Bulletin No. 1997–38

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Internal Revenue

bulletin

Bulletin No. 1997–38

September 22, 1997

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. 97–38, page 14.

Calculation of a partner’s limited deficit restoration

obligation. This ruling holds that the amount of a partner’s

limited deficit restoration obligation is the amount of money

that the partner would be required to contribute to the partnership to satisfy partnership liabilities if all partnership property were sold for the amount of the partnership’s book

basis in the property.

T.D. 8729, page 4.

REG–208151–91, page 21.

Final, temporary, and proposed regulations relate to the

application of section 263A of the Code to property produced in a farming business. A public hearing on the proposed regulations will be held on November 19, 1997.

T.D. 8730, page 16.

Final regulations under section 1245 of the Code relate to

the allocation of depreciation recapture among partners in a

partnership.

EMPLOYEE PLANS

Notice 97–51, page 20.

Weighted average interest rate update. Guidelines are

Finding Lists begin on page 25.

Department of the Treasury

Internal Revenue Service

set forth for determining for September 1997, the weighted

average interest rate and the resulting permissible range of

interest rates used to calculate current liability for purposes

of the full funding limitation of section 412(c)(7) of the Code

as amended by the Omnibus Budget Reconciliation Act of

1987 and by the Uruguay Round Agreements Act (GATT).

EXEMPT ORGANIZATIONS

Announcement 97–97, page 22.

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

ADMINISTRATIVE

Notice 97–52, page 20.

Qualified state tuition programs (QSTPs). This notice

extends the relief for reporting requirements that apply to

QSTPs.

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–4T: Rules for property produced in

a farming business (temporary).

T.D. 8729

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Rules for Property Produced in

a Farming Business

AGENCY: Internal Revenue Service

(IRS), Treasury

ACTION: Final and temporary regulations.

SUMMARY: This document contains

final and temporary regulations relating to

the application of section 263A of the Internal Revenue Code to property produced in a farming business. These regulations affect certain taxpayers engaged in

the trade or business of farming. These

regulations are necessary to provide guidance with respect to section 263A(d).

The text of the temporary regulations

also serves as the text of REG–208151–

91 on page 21 of this Bulletin.

DATES: These regulations are effective

August 22, 1997. For dates of applicability, see §1.263A–4T(f) of these regulations.

FOR FURTHER INFORMATION CONTACT: Jan Skelton, (202) 622-4970 (not

a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

Prior to the enactment of section 263A,

the rules that governed the deduction or

capitalization of costs incurred with respect to property produced in the trade or

business of farming were set forth in several different statutory and regulatory provisions. Costs regarded as preparatory

expenditures were required to be capitalized under section 263. Preparatory expenditures are expenditures incurred prior

September 22, 1997

to raising agricultural or horticultural

commodities or that otherwise enable a

farmer to begin the farming process. See,

e.g., Rev. Rul. 83–28, 1983–1 C.B. 47.

Preparatory expenditures include the

costs of clearing land, leveling and grading land, drilling and equipping wells, acquiring irrigation systems, acquiring

seeds or seedlings, budding trees, and acquiring animals.

Costs regarded as developmental expenditures (sometimes referred to as cultural practices expenditures) were generally permitted to be deducted, or, at a

taxpayer’s election, could be capitalized.

See, e.g., Wilbur v. Commissioner, 43 T.C.

322 (1964), acq., 1965–2 C.B. 7. Developmental expenditures are those expenditures incurred by a taxpayer so that the

growing process may continue in the desired manner. Developmental expenditures are expenditures that, if incurred

while the plant or animal was in a productive state, would be deductible. See,

Maple v. Commissioner, 27 T.C.M. 944

(1968), aff ’d, 440 F.2d 1055 (9th Cir.

1971). Developmental expenditures include the costs of irrigating, fertilizing,

spraying, cultivating, pruning, feeding,

providing veterinary services, rent on

land, and depreciation allowances on irrigation systems or structures.

Former sections 278 and 447 provided

special rules requiring the capitalization

of certain developmental expenditures.

Former section 278(a) provided special

rules for citrus and almond groves. Under

former section 278(a), all otherwise deductible costs of developing citrus or almond groves incurred before the end of

the fourth taxable year after permanent

planting were required to be capitalized.

Rev. Rul. 83–128, 1983–2 C.B. 57, clarified that the costs incurred prior to permanent planting were also required to be

capitalized.

Former sections 278(b) and 447(b) provided special rules for farming syndicates, corporations, and partnerships with

a corporate partner. Section 447 requires

certain corporations and partnerships with

a corporate partner to use an accrual

method of accounting (accrual method).

Former section 447(b) required these taxpayers to capitalize preproductive period

expenses. Preproductive period expenses

were defined as any expenses attributable

to crops, animals, trees, or other property

having a crop or yield and that are incurred during the preproductive period of

such property. Soil and water conservation expenditures, as defined in section

175, and land-clearing expenditures as

defined in former section 182, are preproductive period expenses if they are incurred in a preproductive period of an

agricultural or horticultural activity and if

the taxpayer elects to deduct these expenses rather than capitalize them. House

Comm. on Ways and Means, Tax Reform

Act of 1975, H.R. Rep. No. 94–658, 94th

Cong., 1st Sess. 93 (1975).

In the case of a farming syndicate engaged in planting, cultivating, maintaining, or developing an orchard, vineyard,

or grove, former section 278(b) required

the capitalization of all otherwise deductible expenditures incurred with respect to the orchard, vineyard, or grove, if

incurred prior to the first taxable year in

which there was a crop or yield in commercial quantities.

Former section 278(c) provided a relief

provision. Under this provision, sections

278(a) or (b) would not require the capitalization of developmental expenditures

attributable to an orchard, vineyard, or

grove that was replanted after having

been lost or damaged by reason of freezing temperatures, disease, drought, pests,

or casualty.

Section 263A, enacted in the Tax Reform Act of 1986, Pub. L. 99–514, 100

Stat. 2085, 1986–3 C.B. Vol. 1 (the 1986

Act), provides uniform capitalization

rules that govern the treatment of costs incurred in the production of property or the

acquisition of property for resale. Section

263A was enacted, in part, to prevent the

inappropriate mismatching of income and

expense that results from the current deduction of the costs of producing property. Section 263A generally incorporates

and expands upon the rules set forth in

several code and regulatory sections, including section 263, and former sections

278 and 447.

Section 263A(b) generally provides

that the uniform capitalization rules apply

to the taxpayer’s production of real or tangible personal property. Section 1.263A–

2(a)(1)(i) clarifies that for purposes of

1997–38 I.R.B.

section 263A, produce includes the following: construct, build, install, manufacture, develop, improve, create, raise, or

grow. Sections 263A(d) and (e) provide

special rules for property produced in a

farming business.

Section 263A, as enacted in 1986, generally required taxpayers to capitalize the

costs of producing plants and animals.

Taxpayers not required by section 447 or

448(a)(3) to use an accrual method were

excepted from capitalizing the preproductive period costs of plants and animals

(except animals held for slaughter) that

had a preproductive period of 2 years or

less. Section 263A was amended as part

of the Omnibus Budget Reconciliation

Act of 1987, Pub. L. 100–203, 101 Stat.

1330, 1987–3 C.B. Vol. 1 (the 1987 Act),

the Technical and Miscellaneous Revenue

Act of 1988, Pub. L. 100–647, 102 Stat.

3342, 1988–3 C.B. Vol. 1 (the 1988 Act),

and the Omnibus Budget Reconciliation

Act of 1989, Pub. L. 101–239, 103 Stat.

2106 (the 1989 Act). Under the 1988 Act,

the scope of the exception for these taxpayers is expanded to include all animals

irrespective of the length of the preproductive period.

In addition, taxpayers not required by

section 447 or 448(a)(3) to use an accrual

method may elect not to capitalize the

costs of plants (other than certain costs of

producing citrus and almond trees) with a

preproductive period in excess of 2 years.

If a taxpayer makes this election, the taxpayer must treat such plants as section

1245 property and upon disposition of

these plants any amount allowable as a

deduction that would, but for the election,

have been capitalized must be recaptured

and treated as a deduction allowed for depreciation with respect to such property.

See section 263A(e)(1). Also, if the taxpayer makes the election, the taxpayer

and related persons must apply the alternative depreciation system provided in

section 168(g)(2) to all property used by

the taxpayer or related person predominantly in a farming business and placed in

service in any taxable year in which the

election out of section 263A is in effect.

See section 263A(e)(2).

On March 30, 1987, the IRS published

in the Federal Register a notice of proposed rulemaking (52 FR 10118) by cross

reference to temporary regulations published the same day (T.D. 8131, 52 FR

1997–38 I.R.B.

10052). Amendments to the notice of

proposed rulemaking and temporary regulations were published in the Federal

proposed rulemaking (52 FR 29391) that

cross referenced to temporary regulations

published the same day (T.D. 8148, 52 FR

29375). Notice 88–24, 1988–1 C.B. 491,

provided that forthcoming regulations

would modify the temporary regulations

and the regulations under §1.471–6. Notice 88–86, 1988–2 C.B. 401, provided

that forthcoming regulations would clarify

the definition of a related person for purposes of the election out of section 263A.

In addition, Notice 88–86 provided that

forthcoming regulations would provide

that certain taxpayers could elect to use

the simplified production method for

property used in the trade or business of

farming. On August 5, 1994, the temporary regulations relating to property produced in a farming business were reissued

and published in the Federal Register

(T.D. 8559, 59 FR 39958). Because substantial changes are being made from the

1994 temporary regulations, the IRS and

Treasury Department have decided to

issue, in part, new proposed and temporary, rather than final, regulations.

Explanation of Provisions

Property Produced In The Trade Or

Business Of Farming

The temporary regulations clarify that

the special rules of section 263A(d) apply

only to property produced in a farming

business. The temporary regulations provide that for purposes of section 263A,

the term farming means the cultivation of

land or the raising or harvesting of any

agricultural or horticultural commodity.

Examples include the trade or business of

operating a nursery or sod farm; the raising or harvesting of trees bearing fruit,

nuts, or other crops; the raising of ornamental trees (other than evergreen trees

that are more than six years old at the time

they are severed from their roots); and the

raising, shearing, feeding, caring for,

training, and management of animals.

The regulations clarify that for this purpose harvesting does not include contract

harvesting of an agricultural or horticultural commodity grown or raised by another taxpayer. Accordingly, while a taxpayer that grows a plant may apply the

special rules of section 263A(d) to the

costs of growing and harvesting the plant,

the special rules of section 263A(d) do

not apply to a taxpayer that merely contract harvests agricultural or horticultural

commodities grown or raised by another

taxpayer. Similarly, the temporary regulations clarify that the special rules of section 263A(d) do not apply to a taxpayer

that merely buys and resells plants or animals grown or raised by another. In evaluating whether a taxpayer is engaged in

the production, or merely the resale, of

plants or animals, it is anticipated that

consideration will be given to factors including: the length of time between the

taxpayer’s acquisition of a plant or animal

and the time the plant or animal is made

available for sale to the taxpayer’s customers, and, in the case of plants, whether

plants acquired by the taxpayer are

planted in the ground or kept in temporary

containers.

The temporary regulations provide that

a farming business does not include the

processing of commodities or products

beyond those activities that are incident to

the growing, raising, or harvesting of such

products.

Preparatory And Developmental Costs

The IRS and Treasury Department believe that, in general, section 263A does

not change the rules regarding capitalization of costs during the preparatory period. Thus, the temporary regulations

clarify that, as under prior law, taxpayers

generally must capitalize preparatory expenditures, including the cost of seeds,

seedlings, and animals; clearing, leveling

and grading land; drilling and equipping

wells; irrigation systems; and budding

trees. However, because section 263A requires the capitalization of certain indirect

costs as well as direct costs, the amount of

preparatory expenditures capitalized may

be greater under section 263A than under

prior law.

Section 263A expands the circumstances under which costs that were once

termed developmental expenditures must

be capitalized. The temporary regulations

clarify that costs that were, in years prior

to the enactment of section 263A, regarded as developmental are included in

the category of preproductive period

costs. Section 263A generally requires

the capitalization of preproductive period

September 22, 1997

costs including the costs of irrigating, fertilizing, spraying, cultivating, pruning,

feeding, providing veterinary services,

rent on land, and depreciation allowances

on irrigation systems or structures. Preproductive period costs also include real

estate taxes, interest, and soil and water

conservation expenditures incurred during the preproductive period of a plant.

Taxpayers that are required by section

447 or 448(a)(3) to use an accrual

method must capitalize all preproductive

period costs of plants (without regard to

the length of the preproductive period)

and animals. Taxpayers that are not required by section 447 or 448(a)(3) to use

an accrual method qualify for an exception to this general rule. Under this exception, taxpayers are not required to

capitalize preproductive period costs incurred with respect to animals, or with

respect to plants that have a preproductive period of 2 years or less. Thus,

under this exception, taxpayers are required to capitalize only those preproductive period costs incurred with respect to

plants that have a preproductive period in

excess of 2 years. The temporary regulations clarify that, for purposes of determining whether a plant has a preproductive period in excess of 2 years, in the

case of a plant grown in commercial

quantities in the United States, the nationwide weighted average preproductive

period of such plant is used.

The IRS and Treasury Department are

considering the publication of guidance

with respect to the length of the preproductive period of certain plants that will

have more than one crop or yield. At the

present time, the IRS and Treasury Department anticipate that such guidance

would provide that plants producing the

following crops or yields have a nationwide weighted average preproductive period in excess of 2 years: almonds, apples, apricots, avocados, blueberries,

blackberries, cherries, chestnuts, coffee

beans, currants, dates, figs, grapefruit,

grapes, guavas, kiwifruit, kumquats,

lemons, limes, macadamia nuts, mangoes, nectarines, olives, oranges,

peaches, pears, pecans, persimmons, pistachio nuts, plums, pomegranates,

prunes, raspberries, tangelos, tangerines,

tangors, and walnuts. The IRS and Treasury Department invite comments on this

issue.

September 22, 1997

Capitalization Period

Preproductive period costs (e.g., irrigating, fertilizing, real estate taxes, etc.)

are capitalized during the preproductive

period of a plant or animal. A taxpayer

that grows a plant that will have more

than one crop or yield is engaged in the

production of two types of property, the

plant and the crop or yield of the plant

(e.g., the orange tree and the orange). The

temporary regulations clarify the capitalization period for plants that will have

more than one crop or yield, for crops or

yields of plants that will have more than

one crop or yield, and for other plants.

The temporary regulations clarify that

the preproductive period of a plant generally begins when a taxpayer first incurs

costs with respect to the plant, e.g., when

the plant is acquired or the seed is

planted. In the case of the crop or yield of

a plant that has become productive in

marketable quantities, the preproductive

period of the crop or yield begins when

the crop or yield first appears, whether in

the form of a sprout, bloom, blossom,

bud, etc.

In the case of a plant that will have

more than one crop or yield, the preproductive period of the plant ends when the

plant becomes productive in marketable

quantities (i.e., when the plant is placed in

service for purposes of depreciation). In

the case of the crop or yield of a plant that

has become productive in marketable

quantities, the preproductive period of the

crop or yield ends when the crop or yield

is disposed of. Finally, in the case of

other plants, the preproductive period

ends when the plant is disposed of.

The temporary regulations provide that

the preproductive period of an animal begins at the time of acquisition, breeding,

or embryo implantation. The temporary

regulations clarify that, in the case of an

animal that will be used in the trade or

business of farming, the preproductive

period generally ends when the animal is

placed in service for purposes of depreciation. However, in the case of an animal

that will have more than one yield, the

preproductive period ends when the animal produces (e.g., gives birth to) its first

yield. In the case of any other animal, the

preproductive period ends when the animal is sold or otherwise disposed of. The

temporary regulations additionally clarify

that, in the case of an animal that will

have more than one yield, the costs incurred after the beginning of the preproductive period of the first yield but before

the end of the preproductive period of the

animal must be allocated between the animal and the yield on a reasonable and

consistent basis. Any depreciation allowance on the animal may be allocated

entirely to the yield.

Method Of Capitalizing Costs

The temporary regulations provide that

the costs required to be capitalized with

respect to farming property may, if the

taxpayer chooses, be determined using

any reasonable inventory valuation

method, such as the farm-price method of

accounting (farm-price method) or the

unit-livestock-price method of accounting

(unit-livestock-price method). The use of

these inventory valuation methods avoids

the necessity of accounting for the costs

of raising plants or animals by tracing

costs to each separate plant or animal. In

addition, under the temporary regulations,

these inventory methods may be used by a

taxpayer regardless of whether the farming property being produced is otherwise

treated as inventory by the taxpayer, and

regardless of whether the taxpayer is otherwise using the cash method or an accrual method.

The temporary regulations clarify that

notwithstanding a taxpayer’s use of the

farm-price method with respect to farming property to which the provisions of

section 263A apply, the taxpayer is not required, solely by such use, to use the same

method of accounting with respect to

farming property to which the provisions

of section 263A do not apply.

Under the unit-livestock-price method,

the taxpayer adopts a standard unit price

for each animal within a particular class.

This standard unit price is used by the taxpayer in lieu of specifically identifying

and tracing the costs of raising each animal in the taxpayer’s farming business.

Taxpayers using the unit-livestock-price

method must adopt a reasonable method

of classifying animals with respect to

their age and kind so that the unit prices

assigned by the taxpayer to animals in

each class are reasonable. Thus, taxpayers using the unit-livestock-price method

typically classify livestock based on their

1997–38 I.R.B.

age (for example, a separate class will

typically be established for calves, yearlings, and 2-year olds).

The temporary regulations under section 263A modify the rule set forth in

§1.471–6 providing that no increase in

unit cost is required under the unit-livestock-price method with respect to the

taxable year in which certain animals are

purchased, if the purchases occur in the

last 6 months of the taxable year. The

temporary regulations provide that any

taxpayer required to use an accrual

method under section 448(a)(3) must include in inventory the annual standard

unit price for all animals purchased during the taxable year, regardless of when in

the taxable year the purchases are made.

The temporary regulations further amend

this rule and provide that all taxpayers

using the unit-livestock-price method

must modify the annual standard price to

reasonably reflect the particular period in

the taxable year in which purchases of

livestock are made, if such modification

is necessary in order to avoid significant

distortions in income that would otherwise occur through operation of the unitlivestock-price method. The temporary

regulations do not specify the particular

modification that must be made to the annual standard price for any particular taxpayer, but rather allow any reasonable

modification made by the taxpayer to the

annual standard price to avoid significant

distortions in income. For example, assume a taxpayer purchases and raises cattle for slaughter. Assume further that the

taxpayer is required to use an accrual

method under section 447 so that section

263A applies to the taxpayer’s costs of

raising the cattle. The temporary regulations provide that the taxpayer may not

expense the costs of raising cattle that are

purchased in the latter half of the taxpayer’s taxable year. Instead, the taxpayer must modify the annual standard

price so as to reasonably capitalize the

costs of raising the cattle, based on the

date of their purchase.

In Notice 88–86, the IRS noted that

commentators had inquired as to the

availability of the simplified production

method of accounting (simplified production method) for farmers using the unitlivestock-price method for the costs of

raising livestock. The temporary regulations clarify that farmers using the unit-

1997–38 I.R.B.

livestock-price method are permitted to

elect the simplified production method, as

well as the simplified service cost method

of accounting, under section 263A. In

such a situation, section 471 costs are the

costs taken into account by the taxpayer

under the unit-livestock-price method

using the taxpayer’s standard unit price

determined under these temporary and

final regulations. The term additional

section 263A costs includes all additional

costs required to be capitalized under section 263A including costs that are required to be capitalized under section

263A that are not reflected in the standard

unit prices (e.g., general and administrative costs and depreciation, including depreciation on a calf’s mother).

In light of the additional costs required

to be capitalized under section 263A, taxpayers should not adopt unit prices utilized under pre-section 263A unit-livestock-price rules without carefully

analyzing whether these unit prices reflect

all of the costs required to be capitalized

under section 263A.

in service in a taxable year for which the

election is in effect.

Election Not To Capitalize Costs

In final regulations, cross references to

§1.263A–4T are provided in §§1.61–4,

1.162–12, 1.263A–1, and 1.471–6.

Under §1.471–6(f), taxpayers using the

unit livestock method may not subsequently change the classification or unit

costs they initially adopted without obtaining the approval of the Commissioner.

As provided in Notice 88–24, the final

regulations modify the rule in §1.471–6(f)

and require that taxpayers adjust the unit

prices upward from time to time, to reflect increases in costs taxpayers experience in raising livestock. Any other

changes in the classification or unit prices

used in the unit- livestock-price method

will continue to be allowed only with the

consent of the Commissioner.

Certain taxpayers, other than those required to use an accrual method by section 447 or 448(a)(3), may elect not to

capitalize the preproductive period costs

of certain plants even though such plants

have a preproductive period in excess of 2

years and would otherwise be subject to

the capitalization requirements of section

263A. Taxpayers making this election

may continue to deduct (subject to other

limitations of the Code) the preproductive

period costs that were deductible under

the rules in effect before the enactment of

section 263A. The temporary regulations

clarify that although a taxpayer producing

a citrus or almond grove may make this

election, the election does not apply to the

preproductive period costs of a citrus or

almond grove that are incurred before the

close of the fourth taxable year beginning

with the taxable year in which the trees

were planted.

If a taxpayer makes this election with

respect to any plant, the taxpayer must

treat the plant as section 1245 property.

In addition, the taxpayer, and any person

related to the taxpayer, must use the alternative depreciation system of section

168(g)(2) for any property used predominantly in a farming business that is placed

Casualty Loss Exception

Section 263A(d) provides an exception

from capitalization for preproductive period costs incurred with respect to plants

that are replacing certain plants that were

lost by reason of certain casualties. The

temporary regulations clarify that this exception for preproductive period costs

does not apply to preparatory expenditures or the costs of capital assets. In addition, the temporary regulations clarify

that the casualty loss exception applies

whether the plants are replanted on the

same parcel of land as the plants destroyed by casualty or a parcel of land of

the same acreage in the United States.

The temporary regulations additionally

clarify that the exception applies to all

plants replanted on such acreage, even if

the plants are replanted in greater density

than the plants destroyed by the casualty.

Final Regulations

Effective Date And Transitional Rule

The temporary regulations provide

that, in the case of property that is not inventory in the hands of the taxpayer, the

regulations are generally effective for

costs incurred on or after August 22,

1997, in taxable years ending after such

date. In the case of inventory property,

the temporary regulations are generally

effective for taxable years beginning after

August 22, 1997. However, taxpayers in

compliance with §1.263A–4T in effect

September 22, 1997

prior to August 22, 1997 (See 26 CFR

part 1 edition revised as of April 1,

1997.), as modified by other administrative guidance, that continue to comply

with §1.263A–4T in effect prior to August

22, 1997 (See 26 CFR part 1 edition revised as of April 1, 1997.), as modified by

other administrative guidance, will not be

required to apply these new temporary

rules until the notice of proposed rulemaking that cross-references these temporary

regulations is finalized. The amendment

to §1.471–6(f) is effective for taxable

years beginning after August 22, 1997.

Effect on Other Documents

The following publications will be

obsolete when the notice of proposed

rulemaking that cross-references these

temporary regulations is finalized: Notice

87–76, 1987–2 C.B. 384; Notice 88–24,

1988–1 C.B. 491; and section V of Notice

88–86, 1988–2 C.B. 401.

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 has also 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 regulations do 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, the

temporary regulations will be submitted,

and the notice of proposed rulemaking

that preceded the final regulations were

submitted, to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small

business.

Drafting Information

The principal author of these temporary

regulations is Jan Skelton of the Office of

Assistant Chief Counsel (Income Tax and

Accounting). However, other personnel

from the IRS and Treasury Department

participated in their development.

September 22, 1997

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 * * *

§1.61–4 [Amended]

Par. 2. Section 1.61–4 is amended by:

1. Adding a new sentence “See section

263A for rules regarding costs that are required to be capitalized.” at the end of the

concluding text of paragraph (a).

2. Adding a new sentence “See section

263A for rules regarding costs that are required to be capitalized.” after the fourth

sentence of the concluding text of paragraph (b).

§1.162–12 [Amended]

Par. 3. Section 1.162-12(a) is amended

by:

1. Removing the eighth sentence, and

adding the sentence “For rules regarding

the capitalization of expenses of producing property in the trade or business of

farming, see section 263A and §1.263A–

4T.” in its place.

2. Adding a new sentence “For rules

regarding the capitalization of expenses

of producing property in the trade or business of farming, see section 263A and the

regulations thereunder.” after the third

sentence.

Par. 4. Section 1.263A-0T is added to

read as follows:

§1.263A–0T Outline of regulations under

section 263A (temporary).

This section lists the paragraphs in

§1.263A–4T.

§1.263A–4T Rules for property produced

in a farming business (temporary).

(a) Introduction.

(1) In general.

(2) Exception.

(i) In general.

(ii) Tax shelter.

(iii) Presumption.

(iv) Costs required to be capitalized or

inventoried under another provision.

(v) Examples.

(3) Farming business.

(i) In general.

(A) Plant.

(B) Animal.

(ii) Incidental activities.

(A) In general.

(B) Activities that are not incidental.

(1) In general.

(2) Examples.

(b) Application of section 263A to

property produced in a farming business.

(1) In general.

(i) Plants.

(ii) Animals.

(2) Preproductive period.

(i) Plant.

(A) In general.

(B) Applicability of section 263A.

(1) Beginning of the preproductive

period.

(2) End of the preproductive period.

(i) In general.

(ii) Marketable quantities.

(D) Examples.

(ii) Animal.

(A) Beginning of the preproductive

period.

(B) End of the preproductive period.

(1) In general.

(2) Available for property used in a

trade or business.

(3) Exclusion of property to which

section 263A does not apply.

(d) Election not to have section 263A

apply.

(1) Introduction.

(2) Availability of the election.

(3) Time and manner of making the

election.

(4) Special rules.

(i) Section 1245 treatment.

(ii) Required use of alternative depreciation system.

(iii) Related person.

(A) In general.

(B) Members of family.

(5) Examples.

(e) Exception for certain costs resulting from casualty losses.

(1) In general.

(2) Ownership.

(3) Examples.

1997–38 I.R.B.

(4) Special rule for citrus and almond

groves.

(i) In general.

(ii) Example.

(f) Effective date and transition rule.

§1.263A–1 [Amended]

Par. 5. Section 1.263A–1 is amended

by:

1. Removing the last sentence of paragraph (b)(3) and adding the sentence “See

§1.263A–4T for specific rules relating to

taxpayers engaged in the trade or business

of farming.” in its place.

2. Removing the last sentence of paragraph (b)(4) and adding the sentence “See

§1.263A–4T, however, for rules relating

to taxpayers producing certain trees to

which section 263A applies.” in its place.

Par. 6. Section 1.263A–4T is revised to

read as follows:

§1.263A–4T Rules for property produced

in a farming business (temporary).

(a) Introduction—(1) In general. The

regulations under this section provide

guidance with respect to the application

of section 263A to property produced in a

farming business as defined in paragraph

(a)(3) of this section. Except as otherwise

provided by the rules of this section, the

general rules of §§1.263A–1 through

1.263A–3 and 1.263A–7 through 1.263A–

15 apply to property produced in a farming business. A taxpayer that engages in

the raising or growing of any agricultural

or horticultural commodity, including

both plants and animals, is engaged in the

production of property. Section 263A

generally requires the capitalization of the

direct costs and an allocable portion of the

indirect costs that benefit or are incurred

by reason of the production of this property. Taxpayers that do not qualify for the

exception described in paragraph (a)(2) of

this section must capitalize these costs of

producing all plants and animals unless

the election described in paragraph (d) of

this section is made.

(2) Exception—(i) In general. A taxpayer is not required to capitalize the preproductive period costs of producing

plants with a preproductive period of 2

years or less or the costs of producing animals, if the taxpayer is not—

(A) A corporation or partnership required to use an accrual method of accounting (accrual method) under section

1997–38 I.R.B.

447 in computing its taxable income from

farming; or

(B) A tax shelter required to use an accrual method under section 448(a)(3).

(ii) Tax shelter. A farming business is

considered a tax shelter, and thus a taxpayer required to use an accrual method

under section 448(a)(3), if the farming

business is—

(A) A farming syndicate as defined in

section 464(c); or

(B) A tax shelter, within the meaning

of section 6662(d)(2)(C)(iii).

(iii) Presumption. Marketed arrangements in which persons carry on farming

activities using the services of a common

managerial or administrative service will

be presumed to have the principal purpose

of tax avoidance, within the meaning of

section 6662(d)(2)(C)(iii), if such persons

prepay a substantial portion of their farming expenses with borrowed funds.

(iv) Costs required to be capitalized or

inventoried under another provision. The

exception from capitalization provided in

this paragraph (a)(2) does not apply to

any cost that is required to be capitalized

or inventoried under another Code or regulatory provision, such as section 263 or

section 471.

(v) Examples. The following examples illustrate the provisions of this paragraph (a)(2):

Example 1. Farmer A grows trees that have a

preproductive period in excess of 2 years, and that

produce an annual crop. Farmer A is not required by

section 447 or 448(a)(3) to use an accrual method.

Accordingly, Farmer A qualifies for the exception

described in this paragraph (a)(2). Since the trees

have a preproductive period in excess of 2 years,

Farmer A must capitalize the direct costs and an allocable portion of the indirect costs that benefit or

are incurred by reason of the production of the trees.

Since the annual crop has a preproductive period of

2 years or less, Farmer A is not required to capitalize

the costs of the crops.

Example 2. Assume the same facts as Example 1,

except that Farmer A is required by section 447 or

448(a)(3) to use an accrual method. Farmer A does

not qualify for the exception described in this paragraph (a)(2). Farmer A is required to capitalize the

direct costs and an allocable portion of the indirect

costs that benefit or are incurred by reason of the

production of the trees and crops, including all preproductive period costs.

(3) Farming business—(i) In general.

A farming business means a trade or business involving the cultivation of land or

the raising or harvesting of any agricultural or horticultural commodity. Examples include the trade or business of operating a nursery or sod farm; the raising or

harvesting of trees bearing fruit, nuts, or

other crops; the raising of ornamental

trees (other than evergreen trees that are

more than 6 years old at the time they are

severed from their roots); and the raising,

shearing, feeding, caring for, training, and

management of animals. For purposes of

this section, the term harvesting does not

include contract harvesting of an agricultural or horticultural commodity grown or

raised by another. Similarly, the trade or

business of merely buying and reselling

plants or animals grown or raised by another is not a farming business.

(A) Plant. A plant produced in a farming business includes, but is not limited

to, a fruit, nut, or other crop bearing tree,

an ornamental tree, a vine, a bush, sod,

and the crop or yield of a plant that will

have more than one crop or yield. Sea

plants are produced in a farming business

if they are tended and cultivated as opposed to merely harvested.

(B) Animal. An animal produced in a

farming business includes, but is not limited to, any stock, poultry or other bird,

and fish or other sea life raised by the taxpayer. Thus, for example, the term animal may include a cow, chicken, emu, or

salmon raised by the taxpayer. Fish and

other sea life are produced in a farming

business if they are raised on a fish farm.

A fish farm is an area where fish or other

sea life are grown or raised as opposed to

merely caught or harvested.

(ii) Incidental activities—(A) In general. Farming business includes processing activities that are normally incident to

the growing, raising, or harvesting of

agricultural products. For example, a taxpayer in the trade or business of growing

fruits and vegetables may harvest, wash,

inspect, and package the fruits and vegetables for sale. Such activities are normally incident to the raising of these

crops by farmers. The taxpayer will be

considered to be in the trade or business

of farming with respect to the growing of

fruits and vegetables and the processing

activities incident to their harvest.

(B) Activities that are not incidental—

(1) In general. Farming business does not

include the processing of commodities or

products beyond those activities that are

normally incident to the growing, raising,

or harvesting of such products.

(2) Examples. The following examples illustrate the provisions of this paragraph (a)(3)(ii):

September 22, 1997

Example 1. Individual A is in the business of

growing and harvesting wheat and other grains. Individual A also processes grain that Individual A has

harvested in order to produce breads, cereals, and

other similar food products, which Individual A then

sells to customers in the course of its business. Although Individual A is in the farming business with

respect to the growing and harvesting of grain, Individual A is not in the farming business with respect

to the processing of such grain to produce the food

products.

Example 2. Individual B is in the business of

raising poultry and other livestock. Individual B

also operates a meat processing operation in which

the poultry and other livestock are slaughtered,

processed, and packaged or canned. The packaged

or canned meat is sold to Individual B’s customers.

Although Individual B is in the farming business

with respect to the raising of poultry and other livestock, Individual B is not in the farming business

with respect to the slaughtering, processing, packaging, and canning of such animals to produce the food

products.

(b) Application of section 263A to

property produced in a farming business—(1) In general. Unless otherwise

provided in this section, section 263A requires the capitalization of the direct costs

and an allocable portion of the indirect

costs that benefit or are incurred by reason of the production of any property in a

farming business (including animals and

plants without regard to the length of their

preproductive period).

(i) Plants. Costs typically required to

be capitalized under section 263A include

the acquisition costs of the seed, seedling,

or plant, and the costs of planting, cultivating, maintaining, or developing such

plant during the preproductive period.

These costs include, but are not limited to,

management, irrigation, pruning, fertilizing (including costs that the taxpayer has

elected to deduct under section 180), soil

and water conservation (including costs

that the taxpayer has elected to deduct

under section 175), frost protection,

spraying, upkeep, electricity, tax depreciation and repairs on buildings and equipment used in raising the plants, farm overhead, taxes (except state and federal

income taxes), and interest required to be

capitalized under section 263A(f).

(ii) Animals. Costs typically required

to be capitalized under section 263A include the acquisition cost of the animal,

and the costs of raising or caring for such

animal during the preproductive period.

Preproductive period costs include, but

are not limited to, the costs of management, feed (such as grain, silage, concentrates, supplements, haylage, hay, pasture

and other forages), maintaining pasture or

September 22, 1997

pen areas (including costs that the taxpayer has elected to deduct under sections

175 or 180), breeding, artificial insemination, veterinary services and medicine,

livestock hauling, bedding, fuel, electricity, hired labor, tax depreciation and repairs on buildings and equipment used in

raising the animals (for example, barns,

trucks, and trailers), farm overhead, taxes

(except state and federal income taxes),

and interest required to be capitalized

under section 263A(f).

(2) Preproductive period—(i) Plant—

(A) In general. The preproductive period

of property produced in a farming business means —

(1) In the case of a plant that will have

more than one crop or yield, the period

before the first marketable crop or yield

from such plant;

(2) In the case of the crop or yield of a

plant that will have more than one crop or

yield, the period before such crop or yield

is disposed of; or

(3) In the case of any other plant, the

period before such plant is disposed of.

(B) Applicability of section 263A. For

purposes of determining whether a plant

has a preproductive period in excess of 2

years, the preproductive period of plants

grown in commercial quantities in the

United States is based on the nationwide

weighted average preproductive period

for such plant. For all other plants, the

taxpayer is required, at or before the time

the seed or plant is acquired or planted, to

reasonably estimate the preproductive period of the plant. If the taxpayer estimates

a preproductive period in excess of 2

years, the taxpayer must capitalize preproductive period costs. If the estimate is

reasonable, based on the facts in existence

at the time it is made, the determination of

whether section 263A applies is not modified at a later time even if the actual

length of the preproductive period differs

from the estimate. The actual length of

the preproductive period will, however,

be considered in evaluating the reasonableness of the taxpayer’s future estimates. Thus, the nationwide weighted average preproductive period or the

estimated preproductive period are only

used for purposes of determining whether

the preproductive period of a plant is

greater than 2 years.

plant’s actual preproductive period is used

for purposes of determining the period

during which a taxpayer must capitalize

preproductive period costs with respect to

a particular plant.

(1) Beginning of the preproductive period. The actual preproductive period of a

plant begins when the taxpayer first incurs costs that directly benefit or are incurred by reason of the plant. Generally,

this occurs when the taxpayer plants the

seed or plant. In the case of a taxpayer

that acquires plants that have already been

planted, or plants that are tended, by the

taxpayer or another, prior to permanent

planting, the actual preproductive period

of the plant begins upon acquisition of the

plant by the taxpayer. In the case of the

crop or yield of a plant that will have

more than one crop or yield and that has

become productive in marketable quantities, the actual preproductive period begins when the crop or yield first appears,

for example, in the form of a sprout,

bloom, blossom, or bud.

(2) End of the preproductive period—

(i) In general. In the case of a plant that

will have more than one crop or yield, the

actual preproductive period ends when

the plant first becomes productive in marketable quantities. In the case of any

other plant (including the crop or yield of

a plant that will have more than one crop

or yield), the actual preproductive period

ends when the plant, crop, or yield is sold

or otherwise disposed of.

(ii) Marketable quantities. A plant that

will have more than one crop or yield becomes productive in marketable quantities when it is (or would be considered)

placed in service for purposes of section

168 (without regard to the applicable convention).

(D) Examples. The following examples illustrate the provisions of this paragraph (b)(2)(i):

Example 1. (i) Farmer A, a taxpayer that qualifies for the exception in paragraph (a)(2) of this section, grows plants that will have more than one crop

or yield. The plants are grown in commercial quantities in the United States. Farmer A acquires the

plants by purchasing them from an unrelated party,

Corporation B, and plants them immediately. The

nationwide weighted average preproductive period

of the plant is 4 years. The particular plants grown

by Farmer A do not begin to produce in marketable

quantities until 4 years and 6 months after they are

planted by Farmer A.

(ii) Since the plants are deemed to have a preproductive period in excess of 2 years, Farmer A is required to capitalize the preproductive period costs of

the plants. See paragraphs (a)(2) and (b)(2)(i)(B) of

this section. In accordance with paragraph

1997–38 I.R.B.

(b)(2)(i)(C)(1) of this section, Farmer A must begin

to capitalize such costs when the plants are planted.

In accordance with paragraph (b)(2)(i)(C)(2) of this

section, Farmer A must continue to capitalize costs

to the plants until the plants begin to produce in marketable quantities. Thus, Farmer A must capitalize

the preproductive period costs of the plants for a period of 4 years and 6 months, notwithstanding the

fact that the plants, in general, have a nationwide

weighted average preproductive period of 4 years.

Example 2. (i) Farmer B, a taxpayer that qualifies for the exception in paragraph (a)(2) of this section, grows plants that will have more than one crop

or yield. The plants are grown in commercial quantities in the United States. The nationwide weighted

average preproductive period of the plant is 2 years

and 5 months. Farmer B acquires the plants by purchasing them from an unrelated party, Corporation

B. Farmer B enters into a contract with Corporation

B under which Corporation B will retain and tend

the plants for 7 months following the sale. At the

end of 7 months, Farmer B takes possession of the

plants and plants them in the permanent orchard.

The plants become productive in marketable quantities 1 years and 11 months after they are planted by

Farmer B.

(ii) Since the plants are deemed to have a preproductive period in excess of 2 years, Farmer B is required to capitalize the preproductive period costs of

the plants. See paragraphs (a)(2) and (b)(2)(i)(B) of

this section. In accordance with paragraph

(b)(2)(i)(C)(1) of this section, Farmer B must begin

to capitalize such costs when the purchase occurs.

In accordance with paragraph (b)(2)(i)(C)(2) of this

section, Farmer B must continue to capitalize costs

to the plants until the plants begin to produce in marketable quantities. Thus, Farmer B must capitalize

the preproductive period costs of the plants for a period of 2 years and 6 months (the 7 months the

plants are tended by Corporation B and the 1 year

and 11 months after the plants are planted by Farmer

B), notwithstanding the fact that the plants, in general, have a nationwide weighted average preproductive period of 2 years and 5 months.

Example 3. (i) Assume the same facts as in Example 2, except that Farmer B acquires the plants by

purchasing them from Corporation B when the

plants are 7 months old and that the plants are

planted by Farmer B upon acquisition.

(ii) Since the plants are deemed to have a preproductive period in excess of 2 years, Farmer B is required to capitalize the preproductive period costs of

the plants. See paragraphs (a)(2) and (b)(2)(i)(B) of

this section. In accordance with paragraph

(b)(2)(i)(C)(1) of this section, Farmer B must begin

to capitalize such costs when the plants are planted.

In accordance with paragraph (b)(2)(i)(C)(2) of this

section, Farmer B must continue to capitalize costs

to the plants until the plants begin to produce in marketable quantities. Thus, Farmer B must capitalize

the preproductive period costs of the plants for a period of 1 year and 11 months.

Example 4. (i) Farmer C, a taxpayer that qualifies for the exception in paragraph (a)(2) of this section, grows plants that will have more than one crop

or yield. The plants are grown in commercial quantities in the United States. Farmer C acquires the

plants from an unrelated party and plants them immediately. The nationwide weighted average preproductive period of the plant is 2 years and 3

months. The particular plants grown by Farmer C

begin to produce in marketable quantities 1 year and

10 months after they are planted by Farmer C.

(ii) Since the plants are deemed to have a nationwide weighted average preproductive period in excess of 2 years, Farmer C is required to capitalize the

preproductive period costs of the plants, notwithstanding the fact that the particular plants grown by

1997–38 I.R.B.

Farmer C become productive in less than 2 years.

See paragraph (b)(2)(i)(B) of this section. In accordance with paragraph (b)(2)(i)(C)(1) of this section,

Farmer C must begin to capitalize such costs when it

plants the plants. In accordance with paragraph

(b)(2)(i)(C)(2) of this section, Farmer C properly

ceases capitalization of preproductive period costs

when the plants become productive in marketable

quantities (i.e., after 1 year and 10 months).

Example 5. (i) Farmer D, a taxpayer that qualifies for the exception in paragraph (a)(2) of this section, grows plants that will have more than one crop

or yield. The plants are not grown in commercial

quantities in the United States. At the time the plants

are planted Farmer D reasonably estimates that the

plants will have a preproductive period of 4 years.

The actual plants grown by Farmer D do not begin to

produce in marketable quantities until 4 years and 6

months after they are planted by Farmer D.

(ii) Since the plants have an estimated preproductive period in excess of 2 years, Farmer D is required to capitalize the preproductive period costs of

the plants. See paragraph (b)(2)(i)(B) of this section. In accordance with paragraph (b)(2)(i)(C)(1)

of this section, Farmer D must begin to capitalize

such costs when it plants the plants. In accordance

with paragraph (b)(2)(i)(C)(2) of this section,

Farmer D must continue to capitalize costs until the

plants begin to produce in marketable quantities.

Thus, Farmer D must capitalize the preproductive

period costs of the plants for a period of 4 years and

6 months, notwithstanding the fact that Farmer D estimated that the plants would become productive

after 4 years.

Example 6. (i) Farmer E, a taxpayer that qualifies for the exception in paragraph (a)(2) of this section grows plants that are not grown in commercial

quantities in the United States. The plants do not

have more than 1 crop or yield. At the time the

plants are planted Farmer E reasonably estimates

that the plants will have a preproductive period of 1

year and 10 months. The actual plants grown by

Farmer E are not ready for harvesting and disposal

until 2 years and 2 months after the seeds are planted

by Farmer E.

(ii) Because Farmer E’s estimate of the preproductive period (which was 2 years or less) was reasonable at the time made based on the facts, Farmer

E will not be required to capitalize the preproductive

period costs of the plants notwithstanding the fact

that the actual preproductive period of the plants exceeded 2 years. See paragraph (b)(2)(i)(B) of this

section. However, Farmer E must take the actual

preproductive period of the plants into consideration

when making future estimates of the preproductive

period of such plants.

Example 7. Farmer F, a calendar year taxpayer

that does not qualify for the exception in paragraph

(a)(2) of this section, grows trees that will have more

than one crop. Farmer F acquires and plants the

trees in April, 1998. On October 1, 2003, the trees

are placed in service within the meaning of section

168. Under paragraph (b)(2)(i)(C)(2)(ii) of this section, the trees become productive in marketable

quantities on October 1, 2003. The preproductive

period costs incurred by Farmer F on or before October 1, 2003, are capitalized to the trees. Preproductive period costs incurred after October 1, 2003,

are capitalized to a crop when incurred during the

preproductive period of the crop and expensed when

incurred between the disposal of one crop and the

appearance of the next crop. See paragraphs

(b)(2)(i)(A), (b)(2)(i)(C)(1) and (b)(2)(i)(C)(2) of

this section.

(ii) Animal. An animal’s actual preproductive period is used to determine the

period that the taxpayer must capitalize

preproductive period expenses with respect to a particular animal.

(A) Beginning of the preproductive period. The preproductive period of an animal begins at the time of acquisition,

breeding, or embryo implantation.

(B) End of the preproductive period.

In the case of an animal that will be used

in the trade or business of farming (e.g., a

dairy cow), the preproductive period generally ends when the animal is (or would

be considered) placed in service for purposes of section 168 (without regard to

the applicable convention). However, in

the case of an animal that will have more

than one yield (e.g., a breeding cow), the

preproductive period ends when the animal produces (e.g., gives birth to) its first

yield. In the case of any other animal, the

preproductive period ends when the animal is sold or otherwise disposed of.

and first yield. In the case of an animal

that will have more than one yield, the

costs incurred after the beginning of the

preproductive period of the first yield but

before the end of the preproductive period

of the animal must be allocated between

the animal and the yield on a reasonable

basis. Any depreciation allowance on the

animal may be allocated entirely to the

yield. The allocation method used by a

taxpayer is a method of accounting that

must be used consistently and is subject to

the rules of section 446 and the regulations thereunder.

costs required to be allocated to any plant

or animal under this section may be determined using reasonable inventory valuation methods such as the farm-price

method or the unit-livestock-price

method. See §1.471–6. Under the unitlivestock-price method, unit prices must

include all costs required to be capitalized

under section 263A. A taxpayer using the

unit-livestock-price method may elect to

use the cost allocation methods in

§1.263A–1(f) or 1.263A–2(b) to allocate

its direct and indirect costs to the property

produced in the business of farming. In

such a situation, section 471 costs are the

costs taken into account by the taxpayer

under the unit-livestock-price method

using the taxpayer’s standard unit price as

modified by this paragraph (c)(1). The

September 22, 1997

term additional section 263A costs includes all additional costs required to be

capitalized under section 263A. Tax shelters, as defined in paragraph (a)(2)(ii) of

this section, that use the unit-livestockprice method for inventories must include

in inventory the annual standard unit price

for all animals that are acquired during

the taxable year, regardless of whether the

purchases are made during the last 6

months of the taxable year. Taxpayers required by section 447 or 448(a)(3) to use

an accrual method that use the unit-livestock-price method must modify the annual standard price in order to reasonably

reflect the particular period in the taxable

year in which purchases of livestock are

made, if such modification is necessary in

order to avoid significant distortions in income that would otherwise occur through

operation of the unit livestock method.

(2) Available for property used in a

trade or business. The farm price method

or the unit livestock method may be used

by any taxpayer to allocate costs to any

plant or animal under this section, regardless of whether the plant or animal is held

or treated as inventory property by the

taxpayer. Thus, for example, a taxpayer

may use the unit livestock method to account for the costs of raising livestock

that will be used in the trade or business

of farming (e.g., a breeding animal or a

dairy cow) even though the property in

question is not inventory property.

(3) Exclusion of property to which section 263A does not apply. Notwithstanding a taxpayer’s use of the farm price

method with respect to farm property to

which the provisions of section 263A

apply, that taxpayer is not required, solely

by such use, to use the farm price method

with respect to farm property to which the

provisions of section 263A do not apply.

Thus, for example, assume Farmer A

raises fruit trees that have a preproductive

period in excess of 2 years and to which

the provisions of section 263A, therefore,

apply. Assume also that Farmer A raises

cattle and is not required to use an accrual

method by section 447 or 448(a)(3). Because Farmer A qualifies for the exception

in paragraph (a)(2) of this section, Farmer

A is not required to capitalize the costs of

raising the cattle. Although Farmer A

may use the farm price method with respect to the fruit trees, Farmer A is not required to use the farm price method with

September 22, 1997

respect to the cattle. Instead, Farmer A’s

accounting for the cattle is determined

under other provisions of the Code and

regulations.

(d) Election not to have section 263A

apply—(1) Introduction. This paragraph

(d) permits certain taxpayers to make an

election not to have the rules of this section apply to any plant produced in a

farming business conducted by the electing taxpayer. The election is a method of

accounting under section 446, and once

an election is made, it is revocable only

with the consent of the Commissioner.

(2) Availability of the election. The

election described in this paragraph (d) is

available to any taxpayer that produces

plants in a farming business, except that

no election may be made by a corporation, partnership, or tax shelter required to

use the accrual method under section 447

or 448(a)(3). Moreover, the election does

not apply to the costs of planting, cultivation, maintenance, or development of a

citrus or almond grove (or any part

thereof) incurred prior to the close of the

fourth taxable year beginning with the

taxable year in which the trees were

planted in the permanent grove (including

costs incurred prior to the permanent

planting). If a citrus or almond grove is

planted in more than one taxable year, the

portion of the grove planted in any one

taxable year is treated as a separate grove

for purposes of determining the year of

planting.

(3) Time and manner of making the

election. A taxpayer makes the election

under this paragraph (d) by not capitalizing the preproductive period costs of producing property in a farming business and

by applying the special rules in paragraph

(d)(4) of this section, on its timely filed

original return (including extensions) for

the first taxable year in which the taxpayer is otherwise required to capitalize

preproductive period costs under section

263A. Thus, in order to be treated as having made the election under this paragraph (d), it is necessary to report both income and expenses in accordance with

the rules of this paragraph (d) (e.g., it is

necessary to use the alternative depreciation system as provided in paragraph

(d)(4)(ii) of this section). Thus, for example, a farmer who deducts preproductive

period costs that are otherwise required to

be capitalized under section 263A but

fails to use the alternative depreciation

system under section 168(g)(2) for applicable property placed in service has not

made an election under this paragraph (d)

and is not in compliance with the provisions of section 263A. In the case of a

partnership or S corporation, the election

must be made by the partner, shareholder,

or member.

(4) Special rules. If the election under

this paragraph (d) is made, the taxpayer is

subject to the special rules in this paragraph (d)(4).

(i) Section 1245 treatment. The plant

produced by the taxpayer is treated as section 1245 property and any gain resulting

from any disposition of the plant is recaptured (i.e., treated as ordinary income) to

the extent of the total amount of the deductions that, but for the election, would

have been required to be capitalized with

respect to the plant. In calculating the

amount of gain that is recaptured under

this paragraph (d)(4)(i), a taxpayer may

use the farm price method or another simplified method permitted under these regulations in determining the deductions

that otherwise would have been capitalized with respect to the plant.

(ii) Required use of alternative depreciation system. If the taxpayer or a related person makes an election under this

paragraph (d), the alternative depreciation

system (as defined in section 168(g)(2))

must be applied to all property used predominantly in any farming business of the

taxpayer or related person and placed in

service in any taxable year during which

the election is in effect. The requirement

to use the alternative depreciation system

by reason of an election under this paragraph (d) will not prevent a taxpayer from

making an election under section 179 to

deduct certain depreciable business assets.

(iii) Related person—(A) In general.

For purposes of this paragraph (d)(4), related person means —

(1) The taxpayer and members of the

taxpayer’s family;

(2) Any corporation (including an S

corporation) if 50 percent or more of the

stock (in value) is owned directly or indirectly (through the application of section

318) by the taxpayer or members of the

taxpayer’s family;

(3) A corporation and any other corporation that is a member of the same con-

1997–38 I.R.B.

trolled group (within the meaning of section 1563(a)(1)); and

(4) Any partnership if 50 percent or

more (in value) of the interests in such

partnership is owned directly or indirectly

by the taxpayer or members of the taxpayer’s family.

(B) Members of family. For purposes

of this paragraph (d)(4)(iii), members of

the taxpayer’s family, and members of

family (for purposes of applying section

318(a)(1)), means the spouse of the taxpayer (other than a spouse who is legally

separated from the individual under a decree of divorce or separate maintenance)

and any of the taxpayer’s children (including legally adopted children) who

have not reached the age of 18 as of the

last day of the taxable year in question.

(5) Examples. The following examples illustrate the provisions of this paragraph (d):

Example 1. (i) Farmer A, an individual, is engaged in the trade or business of farming. Farmer A

grows apple trees that have a preproductive period

greater than 2 years. In addition, Farmer A grows

and harvests wheat and other grains. Farmer A

elects under this paragraph (d) not to have the rules

of section 263A apply to the preproductive period

costs of growing the apple trees.

(ii) In accordance with paragraph (d)(4) of this

section, Farmer A is required to use the alternative

depreciation system described in section 168(g)(2)

with respect to all property used predominantly in

any farming business in which Farmer A engages

(including the growing and harvesting of wheat) if

such property is placed in service during a year for

which the election is in effect. Thus, for example,

all assets and equipment (including trees and any

equipment used to grow and harvest wheat) placed

in service during a year for which the election is in

effect must be depreciated as provided in section

168(g)(2).

Example 2. Assume the same facts as in Example

1, except that Farmer A and members of Farmer A’s

family (as defined in paragraph (d)(4)(iii)(B) of this

section) also own 51 percent (in value) of the interests in Partnership P, which is engaged in the trade

or business of growing and harvesting corn. Partnership P is a related person to Farmer A under the

provisions of paragraph (d)(4)(iii) of this section.

Thus, the requirements to use the alternative depreciation system under section 168(g)(2) also apply to

any property used predominantly in a trade or business of farming which Partnership P places in service during a year for which an election made by

Farmer A is in effect.

(e) Exception for certain costs resulting from casualty losses—(1) In general.

Section 263A does not require the capitalization of costs that are attributable to the

replanting, cultivating, maintaining, and

developing of any plants bearing an edible crop for human consumption (including, but not limited to, plants that constitute a grove, orchard, or vineyard) that

1997–38 I.R.B.

were lost or damaged while owned by the

taxpayer by reason of freezing temperatures, disease, drought, pests, or other casualty (replanting costs). Such replanting

costs may be incurred with respect to

property other than the property on which

the damage or loss occurred to the extent

the acreage of the property with respect to

which the replanting costs are incurred is

not in excess of the acreage of the property on which the damage or loss occurred. This paragraph (e) applies only to

the replanting of plants of the same type

as those lost or damaged. This paragraph

(e) applies to plants replanted on the property on which the damage or loss occurred

or property of the same or lesser acreage

in the United States irrespective of differences in density between the lost or damaged and replanted plants. Plants bearing

crops for human consumption are those

crops normally eaten or drunk by humans.

Thus, for example, costs incurred with respect to replanting plants bearing jojoba

beans do not qualify for the exception

provided in this paragraph (e) because

that crop is not normally eaten or drunk

by humans.

(2) Ownership. Replanting costs described in paragraph (e)(1) of this section

generally must be incurred by the taxpayer that owned the property at the time

the plants were lost or damaged. Paragraph (e)(1) of this section will apply,

however, to costs incurred by a person

other than the taxpayer that owned the

plants at the time of damage or loss if—

(i) The taxpayer that owned the plants

at the time the damage or loss occurred

owns an equity interest of more than 50

percent in such plants at all times during

the taxable year in which the replanting

costs are paid or incurred; and

(ii) Such other person owns any portion of the remaining equity interest and

materially participates in the replanting,

cultivating, maintaining, or developing of

such plants during the taxable year in

which the replanting costs are paid or incurred. A person will be treated as materially participating for purposes of this provision if such person would otherwise

meet the requirements with respect to material participation within the meaning of

section 2032A(e)(6).

(3) Examples. The following examples illustrate the provisions of this paragraph (e):

Example 1. (i) Farmer T grows cherry trees that

have a preproductive period in excess of 2 years and

produce an annual crop. These cherries are normally eaten by humans. Farmer T grows the trees

on a 100 acre parcel of land (parcel 1) and the

groves of trees cover the entire acreage of parcel 1.

Farmer T also owns a 150 acre parcel of land (parcel

2) that Farmer T holds for future use. Both parcels

are in the United States. In 1998, the trees and the

irrigation and drainage systems that service the trees

are destroyed in a casualty (within the meaning of

paragraph (e)(1) of this section). Farmer T installs

new irrigation and drainage systems on parcel 1,

purchases young trees (seedlings), and plants the

seedlings on parcel 1.

(ii) The costs of the irrigation and drainage systems and the seedlings must be capitalized under

section 263A. In accordance with paragraph (e)(1)

of this section, the costs of planting, cultivating, developing, and maintaining the seedlings during their

preproductive period are not required to be capitalized by section 263A.

Example 2. (i) Assume the same facts as in Example 1 except that Farmer T decides to replant the

seedlings on parcel 2 rather than on parcel 1. Accordingly, Farmer T installs the new irrigation and

drainage systems on 100 acres of parcel 2 and plants

seedlings on those 100 acres.

(ii) The costs of the irrigation and drainage systems and the seedlings must be capitalized under

section 263A. Because the acreage of the related

portion of parcel 2 does not exceed the acreage of

the destroyed orchard on parcel 1, the costs of planting, cultivating, developing, and maintaining the

seedlings during their preproductive period are not

required to be capitalized by section 263A. See

paragraph (e)(1) of this section.

Example 3. (i) Assume the same facts as in Example 1 except that Farmer T replants the seedlings

on parcel 2 rather than on parcel 1, and Farmer T additionally decides to expand its operations by growing 125 rather than 100 acres of trees. Accordingly,

Farmer T installs new irrigation and drainage systems on 125 acres of parcel 2 and plants seedlings

on those 125 acres.

(ii) The costs of the irrigation and drainage systems and the seedlings must be capitalized under

section 263A. The costs of planting, cultivating, developing, and maintaining 100 acres of the trees during their preproductive period are not required to be

capitalized by section 263A. The costs of planting,

cultivating, maintaining, and developing the additional 25 acres are, however, subject to capitalization. See paragraph (e)(1) of this section.

(4) Special rule for citrus and almond

groves—(i) In general. The exception in

this paragraph (e) is available with respect

to a citrus or almond grove, notwithstanding the taxpayer’s election not to have

section 263A apply (described in paragraph (d) of this section).

(ii) Example. The following example

illustrates the provisions of this paragraph

(e)(4):

Example. (i) Farmer A, an individual, is engaged in the trade or business of farming. Farmer A

grows citrus trees that have a preproductive period

of 5 years. Farmer A elects, under paragraph (d) of

this section, not to have section 263A apply to the

preproductive period costs. This election, however,

is unavailable with respect to the preproductive period costs of a citrus grove incurred within the first 4

years after the trees were planted. See paragraph

September 22, 1997

(d)(2) of this section. After the citrus grove has become productive in marketable quantities, the citrus

grove is destroyed by a casualty within the meaning

of paragraph (e)(1) of this section.

(ii) Farmer A must capitalize the preproductive

period costs incurred before the close of the fourth

taxable year beginning with the year in which the

trees were permanently planted. As a result of the

election not to have section 263A apply to preproductive period costs, Farmer A may deduct the preproductive period costs incurred in the fifth year.

The costs of replanting, cultivating, maintaining, and

developing the trees destroyed by a casualty are exempted from capitalization under this paragraph (e).

(f) Effective date and transition rule.

In the case of property that is not inventory in the hands of the taxpayer, this section is generally effective for costs incurred on or after August 22, 1997, in

taxable years ending after such date. In

the case of inventory property, this section is generally effective for taxable

years beginning after August 22, 1997.

However, taxpayers in compliance with

§1.263A–4T in effect prior to August 22,

1997 (See 26 CFR part 1 edition revised

as of April 1, 1997.), and other administrative guidance, that continue to comply

with §1.263A–4T in effect prior to August

22, 1997 (See 26 CFR part 1 edition revised as of April 1, 1997.), and other administrative guidance, will not be required to apply these new temporary rules

until final regulations are published in the

Federal Register.

§1.471–6 [Amended]

Par. 7. Section 1.471–6 is amended as

follows:

1. Adding two sentences to the end of

paragraph (c).

2. Removing the second sentence in

paragraph (d) and adding two sentences in

its place.

3. Revising the last three sentences of

paragraph (f).

The additions and revision read as follows:

§1.471–6 Inventories of livestock raisers

and other farmers.

methods may be used to account for the

costs of property produced in a farming

business that are required to be capitalized under section 263A regardless of

whether the property being produced is

otherwise treated as inventory by the taxpayer, and regardless of whether the tax-

September 22, 1997

payer is otherwise using the cash or an accrual method of accounting. Thus, for example, the unit livestock method may be

utilized by a taxpayer in accounting under

section 263A for the costs of raising animals that will be used for draft, breeding,

or dairy purposes.

(d) * * * If this method of valuation is

used, it generally must be applied to all

property produced by the taxpayer in the

trade or business of farming, except as to

livestock accounted for, at the taxpayer’s

election, under the unit livestock method

of accounting. However, see §1.263A–

4T(c)(3) for an exception to this rule. * * *

(f) * * * Except as otherwise provided

in this paragraph, once established, the

unit prices and classifications selected by

the taxpayer must be consistently applied

in all subsequent taxable years. For taxable years beginning after August 22,

1997, a taxpayer using the unit livestock

method must, however, annually reevaluate the unit livestock prices and must adjust the prices upward to reflect increases

in the costs of raising livestock. The consent of the Commissioner is not required

to make such upward adjustments. No

other changes in the classification of animals or unit prices shall be made without

the consent of the Commissioner. See

§1.263A–4T for rules regarding the computation of costs for purposes of the unit

livestock method.

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

of the Federal Register for August 22, 1997, 62 F.R.

44542)

Section 704.—Partner’s

Distributive Share

26 CFR 1.704–1: Determination of partner’s distributive share.

(Also § 752; 1.752–2.)

Calculation of a partner’s limited

deficit restoration obligation. This rul-

ing holds that the amount of a partner’s

limited deficit restoration obligation is the

amount of money that the partner would

be required to contribute to the partnership to satisfy partnership liabilities if all

partnership property were sold for the

amount of the partnership’s book basis in

the property.

Rev. Rul. 97–38

ISSUE

If a partner is treated as having a limited deficit restoration obligation under

§ 1.704–1(b)(2)(ii)(c) of the Income Tax

Regulations by reason of the partner’s liability to the partnership’s creditors, how is

the amount of that obligation calculated?

FACTS

In year 1, GP and LP, general partner

and limited partner, each contribute $100x

to form limited partnership LPRS. In general, GP and LP share LPRS’s income and

loss 50 percent each. However, LPRS allocates to GP all depreciation deductions

and gain from the sale of depreciable assets up to the amount of those deductions.

LPRS maintains capital accounts according to the rules set forth in § 1.704– 1(b)(2)(iv), and the partners agree to liquidate

according to positive capital account balances under the rules of§ 1.704–1(b)(2)(ii)(b)(2).

Under applicable state law, GP is liable

to creditors for all partnership recourse liabilities, but LP has no personal liability.

GP and LP do not agree to unconditional

deficit restoration obligations as described in § 1.704–1(b)(2)(ii)(b)(3) (in

general, a deficit restoration obligation requires a partner to restore any deficit capital account balance following the liquidation of the partner ’s interest in the

partnership); GP is obligated to restore a

deficit capital account only to the extent

necessary to pay creditors. Thus, if LPRS

were to liquidate after paying all creditors

and LP had a positive capital account balance, GP would not be required to restore

GP’s deficit capital account to permit a

liquidating distribution to LP. In addition, GP and LP agree to a qualified income offset, thus satisfying the requirements of the alternate test for economic

effect of § 1.704–1(b)(2)(ii)(d). GP and

LP also agree that no allocation will be

made that causes or increases a deficit

1997–38 I.R.B.

balance in any partner’s capital account in

excess of the partner’s obligation to restore the deficit.

LPRS purchases depreciable property

for $1,000x from an unrelated seller, paying $200x in cash and borrowing the

$800x balance from an unrelated bank that

is not the seller of the property. The note

is recourse to LPRS. The principal of the

loan is due in 6 years; interest is payable

semi-annually at the applicable federal

rate. GP bears the entire economic risk of

loss for LPRS’s recourse liability, and

GP’s basis in LPRS (outside basis) is increased by $800x. See § 1.752–2.

In each of years 1 through 5, the property generates $200x of depreciation. All

other partnership deductions and losses

exactly equal income, so that in each of

years 1 through 5 LPRS has a net loss of

$200x.

LAW AND ANALYSIS

Under § 704(b) of the Internal Revenue

Code and the regulations thereunder, a

partnership’s allocations of income, gain,

loss, deduction, or credit set forth in the

partnership agreement are respected if

they have substantial economic effect. If

allocations under the partnership agreement would not have substantial economic effect, the partnership’s allocations

are determined according to the partners’

interests in the partnership. The fundamental principles for establishing economic effect require an allocation to be

consistent with the partners’ underlying

economic arrangement. A partner allocated a share of income should enjoy any

corresponding economic benefit, and a

partner allocated a share of losses or deductions should bear any corresponding

economic burden. See § 1.704–1(b)(2)(ii)(a).

To come within the safe harbor for establishing economic effect in § 1.704–

1(b)(2)(ii), partners must agree to maintain capital accounts under the rules of

§ 1.704–1(b)(2)(iv), liquidate according to

positive capital account balances, and

agree to an unconditional deficit restoration obligation for any partner with a

deficit in that partner’s capital account, as

described in § 1.704–1(b)(2)(ii)(b)(3).

Alternatively, the partnership may satisfy

the requirements of the alternate test for

1997–38 I.R.B.

economic effect provided in § 1.704–

1(b)(2)(ii)(d). LPRS’s partnership agreement complies with the alternate test for

economic effect.

The alternate test for economic effect

requires the partners to agree to a qualified income offset in lieu of an unconditional deficit restoration obligation. If the

partners so agree, allocations will have

economic effect to the extent that they do

not create a deficit capital account for any

partner (in excess of any limited deficit

restoration obligation of that partner) as

of the end of the partnership taxable year

to which the allocation relates. Section

1.704–1(b)(2)(ii)(d)(3) (flush language).

A partner is treated as having a limited

deficit restoration obligation to the extent

of: (1) the outstanding principal balance

of any promissory note contributed to the

partnership by the partner, and (2) the

amount of any unconditional obligation of

the partner (whether imposed by the partnership agreement or by state or local

law) to make subsequent contributions to

the partnership. Section 1.704–1(b)(2)(ii)(c).

LP has no obligation under the partnership agreement or state or local law to

make additional contributions to the partnership and, therefore, has no deficit

restoration obligation. Under applicable

state law, GP may have to make additional contributions to the partnership to

pay creditors. However, GP’s obligation

only arises to the extent that the amount

of LPRS’s liabilities exceeds the value of

LPRS’s assets available to satisfy the liabilities. Thus, the amount of GP’s limited

deficit restoration obligation each year is

equal to the difference between the

amount of the partnership’s recourse liabilities at the end of the year and the value

of the partnership’s assets available to satisfy the liabilities at the end of the year.

To ensure consistency with the other

requirements of the regulations under

§ 704(b), where a partner’s obligation to

make additional contributions to the partnership is dependent on the value of the

partnership’s assets, the partner’s deficit

restoration obligation must be computed

by reference to the rules for determining

the value of partnership property contained in the regulations under § 704(b).

Consequently, in computing GP’s limited

deficit restoration obligation, the value of

the partnership’s assets is conclusively

presumed to equal the book basis of those

assets under the capital account maintenance rules of § 1.704–1(b)(2)(iv). See

§ 1.704–1(b)(2)(ii)(d)(value equals basis

presumption applies for purposes of determining expected allocations and distributions under the alternate test for economic effect); § 1.704–1(b)(2)(iii)(value

equals basis presumption applies for purposes of the substantiality test); § 1.704–

1(b)(3)(iii) (value equals basis presumption applies for purposes of the partner’s

interest in the partnership test); § 1.704–

2(d) (value equals basis presumption applies in computing partnership minimum

gain).

The LPRS agreement allocates all depreciation deductions and gain on the sale

of depreciable property to the extent of

those deductions to GP. Because LPRS’s

partnership agreement satisfies the alternate test for economic effect, the allocations of depreciation deductions to GP

will have economic effect to the extent

that they do not create a deficit capital account for GP in excess of GP’s obligation

to restore the deficit balance. At the end

of year 1, the basis of the depreciable

property has been reduced to $800x. If

LPRS liquidated at the beginning of year

2, selling its depreciable property for its

basis of $800x, the proceeds would be

used to repay the $800x principal on

LPRS’s recourse liability. All of LPRS’s

creditors would be satisfied and GP

would have no obligation to contribute to

pay them. Thus, at the end of year 1, GP

has no obligation to restore a deficit in its

capital account.

Because GP has no obligation to restore a deficit balance in its capital account at the end of year 1, an allocation

that reduces GP’s capital account below

$0 is not permitted under the partnership

agreement and would not satisfy the alternate test for economic effect. An allocation of $200x of depreciation deductions

to GP would reduce GP’s capital account

to negative $100x. Because the allocation

would result in a deficit capital account

balance in excess of GP’s obligation to restore, the allocation is not permitted under

the partnership agreement, and would not

satisfy the safe harbor under the alternate

test for economic effect. Therefore, the

deductions for year 1 must be allocated

September 22, 1997

$100x each to GP and LP (which is in accordance with their interests in the partnership).

The allocation of depreciation of $200x

to GP in year 2 has economic effect. Although the allocation reduces GP’s capital

account to negative $200x, while LP’s

capital account remains $0, the allocation

to GP does not create a deficit capital account in excess of GP’s limited deficit

restoration obligation. If LPRS liquidated

at the beginning of year 3, selling the depreciable property for its basis of $600x,

the proceeds would be applied toward the

$800x LPRS liability. Because GP is obligated to restore a deficit capital account

to the extent necessary to pay creditors,

GP would be required to contribute $200x

to LPRS to satisfy the outstanding liability. Thus, at the end of year 2, GP has a

deficit restoration obligation of $200x,

and the allocation of depreciation to GP

does not reduce GP’s capital account

below its obligation to restore a deficit

capital account.

This analysis also applies to the allocation of $200x of depreciation to GP in

years 3 through 5. At the beginning of year

6, when the property is fully depreciated,

the $800x principal amount of the partnership liability is due. The partners’ capital

accounts at the beginning of year 6 will

equal negative $800x and $0, respectively,

for GP and LP. Because value is conclusively presumed to equal basis, the depreciable property would be worthless and

could not be used to satisfy LPRS’s $800x

liability. As a result, GP is deemed to be

required to contribute $800x to LPRS. A

contribution by GP to satisfy this limited

deficit restoration obligation would increase GP’s capital account balance to $0.

HOLDING

When a partner is treated as having a

limited deficit restoration obligation by

reason of the partner’s liability to the partnership’s creditors, the amount of that

obligation is the amount of money that the

partner would be required to contribute to

the partnership to satisfy partnership liabilities if all partnership property were

sold for the amount of the partnership’s

book basis in the property.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Robert Honigman of the Office

September 22, 1997

of Assistant Chief Counsel (Passthroughs

and Special Industries). For further information regarding this revenue ruling, contact Robert Honigman on (202) 622-3050

(not a toll-free call).

Section 1245.—Gain From

Dispositions of Certain

Depreciable Property

26 CFR 1.1245–1: General rule for treatment

of gain from dispositions of certain depreciable

property.

T.D. 8730

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Allocations of Depreciation

Recapture Among Partners in a

Partnership

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains

final regulations relating to the allocation

of depreciation recapture among partners

in a partnership. The final regulations

amend existing regulations to require that

gain characterized as depreciation recapture be allocated, to the extent possible, to

the partners who took the depreciation or

amortization deductions. The final regulations affect partnerships (and their partners) that sell or dispose of certain depreciable or amortizable property.

DATES: These regulations are effective

August 20, 1997.

For dates of applicability of these regulations, see §§ 1.704–3(f) and 1.1245–

1(e)(2)(iv).

FOR FURTHER INFORMATION CONTACT: Daniel J. Coburn, (202) 622-3050

(not a toll-free number)

SUPPLEMENTARY INFORMATION:

Background

This document amends the Income Tax

Regulations (26 CFR part 1) relating to

the characterization and allocation of depreciation recapture among partners in a

partnership. Section 1245 of the Internal

Revenue Code requires taxpayers to recharacterize as ordinary income some or

all of the gain on the disposition of certain

types of business properties. The amount

recharacterized as ordinary income (depreciation recapture) is the lesser of (1)

the gain realized on the disposition, or (2)

the total deductions allowed or allowable

for depreciation or amortization from the

property.

On December 12, 1996, the IRS published in the Federal Register (61 F.R.

65371) a notice of proposed rulemaking

(REG–209762–95) to provide guidance

on partnership allocations of depreciation

recapture. Although a public hearing was

scheduled for March 27, 1997, the IRS

cancelled the hearing because it received

no requests to speak.

Explanation of Provisions

I. General Background

The regulations provide guidance on

allocating depreciation recapture among

partners, including depreciation recapture

attributable to contributed property.

The regulations provide that a partner’s

share of depreciation recapture is equal to

the lesser of (1) the partner’s share of total

gain arising from the disposition of the

property (gain limitation) or (2) the partner’s share of depreciation or amortization from the property (as defined in paragraph (e)(2)(ii) of the regulations). This

rule seeks to insure, to the extent possible,

that a partner recognizes recapture on the

disposition of property in an amount

equal to the depreciation or amortization

deductions from the property previously

taken by the partner. Any depreciation recapture that is not allocated to a partner

due to the gain limitation is allocated

among those partners whose shares of

total gain on the disposition of the property exceed their shares of depreciation or

amortization from the property. This unallocated depreciation recapture is allocated among those partners in proportion

to their relative shares of the total gain on

the disposition of the property.

The regulations provide special rules

for determining a partner’s share of depreciation or amortization from contributed

property subject to section 704(c). Under

the regulations, a contributing partner’s

share of depreciation or amortization includes depreciation or amortization allowed or allowable prior to contribution.

1997–38 I.R.B.

In addition, the regulations provide that

curative and remedial allocations generally reduce the contributing partner’s

share of depreciation or amortization and

increase the noncontributing partners’

shares of depreciation or amortization.

II. Changes in Response to Comments

In response to comments, the regulations clarify the effect of curative and remedial allocations on the partners’ shares

of depreciation or amortization from contributed property. The examples now

demonstrate that curative and remedial allocations can reduce the contributing partner’s share of depreciation or amortization

to zero, but not below zero. Once the contributing partner’s share of depreciation or

amortization has been reduced to zero, the

curative or remedial allocations do not affect the contributing partner’s share of depreciation or amortization. However, the

curative or remedial allocations continue

to affect the noncontributing partners’

shares of depreciation or amortization.

The regulations have also been revised

to make it clear that these amendments to

the section 1245 regulations only affect

how the depreciation recapture recognized by the partnership is allocated

among the partners; they do not affect the

computation of depreciation recapture at

the partnership level. The regulations recognize that even absent a gain limitation,

remedial and curative allocations may

cause the total of the partners’ shares of

depreciation to exceed the amount of depreciation recapture recognized at the

partnership level. In such a case, the partnership’s depreciation recapture with respect to the contributed property is to be

allocated among the partners in proportion to their relative shares of depreciation

or amortization with respect to that property. However, no partner’s share of depreciation recapture from the property can

exceed that partner’s share of the total

gain arising from the disposition of the

property.

Example 2 of paragraph (e)(2)(iii) of

the regulations has also been revised to

demonstrate more thoroughly how recapture is allocated when a partner’s share of

depreciation recapture is capped by the

partner’s share of gain from the disposition of the property. As illustrated in the

example, some partnerships may find it

necessary to make multiple reallocations

1997–38 I.R.B.

of depreciation recapture from a property

if allocations under the general rule (allocations in proportion to the remaining

partners’ shares of gain from the disposition of the property) cause a remaining

partner’s share of depreciation to exceed

the partner’s share of gain from the disposition of the property.

One commentator requested that the

regulations allow but not require that partnerships allocate depreciation recapture in

proportion to the partners’ shares of the

gain from the disposition of the property.

This change was not made because the

IRS and Treasury continue to believe that

matching depreciation recapture allocations to depreciation allocations most appropriately carries out the policies underlying section 1245.

A number of terminology and stylistic

changes have also been made to these regulations. These changes were made for

purposes of economy and should not be

interpreted as substantive changes.

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 regulations do 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, the

notice of proposed rulemaking preceding

these regulations was submitted to the

Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Daniel J. Coburn, Office of Assistant Chief Counsel (Passthroughs and

Special Industries), IRS. However, other

personnel from the IRS and Treasury 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 1.704–3 is amended by:

(1) Adding new paragraph (a)(11).

(2) Revising paragraph (f).

The addition and revision read as follows:

§1.704–3 Contributed property.

(a) * * *

(11) Contributing and noncontributing

partners’ recapture shares. For special

rules applicable to the allocation of depreciation recapture with respect to property

contributed by a partner to a partnership,

see §§1.1245–1(e)(2) and 1.1250–1(f).

(f) Effective date. With the exception

of paragraph (a)(11) of this section, this

section applies to properties contributed

to a partnership and to restatements pursuant to §1.704–1(b)(2)(iv)(f) on or after

December 21, 1993. Paragraph (a)(11) of

this section applies to properties contributed by a partner to a partnership on or

after August 20, 1997. However, partnerships may rely on paragraph (a)(11) of

this section for properties contributed before August 20, 1997, and disposed of on

or after August 20, 1997.

Par. 3. Section 1.1245–1 is amended

by revising paragraph (e)(2) to read as

follows:

§1.1245–1 General rule for treatment

of gain from dispositions of certain

depreciable property.

(e) * * *

(2)(i) Unless paragraph (e)(3) of this

section applies, a partner’s distributive

share of gain recognized under section

1245(a)(1) by the partnership is equal to

the lesser of the partner’s share of total

gain from the disposition of the property

(gain limitation) or the partner’s share of

depreciation or amortization with respect

to the property (as determined under paragraph (e)(2)(ii) of this section). Any gain

recognized under section 1245(a)(1) by

the partnership that is not allocated under

the first sentence of this paragraph

September 22, 1997

(e)(2)(i) (excess depreciation recapture) is

allocated among the partners whose

shares of total gain from the disposition of

the property exceed their shares of depreciation or amortization with respect to the

property. Excess depreciation recapture

is allocated among those partners in proportion to their relative shares of the total

gain (including gain recognized under

section 1245(a)(1)) from the disposition

of the property that is allocated to the

partners who are not subject to the gain

limitation. See Example 2 of paragraph

(e)(2)(iii) of this section.

(ii)(A) Subject to the adjustments described in paragraphs (e)(2)(ii)(B) and

(e)(2)(ii)(C) of this section, a partner’s

share of depreciation or amortization with

respect to property equals the total amount

of allowed or allowable depreciation or

amortization previously allocated to that

partner with respect to the property.

(B) If a partner transfers a partnership

interest, a share of depreciation or amortization must be allocated to the transferee

partner as it would have been allocated to

the transferor partner. If the partner transfers a portion of the partnership interest, a

share of depreciation or amortization proportionate to the interest transferred must

be allocated to the transferee partner.

(C)(1) A partner’s share of depreciation

or amortization with respect to property

contributed by the partner includes the

amount of depreciation or amortization

allowed or allowable to the partner for the

period before the property is contributed

(2) A partner’s share of depreciation or

amortization with respect to property contributed by a partner is adjusted to account for any curative allocations. (See

§1.704–3(c) for a description of the traditional method with curative allocations.)

The contributing partner’s share of depreciation or amortization with respect to the

contributed property is decreased (but not

below zero) by the amount of any curative

allocation of ordinary income to the contributing partner with respect to that property and by the amount of any curative allocation of deduction or loss (other than

capital loss) to the noncontributing partners with respect to that property. A noncontributing partner’s share of depreciation or amortization with respect to the

contributed property is increased by the

noncontributing partner’s share of any curative allocation of ordinary income to the

September 22, 1997

contributing partner with respect to that

property and by the amount of any curative allocation of deduction or loss (other

than capital loss) to the noncontributing

partner with respect to that property. The

partners’ shares of depreciation or amortization with respect to property from

which curative allocations of depreciation

or amortization are taken is determined

without regard to those curative allocations. See Example 3(iii) of paragraph

(e)(2)(iii) of this section.

(3) A partner’s share of depreciation or

amortization with respect to property contributed by a partner is adjusted to account for any remedial allocations. (See

§1.704–3(d) for a description of the remedial allocation method.) The contributing

partner’s share of depreciation or amortization with respect to the contributed

property is decreased (but not below zero)

by the amount of any remedial allocation

of income to the contributing partner with

respect to that property. A noncontributing partner’s share of depreciation or

amortization with respect to the contributed property is increased by the

amount of any remedial allocation of depreciation or amortization to the noncontributing partner with respect to that property. See Example 3(iv) of paragraph

(e)(2)(iii) of this section.

(4) If, under paragraphs (e)(2)(ii)(C)(2)

and (e)(2)(ii)(C)(3) of this section, the

partners’ shares of depreciation or amortization with respect to a contributed property exceed the adjustments reflected in

the adjusted basis of the property under

§1.1245–2(a) at the partnership level,

then the partnership’s gain recognized

under section 1245(a)(1) with respect to

that property is allocated among the partners in proportion to their relative shares

of depreciation or amortization (subject to

any gain limitation that might apply).

(5) This paragraph (e)(2)(ii)(C) also applies in determining a partner’s share of

depreciation or amortization with respect

to property for which differences between

book value and adjusted tax basis are created when a partnership revalues partnership property pursuant to §1.704–

1(b)(2)(iv)(f).

(iii) Examples. The application of this

paragraph (e)(2) may be illustrated by the

following examples:

Example 1. Recapture allocations. (i) Facts. A

and B each contribute $5,000 cash to form AB, a

general partnership. The partnership agreement provides that depreciation deductions will be allocated

90 percent to A and 10 percent to B, and, on the sale

of depreciable property, A will first be allocated gain

to the extent necessary to equalize A’s and B’s capital accounts. Any remaining gain will be allocated

50 percent to A and 50 percent to B. In its first year

of operations, AB purchases depreciable equipment

for $5,000. AB depreciates the equipment over its

5-year recovery period and elects to use the straightline method. In its first year of operations, AB’s operating income equals its expenses (other than depreciation). (To simplify this example, AB’s

depreciation deductions are determined without regard to any first-year depreciation conventions.)

(ii) Year 1. In its first year of operations, AB has

$1,000 of depreciation from the partnership equipment. In accordance with the partnership agreement, AB allocates 90 percent ($900) of the depreciation to A and 10 percent ($100) of the depreciation

to B. At the end of the year, AB sells the equipment

for $5,200, recognizing $1,200 of gain ($5,200

amount realized less $4,000 adjusted tax basis). In

accordance with the partnership agreement, the first

$800 of gain is allocated to A to equalize the partners’ capital accounts, and the remaining $400 of

gain is allocated $200 to A and $200 to B.

(iii) Recapture allocations. $1,000 of the gain

from the sale of the equipment is treated as section

1245(a)(1) gain. Under paragraph (e)(2)(i) of this

section, each partner ’s share of the section

1245(a)(1) gain is equal to the lesser of the partner’s

share of total gain recognized on the sale of the

equipment or the partner’s share of total depreciation with respect to the equipment. Thus, A’s share

of the section 1245(a)(1) gain is $900 (the lesser of

A’s share of the total gain ($1,000) and A’s share of

depreciation ($900)). B’s share of the section

1245(a)(1) gain is $100 (the lesser of B’s share of

the total gain ($200) and B’s share of depreciation

($100)). Accordingly, $900 of the $1,000 of total

gain allocated to A is treated as ordinary income and

$100 of the $200 of total gain allocated to B is

treated as ordinary income.

Example 2. Recapture allocation subject to gain

limitation. (i) Facts. A, B, and C form general partnership ABC. The partnership agreement provides

that depreciation deductions will be allocated

equally among the partners, but that gain from the

sale of depreciable property will be allocated 75 percent to A and 25 percent to B. ABC purchases depreciable personal property for $300 and subsequently allocates $100 of depreciation deductions

each to A, B, and C, reducing the adjusted tax basis

of the property to $0. ABC then sells the property

for $440. ABC allocates $330 of the gain to A (75

percent of $440) and allocates $110 of the gain to B

(25 percent of $440). No gain is allocated to C.

(ii) Application of gain limitation. Each partner’s

share of depreciation with respect to the property is

$100. C’s share of the total gain from the disposition of the property, however, is $0. As a result,

under the gain limitation provision in paragraph

(e)(2)(i) of this section, C’s share of section

1245(a)(1) gain is limited to $0.

(iii) Excess depreciation recapture. Under paragraph (e)(2)(i) of this section, the $100 of section

1245(a)(1) gain that cannot be allocated to C under

the gain limitation provision (excess depreciation recapture) is allocated to A and B (the partners not

subject to the gain limitation at the time of the allocation) in proportion to their relative shares of total

gain from the disposition of the property. A’s relative share of the total gain allocated to A and B is 75

percent ($330 of $440 total gain). B’s relative share

of the total gain allocated to A and B is 25 percent

($110 of $440 total gain). However, under the gain

limitation provision of paragraph (e)(2)(i) of this

1997–38 I.R.B.

section, B cannot be allocated 25 percent of the excess depreciation recapture ($25) because that

would result in a total allocation of $125 of depreciation recapture to B (a $100 allocation equal to B’s

share of depreciation plus a $25 allocation of excess

depreciation recapture), which is in excess of B’s

share of the total gain from the disposition of the

property ($110). Therefore, only $10 of excess depreciation recapture is allocated to B and the remaining $90 of excess depreciation recapture is allocated to A. A is not subject to the gain limitation

because A’s share of the total gain ($330) still exceeds A’s share of section 1245(a)(1) gain ($190).

Accordingly, all $110 of the total gain allocated to B

is treated as ordinary income ($100 share of depreciation allocated to B plus $10 of excess depreciation

recapture) and $190 of the total gain allocated to A is

treated as ordinary income ($100 share of depreciation allocated to A plus $90 of excess depreciation

recapture).

Example 3. Determination of partners’ shares of

depreciation with respect to contributed property. (i)

Facts. C and D form partnership CD as equal partners. C contributes depreciable personal property

C1 with an adjusted tax basis of $800 and a fair market value of $2,800. Prior to the contribution, C

claimed $200 of depreciation from C1. At the time

of the contribution, C1 is depreciable under the

straight-line method and has four years remaining

on its 5-year recovery period. D contributes $2,800

cash, which CD uses to purchase depreciable personal property D1, which is depreciable over seven

years under the straight-line method. (To simplify

the example, all depreciation is determined without

regard to any first-year depreciation conventions.)

(ii) Traditional method. C1 generates $700 of

book depreciation (1/4 of $2,800 book value) and

$200 of tax depreciation (1/4 of $800 adjusted tax

basis) each year. C and D will each be allocated

$350 of book depreciation from C1 in year 1. Under

the traditional method of making section 704(c) allocations, D will be allocated the entire $200 of tax

depreciation from C1 in year 1. D1 generates $400

of book and tax depreciation each year (1/7 of

$2,800 book value and adjusted tax basis). C and D

will each be allocated $200 of book and tax depreciation from D1 in year 1. As a result, after the first

year of partnership operations, C’s share of depreciation with respect to C1 is $200 (the depreciation

taken by C prior to contribution) and D’s share of

depreciation with respect to C1 is $200 (the amount

of tax depreciation allocated to D). C and D each

have a $200 share of depreciation with respect to

D1. At the end of four years, C’s share of depreciation with respect to C1 will be $200 (the depreciation taken by C prior to contribution) and D’s share

of depreciation with respect to C1 will be $800 (four

years of $200 depreciation per year). At the end of

four years, C and D will each have an $800 share of

depreciation with respect to D1 (four years of $200

depreciation per year).

(iii) Effect of curative allocations. (A) Year 1. If

the partnership elects to make curative allocations

1997–38 I.R.B.

under §1.704–3(c) using depreciation from D1, the

results will be the same as under the traditional

method, except that $150 of the $200 of tax depreciation from D1 that would be allocated to C under the

traditional method will be allocated to D as additional depreciation with respect to C1. As a result,

after the first year of partnership operations, C’s

share of depreciation with respect to C1 will be reduced to $50 (the total depreciation taken by C prior

to contribution ($200) decreased by the amount of

the curative allocation to D ($150)). D’s share of depreciation with respect to C1 will be $350 (the depreciation allocated to D under the traditional

method ($200) increased by the amount of the curative allocation to D ($150)). C and D will each have

a $200 share of depreciation with respect to D1.

(B) Year 4. At the end of four years, C’s share of

depreciation with respect to C1 will be reduced to $0

(the total depreciation taken by C prior to contribution ($200) decreased, but not below zero, by the

amount of the curative allocations to D ($600)), and

D’s share of depreciation with respect to C1 will be

$1,400 (the total depreciation allocated to D under

the traditional method ($800) increased by the

amount of the curative allocations to D ($600)).

However, CD’s section 1245(a)(1) gain with respect

to C1 will not be more than $1,000 (CD’s tax depreciation ($800) plus C’s tax depreciation prior to contribution ($200)). Under paragraph (e)(2)(ii)(C)(4)

of this section, because the partners’ shares of depreciation with respect to C1 exceed the adjustments reflected in the property’s adjusted basis, CD’s section

1245(a)(1) gain will be allocated in proportion to the

partners’ relative shares of depreciation with respect

to C1. Because C’s share of depreciation with respect to C1 is $0, and D’s share of depreciation with

respect to C1 is $1,400, all of CD’s $1,000 of section

1245(a)(1) gain will be allocated to D. At the end of

four years, C and D will each have an $800 share of

depreciation with respect to D1 (four years of $200

depreciation per year).

(iv) Effect of remedial allocations. (A) Year 1. If

the partnership elects to make remedial allocations

under §1.704-3(d), there will be $600 of book depreciation from C1 in year 1. (Under the remedial allocation method, the amount by which C1’s book basis

($2,800) exceeds its tax basis ($800) is depreciated

over a 5-year life, rather than a 4-year life.) C and D

will each be allocated one-half ($300) of the total

book depreciation. As under the traditional method,

D will be allocated all $200 of tax depreciation from

C1. Because the ceiling rule would cause a disparity

of $100 between D’s book and tax allocations of depreciation, D will also receive a $100 remedial allocation of depreciation with respect to C1, and C will

receive a $100 remedial allocation of income with

respect to C1. As a result, after the first year of partnership operations, D’s share of depreciation with

respect to C1 is $300 (the depreciation allocated to

D under the traditional method ($200) increased by

the amount of the remedial allocation ($100)). C’s

share of depreciation with respect to C1 is $100 (the

total depreciation taken by C prior to contribution

($200) decreased by the amount of the remedial allocation of income ($100)). C and D will each have

a $200 share of depreciation with respect to D1.

(B) Year 5. At the end of five years, C’s share of

depreciation with respect to C1 will be $0 (the total

depreciation taken by C prior to contribution ($200)

decreased, but not below zero, by the total amount of

the remedial allocations of income to C ($600)). D’s

share of depreciation with respect to C1 will be

$1,400 (the total depreciation allocated to D under

the traditional method ($800) increased by the total

amount of the remedial allocations of depreciation to

D ($600)). However, CD’s section 1245(a)(1) gain

with respect to C1 will not be more than $1,000

(CD’s tax depreciation ($800) plus C’s tax depreciation prior to contribution ($200)). Under paragraph

(e)(2)(ii)(C)(4) of this section, because the partners’

shares of depreciation with respect to C1 exceed the

adjustments reflected in the property’s adjusted basis,

CD’s section 1245(a)(1) gain will be allocated in proportion to the partners’ relative shares of depreciation

with respect to C1. Because C’s share of depreciation with respect to C1 is $0, and D’s share of depreciation with respect to C1 is $1,400, all of CD’s

$1,000 of section 1245(a)(1) gain will be allocated to

D. At the end of five years, C and D will each have a

$1,000 share of depreciation with respect to D1 (five

years of $200 depreciation per year).

(iv) Effective date. This paragraph

(e)(2) is effective for properties acquired

by a partnership on or after August 20,

1997. However, partnerships may rely on

this paragraph (e)(2) for properties acquired before August 20, 1997, and disposed of on or after August 20, 1997.

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

Approved July 8, 1997.

Donald C. Lubick,

Acting Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on August 19, 1997, 8:45 a.m., and published in the issue

of the Federal Register for August 20, 1997, 62 F.R.

44214)

September 22, 1997

Part III. Administrative, Procedural, and Miscellaneous

Weighted Average Interest Rate

Update

Notice 97–51

Notice 88–73 provides guidelines for

determining the weighted average interest

rate and the resulting permissible range of

interest rates used to calculate current liability for the purpose of the full funding

limitation of § 412(c)(7) of the Internal

Revenue Code as amended by the Omnibus Budget Reconciliation Act of 1987

and as further amended by the Uruguay

Round Agreements Act, Pub. L. 103–465

(GATT).

Month

Year

Weighted

Average

September

1997

6.84

DRAFTING INFORMATION

The principal author of this notice is

Donna Prestia of the Employee Plans Division. For further information regarding

this notice, call (202) 622-6076 between

2:30 and 3:30 p.m. Eastern time (not a

toll-free number). Ms. Prestia’s number

is (202) 622-7377 (also not a toll-free

number).

Qualified State Tuition Programs

Notice 97–52

Section 529 of the Internal Revenue

Code provides tax-exempt status to qualified State tuition programs (“QSTPs”).

This notice extends the relief granted in

Notice 96–58, 1996–2 C.B. 215 concerning the reporting requirements applicable

to QSTPs described in § 529 through

1998. Notice 96–58 provides that reporting will not be required for any distribu-

September 22, 1997

90% to 107%

Permissible

Range

90% to 110%

Permissible

Range

6.15 to 7.31

6.15 to 7.52

tion made by, or benefit furnished in-kind

under, a QSTP prior to 1998. In addition,

Notice 96–58 provides that the Internal

Revenue Service will not assess penalties

against program administrators who do

not file information returns or provide

payee statements on distributions made

during 1997 and prior years.

Sections 211 and 1601(h)(1) of the

Taxpayer Relief Act of 1997, Pub. L.

105–34 (the “Act”) amend § 529. The

Act expands the definitions of “qualified

higher education expenses” to include

room and board expenses, “eligible educational institution” to include certain

proprietary institutions and post-secondary vocational institutions, and “member of the family” to include persons described in § 152(a)(1) through (8). The

Act clarifies the prohibition against investment direction in § 529(b)(5). The

Act amends the gift tax treatment of contributions or transfers to QSTPs made

after August 5, 1997, and the estate tax

The average yield on the 30-year Treasury Constant Maturities for August 1997

is 6.58 percent.

The following rates were determined

for the plan years beginning in the month

shown below.

treatment for decedents dying after June

8, 1997.

The Internal Revenue Service is continuing to develop reporting requirements for

QSTPs. Because guidance on the reporting requirements must now take account

of these amendments and because States

will need additional time to implement appropriate recordkeeping and reporting procedures, reporting will not be required for

calendar years prior to 1999. Further, the

Internal Revenue Service will not assess

penalties against program administrators

who do not file information returns or provide payee statements on distributions

made during 1998 and prior years.

For further information concerning this

notice contact Monice Rosenbaum of the

Office of Associate Chief Counsel (Employee Benefits and Exempt Organizations) at (202) 622-6070 (not a toll-free

number).

1997–38 I.R.B.

Part IV. Items of General Interest

Notice of Proposed Rulemaking

and Notice of Public Hearing

Rules for Property Produced in

a Farming Business

REG–208151–91

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing.

SUMMARY: In T.D. 8729 on page 4 of

this Bulletin, the IRS is issuing temporary

regulations relating to the application of

section 263A of the Internal Revenue

Code of 1986 to property produced in a

farming business. The regulations affect

taxpayers engaged in the business of

farming that grow or raise plants or animals. The text of T.D. 8729 also serves as

the text of these proposed regulations.

This document provides notice of a public

hearing on these proposed regulations.

DATES: Written comments must be received by November 20, 1997. Requests

to speak and outlines of topics to be discussed at the public hearing scheduled for

November 19, 1997, must be received by

October 29, 1997.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG-208151–91),

room 5226, Internal Revenue Service,

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

hand delivered between the hours of 8 a.m.

and 5 p.m. to: CC:DOM:CORP:R (REG208151–91), 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/comment.html. The

public hearing will be held in room 2615,

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

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Jan

1997–38 I.R.B.

Skelton, (202) 622-4970; concerning submissions and the hearing, Michael

Slaughter, (202) 622-7190 (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Background

T.D. 8729 amends Regulations on Income Taxes (26 CFR part 1). The regulations provide guidance with respect to the

application of section 263A to property

produced in a farming business.

The text of those temporary regulations

also serves as the text of these proposed

regulations. The preamble to the 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 has also 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 regulations do 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

impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations, consideration will be given to any written (a signed

original and eight (8) copies) or electronic

comments that are submitted timely to the

IRS. All comments will be available for

public inspection and copying.

A public hearing has been scheduled

for Wednesday, November 19, 1997, at 10

a.m., at the Internal Revenue Building,

1111 Constitution Ave., NW, Washington,

DC, 20224. Because of access restrictions, visitors will not be admitted beyond

the 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 written

comments by November 20, 1997 and

submit an outline of the topics to be discussed and the time to be devoted to each

topic (signed original and eight (8)

copies) by October 29, 1997.

A period of ten 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 Jan Skelton of the Office of Assistant Chief Counsel (Income Tax & Accounting). 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 1.263A–0 is amended

by:

1. Revising the introductory text.

2. Adding the entries for §1.263A–4.

The addition and revision read as follows:

§1.263A–0 Outline of regulations under

section 263A.

This section lists the paragraphs in

§§1.263A–1 through 1.263A–4 and

§§1.263A–8 through 1.263A-15.

§1.263A–4 Rules for property produced

in a farming business.

[The text of the proposed entries for

§1.263A–4 in §1.263A–0 is the same as

September 22, 1997

the text of the entries for §1.263A–4T in

§1.263A–0T published in T.D. 8729].

* * * * *

Par. 3. Section 1.263A–4 is amended

by revising the section heading and

adding new text to read as follows:

§1.263A–4 Rules for property produced

in a farming business.

[The proposed text of §1.263A–4 is the

same as the text in §1.263A–4T published

in T.D. 8729.]

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on August 21, 1997, 8:45 a.m., and published in the issue

of the Federal Register for August 22, 1997, 62 F.R.

44607)

Foundations Status of Certain

Organizations

Announcement 97–97

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:

Acadia Homes for Students, Ellsworth,

Advance, Inc., Derby, CT

Afghan Hindu Association, Inc.,

Flushing, NY

African Methodist Ministries Alliance,

Buffalo, NY

African Women Against Aids Network,

Inc., New Rochelle, NY

Akademia Duncan, New York, NY

Akiele, Inc., Yorktown Heights, NY

September 22, 1997

The Albany Civic Forum, Inc., Albany,

Allied Printing Trades Council

Community Services, Inc., New York,

All Species Wildlife Sanctuary &

Environmental Learning Center,

Rockport, ME

American Central European Dental

Institute, Ltd., Boston, MA

American Friends of Elah, Inc., New

York, NY

American Friends of the Cambodia Trust,

Inc., New York, NY

American Friends of the Russian

Academy, Inc., New York, NY

The American Music Ensemble, Inc.,

Winchester, MA

Americans for Exchange of Culture

Education & Language in East Central

Europe & Russia, Inc., Patchogue, NY

Anagram Productions, Inc., Boston, MA

Andrew E. Tyler Scholarship Foundation,

New York, NY

Animal Connection, Inc., New York, NY

Animal Control Officers Association of

Massachusetts, Inc., Canton, MA

Anna Anderson Doering Memorial

Scholarship Trust, Cromwell, CT

Aquila Legis Foundation of North

America, Inc., New York, NY

Armenian Art Alliance, Watertown, MA

Artspeak, Inc., North Andover, MA

Asgog Foundation, Inc., New York, NY

Ashland Elementary School PTO, Inc.,

Ashland, MA

Association of Citizen Advocacy

Programs in Connecticut, Inc.,

Bridgeport, CT

Ballet Bagata, Inc., Brooklyn, NY

Barnstable County Hospital Foundation,

Inc., Yarmouth, MA

Bartlett-Jackson Recreation Youth

Center, Intervale, NH

Beam Project, Inc., Allston, MA

Black Christians Against Substance

Abuse, Austin, TX

Bone Marrow Transplant Family Support

Network, Avon, CT

Brooklyn Heights Center for Counseling,

Inc., Brooklyn, NY

Central Harlem Local Development

Corporation, New York, NY

Central Harlem Partnership, New York,

Citizens for a Safer Minnesota Education

Fund, St. Paul, MN

Community Television Association of

Maine, South Portland, ME

Connecticut Junior Academy of Science

and Engineering, Hamden, CT

Dekos A Foundation for Education,

Harvard, MA

Don Martin Pena Sabana, Inc., New

York, NY

East Hampton-Marlborough Foundation,

East Hampton, CT

84th Precinct Community Council,

Brooklyn, NY

1st Ward Boosters, Lackawanna, NY

Five Towns Jewish Council, Inc.,

Woodmere, NY

Flora T. Little Trust, Bridgewater, MA

Fraternidad Sangermenos Unidos, Inc.,

New York, NY

Golden Eagle Institute, Inc., Flushing,

Heart Center Foundation, Manchester,

Hingham Music Parents Association,

Hingham, MA

Hispanic Coalition of Greater Waterbury,

Inc., Waterbury, CT

Homeless Resource Center, Inc., Wards

Island, NY

International Midwives Exchange, Inc.,

Kingston, NY

Island Waldorf Community, Inc., West

Tisbury, MA

Jewish Deaf Congress, Inc., Potomac,

Joshua Smith Foundation, Mystic, CT

Kids With Kids, Inc., New York, NY

Ladies of Color, Inc., Jamaica, NY

Lazarus Program for the Homeless, Inc.,

New York, NY

L. Frank Baum-Oz Museum, Inc.,

Chittenango, NY

Lightwing Institute in the Berkshires,

Inc., Farnams Cheshire, MA

Loving Family, Inc., New York, NY

Maine Energy Coalition, Bar Mills, ME

Massachusetts Black Lawyers

Community Service Association, Inc.,

Boston, MA

Mass-Cap Coalition, Inc., Lexington, MA

Mental Health Resources, Inc., Rockland,

M.E.R.C.A., Lebanon, NH

Merrimack Valley Computer Society,

Inc., Lowell, MA

Michael Hefler Memorial Fund, Inc.,

New York, NY

Middlesex Spotlight Players, Inc.,

Middletown, CT

Modern Dance Center of Westchester,

Inc., Bronxville, NY

1997–38 I.R.B.

New Hampshire Coalition on Substance

Abuse & the Elderly, Bedford, NH

New Hampshire Dare Officers

Association, North Woodstock, NH

New Horizons Counseling Center,

Presque Isle, ME

North Shore Art Guild, Inc., Miller Place,

Oyster River High School Athletic

Booster Club, Durham, NH

Pediatric & Medical Clinical Associates,

Inc., Valhalla, NY

Rainbow Repertory Theatre, Inc., New

York, NY

Reaching the Community Needs, Inc.,

Flushing, NY

The Region & Assembly of Overeaters

Anonymous, Brooklyn, NY

Rural Development, Inc., Turner Falls,

Russian-American Council on Economic

Development, New Haven, CT

Sabai, Inc., Lowell, MA

1997–38 I.R.B.

Sebasticook Valley Boys and Girls Club,

Pittsfield, ME

2nd Renaissance Foundation, Inc.,

Natick, MA

Sharisa Advocacy Foundation for

Education and Research, Inc., New

City, NY

Society To Save Children and Families of

War-Torn Liberia, Inc., Jamaica, NY

Stafford Springs Volunteer Fire Dept.,

Inc., Stafford Springs, CT

Stageworks of Leominster, Inc.,

Leominster, MA

Sumoto An African-American Christian

Womens Group, Sacramento, CA

Twinfish Productions, Inc., East

Rockaway, NY

2000 Miracles Foundation, Inc.,

Greenwich, CT

United Conservationists of North

America, Inc., Lyons, NY

Veterans Assistance Foundation, Inc.,

Framingham, MA

Volunteers for Homeless Inc.,

Levittown, PA

The Wellness Foundation of Vermont,

Barre, VT

Worcester Project, Inc., Gardner, MA

Workforce Development Corp.

Downtown Brooklyn Training

Employment Council, New York, NY

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 22, 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 22, 1997

1997–38 I.R.B.

Numerical Finding List1

Bulletins 1997–27 through 1997–37

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

97–91, 1997–37 I.R.B. 25

97–92, 1997–37 I.R.B. 26

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:

97–32, 1997–27 I.R.B. 9

97–32A, 1997–34 I.R.B. 10

97–33, 1997–30 I.R.B. 10

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

97–37, 1997–37 I.R.B. 15

Treasury Decisions:

8722, 1997–29 I.R.B. 4

8723, 1997–30 I.R.B. 4

8724, 1997–36 I.R.B. 4

8725, 1997–37 I.R.B. 16

8726, 1997–34 I.R.B. 7

8727, 1997–34 I.R.B. 5

8728, 1997–37 I.R.B. 4

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

97–50, 1997–37 I.R.B. 21

Railroad Retirement Quarterly Rate:

1997–28 I.R.B. 5

Proposed Regulations:

REG–104893–97, 1997–29 I.R.B. 13

REG–105160–97, 1997–37 I.R.B. 22

REG–106043–97, 1997–37 I.R.B. 24

REG–107644–97, 1997–32 I.R.B. 24

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.

1997–38 I.R.B.

September 22, 1997

Finding List of Current Action on

Previously Published Items

Bulletins 1997–27 through 1997–37

*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 22, 1997

1997–38 I.R.B.

September 22, 1997

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

sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print

and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the

Superintendent of Documents.

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.

Superintendent of Documents

U.S. Government Printing Office

Washington, DC 20402

First Class Mail

Postage and Fees Paid

GPO

Permit No. G–26

Official Business

Penalty for Private Use, $300

September 22, 1997

1997–38 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

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

First Class Mail

Postage and Fees Paid

IRS

Permit No. G–48

Washington, DC 20224

Official Business

Penalty for Private Use, $300

1997–38 I.R.B.

September 22, 1997

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.