be eligible for the

restatement adjustment procedure simply

because the cost varies in amount from

year to year or the same type of cost is described or referred to by a different name

from year to year. Thus, the restatement

adjustment procedure allowed under paragraph (c)(2)(v)(F) of this section is not

available in a prior year with respect to a

particular cost if the same type of cost

was incurred both in the revaluation years

and in such prior year, although the

amount of such cost and the name or description thereof may vary.

(ii) The provisions of this paragraph

(c)(2)(v)(E) are also applicable to taxpayers using the weighted average method in

revaluing inventories under paragraph

(c)(2)(iv) of this section. Thus, to the extent a taxpayer can demonstrate that costs

that contributed to the determination of

the restatement of a particular year or

item could not have affected a prior year

or item, the taxpayer may adjust the revaluation of that prior year or item accordingly under the weighted average method.

All the requirements and definitions,

however, applicable to the restatement adjustment procedure under this paragraph

(c)(2)(v)(E) fully apply to a taxpayer

using the weighted average method to

revalue inventories.

(2) Examples of costs eligible for restatement adjustment procedure. The

provisions of this paragraph (c)(2)(v)(E)

are illustrated by the following four examples. The principles set forth in these

examples are applicable both to production and resale activities and the year of

change in the four examples is 1997. The

examples read as follows:

Example 1. Taxpayer A is a reseller that introduced a defined benefit pension plan in 1994, and

made the plan available to personnel whose labor

costs were (directly or indirectly) properly allocable

to resale activities. A determines the revaluation

factor based on data available for the years 1994

through 1996, for which the pension plan was in existence. Based on these facts, the costs of the pension plan in the revaluation years are eligible for the

restatement adjustment procedure for years prior to

1994.

Example 2. Assume the same facts as in Example

1, except that a defined contribution plan was available, during prior years, to personnel whose labor

costs were properly allocable to resale activities.

The defined contribution plan was terminated before

1997–37 I.R.B.

the introduction of the defined benefit plan in 1994.

Based on these facts, the costs of the defined benefit

pension plan in the revaluation years are not eligible

for the restatement adjustment procedure with respect to years for which the defined contribution

plan existed.

Example 3. Taxpayer C is a manufacturer that established a security department in 1995 to patrol and

safeguard its production and warehouse areas used

in C’s trade or business. Prior to 1995, C had not

been required to utilize security personnel in its

trade or business; C established the security department in 1995 in response to increasing vandalism

and theft at its plant locations. Based on these facts,

the costs of the security department are eligible for

the restatement adjustment procedure for years prior

to 1995.

Example 4. Taxpayer D is a reseller that established a payroll department in 1995 to process the

company’s weekly payroll. In the years 1991

through 1994, D engaged the services of an outside

vendor to process the company’s payroll. Prior to

1991, D’s payroll processing was done by D’s accounting department, which was responsible for

payroll processing as well as for other accounting

functions. Based on these facts, the costs of the payroll department are not eligible for the restatement

adjustment procedure. D was incurring the same

type of costs in earlier years as D was incurring in

the payroll department in 1995 and subsequent

years, although these costs were designated by a different name or description.

(F) Restatement adjustment procedure—(1) In general—(i) This paragraph (c)(2)(v)(F) provides a restatement

adjustment procedure whereunder a taxpayer may adjust the restatement of inventory costs in prior taxable years in

order to produce a different restated value

than the value that would otherwise occur

through application of the revaluation factor to such prior taxable years.

(ii) Under the restatement adjustment

procedure as applied to a particular prior

year, a taxpayer must determine the particular items of cost that are eligible for

the restatement adjustment with respect to

such prior year. The taxpayer must then

recompute, using reasonable estimates

and procedures, the total inventoriable

costs that would have been incurred for

each revaluation year under the taxpayer’s former method and the taxpayer’s

new method by making appropriate adjustments in the data for such revaluation

year to reflect the particular costs eligible

for adjustment.

(iii) The taxpayer must then compute

the total percentage change with respect

to each revaluation year, using the revised

estimates of total inventoriable costs for

such year as described in paragraph

(c)(2)(v)(F)(1)(ii) of this section. The

percentage change must be determined by

calculating the ratio of the revised total of

the inventoriable costs for such revaluation year under the taxpayer ’s new

method to the revised total of the inventoriable costs for such revaluation year

under the taxpayer’s former method.

(iv) An average of the resulting percentage change for all revaluation years is

then calculated, and the resulting average

is applied to the prior year in issue.

(2) Examples of restatement adjustment procedure. The provisions of this

paragraph (c)(2)(v)(F) are illustrated by

the following two examples. The principles set forth in these examples are applicable both to production and resale activities and the year of change in the two

examples is 1997. The examples read as

follows:

Example 1. Taxpayer A is a reseller that is eligible

to make a restatement adjustment by reason of the

costs of a defined benefit pension plan that was introduced in 1994, during the revaluation period. The

revaluation factor, before adjustment of data to reflect

the pension costs, is as provided in the example in

paragraph (c)(2)(v)(C) of this section. Thus, for example, with respect to the year 1994, the total inventoriable costs under A’s former method is $35,000, the

total inventoriable costs under A’s new method is

$45,150, and the percentage change is .29. Under the

method of accounting used by A during 1994 (the former method), none of the pension costs were included

as inventoriable costs. Thus, under the restatement

adjustment procedure, the total inventoriable cost

under A’s former method would remain at $35,000 if

the pension plan had not been in existence. Similarly,

A determines that the total inventoriable costs for

1994 under A’s new method, if the pension plan had

not been in existence, would have been $42,000. The

restatement adjustment for 1994 determined under

this paragraph (c)(2)(v)(F) would then be equal to .20

([$42,000 – $35,000]/$35,000). A would make similar calculations with respect to 1995 and 1996. The

average of such amounts for each of the three years in

the revaluation period would then be determined as in

the example in paragraph (c)(2)(v)(C) of this section.

Such average would be used to revalue cost layers for

years for which the pension plan was not in existence.

Such revalued layers would then be viewed as restated in compliance with the requirements of this

paragraph. With respect to cost layers incurred during

years for which the pension plan was in existence, no

adjustment of the revaluation factor would occur.

Example 2. Assume the same facts as in Example

1, except that a portion of the pension costs were included as inventoriable costs under the method used

by A during 1994 (the former method). Under the

restatement adjustment procedure, A determines that

the total inventoriable costs for 1994 under the former method, if the pension plan had not been in existence, would have been $34,000. Similarly, A determines that the total inventoriable costs for 1994

under A’s new method, if the pension plan had not

been in existence, would have been $42,000. The

restatement adjustment for 1994 determined under

this paragraph (c)(2)(v)(F) would then be equal to

.24 ([$42,000 – $34,000]/$34,000). A would make

similar calculations with respect to 1995 and 1996.

The average of such amounts for each of the three

years in the revaluation period would then be determined as in the example in paragraph (c)(2)(v)(C) of

this section. Such average would be used to revalue

September 15, 1997

cost layers for years for which the pension plan was

not in existence.

(3) Intercompany items—(i) Revaluing

intercompany transactions. Pursuant to

any change in method of accounting for

costs subject to section 263A, taxpayers

are required to revalue the amount of any

intercompany item resulting from the sale

or exchange of inventory property in an

intercompany transaction to an amount

equal to the intercompany item that would

have resulted had the cost of goods sold

for that inventory property been determined under the taxpayer’s new method.

The requirement of the preceding sentence applies with respect to both inventory produced by a taxpayer and inventory acquired by the taxpayer for resale.

In addition, the requirements of this paragraph (c)(3) apply only to any intercompany item of the taxpayer as of the beginning of the year of change in method of

accounting. See §1.1502–13(b)(2)(ii). A

taxpayer must revalue the amount of any

intercompany item only if the inventory

property sold in the intercompany transaction is held as inventory by a buying

member as of the date the taxpayer

changes its method of accounting under

section 263A. Corresponding changes to

the adjustment required under section

481(a) must be made with respect to any

adjustment of the intercompany item required under this paragraph (c)(3). Moreover, the requirements of this paragraph

(c)(3) apply regardless of whether the taxpayer has any items in beginning inventory as of the year of change in method of

accounting. See §1.1502–13 for the definition of intercompany transaction.

(ii) Example. The provisions of this

paragraph (c)(3) are illustrated by the following example. The principles set forth

in this example are applicable both to production and resale activities and the year

of change in the example is 1997. The

example reads as follows:

Example. (i) Assume that S, a member of a consolidated group filing its federal income tax return

on a calendar year, manufactures and sells inventory

property to B, a member of the same consolidated

group, in 1996. The sale between S and B is an intercompany transaction as defined under §1.1502–

13(b)(1). The gain from the intercompany transaction is an intercompany item to S under §1.1502–

13(b)(2). As of the beginning of the year of change

in method of accounting (January 1, 1997), the inventory property is still held by B based on the particular inventory method of accounting used by B

for federal income tax purposes (for example, the

LIFO or FIFO inventory method). The property was

September 15, 1997

sold by S to B in 1996 for $150; the cost of goods

sold with respect to the property under the method in

effect at the time the inventory was produced was

$100, resulting in an intercompany item of $50 to S

under §1.1502–13. As of January 1, 1997, S still has

an intercompany item of $50.

(ii) S is required to revalue the amount of its intercompany item to an amount equal to what the intercompany item would have been had the cost of

goods sold for that inventory property been determined under S’s new method. Assume that the cost

of the inventory under this method would have been

$110, had the method applied to S’s manufacture of

the property in 1996. Thus, S is required to revalue

the amount of its intercompany item to $40 (that is,

$150 less $110), necessitating a negative adjustment

to the intercompany item of $10. Moreover, S is required to increase its adjustment under section

481(a) by $10 in order to prevent the omission of

such amount by virtue of the decrease in the intercompany item.

(iii) Availability of revaluation methods. In revaluing the amount of any intercompany item resulting from the sale

or exchange of inventory property in an

intercompany transaction to an amount

equal to the intercompany item that would

have resulted had the cost of goods sold

for that inventory property been determined under the taxpayer’s new method,

a taxpayer may use the other methods and

procedures otherwise properly available

to that particular taxpayer in revaluing inventory under section 263A and the regulations thereunder, including, if appropriate, the various simplified methods

provided in section 263A and the regulations thereunder and the various procedures described in this paragraph (c).

(4) Anti-abuse rule—(i) In general.

Section 263A(i)(1) provides that the Secretary shall prescribe such regulations as

may be necessary or appropriate to carry

out the purposes of section 263A, including regulations to prevent the use of related parties, pass-thru entities, or intermediaries to avoid the application of

section 263A and the regulations thereunder. One way in which the application of

section 263A and the regulations thereunder would be otherwise avoided is

through the use of entities described in the

preceding sentence in such a manner as to

effectively avoid the necessity to restate

beginning inventory balances under the

change in method of accounting required

or permitted under section 263A and the

regulations thereunder.

(ii) Deemed avoidance of this

section—(A) Scope. For purposes of this

paragraph (c), the avoidance of the application of section 263A and the regulations

thereunder will be deemed to occur if a

taxpayer using the LIFO method of accounting for inventories, transfers inventory property to a related corporation in a

transaction described in section 351, and

such transfer occurs:

(1) On or before the beginning of the

transferor’s taxable year beginning in

1987; and

(2) After September 18, 1986.

(B) General rule. Any transaction described in paragraph (c)(4)(ii)(A) of this

section will be treated in the following

manner:

(1) Notwithstanding any provision to

the contrary (for example, section 381),

the transferee corporation is required to

revalue the inventories acquired from the

transferor under the provisions of this

paragraph (c) relating to the change in

method of accounting and the adjustment

required by section 481(a), as if the inventories had never been transferred and were

still in the hands of the transferor; and

(2) Absent an election as described in

paragraph (c)(4)(iii) of this section, the

transferee must account for the inventories acquired from the transferor by treating such inventories as if they were contained in the transferee’s LIFO layer(s).

(iii) Election to use transferor’s LIFO

layers. If a transferee described in paragraph (c)(4)(ii) of this section so elects,

the transferee may account for the inventories acquired from the transferor by allocating such inventories to LIFO layers

corresponding to the layers to which such

properties were properly allocated by the

transferor, prior to their transfer. The

transferee must account for such inventories for all subsequent periods with reference to such layers to which the LIFO

costs were allocated. Any such election is

to be made on a statement attached to the

timely filed federal income tax return of

the transferee for the first taxable year for

which section 263A and the regulations

thereunder applies to the transferee.

(iv) Tax avoidance intent not required.

The provisions of paragraph (c)(4)(ii) of

this section will apply to any transaction

described therein, without regard to

whether such transaction was consummated with an intention to avoid federal

income taxes.

(v) Related corporation. For purposes

of this paragraph (c)(4), a taxpayer is related to a corporation if—

(A) the relationship between such per-

1997–37 I.R.B.

sons is described in section 267(b)(1), or

(B) such persons are engaged in trades

or businesses under common control

(within the meaning of paragraphs (a) and

(b) of section 52).

(d) Non-inventory property—(1) Need

for adjustments. A taxpayer that changes

its method of accounting for costs subject

to section 263A with respect to non-inventory property must revalue the non-inventory property on hand at the beginning

of the year of change as set forth in paragraph (d)(2) of this section, and compute

an adjustment under section 481(a). The

adjustment under section 481(a) will

equal the difference between the adjusted

basis of the property as revalued using the

taxpayer’s new method and the adjusted

basis of the property as originally valued

using the taxpayer’s former method.

(2) Revaluing property. A taxpayer

must revalue its non-inventory property

as of the beginning of the year of change

in method of accounting. The facts and

circumstances revaluation method of

paragraph (c)(2)(iii) of this section must

be used to revalue this property. In

revaluing non-inventory property, however, the only additional section 263A

costs that must be taken into account are

those additional section 263A costs incurred after the later of December 31,

1986, or the date the taxpayer first be-

comes subject to section 263A, in taxable

years ending after that date. See

§1.263A–1(d)(3) for the definition of additional section 263A costs.

§ 1.263A–7T [Removed]

Par. 5. Section 1.263A–7T is removed.

stores. The July 1997 Bureau of Labor

Statistics price indexes are accepted for

use by department stores employing the

retail inventory and last-in, first-out inventory methods for valuing inventories

for tax years ended on, or with reference

to, July 31, 1997.

§ 1.263A-15 [Amended]

Rev. Rul. 97–37

Par. 6. Section 1.263A–15 is amended

by removing “1.263A–7T (e) generally”

from the last sentence in paragraph (a)(1)

and replacing it with “1.263A–7”.

The following Department Store Inventory Price Indexes for July 1997 were issued by the Bureau of Labor Statistics on

August 14, 1997. The indexes are accepted by the Internal Revenue Service,

under § 1.472–1(k) of the Income Tax

Regulations and Rev. Proc. 86–46, 1986–2

C.B. 739, for appropriate application to inventories of department stores employing

the retail inventory and last-in, first-out inventory methods for tax years ended on, or

with reference to, July 31, 1997.

The Department Store Inventory Price

Indexes are prepared on a national basis

and include (a) 23 major groups of departments, (b) three special combinations

of the major groups - soft goods, durable

goods, and miscellaneous goods, and (c)

a store total, which covers all departments, including some not listed separately, except for the following: candy,

foods, liquor, tobacco, and contract departments.

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

Approved July 28, 1997.

Donald C. Lubick,

Acting Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on August 4, 1997, 8:45 a.m., and published in the issue of

the Federal Register for August 5, 1997, 62 F.R.

42051)

Section 472.—Last-in, First-out

Inventories

26 CFR 1.472-1: Last-in, first-out inventories.

LIFO; price indexes; department

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE

INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Groups

July

1996

1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539.2

2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 635.6

3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . 643.9

4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 888.2

5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 609.3

6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 536.9

7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289.3

8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . 544.7

9. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . . . . . . . 380.6

10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 610.3

11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573.0

12. Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . 475.9

13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1016.0

14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 779.4

15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880.9

16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 671.6

17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 577.5

1997–37 I.R.B.

July

1997

539.8

656.1

641.6

902.6

637.9

543.5

297.8

544.5

395.0

621.6

585.9

495.9

1003.9

797.5

905.7

662.8

598.2

Percent Change

from July 1996

to July 19971

0.1

3.2

–0.4

1.6

4.7

1.2

2.9

0.0

3.8

1.9

2.3

4.2

–1.2

2.3

2.8

–1.3

3.6

September 15, 1997

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE

INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

July

1996

July

1997

Percent Change

from July 1996

to July 19971

18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 811.9

19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245.8

20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79.2

21. Recreation and Education2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112.7

22. Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126.8

23. Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107.0

807.2

243.1

75.9

109.8

132.7

108.6

–0.6

–1.1

–4.2

–2.6

4.7

1.5

Groups 1 – 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 582.4

594.9

2.1

Groups 16 – 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470.3

464.2

–1.3

Groups 21 – 23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113.5

112.5

–0.9

Store Total3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544.2

549.8

1.0

Groups

Absence of a minus sign before percentage change in this column signifies price increase.

Indexes on a January 1986=100 base.

The store total index covers all departments, including some not listed separately, except for the following: candy, foods, liquor, tobacco, and contract departments.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Stan Michaels of the Office of

Assistant Chief Counsel (Income Tax and

Accounting). For further information regarding this revenue ruling, contact Mr.

Michaels on (202) 622-4970 (not a tollfree call).

Section 6334.—Property

Exempt From Levy

property exempt from levy, interest,

penalties, offers in compromise, and the

awarding of costs and certain fees. The

regulations reflect changes to the law

made by the Taxpayer Bill of Rights 2 and

a conforming amendment made by the

Personal Responsibility and Work Opportunity Reconciliation Act of 1996. The

regulations affect taxpayers with respect

to filing of returns, interest, penalties,

court costs, and payment, deposit, and

collection of taxes.

26 CFR 301.6334–1: Property exempt from levy.

T.D. 8725

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

Miscellaneous Sections Affected

by the Taxpayer Bill of Rights 2

and the Personal Responsibility

and Work Opportunity

Reconciliation Act of 1996

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains

final regulations relating to joint returns,

September 15, 1997

DATES: These regulations are effective

July 22, 1997.

For dates of applicability of these regulations, see §§301.6334–1(e) and (f),

301.6601–1(f)(3) and (4), 301.6651–

1(a)(3) and (g)(2), 301.6656–3(c),

301.7122–1(e)(2), 301.7430–2(c)(3)(i)(B), 301.7430–4(b)(3)(ii), 301.7430–

5(a) and (c)(3), and 301.7430–6.

FOR FURTHER INFORMATION CONTACT: Beverly A. Baughman, (202) 6224940 regarding joint returns and penalties; Robert A. Miller, (202) 622-3640

regarding levy; Donna J. Welch, (202)

622-4910 regarding interest; Thomas D.

Moffitt, (202) 622-7900 regarding court

costs; and Kevin B. Connelly, (202) 6223640 regarding compromises (not tollfree numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations has been

reviewed and approved by the Office of

Management and Budget in accordance

with the Paperwork Reduction Act (44

U.S.C. 3507) under control number

1545–1356. Responses to this collection

of information are required to obtain an

award of reasonable administrative costs.

An agency may not conduct or sponsor,

and a person is not required to respond

to, a collection of information unless the

collection of information displays a valid

control number.

The estimated annual burden per respondent varies from 10 minutes to 30

minutes, depending on individual circumstances, with an estimated average of 15

minutes.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to the

Internal Revenue Service, Attn: IRS

Reports Clearance Officer, PC:FP, Washington, DC 20224, and to the Office of

Management and Budget, Attn: Desk

Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to a collec-

1997–37 I.R.B.

tion of information must be retained as

long as their contents may become material in the administration of any internal

revenue law. Generally, tax returns and

tax return information are confidential, as

required by 26 U.S.C. 6103

Background

This document contains amendments to

the Income Tax Regulations and the Regulations on Procedure and Administration

(26 CFR parts 1 and 301, respectively) relating to joint returns under section 6013,

levy under section 6334, interest under

section 6601, the failure to file penalty

under section 6651, the failure to deposit

penalty under section 6656, compromise

under section 7122, and awards of costs

and certain fees under section 7430.

These sections were amended by the Taxpayer Bill of Rights 2 (TBOR2) (Public

Law 104–168, 110 Stat. 1452 (1996)) and

section 110(l)(6) of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (Public Law 104–193,

110 Stat. 2105, 2173 (1996)). The

changes made by TBOR2 and the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 are reflected in the final regulations.

A notice of proposed rulemaking was

published in the Federal Register for January 2, 1997 (62 FR 77). One written

comment was received in response to the

notice of proposed rulemaking. No public

hearing was requested or held. The proposed regulations under sections 6013,

6334, 6601, 6651, 6656, 7122, and 7430

are adopted by this Treasury decision with

minor revisions, which are discussed

below.

Explanation of Revisions and Summary

of Comments

The IRS received one comment regarding the proposed regulations. The commentator remarked that §301.6601– 1(f)(3)

of the proposed regulations is unclear because, as drafted, the regulation implies

that interest on all additions to tax, including those covered by section 6601(e)(2)(B), runs from the date of the notice and

demand. Therefore, the final regulations

clarify that interest on any addition to tax,

except additions to tax described in section

6601(e)(2)(B), begins to run from the date

of the notice and demand.

The commentator also requested clari-

1997–37 I.R.B.

fication for purposes of computing the

$100,000 threshold in §§301.6601–

1(f)(3) and (4) and 301.6651–1(a)(3).

Sections 303(a) and (b) of TBOR2 extend

the interest-free period to 21 calendar

days or 10 business days if the amount for

which the notice and demand is made

equals or exceeds $100,000. The commentator suggested that the $100,000

threshold should include tax, interest, and

penalties. The language in the statute

supports this interpretation. Under section 303(b)(1) of TBOR2, the 10 day period specifically applies to a notice and

demand for interest and penalties. Therefore, the final regulations clarify that 10

business days is the applicable interestfree period if the total amount assessed,

including tax, penalties, and interest, and

shown on the notice and demand equals

or exceeds $100,000.

In addition, §301.6651–1(a)(3), regarding the failure to pay penalty, has been

clarified by cross-referencing the definitions of calendar day and business day in

§301.6601–1(f)(5).

Accordingly, 26 CFR parts 1 and 301

are amended as follows:

Effective Dates

PART 1—INCOME TAXES

These regulations are applicable on

July 31, 1996, except that §301.7122–1(e)

is applicable on July 30, 1996, and

§301.6334–1(a)(2), (a)(3), (a)(11)(i), and

(e), §301.6601–1(f)(3), (f)(4), and (f)(5),

§301.6651–1(a)(3), and §301.7430–

4(b)(3)(ii) are applicable on January 1,

1997.

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

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

Par. 2. Section 1.6013–2(b)(1) is

amended by removing the language “Unless” and adding “Beginning on or before

July 30, 1996, unless” in its place.

Special Analyses

It has been determined that this Treasury

decision is not a significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It

also has been determined that section

553(b) of the Administrative Procedure

Act (5 U.S.C. chapter 5) does not apply to

these regulations. Moreover, it is hereby

certified that the regulations in this document will not have a significant economic

impact on a substantial number of small

entities. This certification is based on a determination that in the past only an average

of 38 taxpayers per year, the majority of

whom were individuals, have filed a request to recover administrative costs. Accordingly, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5

U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Inter-

nal Revenue Code, the notice of proposed

rulemaking preceding these regulations

was submitted to the Chief Counsel for

Advocacy of the Small Business Administration for comment on the impact of the

proposed regulations on small business.

Drafting Information

The principal authors of these regulations are Beverly A. Baughman and

Donna J. Welch, Office of Assistant Chief

Counsel (Income Tax and Accounting),

Robert A. Miller and Kevin B. Connelly,

Office of Assistant Chief Counsel (General Litigation), and Thomas D. Moffitt,

Office of Assistant Chief Counsel (Field

Service). However, other personnel from

the IRS and Treasury Department participated in their development.

Adoption of Amendments to the

Regulations

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 3. The authority citation for part

301 continues to read in part as follows:

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

Par. 4. Section 301.6334–1 is amended

by:

1. Revising paragraph (a)(2).

2. Removing the language “$1,100

($1,050 for levies issued prior to January

1, 1990)” from paragraph (a)(3) and

adding “$1,250” in its place.

3. Removing the language “(relating to

aid to families with dependent children)”

from paragraph (a)(11)(i).

4. Revising paragraph (e).

5. Adding paragraph (f).

The additions and revisions read as follows:

§301.6334–1 Property exempt from levy.

(a) * * *

September 15, 1997

(2) Fuel, provisions, furniture, and personal effects. So much of the fuel, provisions, furniture, and personal effects in

the taxpayer’s household, and of the arms

for personal use, livestock, and poultry of

the taxpayer, that does not exceed $2,500

in value.

* * * * *

(e) Inflation adjustment. For any calendar year beginning after December 31,

1997, each dollar amount referred to in

paragraphs (a)(2) and (3) of this section

will be increased by an amount equal to the

dollar amount multiplied by the cost-ofliving adjustment determined under section 1(f)(3) for the calendar year (substituting “calendar year 1996” for “calendar

year 1992” in section 1(f)(3)(B)). If any

dollar amount as adjusted is not a multiple

of $10, the dollar amount will be rounded

to the nearest multiple of $10 (rounding up

if the amount is a multiple of $5).

(f) Effective date. Generally, these provisions are applicable with respect to levies

made on or after July 1, 1989. However,

any reasonable attempt by a taxpayer to

comply with the statutory amendments addressed by the regulations in this section

prior to February 21, 1995, will be considered as meeting the requirements of the

regulations in this section. In addition,

paragraphs (a)(2), (3), (11)(i) and (e) of

this section are applicable with respect to

levies issued after December 31, 1996.

Par. 5. Section 301.6601–1 is amended

by:

1. Revising paragraphs (f)(3) and

(f)(4).

2. Redesignating paragraph (f)(5) as

paragraph (f)(6) and adding new paragraph (f)(5).

The additions and revisions read as follows:

§301.6601–1 Interest on underpayments.

(f) * * *

(3) Interest will not be imposed on any

assessable penalty, addition to the tax

(other than an addition to tax described in

section 6601(e)(2)(B)), or additional

amount if the amount is paid within 21

calendar days (10 business days if the

amount assessed and shown on the notice

and demand equals or exceeds $100,000)

from the date of the notice and demand. If

interest is imposed, it will be imposed

September 15, 1997

only for the period from the date of the notice and demand to the date on which payment is received. This paragraph (f)(3) is

applicable with respect to any notice and

demand made after December 31, 1996.

(4) If notice and demand is made after

December 31, 1996, for any amount and

the amount is paid within 21 calendar

days (10 business days if the amount assessed and shown on the notice and demand equals or exceeds $100,000) from

the date of the notice and demand, interest

will not be imposed for the period after

the date of the notice and demand.

(5) For purposes of paragraphs (f)(3)

and (4) of this section—

(i) The term business day means any

day other than a Saturday, Sunday, legal

holiday in the District of Columbia, or a

statewide legal holiday in the state where

the taxpayer resides or where the taxpayer’s principal place of business is located. With respect to the tenth business

day (after taking into account the first

sentence of this paragraph (f)(5)(i)), see

section 7503 relating to time for performance of acts where the last day falls on a

statewide legal holiday in the state where

the act is required to be performed.

(ii) The term calendar day means any

day. With respect to the twenty-first calendar day, see section 7503 relating to

time for performance of acts where the

last day falls on a Saturday, Sunday, or

legal holiday.

Par. 6. Section 301.6651–1 is amended

by:

1. Revising paragraph (a)(3).

2. Adding paragraph (g).

The addition and revision read as follows:

§301.6651–1 Failure to file tax return or

to pay tax.

(a) * * *

(3) Failure to pay tax not shown on return. In the case of failure to pay any

amount of any tax required to be shown

on a return specified in paragraph (a)(1)

of this section that is not so shown (including an assessment made pursuant to

section 6213(b)) within 21 calendar days

from the date of the notice and demand

(10 business days if the amount assessed

and shown on the notice and demand

equals or exceeds $100,000) with respect

to any notice and demand made after December 31, 1996, there will be added to

the amount stated in the notice and demand the amount specified below unless

the failure to pay the tax within the prescribed time is shown to the satisfaction

of the district director or the director of

the service center to be due to reasonable

cause and not to willful neglect. The

amount added to the tax is 0.5 percent of

the amount stated in the notice and demand if the failure is for not more than 1

month, with an additional 0.5 percent for

each additional month or fraction thereof

during which the failure continues, but

not to exceed 25 percent in the aggregate.

For purposes of this paragraph (a)(3), see

§301.6601–1(f)(5) for the definition of

calendar day and business day.

(g) Treatment of returns prepared by

the Secretary—(1) In general. A return

prepared by the Secretary under section

6020(b) will be disregarded for purposes

of determining the amount of the addition

to tax for failure to file any return pursuant to paragraph (a)(1) of this section.

However, the return prepared by the Secretary will be treated as a return filed by

the taxpayer for purposes of determining

the amount of the addition to tax for failure to pay the tax shown on any return

and for failure to pay the tax required to

be shown on a return that is not so shown

pursuant to paragraphs (a)(2) and (3) of

this section, respectively.

(2) Effective date. This paragraph (g)

applies to returns the due date for which

(determined without regard to extensions)

is after July 30, 1996.

Par. 7. Section 301.6656–3 is added to

read as follows:

§301.6656–3 Abatement of penalty.

(a) Exception for first time depositors

of employment taxes—(1) Waiver. The

Secretary will generally waive the penalty

imposed by section 6656(a) on a person’s

failure to deposit any employment tax

under subtitle C of the Internal Revenue

Code if—

(i) The failure is inadvertent;

(ii) The person meets the requirements

referred to in section 7430(c)(4)(A)(ii)

(relating to the net worth requirements applicable for awards of attorney’s fees);

(iii) The failure occurs during the first

1997–37 I.R.B.

quarter that the person is required to deposit any employment tax; and

(iv) The return of the tax is filed on or

before the due date.

(2) Inadvertent failure. For purposes

of paragraph (a)(1)(i) of this section, the

Secretary will determine if a failure to deposit is inadvertent based on all the facts

and circumstances.

(b) Deposit sent to Secretary. The

Secretary may abate the penalty imposed

by section 6656(a) if the first time a depositor is required to make a deposit, the

amount required to be deposited is inadvertently sent to the Secretary instead of

to the appropriate government depository.

to deposits required to be made after July

30, 1996.

Par. 8. n §301.7122–1, paragraph (e) is

revised to read as follows:

§301.7122–1 Compromises.

Par 9. Section 301.7430–0 is amended

by adding entries for §§301.7430–1(b)(4)

and 301.7430–5(c)(3) to read as follows:

§301.7430–0 Table of contents.

1997–37 I.R.B.

(b) * * *

(4) Failure to agree to extension of

time for assessments.”.

§301.7430–5 Prevailing party.

(3) Presumption.

Par. 10. Section 301.7430–1 is

amended by adding paragraph (b)(4) to

read as follows:

§301.7430–1 Exhaustion of

administrative remedies.

(e) Record—(1) In general. If an

offer in compromise is accepted, there

will be placed on file the opinion of the

Chief Counsel of the IRS with respect to

the compromise, with the reasons for the

opinion, and including a statement of—

(i) The amount of tax assessed;

(ii) The amount of interest, additional

amount, addition to the tax, or assessable

penalty, imposed by law on the person

against whom the tax is assessed; and

(iii) The amount actually paid in accordance with the terms of the compromise.

(2) Exception. For compromises accepted on or after July 30, 1996, no opinion will be required with respect to the

compromise of any civil case in which the

unpaid amount of tax assessed (including

any interest, additional amount, addition

to the tax, or assessable penalty) is less

than $50,000. However, the compromise

will be subject to continuing quality review by the Secretary.

§301.7430–1 Exhaustion of administrative remedies.

(b) * * *

(4) Failure to agree to extension of

time for assessments. Any failure by the

prevailing party to agree to an extension

of the time for the assessment of any tax

will not be taken into account for purposes of determining whether the prevailing party has exhausted the administrative

remedies available to the party within the

Internal Rrevenue Service.

Par. 11. Section 301.7430–2 is

amended by:

1. Removing the language “7430(c)(4)(B)(ii)” from the third sentence of

paragraph (b)(2) and adding “7430(c)(4)(C)(ii)” in its place.

2. The introductory text of paragraph

(c)(3) is amended by removing the colon

and adding a dash in its place.

3. Revising paragraph (c)(3)(i)(B).

4. Removing the language “If more

than $75” from paragraph (c)(3)(ii)(C)

and adding “In the case of administrative

proceedings commenced after July 30,

1996, if more than $110” in its place.

The revision reads as follows:

§301.7430–2 Requirements and

procedures for recovery of reasonable

administrative costs.

(3) * * *

(i) * * *

(B) A clear and concise statement of

the reasons why the taxpayer alleges that

the position of the Internal Revenue Service in the administrative proceeding was

not substantially justified. For administrative proceedings commenced after July

30, 1996, if the taxpayer alleges that the

Internal Revenue Service did not follow

any applicable published guidance, the

statement must identify all applicable

published guidance that the taxpayer alleges that the Internal Revenue Service

did not follow. For purposes of this paragraph (c)(3)(i)(B), the term applicable

published guidance means final or temporary regulations, revenue rulings, revenue

procedures, information releases, notices,

announcements, and, if issued to the taxpayer, private letter rulings, technical advice memoranda, and determination letters. Also, for purposes of this paragraph

(c)(3)(i)(B), the term administrative proceeding includes only those administrative proceedings or portions of administrative proceedings occurring on or after

the administrative proceeding date as defined in §301.7430–3(c);

Par. 12. Section 301.7430–4 is

amended by:

1. Removing the language “$75” from

paragraph (b)(3)(i) and adding “, in the

case of proceedings commenced after

July 30, 1996, $110” in its place.

2. Revising paragraph (b)(3)(ii).

3. Removing the language “$75” from

the first, second, and third sentences of

paragraph (b)(3)(iii)(B) and adding

“$110” in its place.

4. Removing the language “$75” from

the first sentence of paragraph (b)(3)(iii)(C) and adding “$110” in its place.

5. Removing the language “$75” from

the third sentence of the example in paragraph (b)(3)(iii)(D) and adding “$110” in

its place.

6. Removing the language “$75” from

the second and third sentences of paragraph (c)(2)(ii) and adding “$110” in its

place.

The revision reads as follows:

§301.7430–4 Reasonable administrative

costs.

September 15, 1997

(b) * * *

(3) * * *

(ii) Cost of living adjustment. The Internal Revenue Service will make a cost of

living adjustment to the $110 per hour limitation for fees incurred in any calendar

year beginning after December 31, 1996.

The cost of living adjustment will be an

amount equal to $110 multiplied by the

cost of living adjustment determined under

section 1(f)(3) for the calendar year (substituting “calendar year 1995” for “calendar year 1992” in section 1(f)(3)(B)). If

the dollar limitation as adjusted by this cost

of living increase is not a multiple of $10,

the dollar amount will be rounded to the

nearest multiple of $10 (rounding up if the

amount is a multiple of $5).

Par. 13. Section 301.7430–5 is

amended by:

1. Revising paragraph (a).

2. Adding paragraph (c)(3).

The addition and revision read as follows:

§301.7430–5 Prevailing party.

(a) In general. For purposes of an

award of reasonable administrative costs

under section 7430 in the case of administrative proceedings commenced after July

30, 1996, a taxpayer is a prevailing party

only if—

(1) The position of the Internal Revenue

Service was not substantially justified;

September 15, 1997

(2) The taxpayer substantially prevails

as to the amount in controversy or with

respect to the most significant issue or set

of issues presented; and

(3) The taxpayer satisfies the net worth

and size limitations referenced in paragraph (f) of this section.

(3) Presumption. If the Internal Revenue Service did not follow any applicable published guidance in an administrative proceeding commenced after July 30,

1996, the position of the IRS, on those issues to which the guidance applies and for

all periods during which the guidance was

not followed, will be presumed not to be

substantially justified. This presumption

may be rebutted. For purposes of this

paragraph (c)(3), the term applicable published guidance means final or temporary

regulations, revenue rulings, revenue procedures, information releases, notices, announcements, and, if issued to the taxpayer, private letter rulings, technical

advice memoranda, and determination

letters (see §601.601(d)(2) of this chapter). Also, for purposes of this paragraph

(c)(3), the term administrative proceeding

includes only those administrative proceedings or portions of administrative

proceedings occurring on or after the administrative proceeding date as defined in

§301.7430–3(c).

Par. 14. Section 301.7430–6 is revised

to read as follows:

§301.7430–6 Effective dates.

Sections 301.7430–2 through

301.7430– 6, other than §§301.7430–

2(b)(2), (c)(3)(i)(B), (c)(3)(ii)(C), and

(c)(5); §§301.7430–4(b)(3)(i), (b)(3)(ii),

(b)(3)(iii)(B), (b)(3)(iii)(C), (b)(3)(iii)(D),

and (c)(2)(ii); and §§301.7430–5(a) and

(c)(3), apply to claims for reasonable administrative costs filed with the Internal

Revenue Service after December 23,

1992, with respect to costs incurred in administrative proceedings commenced

after November 10, 1988. Section

301.7430–2(c)(5) is applicable March 23,

1993. Section 301.7430–2(b)(2),

(c)(3)(i)(B), and (c)(3)(ii)(C); 301.7430–

4(b)(3)(i), (b)(3)(ii), (b)(3)(iii)(B),

(b)(3)(iii)(C), (b)(3)(iii)(D), and (c)(2)(ii);

and 301.7430–5(a) and (c)(3) are applicable for administrative proceedings commenced after July 30, 1996.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved June 27, 1997.

Donald C. Lubick,

Acting Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on July

21, 1997, 8:45 a.m., and published in the issue of the

Federal Register for July 22, 1997, 62 F.R. 39115)

1997–37 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous

Designated Private Delivery

Services

Notice 97–50

This notice provides that the list of private delivery services (“PDSs”) designated under Notice 97–26, 1997–17

I.R.B. 6, (“designated PDSs”) for purposes of the “timely mailing as timely filing/paying” rule of § 7502 of the Internal

Revenue Code will remain in effect until

further notice. This notice also modifies

Rev. Proc. 97–19, 1997–10 I.R.B. 55, and

Notice 97–26 by changing the periods

during which PDSs can apply for designation and the dates that the Service will announce the new list of designated PDSs.

Section 7502(f) authorizes the Secretary to designate certain PDSs for the

“timely mailing as timely filing/paying”

rule of § 7502. Rev. Proc. 97–19 provides

the criteria currently applicable for designation of a PDS. Rev. Proc. 97–19 (section 7.01(2)) provides for semiannual application periods ending on June 30th and

December 31st. Rev. Proc. 97–19 (section 8.02) and Notice 97–26 provide that

the Service will issue a revised list of designated PDSs on or before September 1st

1997–37 I.R.B.

and March 1st of each year for which

Rev. Proc. 97–19 is in effect.

Notice 97–26 designates the following

PDSs with respect to the following specific services they provide:

1. Airborne Express (Airborne):

Overnight Air Express Service, Next Afternoon Service, and Second Day Service

2. DHL Worldwide Express (DHL):

DHL “Same Day” Service and DHL USA

Overnight

3. Federal Express (FedEx): FedEx

Priority Overnight, FedEx Standard

Overnight, and FedEx 2Day

4. United Parcel Service (UPS): UPS

Next Day Air, UPS Next Day Air Saver,

UPS 2nd Day Air, and UPS 2nd Day Air

A.M.

Airborne, DHL, FedEx, and UPS are

not designated with respect to any type of

delivery service not identified above. Notice 97-26 also provides special rules used

to determine the date that will be treated as

the postmark date for purposes of § 7502.

The Service received no applications

for designation during the most recent application period, which ended June 30,

1997. Accordingly, until further notice,

the list of designated PDSs in Notice 97–

26 will remain in effect.

Section 7.01(2) of Rev. Proc. 97–19 is

modified to provide that each year there

will be only one application period, which

will end on June 30th. Also, section 8.02

of Rev. Proc. 97–19 and Notice 97–26 are

modified to provide that the Service will

issue a notice providing a new list of designated PDSs on or before September 1st

of each year for which Rev. Proc. 97–19

is in effect.

EFFECT ON OTHER DOCUMENTS

Notice 97–26 and Rev. Proc. 97–19 are

modified.

EFFECTIVE DATE

This notice is effective on September 1,

1997.

FOR FURTHER INFORMATION

The principal author of this notice is

Robert J. Basso of the Office of Assistant

Chief Counsel (Income Tax and Accounting). For further information regarding

this notice, contact Mr. Basso at (202)

622-4940 (not a toll-free call).

September 15, 1997

Part IV. Items of General Interest

Notice of Proposed Rulemaking

and Notice of Public Hearing

Qualified Nonrecourse

Financing Under Section

465(b)(6)

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Jeffrey A. Erickson, (202) 622-3070; concerning submissions and the hearing,

Michael Slaughter, (202) 622-7190 (not

toll-free numbers).

REG–105160–97

SUPPLEMENTARY INFORMATION:

AGENCY: Internal Revenue Service

(IRS), Treasury.

Introduction

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations under section

465(b)(6) regarding qualified nonrecourse

financing. The proposed regulations address whether the personal liability of an

entity prevents financing from being

treated as qualified nonrecourse financing

and whether qualified nonrecourse financing may be secured by property that

is incidental to the activity of holding real

property. The proposed regulations

would affect partnerships and their partners. This document also gives notice of

a public hearing scheduled for December

10, 1997.

DATES: Written comments and requests

to speak (with outlines of oral comments)

at the public hearing scheduled for December 10, 1997, must be received by

November 19, 1997.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–105160–97),

room 5228, Internal Revenue Service,

POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between

the hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (REG–105160–97),

Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW,

Washington, DC. Alternatively, taxpayers

may submit comments electronically via

the Internet by selecting the “Tax Regs”

option of the IRS Home Page, or by submitting comments directly to the IRS Internet site at: http://www.irs.ustreas.

gov/prod/tax_regs/comments.html. The

public hearing will be held in room 2615,

Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

September 15, 1997

This document contains proposed regulations under section 465(b)(6) of the Internal Revenue Code (Code). Section

465, which applies to individuals and certain corporations, limits a taxpayer’s loss

deduction for an activity to the amount of

the taxpayer’s amount at risk in the activity at the close of the taxable year. A taxpayer’s amount at risk generally includes

the amount of any cash and the adjusted

tax basis of any property contributed by

the taxpayer to the activity plus any

amounts borrowed for use in the activity

to the extent the taxpayer is personally liable for repayment.

For the activity of holding real property, a taxpayer may also include as an

amount at risk the taxpayer’s share of any

“qualified nonrecourse financing” that is

secured by real property used in the activity of holding real property, even though

the taxpayer is not personally liable for

repayment of the financing. Section

465(b)(6) defines qualified nonrecourse

financing as any financing that (i) is borrowed by the taxpayer for the activity of

holding real property; (ii) is borrowed by

the taxpayer from a qualified person or

represents a loan from any federal, state,

or local government or instrumentality

thereof, or is guaranteed by any federal,

state, or local government; (iii) except to

the extent provided in regulations, no person is personally liable for repayment;

and (iv) is not convertible debt.

Explanation of Provisions

I. Secured by Real Property

Section 465(b)(6)(A) provides that qualified nonrecourse financing must be secured by real property used in the activity

of holding real property. The legislative

history of section 465(b)(6) suggests that

qualified nonrecourse financing can be secured only by real property. H.R. Rep. No.

426, 99th Cong., 1st Sess. 293 (1985),

1986–3 (Vol. 2) C.B. 293; S. Rep. No. 313,

99th Cong., 2d Sess. 748 (1986), 1986–3

(Vol. 3) C.B. 748. Section 465(b)(6)(E),

however, provides that the activity of holding real property includes the holding of

personal property that is incidental to making real property available as living accommodations. Section 465(b)(6) does

not specifically provide that such incidental property may be used to secure qualified nonrecourse financing. The proposed

regulations provide that financing can

qualify as qualified nonrecourse financing

if, in addition to the real property used in

the activity of holding real property, the financing is secured by both real property

and other property that is incidental to the

activity of holding real property.

II. Personal Liability

Section 465(b)(6)(B)(iii) provides that,

except to the extent provided in regulations, no person may be personally liable

for repayment of qualified nonrecourse financing. The legislative history of section 465 states that regulations may provide rules under which the guaranty,

indemnity, or personal liability of a person other than the taxpayer does not cause

the financing to be treated as other than

qualified nonrecourse financing. H.R.

Rep. No. 426, 99th Cong., 1st Sess. 294

(1985), 1986–3 (Vol. 2) C.B. 294; S. Rep.

No. 313, 99th Cong., 2d Sess. 749 (1986),

1986–3 (Vol. 3) C.B. 749.

A partnership is treated as a person

under the Code. Thus, any financing for

which a partnership is personally liable is

not qualified nonrecourse financing under

section 465(b)(6)(B)(iii), even if no partner is personally liable for the financing.

This result is inappropriate if the only activity of the partnership is the real property activity; the personal liability of the

partnership in that situation is not meaningful and the financing is the equivalent

of nonrecourse financing. Situations in

which a partnership is liable for repayment, but no partner is personally liable,

may be unusual for general and limited

partnerships; however, such situations

may become increasingly common with

the use of limited liability companies

(LLCs) in which the LLC is personally liable for its debts and the members of the

1997–37 I.R.B.

LLC are not liable. In response, the proposed regulations provide that the personal liability of a partnership (including

an LLC that is treated as a partnership) is

disregarded in determining whether a financing is qualified nonrecourse financing if the entity’s only assets are real

property used in the activity of holding

real property or both real property and

other property that is incidental to the activity of holding real property, and no

other person is liable for the financing.

In addition, section 465(b)(6) does not

specifically provide that financing may

qualify as qualified nonrecourse financing

if a person is personally liable for a portion of the financing. Treating the portion

of the financing for which no person is

personally liable as qualified nonrecourse

financing would not be inconsistent with

the underlying policy of section 465.

Therefore, the proposed regulations provide that the portion for which no person

is personally liable can qualify as qualified nonrecourse financing.

Proposed Effective Date

These regulations are proposed to be

effective for financing incurred on or after

the date final regulations are published in

the Federal Register.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a significant regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) does not apply to these regulations, and because these regulations do

not impose on small entities a collection

of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6)

does not apply. Therefore, a Regulatory

Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal

Revenue Code, this notice of proposed

rulemaking will be submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment on its

impact on small business.

ments (preferably a signed original and

eight (8) copies) that are submitted timely

to the IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled

for December 10, 1997, at 10 a.m., in

room 2615, Internal Revenue Building,

1111 Constitution Avenue NW., Washington, DC. Because of access restrictions,

visitors will not be admitted beyond the

Internal Revenue Building lobby more

than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons that wish to present oral comments at the hearing must submit timely

written comments (preferably a signed

original and eight (8) copies) and an outline of the topics to be discussed and the

time to be devoted to each topic by November 19, 1997.

A period of 10 minutes will be allotted

to each person for making comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information

The principal author of these regulations is Jeffrey A. Erickson, Office of

Chief Counsel (Passthroughs and Special

Industries). However, other personnel

from the IRS and Treasury Department

participated in their development.

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding an entry in

numerical order to read as follows:

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

§1.465–27(b)(3) also issued under 26

U.S.C. 465(b)(6)(B)(iii). * * *

Par. 2. Section 1.465–27 is added to

read as follows:

Comments and Public Hearing

§1.465–27 Qualified nonrecourse

financing

Before these proposed regulations are

adopted as final regulations, consideration will be given to any written com-

(a) In general. Notwithstanding any

provision of section 465(b) or the regulations under section 465, in the case of an

1997–37 I.R.B.

activity of holding real property, a taxpayer is considered at risk with respect to

the taxpayer’s share of any qualified nonrecourse financing that is secured by real

property used in such activity.

(b) Qualified nonrecourse financing—

(1) In general. For section 465(b)(6) and

this section, the term qualified nonrecourse financing means any financing—

(i) Which is borrowed by the taxpayer

with respect to the activity of holding real

property;

(ii) Which is borrowed by the taxpayer

from a qualified person or represents a

loan from any federal, state, or local government or instrumentality thereof, or is

guaranteed by any federal, state, or local

government;

(iii) Except as otherwise provided in

paragraph (b)(3)(ii) of this section, for

which no person is personally liable for

repayment; and

(iv) Which is not convertible debt.

(2) Secured by incidental property. A

taxpayer will be considered at risk with respect to the taxpayer’s share of any qualified nonrecourse financing secured by real

property used in the activity of holding

real property, where such financing is also

secured by property that is incidental to

the activity of holding such real property.

(3) Personal liability—(i) Partial liability. If a person is personally liable for

repayment of a portion of a financing, the

portion of the financing for which no person is personally liable can qualify as

qualified nonrecourse financing.

(ii) Partnership liability. The personal

liability of an entity classified as a partnership for repayment of a financing shall

be disregarded in determining whether the

financing is qualified nonrecourse financing, if the only assets of the partnership

are either real property used in the activity

of holding real property or both such real

property and other property that is incidental to the activity of holding such real

property, and no other person is liable for

repayment of the financing.

(4) Examples. The following examples

illustrate the rules of paragraph (b) of this

section:

Example 1. Personal liability of partnership; Incidental property. X is a limited liability company

that is classified as a partnership for federal tax purposes. X is engaged only in the activity of holding

real property. In addition to real property used in the

activity of holding real property, X owns office

equipment, a truck, and maintenance equipment that

it uses to support the activity of holding real prop-

September 15, 1997

erty. X borrows $500 to use in the activity. X is personally liable on the financing, but no member of X

and no other person is liable for repayment of the financing. Under paragraph (b)(3)(ii) of this section,

the personal liability of X for repayment of the financing is disregarded when determining whether the

financing is qualified nonrecourse financing. Under

paragraph (b)(2) of this section, the personal property

is treated as incidental personal property used in the

activity of holding real property. Therefore, assuming

the financing satisfies the other requirements for qualified nonrecourse financing, the financing will be

treated as qualified nonrecourse financing.

Example 2. Bifurcation of financing. The facts

are the same as in Example 1, except that A, a member of X, is personally liable for repayment of $100

of the financing. Under paragraph (b)(3)(i) of this

section, the portion of the financing for which A is

not personally liable for repayment ($400) can qualify as qualified nonrecourse financing.

date the final regulations are published in

the Federal Register.

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on August 12, 1997, 8:45 a.m., and published in the issue

of the Federal Register for August 13, 1997, 62 F.R.

43295)

Notice of Proposed Rulemaking

Remedial Amendment Period

REG–106043–97

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.

SUMMARY: T.D. 8727, 1997–34 I.R.B.

5, the IRS is issuing temporary regulations relating to the remedial amendment

period during which a sponsor of a qualified retirement plan or an employer that

maintains a qualified retirement plan can

make retroactive amendments to the plan

to eliminate certain qualification defects

for the entire period. The text of those

temporary regulations also serves as the

text of these proposed regulations. These

proposed regulations will affect sponsors

of qualified retirement plans, and employers that maintain qualified retirement

plans.

DATES: Written comments and requests

for a public hearing must be received by

September 15, 1997

October 30, 1997.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG-106043-97),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be

between the hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (REG–106043–97),

Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW,

Washington, DC. Alternatively, taxpayers

may submit comments electronically via

the internet by selecting the “Tax Regs”

option on the IRS Home Page, or by submitting comments directly to the IRS internet site at http://www.irs.ustreas.gov/

prod/tax_regs/comments.html.

impact on small business.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Linda S. F. Marshall, (202) 6226030;

concerning

submissions,

Evangelista Lee, (202) 622-7190 (not

toll-free numbers).

Drafting Information

SUPPLEMENTARY INFORMATION:

Background

Final and temporary regulations in T.D.

8727 amend the Income Tax Regulations

(26 CFR part 1) relating to section 401(b).

The regulations provide guidance to clarify

the scope of the Commissioner’s authority

to provide relief from plan disqualification

under section 401(b) and the regulations.

The text of T.D. 8727 the temporary

regulations also serves as the text of these

proposed regulations. The preamble to

the final and temporary regulations explains the temporary regulations.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a significant regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) does not apply to these regulations and, because the regulation does not

impose a collection of information on

small entities, the Regulatory Flexibility

Act (5 U.S.C. chapter 6) does not apply.

Pursuant to section 7805(f) of the Internal

Revenue Code, this notice of proposed

rulemaking will be submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment on its

Comments and Requests for a Public

Hearing

Before these proposed regulations are

adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8)

copies) that are submitted timely to the

IRS. All comments will be available for

public inspection and copying. A public

hearing may be scheduled if requested in

writing by any person that timely submits

written comments. If a public hearing is

scheduled, notice of the date, time, and

place for the hearing will be published in

the Federal Register.

The principal author of these regulations is Linda S. F. Marshall, Office of the

Associate Chief Counsel (Employee Benefits and Exempt Organizations). However, other personnel from the IRS and

Treasury Department participated in their

development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be 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 * * *

Par. 2. Section 1.401(b)-1 is amended

by:

1. Revising paragraphs (b)(3), (c) and

(d)(1)(iv).

2. Adding paragraph (d)(1)(v).

The addition and revisions read as follows:

§1.401(b)-1 Certain retroactive changes

in plan.

[The text of proposed paragraphs

(b)(3), (c), (d)(1)(iv) and (v) is the same

as the text of §1.401(b)–1T(b)(3), (c),

(d)(1)(iv) and (v) published in T.D. 8727.]

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on July

31, 1997, 8:45 a.m., and published in the issue of the

Federal Register for August 1, 1997, 62 F.R. 41322)

1997–37 I.R.B.

Changes to Excise Taxes

Announcement 97–91

Purpose

To announce additional excise tax changes made by the Taxpayer Relief Act of 1997 (P.L. 105–34).

These changes affect taxes on:

• Fuels

• Communications

• Air transportation

• Heavy highway vehicles

• Luxury automobiles

• Arrow components

Note: Announcement 97–78, 1997–34 I.R.B. 11, released on August 14, 1997, covered certain changes

made by the Act that took effect during August of 1997. Those changes affect the tax on the use of international air travel facilities, the date for deposits of air transportation taxes, and the tax on vaccines.

Fuel tax rates

The changes listed below apply after September 30, 1997.

• The table below shows the new rates for fuels (other than those included under IRS No. 79) due to the

reinstatement of the Leaking Underground Storage Tank Trust Fund tax (generally $.001 per gallon).

• The rate on liquefied petroleum gas has decreased; this fuel will be identified separately as IRS No.

61.

• Other special fuels and alcohol fuels (other than gasohol) will be identified under IRS No. 79. (See the

Instructions for Form 720 for this list.)

IRS No.

Type of fuel

Tax rate per gallon

Gasoline

Gasohol containing at least 10% alcohol

Gasohol containing at least 7.7% alcohol

Gasohol containing at least 5.7% alcohol

Gasoline removed or entered for gasohol production, at least 10% alcohol

Gasoline removed or entered for gasohol production, at least 7.7% alcohol

Gasoline removed or entered for gasohol production, at least 5.7% alcohol

Diesel fuel

Dyed diesel fuel used in trains

Dyed diesel fuel used in certain buses

Liquefied petroleum gas ( LPG)

Aviation gasoline

Aviation fuel (other than gasoline)

Aviation fuel (commercial)

Inland waterways fuel use

$.184

$.130

$.14242

$.15322

$.14444

$.1543

$.16248

$.244

$.0565

$.074

$.136

$.194

$.219

$.044

$.244

Communications tax

In the case of communications services acquired by means of a prepaid telephone card, the 3% excise tax

is imposed on the face amount of the card when the card is transferred by a telecommunications carrier to

any person who is not a carrier. The provision will be effective after October 31, 1997.

Transportation of

persons by air

For amounts paid after September 30, 1997, for transportation beginning after September 30, 1997, the

following changes apply:

• The tax is 9% (7.5% for segments to or from rural airports), plus $1.00 for each domestic segment (excluding segments to or from rural airports).

• Amounts paid to an air carrier for the right to provide mileage awards or other reductions in the cost of

any transportation of persons are treated as amounts paid for taxable transportation.

Retail tax on heavy

highway vehicles

1997–37 I.R.B.

The following changes apply after December 31, 1997, except as noted:

• The repair or modification of a vehicle will not be treated as manufacture for excise tax purposes unless

September 15, 1997

the repair or modification costs exceed 75% of the retail price of a comparable new vehicle. This rule

does not apply if the vehicle as repaired or modified would, if new, be taxable, and the vehicle when

new was not taxable.

• The registration requirement applicable to certain sales of trucks, tractors, and trailers will be replaced

with a certification requirement.

• Parts or accessories added to a heavy truck within six months of the initial purchase will be taxable

only if the aggregate price of the additions is more than $1,000. (This change is effective for vehicles

sold after August 5, 1997.)

• A credit against the retail tax on heavy highway vehicles will be allowed for excise tax imposed on

tires sold on or in connection with the vehicle. This replaces the exclusion from the amount subject to

the heavy vehicle tax allowed for tire value.

Luxury tax

Effective after August 5, 1997, the luxury tax threshold is raised for electric and clean-fuel motor vehicles.

• The electric vehicle threshold is 150 percent of the luxury tax threshold.

• The clean-fuel motor vehicle threshold is the luxury tax threshold plus an amount equal to the increase

in the price of the vehicle attributable to the retrofit parts and components installed that permit the vehicle to be clean burning.

Also effective for vehicles sold after August 5, 1997, parts or accessories added to a luxury automobile within

six months of the initial purchase are only taxable if the aggregate price of the additions is more than $1,000.

Arrow components

Effective after September 30, 1997, a 12.4% tax will be imposed on the price for which the manufacturer

sells any point, nock, vane, or shaft of the type used in the manufacture of any arrow. This replaces the

tax on arrows. The tax will be reported under new IRS No. 102.

Foundations Status of Certain

Organizations

Announcement 97–92

The following organizations have

failed to establish or have been unable to

maintain their status as public charities or

as operating foundations. Accordingly,

grantors and contributors may not, after

this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices

under section 508(b) of the Code. This

listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following

organizations (which have been treated as

organizations that are not private foundations described in section 509(a) of the

Code) are now classified as private foundations:

Across the Bridge Eastside Children’s

Museum, Bellevue, WA

African Christian Fellowship of

California Inc., Fullerton, CA

Ark Ministries, Inc., Lewisville, TX

Burlington-Edison School District

Foundation, Burlington, WA

September 15, 1997

Celestial Flight Nonprofit Housing

Corporation, Detroit, MI

Cerebral Palsy SOS, Inc., New York, NY

Challenges, Inc., Atlanta, GA

Chippechaug Christian Camp Inc.,

Meriden, CT

Church of Gospel Ministry, Lenoxdale,

Classic Foundation, Inc., Fitchburg, MA

Families A La Carte, Vallejo, CA

The Family School, Bronx, NY

Florida Home Incorporated, Richmond,

Foundation for Genetics Research,

Houston, TX

The Foundation for Living, Tacoma, WA

Foundation for the Special Commission

on the Administration of Justice in

Illinois, Chicago, IL

Friends of Evergreen, Portland, ME

Haverhill Junior Football League,

Haverhill, MA

Home Care for Christian Scientists, Inc.,

Boston, MA

Illinois Town Hall Meetings, Rolling

Meadows, IL

Imperial Valley Affordable Housing,

Brawley, CA

Interculture, Inc., New York, NY

International Friends of Migdal Ohr

Institutions, New York, NY

In the Best Interests of the Children, Inc.,

Boston, MA

James Phillip Family Foundation of

Cleveland, Willoughby Hills, OH

Japanese-American International Art

Corporation, New York, NY

Japanese Community Association, Inc.,

Scarsdale, NY

Jeff’s Companion Animal Shelter, Inc.,

Westport, MA

La Casa Housing Corporation, Inc.,

Waterbury, CT

Learning Ladder Day Care, Inc.,

Cortland, NY

Lincoln and Friends, Fairfax, CA

Maryland Volunteer Water Quality

Monitoring Association Inc., Crofton,

Maxie Wright’s Boys Center, San

Bernardino, CA

MGS Charity, Inc., Huntington, NY

The Nashville Foundation for Women

Business Owners Inc., Nashville, TN

National Association of Minorities in

Cable Foundation, Cerritos, CA

National Council for the Handicapped,

Inc., Brooklyn, NY

The National Museum of Artificial Limb

Technology, San Francisco, CA

Nevada Historical Automobile Society

Inc., Elcajon, CA

New Beginnings Outreach Ministries,

Inc., Bronx, NY

New Hampshire Association for the

1997–37 I.R.B.

Education of Young Children, Weare,

New Hampshire Soccer Association,

Nashua, NH

New Village Productions, Inc., New

York, NY

New World Dancers and Singers, Inc.,

New York, NY

New York City Society for Parenteral and

Enteral Nutrition, Riverdale, NY

North Okaloosa Arc Inc., Crestview, FL

Onake II, Rooseveltown, NY

Out of the Blue Theater Company,

Somerville, MA

Pacific Basin Research Institute,

Rockville, MD

Paradise Pet Shelter, Inc., Millis, MA

Patricia Marschner Memorial for the

Children of Londonderry,

Londonderry, NH

Peaceful Settlements Foundation, Boise,

Peninsula Sexual Minority Youth League,

Newport News, VA

Picnic-in-the-Park, Incorporated,

Concord, MA

Pima Optimum Learning Center,

Scottsdale, AZ

Pipco Corporation, Rochester, NY

Pittsburgh Allergy Society, Latrobe, PA

Plainfield First Response, Plainfield, VT

Playground in the Park, Inc., Cheshire,

1997–37 I.R.B.

Point O Woods Historical Society,

Summit, NJ

Preserve Earths Threatened Ecosystems

Foundation, Berkeley, CA

PTA New York State Congress, Inc.,

Brentwood, NY

Public Productions, Inc., Waltham, MA

Rainforest Rescue, Inc., West Action,

Rakka Thamm Theater Company, Inc.,

New York, NY

RCLC Foundation, Inc., Riverside, CT

Reach Out Ethiopia, Inc., Cambridge,

Renaissance Intl, Inc., New York, NY

Rochester Charity Partners, Inc.,

Rochester, NY

San Diego Museum of Modern Sculpture,

San Diego, CA

Senior Citizen Association of Taiwanese

Christians of Greater New York, Inc.,

Flushing, NY

Shelter Homeless America, Inc.,

Lawrence, MA

Sluggers Forever Inc., New Ulm, MN

Southeast Texas Legal Clinic, Houston,

St. Boniface Development Corporation,

Brooklyn, NY

Survivors United Network, Inc.,

Bridgehampton, NY

Transglobal Communications

Foundation, New York, NY

Traumatic Brain Injury Resource

Network, Inc., Framingham, MA

Trenton Education Dance Institute, Inc.,

W. Trenton, NJ

Trillium Performing Arts Center, Inc.,

Watertown, NY

Tzu Charn Foundation, Sunnyvale, CA

Walden-Bell Foundation, Portland, OR

Waterville Performing Arts Centre, Inc.,

Waterville, ME

West Greenwich Community Rescue

Company, West Greenwich, RI

Wilson County Education Foundation,

Inc., Floresville, TX

Worcester Institute for Students of

Europe, Worcester, MA

You Make Our Future, Inc., Danbury, CT

If an organization listed above submits

information that warrants the renewal of its

classification as a public charity or as a private operating foundation, the Internal

Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors and

contributors may thereafter rely upon such

ruling or determination letter as provided

in section 1.509(a)–7 of the Income Tax

Regulations. It is not the practice of the

Service to announce such revised classification of foundation status in the Internal

Revenue Bulletin.

September 15, 1997

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

effect:

Amplified describes a situation where

no change is being made in a prior published position, but the prior position is

being extended to apply to a variation of

the fact situation set forth therein. Thus,

if an earlier ruling held that a principle

applied to A, and the new ruling holds

that the same principle also applies to B,

the earlier ruling is amplified. (Compare

with modified, below).

Clarified is used in those instances

where the language in a prior ruling is

being 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.

Distinguished describes a situation

where a ruling mentions a previously

published ruling and points out an essential difference between them.

Modified is 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 ap-

plies to both A and B, the prior ruling is

modified because it corrects a published

position. (Compare with amplified and

clarified, above).

Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used

in a ruling that lists previously published

rulings that are obsoleted because of

changes in law or regulations. A ruling

may also be obsoleted because the substance has been included in regulations

subsequently adopted.

Revoked describes situations where the

position in the previously published ruling is not correct and the correct position

is being stated in the new ruling.

Superseded describes a situation where

the new ruling does nothing more than

restate the substance and situation of a

previously published ruling (or rulings).

Thus, the term is used to republish under

the 1986 Code and regulations the same

position published under the 1939 Code

and regulations. The term is also used

when it is desired to republish in a single

ruling a series of situations, names, etc.,

that were previously published over a period of time in separate rulings. If the

new ruling does more than restate the

substance of a prior ruling, a combination

of terms is used. For example, modified

and superseded describes 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 published ruling is first

modified and then, as modified, is superseded.

Supplemented is 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 ruling has been supplemented

several times, a new ruling may be published that includes the list in the original

ruling and the additions, and supersedes

all prior rulings in the series.

Suspended is used in rare situations to

show that the previous published rulings

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

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedral Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

The following abbreviations in current use and formerly used will appear in material published in the

Bulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

September 15, 1997

1997–37 I.R.B.

Numerical Finding List1

Bulletins 1997–27 through 1997–36

Announcements:

97–61, 1997–29 I.R.B. 13

97–67, 1997–27 I.R.B. 37

97–68, 1997–28 I.R.B. 13

97–69, 1997–28 I.R.B. 13

97–70, 1997–29 I.R.B. 14

97–71, 1997–29 I.R.B. 15

97–72, 1997–29 I.R.B. 15

97–73, 1997–30 I.R.B. 86

97–74, 1997–31 I.R.B. 16

97–75, 1997–32 I.R.B. 28

97–76, 1997–32 I.R.B. 28

97–77, 1997–33 I.R.B. 58

97–78, 1997–34 I.R.B. 11

97–79, 1997–35 I.R.B. 8

97–80, 1997–34 I.R.B. 12

97–81, 1997–34 I.R.B. 12

97–82, 1997–34 I.R.B. 12

97–83, 1997–34 I.R.B. 13

97–84, 1997–34 I.R.B. 13

97–85, 1997–35 I.R.B. 8

97–86, 1997–35 I.R.B. 9

97–87, 1997–35 I.R.B. 9

97–88, 1997–35 I.R.B. 9

97–89, 1997–36 I.R.B. 10

97–90, 1997–36 I.R.B. 10

97–93, 1997–36 I.R.B. 11

97–94, 1997–36 I.R.B. 12

97–95, 1997–36 I.R.B. 12

Revenue Procedures-Continued

97–34, 1997–30 I.R.B. 14

97–35, 1997–33 I.R.B. 11

97–36, 1997–33 I.R.B. 14

97–37, 1997–33 I.R.B. 18

97–38, 1997–33 I.R.B. 43

97–39, 1997–33 I.R.B. 48

97–40, 1997–33 I.R.B. 50

97–41, 1997–33 I.R.B. 5

97–42, 1997–33 I.R.B. 57

Revenue Rulings:

97–27, 1997–27 I.R.B. 4

97–28, 1997–28 I.R.B. 4

97–29, 1997–28 I.R.B. 4

97–30, 1997–31 I.R.B. 12

97–31, 1997–32 I.R.B. 4

97–32, 1997–33 I.R.B. 4

97–33, 1997–34 I.R.B. 4

97–34, 1997–34 I.R.B. 14

97–35, 1997–35 I.R.B. 4

97–36, 1997–36 I.R.B. 5

Treasury Decisions:

8722, 1997–29 I.R.B. 4

8723, 1997–30 I.R.B. 4

8724, 1997–36 I.R.B. 4

8726, 1997–34 I.R.B. 7

8727, 1997–34 I.R.B. 5

...

Court Decisions:

2061, 1997–31 I.R.B. 5

2062, 1997–32 I.R.B. 8

Delegation Orders:

172 (Rev. 5), 1997–28 I.R.B. 6

Notices:

97–37, 1997–27 I.R.B. 4

97–38, 1997–27 I.R.B. 8

97–39, 1997–27 I.R.B. 8

97–40, 1997–28 I.R.B. 6

97–41, 1997–28 I.R.B. 6

97–42, 1997–29 I.R.B. 12

97–43, 1997–30 I.R.B. 9

97–44, 1997–31 I.R.B. 15

97–45, 1997–33 I.R.B. 7

97–46, 1997–34 I.R.B. 10

97–47, 1997–35 I.R.B. 5

97–48, 1997–35 I.R.B. 5

97–49, 1997–36 I.R.B. 8

Railroad Retirement Quarterly Rate:

1997–28 I.R.B. 5

Proposed Regulations:

REG–104893–97, 1997–29 I.R.B. 13

REG–107644–97, 1997–32 I.R.B. 24

Revenue Procedures:

97–32, 1997–27 I.R.B. 9

97–32A, 1997–34 I.R.B. 10

97–33, 1997–30 I.R.B. 10

A cumulative list of all revenue rulings, revenue

procedures, Treasury decisions, etc., published in

Internal Revenue Bulletins 1997–1 through 1997–26

will be found in Internal Revenue Bulletin 1997–27,

dated July 7, 1997.

1997–37 I.R.B.

September 15, 1997

Finding List of Current Action on

Previously Published Items

Bulletins 1997–27 through 1997–36

*Denotes entry since last publication

Revenue Procedures:

96–36

Superseded by

97–34, 1997–30 I.R.B. 14

96–42

Superseded by

97–27, 1997–27 I.R.B. 9

97–32

Modified and amplified by

97–32A, 1997–34 I.R.B. 10

Revenue Rulings:

89–42

Supplemented by

97–31, 1997–32 I.R.B. 4

A cumulative finding list for previously published

items mentioned in Internal Revenue Bulletins

1997–1 through 1997–26 will be found in Internal

Revenue Bulletin 1997–27, dated July 7, 1997.

September 15, 1997

1997–37 I.R.B.

INTERNAL REVENUE BULLETIN

The Introduction on page 3 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 Superintendent of

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detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Please

allow two to six weeks, plus mailing time, for delivery.

WE WELCOME COMMENTS ABOUT THE

INTERNAL REVENUE BULLETIN

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we

would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page

(www.irs.ustreas.gov) or write to the IRS Bulletin Unit, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW, Washington, DC

20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.

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U.S. Government Printing Office

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First Class Mail

Postage and Fees Paid

GPO

Permit No. G–26

INTERNAL REVENUE BULLETIN

The Introduction on page 3 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 Superintendent 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

and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the

Superintendent of Documents.

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, U.S. Government Printing Office, Washington, DC 20402. Please

allow two to six weeks, plus mailing time, for delivery.

WE WELCOME COMMENTS ABOUT THE

INTERNAL REVENUE BULLETIN

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we

would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page

(www.irs.ustreas.gov) or write to the IRS Bulletin Unit, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW, Washington, DC

20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.

Internal Revenue Service

Washington, DC 20224

Official Business

Penalty for Private Use, $300

First Class Mail

Postage and Fees Paid

IRS

Permit No. G–48

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.