Internal Revenue Bulletin 2002-5 (PDF rendition): IRS Revenue Procedures

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HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
T.D. 8972, page 443.
Final regulations under section 1301 of the Code provide guid-
ance to individuals engaged in a farming business who may
elect to income average and thereby reduce their regular tax
liability by treating all or a portion of the current year’s farming
income as if it had been earned in equal portions over the prior
three years.
T.D. 8976, page 421.
Final regulations under section 472 of the Code relate to
accounting for inventories under the last-in, first-out (LIFO)
method. The regulations provide guidance regarding methods
of valuing dollar-value LIFO pools and affect persons who elect
to use the dollar-value LIFO and inventory price index computa-
tion (IPIC) methods or who receive dollar-value LIFO inventories
in certain nonrecognition transactions. Rev. Procs. 84–57 and
98–49 obsoleted. Rev. Rul. 89–29 obsoleted.
EMPLOYEE PLANS
Notice 2002–9, page 450 .
Weighted average interest rate update.The weighted aver-
age interest rate for January 2002 and the resulting permis-
sible range of interest rates used to calculate current liability
for purposes of the full funding limitation of section 412(c)(7) of
the Code are set forth.
EXCISE TAX
REG–125450–01, page 457 .
Proposed regulations under section 4374 of the Code contain
amendments to the regulations relating to liability for the insur-
ance premium excise tax. This document affects persons who
make, sign, issue, or sell a policy of insurance, indemnity bond,
annuity contract, or policy of reinsurance issued by any foreign
insurer or reinsurer. A public hearing is scheduled for March
19, 2002.
ADMINISTRATIVE
Rev. Proc. 2002–14, page 450.
Automobile owners and lessees.This procedure provides
owners and lessees of passenger automobiles (including elec-
tric automobiles) with tables detailing the limitations on depre-
ciation deductions for automobiles first placed in service dur-
ing calendar year 2002 and the amounts to be included in
income for automobiles first leased during calendar year
2002. In addition, it provides the maximum allowable value of
employer-provided automobiles first made available to employ-
ees for personal use in calendar year 2002 for which the
vehicle cents-per-mile valuation rule provided under section
1.61–21(e) of the regulations may be applicable.
Announcement 2002–6, page 458.
This document contains a notice of public hearing on REGs–
142299–01 and 209135–88 (2002–4 I.R.B. 418) relating to
certain transactions or events that result in a Regulated Invest-
ment Company (RIC) or Real Estate Investment Trust (REIT)
owning property that has a basis determined by reference to a
C corporation’s basis in the property. A public hearing is sched-
uled for May 1, 2002.
Announcement 2002–7, page 459.
This document contains corrections to temporary regulations
(REG–105344–01, 2002–2 I.R.B. 302) which permit the IRS
to authorize federal, state, and local agencies with access to
returns and return information to redisclose such information,
with the Commissioner’s approval, to any authorized recipient
set forth in section 6103 of the Code, subject to the same con-
ditions and restrictions, and for the same purposes, as if the
recipient had received the information directly from the IRS.
Finding Lists begin on page ii.
Index for January begins on page iv.
Bulletin No. 2002–5
February 4, 2002

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
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 Conven-
tions, 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 are consolidated semiannually into Cumulative Bulle-
tins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive 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 Bul-
letin. All published rulings apply retroactively unless otherwise
indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal practices and procedures that affect the rights and duties
of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the rev-
enue ruling. In those based on positions taken in rulings to tax-
payers 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.
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 procedures 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.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion 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 Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
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 semiannual basis, and are
published in the first Bulletin of the succeeding 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.
February 4, 20022002–5 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 61.—Gross Income
Defined
26 CFR 1.61–21: Taxation of fringe benefits.
This procedure provides the maximum value of
employer-provided automobiles first made available
to employees for personal use in calendar year 2002
for which the vehicle cents-per-mile valuation rule
provided under § 1.61–21(e) of the Income Tax
Regulations may be applicable. See Rev. Proc.
2002–14, page 450.
Section 280F.—Limitation on
Depreciation for Luxury
Automobiles; Limitation
Where Certain Property Used
for Personal Purposes
26 CFR 1.280F–7: Property leased after December
31, 1986.
This procedure provides owners and lessees of
passenger automobiles (including electric automo-
biles) with tables detailing the limitations on depre-
ciation deductions for automobiles first placed in
service during calendar year 2002 and the amounts
to be included in income for automobiles first leased
during calendar year 2002. See Rev. Proc. 2002–14,
page 450.
Section 472.—Last-in, First-
out Inventories
26 CFR 1.472–8: Dollar-value method of pricing
LIFO inventories.
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
T.D. 8976
Dollar-Value LIFO Regulations;
Inventory Price Index
Computation Method
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations under section 472 of the
Internal Revenue Code that relate to
accounting for inventories under the last-
in, first-out (LIFO) method. The final
regulations provide guidance regarding
methods of valuing dollar-value LIFO
pools and affect persons who elect to use
the dollar-value LIFO and inventory price
index computation (IPIC) methods or
who receive dollar-value LIFO invento-
ries in certain nonrecognition transac-
tions.
DATES:Effective Date: These regula-
tions are effective on December 31, 2001.
Applicability Date: For dates of appli-
cability, see §§ 1.472–8(e)(3)(v) and
1.472–8(h)(4).
FOR FURTHER INFORMATION CON-
TACT: Leo F. Nolan II at (202) 622–4970
(not a toll-free call).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information in this
final rule have been reviewed and, pend-
ing receipt and evaluation of public com-
ments, approved by the Office of Man-
agement and Budget (OMB) under 44
U.S.C. 3507 and assigned control number
1545–1767.
The collections of information in this
regulation are in § 1.472–8(e)(3)(iii)(B)
(3) and (e)(3)(iv). To elect the IPIC
method, a taxpayer must file Form 970,
“Application to Use LIFO Inventory
Method.” This information is required to
inform the Commissioner regarding the
taxpayer’s elections under the IPIC
method. This information will be used to
determine whether the taxpayer is prop-
erly accounting for its dollar-value pools
under the IPIC method. The collections of
information are required if the taxpayer
wants to obtain the tax benefits of the
LIFO method. The likely respondents are
business or other for-profit institutions,
and/or small businesses or organizations.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the Office of Management
and Budget.
The reporting burden contained in
§ 1.472–8(e)(3)(iii)(B)(3) and (e)(3)(iv) is
reflected in the burden of Form 970.
Comments on the collections of infor-
mation should be sent to theOffice of
Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503, with
copies to theInternal Revenue Service,
Attn: IRS Reports Clearance Officer,
W:CAR:MP:FP:S, Washington, DC
20224.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
Section 472 of the Internal Revenue
Code (Code) permits a taxpayer to
account for inventories using a last-in,
first-out (LIFO) method of accounting.
Section 472(f) directs the Secretary to
prescribe regulations that permit the use
of suitable published governmental price
indexes for purposes of the LIFO method.
The IRS and Treasury Department pre-
scribed the inventory price index compu-
tation (IPIC) method in § 1.472–8(e)(3)
(T.D. 7814, 1982–1 C.B. 84 [47 FR
11271]) (the current regulations), under
the authority contained in sections 472
and 7805. A taxpayer using the IPIC
method must base its inventory price
indexes on the consumer price indexes or
producer price indexes published by the
United States Bureau of Labor Statistics
(BLS). The IPIC method was intended to
simplify the use of the dollar-value LIFO
method, so that the LIFO method could
be used by more taxpayers and so that
taxpayers already using the dollar-value
LIFO method would have a simpler alter-
native method of computing an index for
their dollar-value pool.
On May 19, 2000, the IRS and Trea-
sury Department published a notice of
proposed rulemaking (REG–107644–98,
2000–23 I.R.B. 1229 [65 FR 31841]) (the
proposed regulations) intended to sim-
plify and clarify certain aspects of the
2002–5 I.R.B.421February 4, 2002

IPIC method. In addition, the proposed
regulations provided rules for computing
the LIFO value of a dollar-value pool
when a taxpayer receives LIFO invento-
ries in certain nonrecognition transac-
tions. Comments responding to the notice
were received, and a public hearing was
held on September 15, 2000.
The IRS and Treasury Department
received 16 comment letters concerning
the proposed regulations. After consider-
ing the comments contained in these let-
ters, the IRS and Treasury Department
adopt the proposed regulations as revised
by this Treasury decision. The comments
and revisions are discussed below.
Explanation of Provisions and
Summary of Comments
1. Overview
Under the last-in, first-out (LIFO)
method, inventory on hand at the end of
the year is treated as consisting of“lay-
ers,”first of inventory on hand at the
beginning of the year (in the order of
acquisition), and then of any inventory
acquired during the current year. Section
1.472–8 permits a taxpayer to use the
dollar-value LIFO method, which
accounts for all items in an inventory
“pool”(dollar-value pool) in terms of dol-
lars of cost rather than in terms of quan-
tities and prices of specific goods. Spe-
cifically, the taxpayer annually
determines the existence of an increase
(increment) or decrease (liquidation) in a
dollar-value pool by comparing inventory
quantities measured in terms of
equivalent-value dollars (base-year cost).
The current-year cost of beginning and
ending inventory is converted into base-
year cost using an inflation index, which
is the ratio of the dollar-value pool’s total
current-year cost to its total base-year
cost. By subtracting the base-year cost of
the dollar-value pool at the beginning of
the taxable year from the base-year cost
of the dollar-value pool at the end of the
taxable year, the taxpayer determines the
amount of any resulting increment or liq-
uidation. Finally, the taxpayer computes
the LIFO value of an increment (layer) by
multiplying that increment’s base-year
cost by an inflation index.
The current regulations provide an
alternative method for a taxpayer to deter-
mine an inflation index. Under the inven-
tory price index computation (IPIC)
method, the taxpayer computes an inven-
tory price index (IPI) based on the con-
sumer price indexes (CPI) or producer
price indexes (PPI) published monthly by
the United States Bureau of Labor Statis-
tics (BLS) in the“CPI Detailed Report”
and“PPI Detailed Report,”respectively.
See alsohttp://www.bls.gov.
To facilitate a taxpayer’s use of the
IPIC method, the final regulations use
new, more-descriptive terms for some
IPIC method concepts. For example,pool
indexhas been replaced withIPI,appro-
priate indexhas been replaced withcat-
egory inflation index, andindex category
has been replaced withBLS index cat-
egory. Within this preamble, the discus-
sion of the current and proposed regula-
tions uses both old and new terms, and
the discussion of the final regulations
generally uses the new terms.
2. Inventory Price Index—20 percent
reduction
The current regulations state that“[a]n
inventory price index computed [under
the IPIC method] shall be a stated per-
centage of the percent change in the
selected consumer or producer price
index or indexes for a specific category or
categories of goods.”For this purpose,
“stated percentage”means“100 percent”
in the case of an eligible small business,
as defined in section 474 (i.e., average
annual gross receipts for the three preced-
ing taxable years do not exceed
$5,000,000), and“80 percent”in all other
cases. The proposed regulations retained
this 20 percent reduction for large taxpay-
ers.
Several commentators objected to the
continuing requirement that large taxpay-
ers reduce the IPI by 20 percent. Some of
these commentators opined that the IPIC
method is effectively a safe harbor
method that significantly simplifies the
LIFO computation and reduces IRS and
taxpayer controversy; however, the 20
percent reduction is a major deterrent to
its use by large taxpayers. Others argued
that the CPI and PPI are representative of
true inflation and, therefore, the 20 per-
cent reduction decreases the accuracy of
the IPIC method. Other commentators
recommended that the stated percentage
not be decreased by 20 percent until the
taxpayer’s gross receipts exceed
$10,000,000. In their view, a taxpayer’s
gross receipts are likely to exceed
$5,000,000 by the time the taxpayer’s
business is profitable enough to benefit
by changing to the LIFO method.
The 20 percent reduction contained in
the current regulations represents a bal-
ance between two competing tax policies
—simplification and prevention of
adverse selection. The IPIC method was
developed originally to simplify the LIFO
rules so that small businesses that could
not compute an internal inflation index
could use the LIFO method. Nonetheless,
availability of the method was provided
to all taxpayers because it was believed to
be too difficult to define the class of tax-
payers for which the LIFO rules were
unduly burdensome and inappropriate to
prevent large taxpayers from using the
simplified method. Allowing all taxpayers
to use the CPI or PPI regardless of the
rate of inflation they actually experi-
enced, however, provided an opportunity
for adverse selection whereby a sophisti-
cated taxpayer would adopt the IPIC
method only when the inflation reflected
in the CPI or PPI exceeded the taxpayer’s
internal rate of inflation. The 20 percent
reduction of the IPI was incorporated into
the current regulations to reduce this
potential for adverse selection.
The IRS and Treasury Department
now believe that the benefits of simplifi-
cation (and reduced controversy) obtained
from the IPIC method outweigh the need
to prevent adverse selection. Conse-
quently, the final regulations eliminate the
requirement to reduce the IPI by 20 per-
cent. All taxpayers electing to use the
IPIC method may use 100 percent of the
IPI to compute the LIFO value of a
dollar-value pool.
3. Use of 10 Percent Categories and
BLS Weights
The current regulations provide rules
for assigning the items in a dollar-value
pool to the applicable categories listed in
the“CPI Detailed Report”or the“PPI
Detailed Report”for which the BLS pub-
lishes corresponding cumulative price
indexes (BLS categories and BLS price
indexes, respectively) for purposes of
computing the IPI for a dollar-value pool.
In very simple terms, taxpayers use a pro-
cess of elimination to assign all the items
in a dollar-value pool to BLS categories
February 4, 20024222002–5 I.R.B.

that include at least 10 percent of the total
inventory value (10 percent BLS catego-
ries) and then use the corresponding BLS
weights to compute a weighted-average
appropriate index for the items assigned
to those 10 percent BLS categories.
The proposed regulations eliminate the
requirements to use the 10 percent BLS
categories and BLS weights to compute
an appropriate index because it was
believed that these requirements did not
provide the intended simplicity but rather
added unnecessary complexity to the
IPIC method. Instead, the proposed regu-
lations require the taxpayer to assign
items in a dollar-value pool to the most-
detailed BLS categories listed in the“CPI
Detailed Report”or the“PPI Detailed
Report,”whichever is applicable, and to
weight the BLS price indexes based on
the relative current-year cost of the items
assigned to those BLS categories.
Several commentators objected to the
elimination of the requirement to use the
10 percent BLS categories and BLS
weights to compute an appropriate index.
They suggested that this regime does in
fact provide simplification for some tax-
payers and consequently should be
retained as an option, particularly for
retail grocers that would have to incur
substantial administrative costs to have
the items contained in their dollar-value
pools assigned to numerous, most-
detailed BLS categories. Other commen-
tators supported the elimination of the
requirement to use BLS weights, arguing
that this will reduce both the complexity
of the IPIC method and the potential for
distortion caused by the use of the BLS
weights. However, these commentators
generally recommended retention of the
10 percent categories or, alternatively,
modification of the proposed rule to per-
mit a taxpayer to assign items in a dollar-
value pool to less-detailed BLS categories
(e.g., using 6-digit or 4-digit commodity
codes in the PPI). Another commentator
suggested lowering the testing threshold
from 10 percent to 8 percent.
The IRS and Treasury Department
now understand that the requirement to
use 10 percent BLS categories and BLS
weights provides simplicity for some tax-
payers but complexity for others. Accord-
ingly, the final regulations retain the 10
percent BLS categories and BLS weights
as an elective method (10 percent
method) of determining the category
inflation index of a 10 percent BLS cat-
egory. The final regulations clarify, how-
ever, that to determine whether a BLS
category may be selected under the 10
percent method, a taxpayer must compare
the current-year cost of the items in that
category to the total current-year cost of
the items in the dollar-value pool, not to
the total current-year cost of the items in
the taxpayer’s entire inventory.
4. Weighted Harmonic Mean for
Computing Inventory Price Index
A pool index computed using the
dollar-value LIFO method should reflect
a weighted average of the inflation rates
of the items contained in the ending
inventory of the dollar-value pool. The
current regulations state that the appropri-
ate indexes are weighted according to the
relative current-year costs of the items in
each selected BLS category. However, the
regulations do not state how a taxpayer
computes a weighted average of the
appropriate indexes using the amount of
relative current-year costs in each
selected BLS category. An example of
IPIC weighting methodology is found in
Rev. Proc. 84–57 (1984–2 C.B. 496),
which shows the computation of an IPI
based on a weighted arithmetic mean of
the appropriate indexes. (Weighted Arith-
metic Mean = [Sum of (Weight x Appro-
priate Index)] / Sum of Weights). In addi-
tion, an example found in Rev. Proc.
98–49 (1998–2 C.B. 320) uses a weighted
arithmetic mean to compute a weighted-
average percent change for a selected
BLS category.
The proposed regulations provide that
the pool index must be computed using a
weighted harmonic mean, instead of a
weighted arithmetic mean, based on the
relative current-year costs in the dollar-
value pool. (Weighted Harmonic Mean =
Sum of Weights / Sum of (Weight /
Appropriate Index)).
Using a weighted arithmetic mean of
the category inflation indexes of the BLS
categories represented in a dollar-value
pool is not a mathematically correct
method of computing the IPI for the pool
when the corresponding weights are the
relative current-year costs at the end of
the taxable year. If a taxpayer’s dollar-
value pool has the same quantity of two
items with identical base-year costs, the
IPI should reflect the inflation rates of the
two items equally. However, a weighted
arithmetic mean of the category inflation
indexes will assign more weight to the
inflation rate of the item that has the
higher current-year cost. Thus, the mean
will be skewed in favor of BLS categories
that experience higher rates of inflation,
and the IPI will be overstated. This result
also will occur when the items in the
dollar-value pool experience deflation
because too much weight will be assigned
to the BLS categories that experience less
deflation.
Several commentators objected to the
mandatory use of the weighted harmonic
mean when computing an IPI. Acknowl-
edging that an IPI based on a weighted
harmonic mean is mathematically correct,
these commentators stated that the inac-
curacy built into a weighted arithmetic
mean is offset (in the case of larger tax-
payers) by the 20 percent reduction of the
“stated percentage.”Thus, they recom-
mended that taxpayers be permitted to
continue computing IPIs based on a
weighted arithmetic mean rather than be
required to incur additional administrative
costs to begin computing IPIs based on a
weighted harmonic mean.
The IRS and Treasury Department did
not adopt these suggestions because a
weighted arithmetic mean based on rela-
tive current-year costs at the end of the
period is not mathematically correct and
the conversion from a weighted arith-
metic mean to a weighted harmonic mean
is not unduly burdensome. To assist tax-
payers that need to change to a weighted
harmonic mean, the final regulations
include the formula for, and examples of,
computing a weighted harmonic mean.
On the other hand, the use of a
weighted arithmetic mean is mathemati-
cally correct when computing a weighted-
average category inflation index based on
relative costs at the beginning of the tax-
able year. The published BLS weights
applicable for a taxable year are essen-
tially based on relative costs at the begin-
ning of the period. Therefore, whenever it
is necessary to compute the category
inflation index of a 10 percent BLS cat-
egory using BLS weights, taxpayers must
compute a weighted arithmetic mean.
When computing the IPI for a dollar-
value pool, however, even taxpayers
electing to use the 10 percent method
2002–5 I.R.B.423February 4, 2002

must use the weighted harmonic mean
based on the current-year cost of the
items assigned to each 10 percent BLS
category.
5. Selecting an Appropriate Month
The current regulations state that a tax-
payer not using the retail method must
select price indexes“as of the month or
months”most appropriate to its method
of determining current-year cost (appro-
priate month), or make a one-time bind-
ing election of an appropriate representa-
tive month (representative month). In the
case of a retailer using the retail method,
the appropriate month is the last month of
the retailer’s taxable year. The IRS has
ruled that a month is a representative
month if a nexus exists between the
selected month, the taxpayer’s method of
determining current-year cost, and the
taxpayer’s historic experience of inven-
tory purchases. Rev. Rul. 89–29 (1989–1
C.B. 168). In practice, many taxpayers
have been confused about the meaning of
“month or months most appropriate to the
taxpayer’s method of determining
current-year cost.”
The proposed regulations clarify that
for each dollar-value pool, a taxpayer not
using the retail method either must annu-
ally select an appropriate month or must
make an election to use a representative
month. The principles of Rev. Rul. 89–29,
which have been incorporated into the
final regulations, continue to apply for the
purpose of determining whether a particu-
lar month is appropriate or representative.
Several commentators stated that tax-
payers should be permitted to use two
IPIs for each taxable year (dual indexes),
so that they will not be denied the right to
use the earliest acquisitions method of
determining current-year costs. These
commentators suggest that a taxpayer
whose accounting system determines the
current-year cost of ending inventory
using a first-in, first-out (FIFO) method
(i.e., most recent purchases) could com-
pute an IPI based on indexes selected
from the CPI or PPI applicable to a
month late in the taxable year to deflate
the current-year cost of items in ending
inventory for the purpose of determining
whether an increment or liquidation has
occurred during the taxable year. If there
is an increment, the taxpayer would com-
pute a second IPI based on indexes
selected from the CPI or PPI applicable to
a month early in the taxable year to
inflate the base-year cost of the increment
to its LIFO value based on its“pricing
election”(i.e., earliest acquisitions).
The IRS and Treasury Department did
not adopt this suggestion for several rea-
sons. First, the IPIC method and the ear-
liest acquisitions method are not mutually
exclusive. In fact, the current and pro-
posed IPIC regulations clearly permit an
electing taxpayer to use any method of
determining current-year cost permitted
under§1.472–8(e)(2)(ii), including the
earliest acquisitions method. A dual index
IPIC method is not needed to ensure that
an electing taxpayer will be able to use
the earliest acquisitions method. How-
ever, the earliest acquisitions method is
available under the IPIC method only to a
taxpayer that actually computes the
current-year cost of its ending inventory
using the earliest acquisitions method
because use of a dual index is inconsis-
tent with the IPIC method’s concept of an
appropriate month. The appropriate
month concept requires a taxpayer to
select a month that correlates with its
actual method of computing current-year
cost and its experience with inventory
purchases. As explained in Rev. Rul.
89–29,“[t]he timing of the index (and the
month selected) must relate to the timing
of the determination of current-year cost,
otherwise distortion would occur.”The
determination of an appropriate month is
not a choice between equally acceptable
methods of determining current-year cost,
but depends on the taxpayer’s actual
method of determining current-year cost
and actual purchases. Thus, a taxpayer
using a calendar tax year may select Janu-
ary as the appropriate month only if items
represented in the ending inventory were
purchased in January and the taxpayer
determines the current-year cost of the
ending inventory based on the cost of
those January purchases.
Moreover, though a dual index IPIC
method would eliminate the requirement
to determine the actual earliest acquisi-
tions cost of the items in a dollar-value
pool, the method would not simplify a
taxpayer’s use of the dollar-value LIFO
method. A dual index IPIC method will
require an electing taxpayer to compute
(and the IRS to examine) twice as many
category inflation indexes because the
taxpayer would need BLS price indexes
that reflect its inflation experience under
the most recent purchases method as well
as under the earliest acquisitions method.
Similarly, a dual index IPIC method
would require a taxpayer to select twice
as many appropriate or representative
months for each taxable year. Not only
does the requirement to select two appro-
priate months increase the complexity of
the IPIC method, it also decreases the
accuracy of the method as some accuracy
is lost as a result of determining the
appropriate month for the entire pool
rather than for each inventory item or
each BLS category.
In summary, the IPIC method was
intended to simplify the dollar-value
LIFO method, primarily so it could be
used by taxpayers that were otherwise
unable to use the method. The IPIC
method was neither intended nor
designed to serve as a surrogate for deter-
mining the earliest acquisitions cost of the
items in a dollar-value pool. The prohibi-
tion on the use of dual indexes in connec-
tion with the IPIC method, however, does
not necessarily mean that the use of dual
indexes will be prohibited in the context
of other LIFO methods.
Several commentators objected to the
rule that requires a taxpayer using both
the retail method and LIFO method to use
the last month of the taxable year as its
appropriate month. In their view, a month
in the middle of the year would be more
representative because the retail method
produces an average cost for a group of
goods based on purchases for an entire
year.
The IRS and Treasury Department did
not adopt this suggestion because they
believe that the appropriate month for a
taxpayer using the retail method is the
last month of the taxable year. Section
1.471–8 generally requires that a taxpayer
adjust retail selling prices of the goods on
hand at the end of the year to cost based
on the ratio of goods available for sale at
cost to goods available for sale at retail
(the cost complement percentage). While
this ratio may reflect an average cost
complement percentage for the year, it is
applied to retail selling prices of the
February 4, 20024242002–5 I.R.B.

goods on hand at the end of the taxable
year rather than the average retail selling
price of these goods during the year. Con-
sequently, the approximate cost deter-
mined under the retail method is not nec-
essarily equal to the average cost of the
inventory.
One commentator suggested that the
final regulations should include factors
for determining an appropriate month.
Other commentators requested an
example showing how to determine an
appropriate month when a short taxable
year follows the first taxable year that a
taxpayer uses the IPIC method. In
response to these comments, the final
regulations incorporate the guidance on
an appropriate representative month
(including three of the examples) found in
Rev. Rul. 89–29.
6. Calculation of a Category Inflation
Index
The proposed regulations generally
provide that in the case of a taxpayer
using the double-extension IPIC method,
the inflation index for a selected BLS cat-
egory is equal to the quotient of the BLS
price index for the appropriate or repre-
sentative month of the current taxable
year and the month preceding the first
day of the base year. In the case of a tax-
payer using the link-chain IPIC method,
the inflation index for a selected BLS cat-
egory is equal to the BLS price index for
the appropriate or representative month of
the current taxable year divided by the
appropriate or representative month used
for the immediately preceding taxable
year. However, if the first taxable year the
taxpayer uses the IPIC method also is the
first taxable year the taxpayer uses the
dollar-value LIFO method, the inflation
index is equal to the quotient of the pub-
lished cumulative index for the appropri-
ate or representative month for the current
taxable year divided by the published
cumulative index for the month immedi-
ately preceding the first day of the taxable
year.
Several commentators argued that the
prescribed calculation for the first taxable
year a taxpayer uses both the dollar-value
LIFO and IPIC methods is likely to over-
state or understate inflation if the tax-
payer has opening inventories, unless the
opening inventories were purchased dur-
ing the last month of the preceding tax-
able year. To address this concern, the
commentators suggested that a taxpayer
be permitted to compare the BLS price
index for the appropriate month of the
first LIFO taxable year with the BLS
price index for the appropriate month of
the taxpayer’s last non-LIFO taxable year.
Another commentator suggested that the
denominator in this formula should be the
BLS price index that reflects prices dur-
ing the last inventory turn of the immedi-
ately preceding taxable year.
The IRS and Treasury Department
agree with the commentators’concerns.
In addition, the IRS and Treasury Depart-
ment recognize that the same problem
exists under the proposed regulations as a
result of the requirement to use the month
preceding the first day of the base year to
compute an appropriate index under the
double-extension IPIC method. Accord-
ingly, the final regulations generally pro-
vide that a category inflation index should
be computed with reference to the BLS
price indexes for an appropriate month of
the year preceding its LIFO election (in
the case of the double-extension IPIC
method) or of the preceding year (in the
case of the link-chain IPIC method). In
addition, the final regulations incorporate
the general guidance of Rev. Proc. 98–49
concerning the computation of a category
inflation index when a selected BLS cat-
egory is revised for the taxable year.
7. Scope of an IPIC Method Election
The current regulations generally
require a taxpayer using the IPIC method
to use that method to account for all items
accounted for using the LIFO method
(LIFO inventory items). The current regu-
lations also prohibit the use of the IPIC
method by a taxpayer that is eligible to
use BLS price indexes prepared for the
purpose of valuing the LIFO inventory
items of a specific industry. For example,
a taxpayer eligible to use the BLS retail
price indexes published in“Department
Store Inventory Price Indexes”(DSIP
indexes) may not use the IPIC method.
The proposed regulations liberalize the
eligibility restrictions applicable to the
IPIC method in two respects. First, a tax-
payer must use the IPIC method for all
items accounted for under the dollar-
value LIFO method, but not for all items
accounted for under the LIFO method.
Second, a taxpayer eligible to use DSIP
indexes may elect to use the IPIC method
for all its LIFO inventory items or for
those LIFO inventory items that do not
fall within any of the 23 major groups
listed in“Department Store Inventory
Price Indexes.”
Several commentators objected to the
proposed general requirement that an
electing taxpayer use the IPIC method for
all its LIFO inventory items. In their
view, section 446(d) permits a taxpayer to
elect the IPIC method for each trade or
business. The requirement to use the IPIC
method for all LIFO inventory items, as
originally promulgated, was designed to
prevent adverse selection. The IRS and
Treasury Department understand, how-
ever, that taxpayers often have valid busi-
ness reasons for using the IPIC method in
some businesses but not in others. For
example, a taxpayer may have difficulty
using the double-extension method in one
of its trades or businesses but not in
another. Accordingly, the final regulations
permit a taxpayer to limit its IPIC elec-
tion to one or more specific trades or
businesses.
8. Selection of“CPI Detailed Report”
or“PPI Detailed Report”
The current regulations state that a
retailer may select price indexes from the
“CPI Detailed Report”or the“PPI
Detailed Report,”but if equally appropri-
ate price indexes may be selected from
either, a retailer using the retail method
must select from the“CPI Detailed
Report,”and a retailer not using the retail
method must select from the“PPI
Detailed Report.”
The proposed regulations eliminate the
requirement that retailers determine
whether the“CPI Detailed Report”and
“PPI Detailed Report”contain equally
appropriate price indexes. Instead, the
proposed regulations require retailers
using the retail method to select price
indexes from the“CPI Detailed Report”
and require all other taxpayers using the
IPIC method to select price indexes from
the“PPI Detailed Report.”
Several commentators suggested that
the IRS and Treasury Department permit
all retailers using the IPIC method to
select price indexes from either the“CPI
Detailed Report”or the“PPI Detailed
Report.”These commentators argue that
many retailers selecting price indexes
2002–5 I.R.B.425February 4, 2002

from the CPI do not use the retail method
and would be forced to change. This
change would be particularly burdensome
because the categories listed in the“PPI
Detailed Report”are far more detailed
(and less correlated) than those listed in
the“CPI Detailed Report.”In addition,
these commentators argue that the pro-
posed rule fails to recognize that the PPI
does not necessarily reflect cost for retail-
ers not using the retail method because
the majority of retailers purchase their
goods from wholesalers not producers.
Finally, the commentators expressed con-
cern that the proposed rule would pre-
clude retailers that use the retail method
at their stores and a cost method at their
warehouses from using the price indexes
listed in the“CPI Detailed Report”when
retail price information is not ascertained
or readily available for goods in ware-
houses.
The IRS and Treasury Department
generally agree with the commentators’
concerns. Accordingly, the final regula-
tions permit all retailers using the IPIC
method to assign items in dollar-value
pools to the BLS categories listed in
either the“CPI Detailed Report”or the
“PPI Detailed Report,”whichever is
selected.
9. BLS Category for Work-in-Process
The proposed regulations provide that
manufacturers and processors must assign
all work-in-process (WIP) items in a
dollar-value pool to the most-detailed
index categories that include the finished
goods into which the WIP item will be
manufactured or processed. For this pur-
pose,finished goodmeans any good that
is in a salable state.
Several commentators objected to the
proposed requirement that a taxpayer
compute a separate inflation index for a
WIP item that is in a salable state but not
regularly sold by the taxpayer.
The IRS and Treasury Department
agree with the commentators’objection to
the extent that the taxpayer’s WIP items
are merely salable. Accordingly, the final
regulations provide that a taxpayer is not
required to compute a separate category
inflation index for a salable WIP item,
unless the taxpayer regularly sells that
WIP item.
10. Relocation and Clarification of
Special Pooling Rules
The current regulations provide spe-
cial, elective pooling rules for retailers,
wholesalers, jobbers, and distributors that
use the IPIC method. These taxpayers are
permitted to establish a dollar-value pool
for any group of goods included in one of
the 11 general categories of consumer
goods described in the“CPI Detailed
Report.”In addition, Rev. Proc. 84–57
provides that inventory pools may be
established for any group of goods
included within one of the 15 general cat-
egories of producer goods described in
Table 6 of the“PPI Detailed Report.”
Finally, the regulations provide that
dollar-value pools that comprise less than
5 percent of inventory value may be com-
bined to form a single miscellaneous
dollar-value pool. If the resulting miscel-
laneous dollar-value pool itself comprises
less than 5 percent of inventory value,
that pool may be combined with the larg-
est dollar-value pool.
The proposed regulations retain the
special, elective pooling rules for inven-
tory items accounted for under the IPIC
method contained in the current regula-
tions and incorporate the special, elective
pooling rules contained in Rev. Proc.
84–57.
Several commentators asked whether
taxpayers must apply the 5 percent rules
to a dollar-value pool annually and, if so,
how they are to account for dollar-value
pools that no longer satisfy the 5 percent
threshold. One commentator suggested
that the IRS and Treasury Department
make these 5 percent rules optional, state
whether these rules are methods of
accounting, and require taxpayers to
apply the principles of§1.472–8(g)(2)
when changing dollar-value pools
because of these 5 percent rules. Another
commentator recommended that taxpay-
ers be permitted to include inventories not
accounted for under the LIFO method in
“inventory value”when determining
whether the 5 percent rules apply.
The IRS and Treasury Department
believe that both of the 5 percent rules for
dollar-value pools have been, and remain,
optional. Under the current and proposed
regulations, a taxpayer may, but is not
required to, combine two or more specific
dollar-value pools into a single miscella-
neous dollar-value pool when the cost of
each specific dollar-value pool does not
exceed 5 percent of the total cost of the
taxpayer’s LIFO inventory. In addition, a
taxpayer may, but is not required to, com-
bine the single miscellaneous dollar-value
pool and the largest specific dollar-value
pool when cost of the miscellaneous
dollar-value pool does not exceed 5 per-
cent of the total cost of the taxpayer’s
LIFO inventory. Furthermore, the IRS
and Treasury Department believe that
both of the 5 percent rules are methods of
accounting within the broader IPIC pool-
ing method, so a taxpayer may not
change to, or cease using, either of the 5
percent rules without obtaining the Com-
missioner’s prior consent. In addition, any
change in pooling required by the taxpay-
er’s proper use of the 5 percent rule(s) is
a change in method of accounting. Thus,
the final regulations require a taxpayer in
these circumstances to combine and sepa-
rate its dollar-value pools in accordance
with§1.472–8(g). Moreover, the final
regulations require a taxpayer to deter-
mine whether to separate or combine the
5 percent pools every third taxable year
based on current-year data rather than on
average data.
11. New Base Year for IPIC Method
Changes
The current regulations require a tax-
payer that changes to the IPIC method
from another dollar-value LIFO method
to treat the year of change as the base
year in determining the LIFO value of the
dollar-value pool(s) for the year of
change and later taxable years. The tax-
payer is required to restate the base-year
cost of the existing increments in terms of
new base-year cost, which also requires
the restatement of the IPI of each of the
layers. This procedure is referred to alter-
natively as updating the base year or
establishing a new base year.
One commentator suggested eliminat-
ing the reference to§1.472–8(f)(2) in the
case of a voluntary change from the spe-
cific goods LIFO method to the dollar-
value LIFO method because taxpayers
and tax practitioners have long ques-
tioned how to implement this change
without updating the base year. The final
regulations adopt this suggestion and
require a taxpayer changing from the spe-
cific goods LIFO method to the IPIC
February 4, 20024262002–5 I.R.B.

method to establish a new base year.
Although guidance addressing taxpayers
changing from the specific goods LIFO
method to a dollar-value LIFO method
other than the IPIC method is outside the
scope of these regulations, the IRS and
Treasury Department are considering
whether to issue additional guidance to
address the commentator’s concerns
regarding changes from the specific
goods method to a dollar-value LIFO
method.
The proposed regulations clarify that
the base-year-updating procedure is man-
datory for voluntary changes to the IPIC
method. However, the proposed regula-
tions authorized examining agents to
require a change to the IPIC method in
circumstances where the taxpayer’s prior
method does not clearly reflect income
and to implement the change using a cut-
off method in circumstances where the
taxpayer’s books and records lacked the
information necessary to compute a sec-
tion 481(a) adjustment. The latter provi-
sion was intended to provide examining
agents with an alternative to LIFO termi-
nation in appropriate circumstances.
One commentator objected to giving
examining agents the authority to require
a taxpayer using a LIFO method to
change to the double-extension IPIC
method even when the taxpayer produces
records that will allow the agent to calcu-
late the effect of changing to a correct
method other than the IPIC method. This
commentator requested“clear-cut”pub-
lished guidance on the types of records
that taxpayers using a LIFO method must
retain and the length of time that they
must retain them. In addition, because of
the administrative burden associated with
record retention (particularly those
records needed for LIFO methods not
used by the taxpayer), this commentator
requested that the IRS and Treasury
Department create a shortcut procedure,
similar to the three-year transition rule
under§1.263A–7(c)(2)(iv), to calculate
the effect of changing the taxpayer’s
LIFO method. Finally, this commentator
suggested that the IRS and Treasury
Department, as a matter of fairness, per-
mit a taxpayer to recompute each year’s
layer using the IPI for that year.
Several commentators urged the IRS
and Treasury Department to withdraw the
involuntary change provisions entirely or,
alternatively, to modify them to give
examining agents discretion to impose a
change to the double-extension IPIC
method with or without establishing a
new base year. One of these commenta-
tors also urged the IRS and Treasury
Department to give these examining
agents discretion to impose a change to
either the double-extension IPIC method
or the link-chain IPIC method.
In response to these comments, the
final regulations provide that an examin-
ing agent may change a taxpayer from a
LIFO method that does not clearly reflect
income to the IPIC method. If the agent
decides to change the taxpayer to the
IPIC method, and the taxpayer does not
provide sufficient information from its
books and records to compute an adjust-
ment under section 481, the agent may
implement the change using the simpli-
fied transition method. Under the simpli-
fied transition method, the agent makes
certain assumptions regarding the compo-
sition of ending inventory in prior taxable
years and recomputes the LIFO value of
each dollar-value pool as of the beginning
of the year of change using the IPIC
method. The section 481(a) adjustment
arising from the accounting method
change is equal to the difference between
that recomputed LIFO value and the
LIFO value of the dollar-value pool deter-
mined under the taxpayer’s former
method. The IRS and Treasury Depart-
ment are considering other simplified
methods of computing a section 481(a)
adjustment arising from a change from
one LIFO method to another and may
publish additional guidance in the future.
The suggestion regarding the issuance of
guidance on a taxpayer’s recordkeeping
requirement is beyond the scope of this
project, but will be considered for pos-
sible future guidance.
12. Inventories Received in Certain
Nonrecognition Transactions
An election to use the dollar-value
LIFO method for LIFO inventories
received in a nonrecognition transaction
to which section 381 does not apply (non-
section 381 transfer) may not continue the
LIFO reserve of the transferor. If the mix
of goods in the inventory changes signifi-
cantly after the transfer, the mechanics of
the dollar-value LIFO method may pro-
duce an artificial increment in the year
the inventories are received that effec-
tively eliminates the LIFO reserve estab-
lished by the transferor. This artificial
increment occurs because the base-year
cost of new items are reconstructed to the
transferee’s base year (i.e., the year it
elects LIFO) and not to the transferor’s
base year. When a transferee elects the
LIFO and IPIC methods for LIFO inven-
tories received in a non-section 381 trans-
fer, the transferee will have an artificial
increment in the year the inventories are
received even without a significant
change in the mix of goods in its ending
inventory. The IPIC method invariably
produces an increment because the differ-
ence between the current-year cost and
the carryover basis of the transferred
inventories (i.e., the base-year cost)
reflects more than one year’s inflation
and the IPI used to convert the current-
year cost of the dollar-value pool at the
end of the taxable year to base-year cost
will reflect only one year’s inflation.
To prevent the recapture of a transfer-
or’s LIFO reserve in a non-section 381
transfer, the proposed regulations require
the transferee to update its base-year cost
if a transferee uses the dollar-value LIFO
method for inventories received in a non-
section 381 transfer and the transferor
accounted for those inventories using the
dollar-value LIFO method as follows.
First, the transferee’s base year for the
inventories received from the transferor is
the year of transfer. Second, the transfer-
ee’s base-year cost for the inventories
received from the transferor is equal to
the transferor’s current-year cost for those
inventories. Finally, if the transferee
owned inventories prior to the transfer,
the new base-year cost of those invento-
ries will be equal to their current-year
cost. The proposed regulations do not
affect either the ability of a newly formed
transferee to elect new accounting meth-
ods or the holdings of Rev. Rul. 70–564
(1970–2 C.B. 109) and Rev. Rul. 70–565
(1970–2 C.B. 110). However, the pro-
posed regulations do not apply to a non-
section 381 transfer if its principal pur-
pose is to avail the transferee of a method
of accounting that is unavailable to the
transferor (or is unavailable to the transf-
eror without the Commissioner’s con-
sent).
One commentator asserted that when a
taxpayer described in Rev. Rul. 70–564
2002–5 I.R.B.427February 4, 2002

(i.e., no beginning LIFO inventories)
applies the proposed rule to transferred
inventories, the resulting IPI of the col-
lapsed base-year layer will not equal 1.
Because this result may cause some con-
fusion, the commentator suggested
including an example in the final regula-
tions. The final regulations include an
example demonstrating the computation
of increments and liquidations after a new
base year is established.
Several commentators asserted that the
proposed rule may result in the creation
of an artificial increment or liquidation
when a transferee and transferor use dif-
ferent methods of determining current-
year costs. Thus, the regulations should
be changed to permit a transferee to
establish (or reconstruct) the new base-
year cost of the transferred inventories
equal to the transferor’s first-in, first-out
cost for the year immediately preceding
the year of transfer, or alternatively, if the
final regulations continue to require the
use of the transferor’s current-year cost
and current-year cost method, the regula-
tions should be changed to provide that
the period for measuring inflation for the
base year is between the appropriate
month for determining base-year cost and
the appropriate month for determining
current-year cost. In addition, one com-
mentator suggested that the final regula-
tions be changed to clarify that“begin-
ning inventory, if any”refers only to
inventory that the transferee actually
owned before the nonrecognition transac-
tion.
The IRS and Treasury Department
agree with these commentator’s concerns.
Accordingly, the final regulations permit
the transferee to compute the base-year
cost of transferred inventories using its
current-year cost and its method of deter-
mining current-year cost. The final regu-
lations also clarify the meaning of begin-
ning inventory.
Another commentator contended that
the holding of Rev. Rul. 70–564 is incor-
rect and, thus, the average cost rule of
section 472(b)(3) should not be applied to
inventories received by a transferee with-
out an existing LIFO election in a non-
section 381 transfer. In addition, this
commentator noted that the holding of
Rev. Rul. 70–564 is inconsistent with
§1.1502–13 (concerning intercompany
transactions), which generally provides
that an intercompany transaction may not
change the timing of the recognition of
income or deductions. This commentator
suggested that the holding of Rev. Rul.
70–565, which provides for a carryover
of a transferor’s LIFO layer history in a
section 351 transfer to a transferee with
an existing LIFO election, should be
applied in all non-section 381 transfers.
The IRS and Treasury Department
believe this comment is outside the scope
of these final regulations. However, in
response to this comment, the IRS and
Treasury Department are reconsidering
whether to continue to require different
results upon the transfer of LIFO invento-
ries in a non-section 381 transfer (as cur-
rently required by Rev. Rul. 70–564 and
Rev. Rul. 70–565) depending upon
whether the transferee has an existing
LIFO election.
13. Effective Date of Final Regulations
The proposed regulations provide that
proposed§§1.472–8(b)(4), (c)(2), and
(e)(3) will apply to taxable years begin-
ning on or after the date they are pub-
lished in theFederal Registeras final
regulations. In addition, the proposed
regulationsprovidethatproposed
§1.472–8(h) will apply to transfers
occurring on or after the date it is pub-
lished in theFederal Registeras a final
regulation.
One commentator suggested that tax-
payers be permitted, but not required, to
apply§§1.472–8(b)(4), (c)(2), and (e)(3)
for taxable yearsendingon or after the
date the regulations are published in the
Federal Registeras final regulations.
This commentator also suggested that
taxpayers be permitted to apply§1.472–
8(h) to transfers occurring during the tax-
able yearendingon or after the date the
regulations are published in theFederal
Registeras final regulations. In addition,
several commentators suggested that the
transition period for an automatic change
in method of accounting to comply with
§§1.472–8(b)(4), (c)(2), and (e)(3) be
extended to include thesecondtaxable
year ending on or after the date the regu-
lations are published in theFederal Reg-
isteras final regulations.
The IRS and Treasury Department
agree with these suggestions. However, in
order to ensure that taxpayers may imple-
ment these changes for taxable years end-
ing December 31, 2001, as requested by
the commentators, the final regulations
are effective for taxable years ending on
or after December 31, 2001.
Effect on Other Documents
Rev. Proc. 84–57, Rev. Rul. 89–29,
and Rev. Proc. 98–49 are obsolete on
January 9, 2002.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment 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 regula-
tions. Pursuant to section 7805(f) of the
Code, the proposed regulations preceding
this Treasury decision was submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact on small business. It
is hereby certified that the collections of
information in this Treasury decision will
not have a significant economic impact
on a substantial number of small entities.
First, only taxpayers that adopt, or change
to, the IPIC method will be affected by
the collections of information. Second,
relatively few small entities are expected
to adopt, or change to, the IPIC method.
Third, the burden of the collections of
information is not significant. Therefore,
a Regulatory Flexibility Analysis under
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required.
Drafting Information
The principal author of these regula-
tions is Leo F. Nolan II of the Office of
Associate Chief Counsel (Income Tax and
Accounting). However, other personnel
from the IRS and Treasury Department
participated in their development.
*****
February 4, 20024282002–5 I.R.B.

Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805***
§1.472–8 also issued under 26 U.S.C.
472.***
Par. 2. Section 1.472–8 is amended as
follows:
1. Paragraph (b)(4) is added.
2. The text of paragraph (c) following
the paragraph heading is redesignated as
paragraph (c)(1) and a paragraph heading
for newly designated (c)(1) is added.
3. Paragraph (c)(2) is added.
4. Paragraph (e)(3) and (h) are revised.
5. The undesignated paragraph follow-
ing paragraph (h) is removed.
The revisions and additions read as fol-
lows:
§1.472–8 Dollar-value method of pricing
LIFO inventories.
*****
(b)***
(4)IPIC method pools. A manufacturer
or processor that elects to use the inven-
tory price index computation method
described in paragraph (e)(3) of this sec-
tion (IPIC method) for a trade or business
may elect to establish dollar-value pools
for those items accounted for using the
IPIC method based on the 2-digit com-
modity codes (i.e., major commodity
groups) in Table 6 (Producer price
indexes and percent changes for com-
modity groupings and individual items,
not seasonally adjusted) of the“PPI
Detailed Report”published monthly by
the United States Bureau of Labor Statis-
tics (available from New Orders, Superin-
tendent of Documents, P.O. Box 371954,
Pittsburgh, PA 15250–7954). A taxpayer
electing to establish dollar-value pools
under this paragraph (b)(4) may combine
IPIC pools that comprise less than 5 per-
cent of the total current-year cost of all
dollar-value pools to form a single mis-
cellaneous IPIC pool. A taxpayer electing
to establish dollar-value pools under this
paragraph (b)(4) may combine a miscella-
neous IPIC pool that comprises less than
5 percent of the total current-year cost of
all dollar-value pools with the largest
IPIC pool. Each of these 5 percent rules is
a method of accounting. A taxpayer may
not change to, or cease using, either 5
percent rule without obtaining the Com-
missioner’s prior consent. Whether a spe-
cific IPIC pool or the miscellaneous IPIC
pool satisfies the applicable 5 percent rule
must be determined in the year of adop-
tion or year of change (whichever is
applicable) and redetermined every third
taxable year. Any change in pooling
required or permitted as a result of a 5
percent rule is a change in method of
accounting. A taxpayer must secure the
consent of the Commissioner pursuant to
§1.446–1(e) before combining or sepa-
rating pools and must combine or sepa-
rate its IPIC pools in accordance with
paragraph (g)(2) of this section.
(c) * * *(1)In general.***
(2)IPIC method pools. A retailer that
elects to use the inventory price index
computation method described in para-
graph (e)(3) of this section (IPIC method)
for a trade or business may elect to estab-
lish dollar-value pools for those items
accounted for using the IPIC method
based on either the general expenditure
categories (i.e., major groups) in Table 3
(Consumer Price Index for all Urban
Consumers (CPI-U): U.S. city average,
detailed expenditure categories) of the
“CPI Detailed Report”or the 2–digit
commodity codes (i.e., major commodity
groups) in Table 6 (Producer price
indexes and percent changes for com-
modity groupings and individual items,
not seasonally adjusted) of the“PPI
Detailed Report.”A wholesaler, jobber, or
distributor that elects to use the IPIC
method for a trade or business may elect
to establish dollar-value pools for any
group of goods accounted for using the
IPIC method and included within one of
the 2-digit commodity codes (i.e., major
commodity groups) in Table 6 (Producer
price indexes and percent changes for
commodity groupings and individual
items, not seasonally adjusted) of the
“PPI Detailed Report.”The“CPI Detailed
Report”and the“PPI Detailed Report”
are published monthly by the United
States Bureau of Labor Statistics (BLS)
(available from New Orders, Superinten-
dent of Documents, P.O. Box 371954,
Pittsburgh, PA 15250–7954). A taxpayer
electing to establish dollar-value pools
under this paragraph (c)(2) may combine
IPIC pools that comprise less than 5 per-
cent of the total current-year cost of all
dollar-value pools to form a single mis-
cellaneous IPIC pool. A taxpayer electing
to establish pools under this paragraph
(c)(2) may combine a miscellaneous IPIC
pool that comprises less than 5 percent of
the total current-year cost of all dollar-
value pools with the largest IPIC pool.
Each of these 5 percent rules is a method
of accounting. Thus, a taxpayer may not
change to, or cease using, either 5 percent
rule without obtaining the Commission-
er’s prior consent. Whether a specific
IPIC pool or the miscellaneous IPIC pool
satisfies the applicable 5 percent rule
must be determined in the year of adop-
tion or year of change (whichever is
applicable) and redetermined every third
taxable year. Any change in pooling
required or permitted under a 5 percent
rule is a change in method of accounting.
A taxpayer must secure the consent of the
Commissioner pursuant to section 1.446–
1(e) before combining or separating pools
and must combine or separate its IPIC
pools in accordance with paragraph (g)(2)
of this section.
*****
(e)***
(3)Inventory price index computation
(IPIC) method—(i)In general. The
inventory price index computation
method provided by this paragraph (e)(3)
(IPIC method) is an elective method of
determining the LIFO value of a dollar-
value pool using consumer or producer
price indexes published by the United
States Bureau of Labor Statistics (BLS).
A taxpayer using the IPIC method must
compute a separate inventory price index
(IPI) for each dollar-value pool. This IPI
is used to convert the total current-year
cost of the items in a dollar-value pool to
base-year cost in order to determine
whether there is an increment or liquida-
tion in terms of base-year cost and, if
there is an increment, to determine the
LIFO inventory value of the current
year’s layer of increment (layer). Using
one IPI to compute the base-year cost of
a dollar-value pool for the current taxable
year and using a different IPI to compute
the LIFO inventory value of the current
2002–5 I.R.B.429February 4, 2002

taxable year’s layer is not permitted under
the IPIC method. The IPIC method will
be accepted by the Commissioner as an
appropriate method of computing an
index, and the use of that index to com-
pute the LIFO value of a dollar-value
pool will be accepted as accurate, reli-
able, and suitable. The appropriateness of
a taxpayer’s computation of an IPI, which
includes all the steps described in para-
graph (e)(3)(iii) of this section, will be
determined in connection with an exami-
nation of the taxpayer’s federal income
tax return. A taxpayer using the IPIC
method may elect to establish dollar-
value pools according to the special rules
in paragraphs (b)(4) and (c)(2) of this sec-
tion or the general rules in paragraphs (b)
and (c) of this section. Taxpayers eligible
to use the IPIC method are described in
paragraph (e)(3)(ii) of this section. The
manner in which an IPI is computed is
described in paragraph (e)(3)(iii) of this
section. Rules relating to the adoption of,
or change to, the IPIC method are in para-
graph (e)(3)(iv) of this section.
(ii)Eligibility. Any taxpayer electing
to use the dollar-value LIFO method may
elect to use the IPIC method. Except as
provided in this paragraph (e)(3)(ii) or in
other published guidance, a taxpayer that
elects to use the IPIC method for a spe-
cific trade or business must use that
method to account for all items of dollar-
value LIFO inventory. A taxpayer that
uses the retail price indexes computed by
the BLS and published in“Department
Store Inventory Price Indexes”(available
from the BLS by calling (202) 606–6325
and entering document code 2415) may
elect to use the IPIC method for items
that do not fall within any of the major
groups listed in“Department Store Inven-
tory Price Indexes.”
(iii)Computation of an inventory price
index—(A)In general. The computation
of an IPI for a dollar-value pool requires
the following four steps, which are
described in more detail in this paragraph
(e)(3)(iii): First, selection of a BLS table
and an appropriate month; second, assign-
ment of items in a dollar-value pool to
BLS categories (selected BLS catego-
ries); third, computation of category infla-
tion indexes for selected BLS categories;
and fourth, computation of the IPI. A tax-
payer may compute the IPI for each
dollar-value pool using either the double-
extension method (double-extension IPIC
method) or the link-chain method (link-
chain IPIC method), without regard to
whether the use of a double-extension
method is impractical or unsuitable. The
use of either the double-extension IPIC
method or the link-chain IPIC method is
a method of accounting, and the adopted
method must be applied consistently to all
dollar-value pools within a trade or busi-
ness accounted for under the IPIC
method. A taxpayer that wants to change
from the double-extension IPIC method
to the link-chain IPIC method, or vice
versa, must secure the consent of the
Commissioner under§1.446–1(e). This
change must be made with a new base
yearasdescribedinparagraph
(e)(3)(iv)(B)(1).
(B)Selection of BLS table and appro-
priate month—(1)In general. Under the
IPIC method, an IPI is computed using
the consumer or producer price indexes
for certain categories (BLS price indexes
and BLS categories, respectively) listed
in the selected BLS table of the“CPI
Detailed Report”or the“PPI Detailed
Report”for the appropriate month.
(2)BLS table selection. Manufactur-
ers, processors, wholesalers, jobbers, and
distributors must select BLS price
indexes from Table 6 (Producer price
indexes and percent changes for com-
modity groupings and individual items,
not seasonally adjusted) of the“PPI
Detailed Report”, unless the taxpayer can
demonstrate that selecting BLS price
indexes from another table of the“PPI
Detailed Report”is more appropriate.
Retailers may select BLS price indexes
from either Table 3 (Consumer Price
Index for all Urban Consumers (CPI-U):
U.S. city average, detailed expenditure
categories) of the“CPI Detailed Report”
or from Table 6 (or another more appro-
priate table) of the“PPI Detailed Report.”
The selection of a BLS table is a method
of accounting and must be used for the
taxable year of adoption and all subse-
quent years, unless the taxpayer obtains
theCommissioner’sconsentunder
§1.446–1(e) to change its table selection.
A taxpayer that changes its BLS table
must establish a new base year in the year
of change as described in paragraph
(e)(3)(iv)(B) of this section.
(3)Appropriate month. In the case of a
retailer using the retail method, the appro-
priate month is the last month of the
retailer’s taxable year. In the case of all
other taxpayers, the appropriate month is
the month most consistent with the
method used to determine the current-
year cost of the dollar-value pool under
paragraph (e)(2)(ii) of this section and the
taxpayer’s history of inventory produc-
tion or purchases during the taxable year.
A taxpayer not using the retail method
may annually select an appropriate month
for each dollar-value pool or make an
election on Form 970,“Application to
Use LIFO Inventory Method,”to use a
representative appropriate month (repre-
sentative month). An election to use a
representative month is a method of
accounting and the month elected must be
used for the taxable year of the election
and all subsequent taxable years, unless
the taxpayer obtains the Commissioner’s
consent under§1.446–1(e) to change or
revoke its election.
(4)Examples. The following examples
illustrate the rules of this paragraph
(e)(3)(iii)(B)(3):
Example 1.Determining an appropriate month.
A wholesaler of seasonal goods timely files a Form
970,“Application to Use LIFO Inventory Method,”
for the taxable year ending December 31, 2001. The
taxpayer indicates elections to use the dollar-value
LIFO method, to determine the current-year cost
using the earliest acquisitions method in accordance
with paragraph (e)(2)(ii)(b) of this section, and to
use the IPIC method under paragraph (e)(3) of this
section. Although the taxpayer purchases inventory
items regularly throughout the year, the items pur-
chased vary according to the seasons. The seasonal
items on hand at December 31, 2001, are purchased
between October and December. Thus, based on the
taxpayer’s use of the earliest acquisitions method of
determining current-year cost and its experience
with inventory purchases, the appropriate month for
the items represented in the ending inventory at
December 31, 2001, is October.
Example 2. Electing a representative month.A
retailer not using the retail method timely files a
Form 970,“Application to Use LIFO Inventory
Method,”for the taxable year ending December 31,
2001. The taxpayer indicates elections to use the
dollar-value LIFO method, the most recent pur-
chases method of determining current-year cost
under paragraph (e)(2)(ii)(a) of this section, the
IPIC method under paragraph (e)(3) of this section,
and December as its representative month under
paragraph (e)(3)(iii)(B)(3) of this section. The items
in the taxpayer’s ending inventory are purchased
fairly uniformly throughout the year, with the first
purchases normally occurring in January and the last
purchases normally occurring in December. The tax-
payer’s election to use December as its representa-
tive month is permissible because the taxpayer
elected to use the most recent purchases method and
February 4, 20024302002–5 I.R.B.

the taxpayer’s last purchases of the taxable year nor-
mally occur during December, the last month of the
taxpayer’s taxable year.
Example 3. Changing representative month. The
facts are the same as inExample 2, except the tax-
payer files a Form 3115,“Application for Change in
Accounting Method,”requesting permission to
change to the earliest acquisitions method of deter-
mining current-year cost in accordance with para-
graph (e)(2)(ii)(b) of this section and to change its
representative month from December to January
beginning with the taxable year ending December
31, 2003. If the Commissioner consents to the tax-
payer’s request to change to the earliest acquisitions
method, December will no longer be a permissible
representative month for this taxpayer because of
the absence of a nexus between the earliest acquisi-
tions method, the month of December (the last
month of the taxpayer’s taxable year), and the tax-
payer’s experience with inventory purchases during
the year. Thus, the Commissioner will permit the
taxpayer to change its representative month to Janu-
ary, the first month of the taxpayer’s taxable year.
Example 4.Changing representative month. The
facts are the same as inExample 2. In 2002, the
taxpayer changes its annual accounting period to a
taxable year ending June 30, which requires the tax-
payer to file a return for the short taxable year
beginning January 1, 2002, and ending June 30,
2002. As a result, December is no longer a permis-
sible representative month because of the absence of
a nexus between the most recent purchases method,
the month of December, and the taxpayer’s experi-
ence with inventory purchases during the year. The
taxpayer should file a Form 3115 requesting permis-
sion to change its representative month from
December to June beginning with the short taxable
year ending June 30, 2002. Because the taxpayer’s
last purchases of the taxable year now will occur in
June, the Commissioner will consent to the taxpay-
er’s request to change its representative month to
June.
Example 5.Changing representative month. The
facts are the same as inExample 2, except that the
taxpayer elects to use January as its representative
month. The taxpayer timely files a Form 3115
requesting permission to change its representative
month from January to December beginning with
the taxable year ending December 31, 2003. January
is not a permissible representative month because of
the absence of a nexus between the most recent pur-
chases method, the taxpayer’s history of inventory
purchases, and the month of January, the first month
in the taxpayer’s taxable year. Because December is
a permissible representative month, the Commis-
sioner will permit the taxpayer to change its repre-
sentative month to December.
(C)Assignment of inventory items to
BLS categories—(1)In general. Except
as provided in paragraph (e)(3)(iii)(C)(2)
of this section, a taxpayer must assign
each item in a dollar-value pool to the
most-detailed BLS category of the
selected BLS table that contains that item.
For example, in Table 6 of the“PPI
Detailed Report”for a given month, the
commodity codes for the various BLS
categories run from 2 to 8 digits, with the
least-detailed BLS categories having a
2-digit code and the most-detailed BLS
categories usually (but not always) hav-
ing an 8-digit code. For purposes of
assigning items to the most-detailed BLS
category, manufacturers and processors
must assign each raw material item to the
most-detailed PPI category that includes
that raw material and must assign each
finished good item to the most-detailed
PPI category that includes that finished
good. In addition, manufacturers and pro-
cessors must assign each work-in-process
(WIP) item to the most-detailed PPI cat-
egory that includes the finished good into
which the item will be manufactured or
processed. For this purpose,finished good
means a salable item that the taxpayer
regularly sells. For example, a gasoline-
engine manufacturer that also manufac-
tures the pistons used in those engines
and regularly sells some of the pistons
(e.g., to retailers of replacement parts)
must assign both finished pistons that
have not been affixed to an engine block
and piston WIP items to the most-detailed
PPI category that includes pistons. Fin-
ished pistons that have been affixed to an
engine block must be assigned to the
most-detailed PPI category that includes
gasoline engines. In contrast, if sales of
these pistons occur infrequently, the tax-
payer must assign both finished pistons
and piston WIP items to the most-detailed
PPI category that includes gasoline
engines.
(2)10 percent method. Instead of
assigning each item in a dollar-value pool
to the most-detailed BLS categories, as
described in paragraph (e)(3)(iii)(C)(1)of
this section, a taxpayer may elect to use
the 10 percent method described in this
paragraph (e)(3)(iii)(C)(2). Under the 10
percent method, items are assigned to
BLS categories using a three-step proce-
dure. First, when the current-year cost of
a specific item is 10 percent or more of
the total current-year cost of the dollar-
value pool, the taxpayer must assign that
item to the most-detailed BLS category
that includes that item (10 percent BLS
category). Any other item that is includ-
ible in that 10 percent BLS category
(other than an item that qualifies for its
own 10 percent BLS category under the
preceding sentence) must be assigned to
that 10 percent BLS category. Second, if
one or more items have not been assigned
to BLS categories in the first step, the
taxpayer must investigate successively
less-detailed BLS categories and assign
the unassigned item(s) to the first BLS
category that contains unassigned items
whose current-year cost, in the aggregate,
is 10 percent or more of the total current-
year cost of the dollar-value pool (also,
10 percent BLS categories). This step
must be repeated until all the items in the
dollar-value pool have been included in
an appropriate 10 percent BLS category,
the current-year cost of the unassigned
items, in the aggregate, is less than 10
percent of the total current-year cost of
the dollar-value pool, or the taxpayer
determines that a single BLS category is
not appropriate for the aggregate of the
unassigned items. Third, if items in a
dollar-value pool have not been assigned
to a 10 percent BLS category because the
current-year cost of those items, in the
aggregate, is less than 10 percent of the
total current-year cost of the dollar-value
pool, the taxpayer must assign those
items to the most-detailed BLS category
that includes all those items (also, a 10
percent category). On the other hand, if
items in a dollar-value pool have not been
assigned to a 10 percent BLS category
because the taxpayer determines that a
single BLS category is not appropriate for
the aggregate of those items, the taxpayer
must assign each of those items to a
single miscellaneous BLS category cre-
ated by the taxpayer (also, a 10 percent
category). In no event may a taxpayer
assign items in a dollar-value pool to a
BLS category that is less detailed than
either the major groups of consumer
goods described in Table 3 of the monthly
“CPI Detailed Report”or the major com-
modity groups of producer goods
described in Table 6 of the monthly“PPI
Detailed Report.”Principles similar to
thosedescribedinparagraph
(e)(3)(iii)(C)(1) apply for purposes of
assigning raw material, work-in-process,
and finished good items to the most-
detailed BLS category under the 10 per-
cent method.
(3)Change in method of accounting.
The 10 percent method of assigning items
in a dollar-value pool to BLS categories
is a method of accounting. In addition, a
taxpayer’s selection of a BLS category
for a specific item is a method of
accounting. However, the assignment of
2002–5 I.R.B.431February 4, 2002

items to different BLS categories solely
as a result of the application of the 10
percent method is a change in underlying
facts and not a change in method of
accounting. Likewise, the selection of a
new BLS category for a specific item as
a result of a revision to a BLS table is a
change in underlying facts and not a
change in method of accounting. A tax-
payer that wants to change its method of
selecting BLS categories (i.e., to or from
the 10-percent method) or of selecting a
BLS category for a specific item must
secure the Commissioner’s consent in
accordance with§1.446–1(e). A taxpayer
that voluntarily changes its method of
selecting BLS categories or of selecting a
BLS category for a specific item must
establish a new base year in the year of
change as described in paragraph
(e)(3)(iv)(B) of this section.
(D)Computation of a category infla-
tion index—(1)In general. As described
in more detail in this paragraph
(e)(3)(iii)(D), a category inflation index
reflects the inflation that occurs in the
BLS price indexes for a selected BLS cat-
egory (or, if applicable, 10 percent BLS
category) during the relevant measure-
ment period.
(2)BLS price indexes. The BLS price
indexes are the cumulative indexes pub-
lished in the selected BLS table for the
appropriate month. A taxpayer may elect
to use either preliminary or final BLS
price indexes for the appropriate month,
provided that the selected BLS price
indexes are used consistently. However, a
taxpayer that elects to use final BLS price
indexes for the appropriate month must
use preliminary BLS price indexes for
any taxable year for which the taxpayer
files its original federal income tax return
before the BLS publishes final BLS price
indexes for the appropriate month. If a
BLS price index for a most-detailed or 10
percent BLS category is not otherwise
available for the appropriate or represen-
tative month (but not because the BLS
categories in the BLS table have been
revised), the taxpayer must use the BLS
price index for the next most-detailed
BLS category that includes the specific
item(s) in the most-detailed or 10 percent
BLS category. If a BLS price index is not
otherwise available for the appropriate or
representative month because the BLS
categories in the BLS table have been
revised,therulesofparagraph
(e)(3)(iii)(D)(4) of this section apply.
(3)Category inflation index.(i)In
general. Except as provided in paragraph
(e)(3)(iii)(D)(4) of this section (concern-
ing compound category inflation indexes)
or (e)(3)(iii)(D)(5) of this section (con-
cerning category inflation indexes for cer-
tain 10 percent BLS categories), a cat-
egory inflation index for a selected BLS
category (or, if applicable, 10 percent
BLS category) is computed under the
rules of this paragraph (e)(3)(iii)(D)(3).
(ii)Double-extension IPIC method.In
the case of a taxpayer using the double-
extension IPIC method, the category
inflation index for a BLS category is the
quotient of the BLS price index for the
appropriate or representative month of the
current year divided by the BLS price
index for the appropriate month of the
taxable year preceding the base year (base
month). However, if the taxpayer did not
have an opening inventory in the year that
its election to use the dollar-value LIFO
method and double-extension IPIC
method became effective, the category
inflation index for a BLS category is the
quotient of the BLS price index for the
appropriate or representative month of the
current year divided by the BLS price
index for the month immediately preced-
ing the month of the taxpayer’s first
inventory production or purchase.
(iii)Link-chain IPIC method.Inthe
case of a taxpayer using the link-chain
IPIC method, the category inflation index
for a BLS category is the quotient of the
BLS price index for the appropriate or
representative month of the current year
divided by the BLS price index for the
appropriate month used for the immedi-
ately preceding taxable year. However, if
the taxpayer did not have an opening
inventory in the year that its election to
use the dollar-value LIFO method and
link-chain IPIC method became effective,
the category inflation index for a BLS
category for the year of election is the
quotient of the BLS price index for the
appropriate or representative month of the
current year divided by the BLS price
index for the month immediately preced-
ing the month of the taxpayer’s first
inventory production or purchase.
(iv)Special rules concerning represen-
tative months. A taxpayer electing to use
a representative month under paragraph
(e)(3)(iii)(B)(3) of this section must use
an appropriate month, rather than the
representative month, to determine cat-
egory inflation indexes in the circum-
stancesdescribedinthisparagraph
(e)(3)(iii)(D)(3)(iv) and in other similar
circumstances. For example, in the case
of a short taxable year, the category infla-
tion index should reflect the inflation that
occurs from the base month (in the case
of the double-extension IPIC method), or
the appropriate or representative month
used for the preceding taxable year (in the
case of the link-chain IPIC method), and
the appropriate month for the short tax-
able year. Similarly, if a taxpayer using
the link-chain IPIC method is granted
consent to change both its method of
determining the current-year cost of a
dollar-value pool and its representative
month, the category inflation index for
the year of change should reflect the
inflation that occurs between the old rep-
resentative month used for the preceding
taxable year and the new representative
month used for the year of change.
(4)Compound category inflation index
for revised BLS categories or price
indexes—(i)In general. Periodically, the
BLS revises a BLS table to add one or
more new BLS categories, eliminate one
or more previously reported BLS catego-
ries, or reset the base-year BLS price
index of one or more BLS categories. If
the BLS has revised the applicable BLS
table for a taxable year, a taxpayer must
compute the category inflation index for
each BLS category for which the taxpayer
cannot compute a category inflation
index in accordance with paragraph
(e)(3)(iii)(D)(3) of this section (affected
BLS category) using a reasonable
method, provided the method is used con-
sistently for all affected BLS categories
within a particular taxable year. For
example, if the BLS revised the CPI by
adding new BLS categories as of January
2001, and eliminating some previously
reported BLS categories as of December
2000, January 2002 would be the first
month for which it would be possible to
compute a category inflation index for a
12–month period using the BLS price
indexes for any affected category. The
compound category inflation index
described in paragraph (e)(3)(iii)(D)(4)(ii)
of this section is a reasonable method of
February 4, 20024322002–5 I.R.B.

computing the category inflation index
for an affected BLS category.
(ii)Computation of compound cat-
egory inflation index. When the appli-
cable BLS table is revised as described in
paragraph (e)(3)(iii)(D)(4)(i) of this sec-
tion, a taxpayer may use the procedure
described in this paragraph (e)(3)(iii)
(D)(4)(ii) to compute a compound cat-
egory inflation index for each affected
BLS category represented in the taxpay-
er’s ending inventory. For this purpose, a
compound category inflation index is the
product of the category inflation index for
the“first portion”multiplied by the corre-
sponding category inflation index for the
“second portion.”The category inflation
index for the first portion must reflect the
inflation that occurs between the end of
the base month (in the case of the double-
extension IPIC method), or the preceding
year’s appropriate or representative
month (in the case of the link-chain IPIC
method), and the end of the last month
covered by the unrevised BLS table based
on the old BLS category. The correspond-
ing category inflation index for the sec-
ond portion must reflect the inflation that
occurs between the beginning of the first
month covered by the revised BLS table
based on the new BLS category and the
end of the current year’s appropriate or
representative month. First, using the
revised BLS table for the current-year’s
appropriate or representative month, the
taxpayer assigns items in the dollar-value
pool using its method of assigning items
to BLS categories as described in para-
graph (e)(3)(iii)(C) of this section. Sec-
ond, for each affected BLS category rep-
resented in the ending inventory, the
taxpayer computes the category inflation
index for the second portion using this
formula: [ A / B ], where A equals the
BLS price index for the current year’s
appropriate or representative month and
B equals the BLS price index for the last
month covered by the unrevised BLS
table (as published for the first month of
the revised BLS table). Third, using the
unrevised BLS table for the base month
(in the case of the double extension IPIC
method) or the preceding year’s appropri-
ate or representative month (in the case of
the link-chain IPIC method), the taxpayer
assigns each of the items in the dollar-
value pool using its method of assigning
items to BLS categories. Fourth, for each
affected BLS category represented in the
ending inventory, the taxpayer computes
the category inflation index for the first
portion using this formula: [C/D],
where C equals the BLS price index for
the last month covered by the unrevised
BLS table (as published for the last
month of the unrevised BLS table) and D
equals the BLS price index for the base
month (in the case of the double-
extension IPIC method) or the preceding
year’s appropriate or representative
month (in the case of the link-chain IPIC
method). Fifth, for each affected BLS cat-
egory represented in the ending inventory,
the taxpayer computes the compound cat-
egory inflation index using this formula: [
X * Y ], where X equals the category
inflation index for the second portion, and
Y equals the corresponding category
inflation index for the first portion. For
the purpose of computing the compound
category inflation index for each affected
BLS category, the corresponding category
inflation index for the first portion is the
category inflation index for the unrevised
BLS category that includes the specific
inventory item(s) included in the revised
BLS category. If items included in a
single revised BLS category had been
included in separate BLS categories
before the revision of the BLS table, the
corresponding category inflation index
for the first portion is the weighted har-
monic mean of the category inflation
indexes for these unrevised BLS catego-
ries. See paragraph (e)(3)(iii)(E)(1) of this
section for a formula of the weighted har-
monic mean. When computing this
weighted-average category inflation
index, a taxpayer must use the current-
year costs (or in the case of a retailer
using the retail method, the retail selling
prices) in ending inventory as the
weights.
(iii)New base year. A taxpayer may
establish a new base year in the year fol-
lowing the taxable year for which the tax-
payer computed a compound category
inflation index under this paragraph
(e)(3)(iii)(D)(4) for one or more affected
BLS categories in a dollar-value pool.
See paragraph (e)(3)(iv)(B) of this section
for the procedures and computations inci-
dent to establishing a new base year.
(iv)Examples. The following
examples illustrate the rules of this para-
graph (e)(3)(iii)(D)(4):
Example 1.BLS categories eliminated. (i) A
retailer, whose taxable year ends January 31, elected
to account for its inventories using the dollar-value
LIFO method and double-extension IPIC method
(based on the CPI), beginning with the taxable year
ending January 31, 1997. The taxpayer does not use
the retail method, but elected to use January as its
representative month. On January 31, 1999, the tax-
payer’s only dollar-value pool contains only two
items—lemons and peaches. The total current-year
cost of these items is as follows: lemons, $40, and
peaches, $30.
(ii) The CPI was revised in October of 1998 to
eliminate the“Citrus fruits”subcategory of“Other
fresh fruits.”In addition, the base-year BLS price
index for“Other fresh fruits”was reset to 100.00 as
of October 1, 1998. In relevant part, the January
1999 CPI permits the assignment of both lemons
and peaches to“Other fresh fruits.”The January
1999 BLS price indexes for“Citrus fruits”and
“Other fresh fruits”are 96.6 and 105.6, respectively.
In relevant part, the September 1998 CPI permits
the assignment of lemons to“Citrus fruits”and
peaches to“Other fresh fruits.”The September 1998
BLS price indexes for“Citrus fruits”and“Other
fresh fruits”are 194.9 and 294.9, respectively, and
the January 1997 BLS price indexes for“Citrus
fruits”and“Other fresh fruits”are 190.2 and 290.2,
respectively.
(iii) Because the BLS eliminated the category,
“Citrus fruits,”as of October 1998, it did not pub-
lish a BLS price index for that category in the Janu-
ary 1999 CPI. Thus, the taxpayer cannot compute a
category inflation index for“Citrus fruits”under the
normal procedures, but may compute a compound
category inflation index for that affected BLS cat-
egory using the procedures described in paragraph
(e)(3)(iii)(D)(4)(ii) of this section.
(iv) The taxpayer computes a compound cat-
egory inflation index for the two BLS categories
that formerly included lemons and peaches. The tax-
payer first assigns lemons and peaches to“Other
fresh fruits,”the most-detailed index in the January
1999 CPI, and then computes the category inflation
index for the second portion as follows:
2002–5 I.R.B.433February 4, 2002

Item1999 Category
Jan. 1999 index /
Sept. 1998 index
(as published in
Oct. 1998)
Category inflation index
Lemons & PeachesOther fresh fruits105.6 / 100.01.0560
(v) The taxpayer assigns the lemons and peaches to the most-detailed BLS categories in the January 1998 CPI as follows: lemons to“Citrus fruits”and peaches
to“Other fresh fruits.”Then, the taxpayer computes the category inflation index for the first portion as follows:
Item
1998 Category
Sept. 1998 index
(as published in
Sept. 1998) /
Jan. 1997
Category inflation index
LemonsCitrus fruits194.9 / 190.21.0247
PeachesOther fresh Fruits294.9 / 290.21.0162
(vi) Because lemons and peaches, which are included together in the revised“Other fresh fruits”category, had been included in separate BLS categories before
the BLS table was revised, the taxpayer must compute a single corresponding category inflation index for the affected BLS categories for the first portion. This
corresponding category inflation index is the weighted harmonic mean of the separate corresponding category inflation indexes for the first portion using the cost
of the items in ending inventory as the weights. The taxpayer computes the corresponding category inflation index for“Other fresh fruits”for the first portion as
follows:
Item
(I)
Weight
(Cost of Item)
(II)
Category Inflation Index
(III)
Quotient:
(I) / (II)
Lemons$40.001.0247$39.04
Peaches30.00
1.016229.52
Total$70.00$68.56
(IV)
Sum of Weights
(V)
Sum of (Weight /
Category Inflation Index)
(VI)
Weighted Harmonic Mean
of Other Fresh Fruits:
(IV) / (V)
$70.00$68.561.0210
(vii) Finally, the taxpayer computes the compound category inflation index for Other fresh fruits as follows:
Item
(I)
Category Inflation
Index
(Second Portion)
(II)
Category Inflation
Index
(First Portion)
(III)
Compound Category
Inflation Index:
(I) * (II)
Other fresh fruits1.05601.02101.0782
(viii) The taxpayer may establish a new base year for the taxable year ending January 31, 2000.
Example 2.BLS categories separated. (i) The facts are the same as inExample 1, except prior to October 1998, both lemons and peaches were assigned to
“Other fresh fruits”and in the October 1998 CPI, the BLS created a new category,“Citrus fruits,”for citrus fruits, such as lemons. Moreover, the BLS reset the
base-year BLS price index for“Other fresh fruits”to 100.0 as of October 1, 1998. As a result of these changes, the taxpayer may no longer assign lemons to“Other
fresh fruits.”
(ii) Because“Citrus fruits”is new as of October 1998, the BLS did not publish a BLS price index for this BLS category in the January 1999 CPI. Thus, because
the taxpayer cannot compute a category inflation index for“Citrus fruits”under the normal procedures, the taxpayer may compute a compound category inflation
index for the affected BLS category using the procedures described in paragraph (e)(3)(iii)(D)(4)(ii) of this section.
(iii) Based on the January 1999 CPI, the taxpayer assigns lemons to“Citrus fruits”and peaches to“Other fresh fruits.”Then, the taxpayer computes a com-
pound category inflation index for each of the two BLS categories. The computation of the category inflation index for the second portion is as follows:
February 4, 20024342002–5 I.R.B.

Item1999 Category
Jan. 1999 index /
Sept. 1998 index
(as published in
Oct. 1998)
Category Inflation Index
LemonsCitrus fruits96.6 / 1000.9660
PeachesOther fresh fruits105.6 / 1001.0560
(iv) Then, the taxpayer computes the category inflation index for the first portion as follows:
Item
1998 Category
Sept. 1998 index
(as published in
Sept. 1998) /
Jan. 1997
Category Inflation Index
Lemons & PeachesOther fresh fruits294.9 / 290.21.0162
(v) Finally, the taxpayer computes the compound category inflation index for“Citrus fruits”and“Other fresh fruits”:
Item
(I)
Category Inflation
Index
(Second Portion)
(II)
Category Inflation
Index
(First Portion)
(III)
Compound Category
Inflation Index:
(I) * (II)
Citrus fruits0.96601.01620.9816
Other fresh fruits1.05601.01621.0731
(vi) The taxpayer may establish a new base year for the taxable year ending January 31, 2000.
(5)10 percent method.(i)Applicabil-
ity. A taxpayer that elects to use the 10
percent method described in paragraph
(e)(3)(iii)(C)(2) of this section must com-
pute a category inflation index for a less-
detailed 10 percent BLS category as pro-
vided in this paragraph (e)(3)(iii)(D)(5).
A less-detailed 10 percent category is a
BLS category that—
(A) subsumes two or more BLS cat-
egories;
(B) does not have a single assigned
item whose current-year cost is 10 per-
cent or more of the current-year cost of
all the items in the dollar-value pool;
(C) has at least one item in at least one
of the subsumed BLS categories; and
(D) has at least one subsumed BLS
category that either does not have any
assigned items or is a separate 10 percent
BLS category.
(ii)Determination of category infla-
tion index. If the rules of this paragraph
(e)(3)(iii)(D)(5) apply, the category infla-
tion index for the less-detailed 10 percent
BLS category is equal to the weighted
arithmetic mean of the category inflation
index (or, compound category inflation
index, if applicable) for each of the sub-
sumed BLS categories that have been
assigned at least one item from the tax-
payer’s dollar-value pool (excluding any
item that is properly assigned to a sepa-
rate 10 percent BLS category). [Weighted
Arithmetic Mean = Sum of (Weight x
Category Inflation Index)] / Sum of
Weights]. The appropriate weight for each
of the most-detailed BLS categories refer-
enced in the preceding sentence is the
corresponding BLS weight. Currently, in
January of each year, the BLS publishes
the BLS weights determined for Decem-
ber of the preceding year. In the case of a
taxpayer using the double-extension IPIC
method, the BLS weights for December
of the taxable year preceding the base
year are to be used for all taxable years.
In the case of a taxpayer using the link-
chain IPIC method, the BLS weights for
December of a given calendar year are to
be used for taxable years that end during
the 12-month period that begins on July 1
of the following calendar year. However,
if the BLS weights are not published for
all of the most-detailed BLS categories
referenced above, the taxpayer may use
the current-year cost (or in the case of a
retailer using the retail method, the retail
selling prices) of all items assigned to a
specific most-detailed BLS category as
the appropriate weight for that category,
but must compute a weighted harmonic
mean. See paragraph (e)(3)(iii)(E)(1)of
this section for a formula of the weighted
harmonic mean.
(E)Computation of Inventory Price
Index (IPI)—(1)Double-extension IPIC
method. Under the double-extension IPIC
method, the IPI for a dollar-value pool is
the weighted harmonic mean of the cat-
egory inflation indexes (or, if applicable,
compound category inflation indexes)
determined under paragraph (e)(3)(iii)(D)
of this section for each selected BLS cat-
egory (or, if applicable 10 percent BLS
category) represented in the taxpayer’s
dollar-value pool at the end of the taxable
year. The formula for computing the
weighted harmonic mean of the category
inflation indexes is: [ Sum of Weights /
Sum of (Weight / Category Inflation
Index) ]. The weights to be used when
computing this weighted harmonic mean
are the current-year costs (or, in the case
of a retailer using the retail method, the
retail selling prices) in each selected BLS
category represented in the dollar-value
pool at the end of the taxable year.
(2)Link-chain IPIC method. Under the
link-chain IPIC method, the IPI for a
dollar-value pool is the product of the
weighted harmonic mean of the category
inflation indexes (or, if applicable, the
compound category inflation indexes)
determined under paragraph (e)(3)(iii)(D)
2002–5 I.R.B.435February 4, 2002

of this section for each selected BLS cat-
egory (or, if applicable, 10 percent BLS
category) represented in the taxpayer’s
dollar-value pool at the end of the taxable
year multiplied by the IPI for the imme-
diately preceding taxable year. The for-
mula for computing the weighted har-
monic mean of the category inflation
indexes is: [ Sum of Weights / Sum of
(Weight / Category Inflation Index) ]. The
weights to be used when computing this
weighted harmonic mean are the current-
year costs (or, in the case of a retailer
using the retail method, the retail selling
prices) in each selected BLS category
represented in the dollar-value pool at the
end of the taxable year.
(3)Examples. The following examples
illustrate the rules of this paragraph
(e)(3)(iii)(E):
Example 1.Double-extension method. (i)Intro-
duction. R is a retail furniture merchant that does
not use the retail method. For the taxable year end-
ing December 31, 2000, R used the first-in, first-out
method of identifying inventory and valued its
inventory at cost. The total cost of R’s inventory on
December 31, 2000, was $850,000. R elected to use
the dollar-value LIFO and double-extension IPIC
methods for its taxable year ending December 31,
2001. R does not elect to use the 10 percent method
described in paragraph (e)(3)(iii)(C)(2) of this sec-
tion. R determines the current-year cost of the items
using the actual cost of the most recently purchased
goods. R elected to pool its inventory based on the
major groups in Table 6 of the monthly“PPI
Detailed Report”in accordance with the special
IPIC pooling rules of paragraph (b)(4) of this sec-
tion. All items in R’s inventories fall within the
2-digit commodity code in Table 6 of the monthly
“PPI Detailed Report”for“furniture and household
durables.”Therefore, R will maintain a single
dollar-value pool.
(ii)Select a BLS table and appropriate month
for 2001. R determines that the appropriate month
for 2001 is October. R also determines that the
appropriate month for 2000 would have been
December if R had used the IPIC method for that
year.
(iii)Assign inventory items to BLS categories for
2001. For 2001, R assigns all items in the dollar-
value pool to the most-detailed BLS categories
listed in Table 6 of the October 2001“PPI Detailed
Report”that contain those items. The BLS catego-
ries and the current-year cost of the items assigned
to them are summarized as follows:
Commodity CodeCategoryCurrent-Year Cost
12120101Living Room Table$111,924.00
12120211Dining Room Table159,578.00
12120216Dining Room Chairs98,639.00
12130101Upholstered Sofas332,488.00
12130111Upholstered Chairs218,751.00
Total$921,380.00
(iv)Compute category inflation indexes for 2001. Because R elected to use the double-extension IPIC method and did not elect the 10 percent method, the
category inflation indexes are computed in accordance with paragraph (e)(3)(iii)(D)(3)(ii) of this section (BLS price indexes for October 2001 divided by BLS price
indexes for December 2000). R computes the category inflation indexes for 2001 as follows:
Category
(I)
Oct. 2001
Index
(II)
Dec. 2000
Index
(III)
Category Inflation Index:
(I) / (II)
Living Room Table172.4169.21.018913
Dining Room Table171.9168.11.022606
Dining Room Chairs172.8169.71.018268
Upholstered Sofas142.2140.91.009226
Upholstered Chairs134.1132.51.012075
(v)Compute IPI for 2001. R must compute the IPI for 2001, which is the weighted harmonic mean of the category inflation indexes for 2001. The formula for
the weighted harmonic mean provided in paragraph (e)(3)(iii)(E)(1) of this section is [ Sum of Weights / Sum of (Weight / Category Inflation Index) ]. The IPI for
2001 is computed as follows:
Category
(I)
Weight
(II)
Category Inflation
Index
(III)
Quotient:
(I) / (II)
Living Room Table$111,924.001.018913$109,846.47
Dining Room Table159,578.001.022606156,050.33
Dining Room Chairs98,639.001.01826896,869.39
Upholstered Sofas332,488.001.009226329,448.51
Upholstered Chairs218,751.00
1.012075216,141.10
Total$921,380.00$908,355.80
February 4, 20024362002–5 I.R.B.

(IV)
Sum of Weights
(V)
Sum of (Weight /
Category Inflation Index)
(VI)
Inventory Price Index:
(IV) / (V)
$921,380.00$908,355.801.01433821
(vi)Determine the LIFO value of the dollar-value pool for 2001. For 2001, R determines the total base-year cost of its ending inventory by dividing the total
current-year cost of the items in the dollar-value pool by the IPI for 2001. The total base-year cost of R’s ending inventory is $908,355.80 ($921,380 / 1.01433821).
Comparing the base-year cost of the ending inventory to the base-year cost of the beginning inventory, R determines that the base-year cost of the 2001increment
is $58,355.80 ($908,355.80 - $850,000.00). R multiplies the base-year cost of the 2001 increment by the IPI for 2001 and determines that the LIFO valueof the
2001 layer is $59,192.52 ($58,355.80 * 1.01433821). Thus, the LIFO value of R’s total inventory at the end of 2001 is $909,192.52 ($850,000.00 (opening inven-
tory) + $59,192.52 (2001 layer)).
(vii)Select a BLS table and appropriate month for 2002. For 2002, R must compute a new IPI under the double-extension IPIC method to determine the LIFO
value of its dollar-value pool. R determines that the appropriate month for 2002 is November.
(viii)Assign inventory items to BLS categories for 2002. For 2002, R assigns all items in the dollar-value pool to the most-detailed BLS categories listed in
Table 6 of the November 2002“PPI Detailed Report”that contain those items. The BLS categories and the current-year cost of the items assigned to them are
summarized as follows:
Commodity CodeCategoryCurrent-Year Cost
12120103Living Room Desks$125,008.00
12120211Dining Room Table136,216.00
12120216Dining Room Chairs113,569.00
12130101Upholstered Sofas343,900.00
12130111Upholstered Chairs233,050.00
Total$951,743.00
(ix)Compute category inflation indexes for 2002. Because R uses the double-extension IPIC method and did not elect the 10 percent method, the category infla-
tion indexes are computed in accordance with paragraph (e)(3)(iii)(D)(3)(ii) of this section (BLS price indexes for November 2002 divided by BLS price indexes
for December 2000). R computes the category inflation indexes for 2002 as follows:
Category
(I)
Nov. 2002
Index
(II)
Dec. 2002
Index
(III)
Category Inflation
Index
(I) / (II)
Living Room Desks172.6160.31.076731
Dining Room Table174.8168.11.039857
Dining Room Chairs177.0169.71.043017
Upholstered Sofas144.9140.91.028389
Upholstered Chairs136.6132.51.030943
(x)Compute IPI for 2002. R must compute the IPI for 2002, which is the weighted harmonic mean [Sum of Weights / Sum of (Weight / Category Inflation
Index)] of the category inflation indexes for 2002. The IPI for 2002 is computed as follows:
Category
(I)
Weight
(II)
Category Inflation
Index
(III)
Quotient:
(I) / (II)
Living Room Desks$125,008.001.076731$116,099.56
Dining Room Table136,216.001.039857130,994.93
Dining Room Chairs113,569.001.043017108,885.09
Upholstered Sofas343,900.001.028389334,406.53
Upholstered Chairs233,050.00
1.030943226,055.17
Total$951,743.00$916,441.28
(IV)
Sum of Weights
(V)
Sum of (Weight /
Category Inflation Index)
(VI)
Inventory Price Index:
(IV) / (V)
$951,743.00$916,441.281.03852044
2002–5 I.R.B.437February 4, 2002

(xi)Determine the LIFO value of the pool for 2002. For 2002, R determines the total base-year cost of its ending inventory by dividing the total current-year
cost of the items in the dollar-value pool by the IPI for 2002. The total base-year cost of the ending inventory is $916,441.28 ($951,743.00 / 1.03852044). Com-
paring the base-year cost of the ending inventory to the base-year cost of the beginning inventory, R determines that the base-year cost of the 2002 increment is
$8,085.48 ($916,441.28 - $908,355.80). R multiplies the base-year cost of the 2002 increment by the IPI for 2002 and determines that the LIFO value of the 2002
layer is $8,396.94 ($8,085.48 * 1.03852044). Thus, the LIFO value of R’s total inventory at the end of 2002 is $917,589.46 ($850,000.00 (opening inventory) +
$59,192.52 (2001 layer) + $8,396.94 (2002 layer)).
Example 2.Link-chain method. (i)Introduction. The facts are the same asExample 1, except that R uses the link-chain IPIC method. The double-extension IPIC
method and the link-chain IPIC method yield the same results for the first taxable year in which the dollar-value LIFO and IPIC methods are used. Therefore, this
example illustrates only how R will compute the IPI for, and determine the LIFO value of, its dollar-value pool for 2002.
(ii)Select a BLS table and appropriate month for 2002. R determines that the appropriate month for 2002 is November.
(iii)Assign inventory items to BLS categories for 2002. For 2002, R assigns all items in the dollar-value pool to the most-detailed BLS categories listed in Table
6 of the November 2002“PPI Detailed Report”that contain those items. The BLS categories and the current-year cost of the items assigned to them are summa-
rized as follows:
Commodity CodeCategoryCurrent-Year Cost
12120103Living Room Desks$125,008.00
12120211Dining Room Table136,216.00
12120216Dining Room Chairs113,569.00
12130101Upholstered Sofas343,900.00
12130111Upholstered Chairs233,050.00
Total$951,743.00
(iv)Compute category inflation indexes for 2002. Because R uses the link-chain IPIC method and did not elect the 10 percent method, the category inflation
indexes are computed in accordance with paragraph (e)(3)(iii)(D)(3)(iii) of this section (BLS price indexes for November 2002 divided by BLS price indexes for
October 2001). R computes the category inflation indexes for 2002 as follows:
Category
(I)
Nov. 2002
Index
(II)
Oct. 2001
Index
(III)
Category Inflation
Index
(I) / (II)
Living Room Desks172.6162.01.065432
Dining Room Table174.8171.91.016870
Dining Room Chairs177.0172.81.024306
Upholstered Sofas144.9142.21.018987
Upholstered Chairs136.6134.11.018643
(v)Compute IPI for 2002. As provided in paragraph (e)(3)(iii)(E)(2) of this section, R must compute the IPI for 2002 by multiplying the weighted harmonic
mean of the category inflation indexes for 2002 by the IPI for 2001. The IPI for 2002 is computed as follows:
Category
(I)
Weight
(II)
Category Inflation
Index
(III)
Quotient:
(I) / (II)
Living Room Desks$125,008.001.065432$117,330.81
Dining Room Table136,216.001.016870133,956.16
Dining Room Chairs113,569.001.024306110,874.09
Upholstered Sofas343,900.001.018987337,492.04
Upholstered Chairs233,050.00
1.018643228,784.77
Total$951,743.00$928,437.87
(IV)
Sum
of
Weights
(V)
Sum of (Weight /
Category
Inflation Index)
(VI)
Weighted
Harmonic Mean
of Category
Inflation Indexes
for 2002:
(IV) / (V)
(VII)
Inventory
Price Index
for 2001
(VIII)
Inventory
Price Index
for 2002:
(VI) * (VII)
$951,743.00$928,437.871.025101441.014338211.03979956
February 4, 20024382002–5 I.R.B.

(vi)Determine the LIFO value of the pool for 2002. R determines the total base-year cost of its ending inventory by dividing the total current-year cost of the
items in the dollar-value pool by the IPI for 2002. The total base-year cost of the ending inventory is $915,313.91 ($951,743.00 / 1.03979956). Comparing the
base-year cost of the ending inventory to the base-year cost of the beginning inventory, R determines that the base-year cost of the 2002 layer is $6,958.11
($915,313.91 - $908,355.80). R multiplies the base-year cost of the 2002 layer by the IPI for 2002 and determines that the LIFO value of the 2002 layer is$7,235.04
($6,958.11 * 1.03979956). Thus, the LIFO value of R’s total inventory at the end of 2002 is $916,427.56 ($850,000.00 (opening inventory) + $59,192.52 (2001
layer) + $7,235.04 (2002 layer)).
(iv)Adoption or change of method—
(A)Adoption or change to IPIC method.
The use of an inventory price index com-
puted under the IPIC method is a method
of accounting. A taxpayer permitted to
adopt the dollar-value LIFO method with-
out first securing the Commissioner’s
consent also may adopt the IPIC method
without first securing the Commissioner’s
consent. The IPIC method may be
adopted and used, however, only if the
taxpayer provides the following informa-
tion on a Form 970,“Application to Use
LIFO Inventory Method,”or in another
manner as may be acceptable to the Com-
missioner: A complete list of dollar-value
pools (including a description of the items
in each dollar-value pool); the BLS table
(i.e., CPI or PPI) selected for each dollar-
value pool; the representative month, if
applicable, elected for each dollar-value
pool; the BLS categories to which the
items in each dollar-value pool will be
assigned; the method of assigning items
to BLS categories (e.g., the 10 percent
method) for each dollar-value pool; and
the method of computing the IPI (i.e.,
double-extension IPIC method or link-
chain IPIC method) for each dollar-value
pool. In the case of a taxpayer permitted
to adopt the IPIC method without request-
ing the Commissioner’s consent, the
Form 970 must be attached to the taxpay-
er’s income tax return for the taxable year
of adoption. In all other cases, a taxpayer
may change to the IPIC method only after
securing the Commissioner’s consent as
provided in§1.446–1(e). In these latter
cases, the Form 970 containing the infor-
mation described in this paragraph
(e)(3)(iv)(A) must be attached to a Form
3115,“Application for Change in
Accounting Method,”filed as required by
§1.446–1(e). A taxpayer that simulta-
neously changes to the dollar-value LIFO
and IPIC methods from another LIFO
method must apply the rules of paragraph
(f)(2) of this section before applying the
rules of paragraph (e)(3)(iv)(B)(1) of this
section. To satisfy the requirements of
§1.472–2(h), taxpayers must maintain
adequate books and records, including
those concerning the use of the IPIC
method and necessary computations. Not-
withstanding the rules in paragraph (e)(1)
of this section, a taxpayer that adopts, or
changes to, the link-chain IPIC method is
not required to demonstrate that the use
of any other method of determining the
LIFO value of a dollar-value pool is
impractical.
(B)New base year—(1)Voluntary
change—(i)In general. In the case of a
taxpayer using a non-IPIC method to
determine the LIFO value of inventory,
the layers previously determined under
that method, if any, and the LIFO values
of those layers are retained if the taxpayer
voluntarily changes to the IPIC method.
Instead of using the earliest taxable year
for which the taxpayer adopted the LIFO
method for any items in the dollar-value
pool, the year of change is used as the
new base year for the purpose of deter-
mining the amount of increments and liq-
uidations, if any, for the year of change
and subsequent taxable years. The base-
year cost of the layers in a dollar-value
pool at the beginning of the year of
change must be restated in terms of new
base-year cost using the year of change as
the new base year and, if applicable, the
indexes for the previously determined
layers must be recomputed accordingly.
The recomputed indexes will be used to
determine the LIFO value of subsequent
liquidations. For purposes of computing
an IPI under paragraph (e)(3)(iii)(E) of
this section, the IPI for the immediately
preceding year is 1.00. The new total
base-year cost of the items in a dollar-
value pool for the purpose of determining
future increments and liquidations is
equal to the total current-year cost of the
items in the dollar-value pool (determined
using the taxpayer’s method of determin-
ing the total current-year cost of the items
in the dollar-value pool under paragraph
(e)(2)(ii) of this section). A taxpayer must
allocate this new total base-year cost to
each layer based on the ratio of the old
base-year cost of the layer to the old total
base-year cost of the dollar-value pool.
(ii)Example. The following example
illustrates the rules of this paragraph
(e)(3)(iv)(B)(1):
Example. (i) In 1990, X elected to use a dollar-value LIFO method (other than the IPIC method) for its single dollar-value pool. X is granted permission to
change to the link-chain IPIC method, beginning with the taxable year ending December 31, 2001. X will continue using a single dollar-value pool. X’s beginning
inventory as of January 1, 2001, computed using its former inventory method, is as follows:
Layer
(I)
Base-Year
Cost
(II)
Inflation
Index
(III)
LIFO Value:
(I) * (II)
Base layer$135,0001.00$135,000
1991 layer20,0001.4328,600
1994 layer60,0001.5593,000
1995 layer13,0001.5920,670
1997 layer2,000
1.613,220
Total$230,000$280,490
2002–5 I.R.B.439February 4, 2002

(ii) Under X’s method of determining the current-year cost of items in a dollar-value pool, the current-year cost of the beginning inventory is $391,000. Thus,
X’s new base-year cost as of January 1, 2001, is $391,000. X allocates this new base-year cost to each layer based on the ratio of old base-year cost of the layer
to the total old base-year cost of the dollar-value pool. To recompute the inflation indexes for each of its layers, X divides the LIFO value of each layer by the new
base-year cost attributable to the layer. The new base-year cost, recomputed inflation indexes, and LIFO value of X’s layers as of January 1, 2001, are as follows:
Layer
(I)
Base-Year
Cost
(II)
Inflation
Index
(III)
LIFO Value:
(I) * (II)
Base layer$229,5000.588235$135,000
1991 layer34,0000.84117628,600
1994 layer102,0000.91176593,000
1995 layer22,1000.93529420,670
1997 layer3,400
0.9470593,220
Total$391,000$280,490
(iii) In 2001, the current-year cost of X’s ending inventory is $430,139. The weighted harmonic mean of the category inflation indexes applicable to X’s ending
inventory is 1.075347, and in accordance with paragraph (e)(3)(iv)(B)(1)(i) of this section, the inflation index for the immediately preceding taxable year is 1.00.
Thus, X’s IPI for 2001 is 1.075347 (1.00 * 1.075347). The total base-year cost of X’s ending inventory is $400,000 ($430,139 / 1.075347). The base-year cost, IPI,
and LIFO value of X’s layers as of December 31, 2001, are as follows:
Layer
(I)
Base-Year
Cost
(II)
Inflation
Index
(III)
LIFO Value:
(I) * (II)
Base layer$229,5000.588235$135,000
1991 layer34,0000.84117628,600
1994 layer102,0000.91176593,000
1995 layer22,1000.93529420,670
1997 layer3,4000.9470593,220
2001 layer9,000
1.0753479,678
Total$400,000$290,168
(iv) In 2002, the current-year cost of X’s ending inventory is $418,000. The weighted harmonic mean of the category inflation indexes applicable to X’s ending
inventory is 1.02292562, and the IPI for the immediately preceding year is 1.075347. Thus, X’s IPI for 2001 is 1.10 (1.075347 * 1.02292562). The total base-year
cost of X’s ending inventory is $380,000 ($418,000 / 1.10), which results in a liquidation of $20,000 ($400,000 - $380,000) in terms of base-year cost. This liqui-
dation eliminates the 2001 layer ($9,000 base-year cost), the 1997 layer ($3,400 base-year cost), and part of the 1995 layer ($7,600 base-year cost).The base-year
cost, indexes, and LIFO value of X’s layers as of December 31, 2002, are as follows:
Layer
(I)
Base-Year
Cost
(II)
Inflation
Index
(III)
LIFO Value:
(I) * (II)
Base layer$229,5000.588235$135,000
1991 layer34,0000.84117628,600
1994 layer102,0000.91176593,000
1995 layer14,500
0.93529413,562
Total$380,000$270,162
(2)Involuntary change—(i)In gen-
eral. If a taxpayer uses a non-IPIC
method to compute the LIFO value of a
dollar-value pool, and if the Commis-
sioner determines that the taxpayer’s
method does not clearly reflect income,
the Commissioner may require the tax-
payer to change to the IPIC method. If the
Commissioner requires a taxpayer to
change to the IPIC method, and the tax-
payer does not provide sufficient informa-
tion from its books and records to com-
pute an adjustment under section 481, the
Commissioner may implement the change
using the simplified transition method
described in paragraph (e)(3)(iv)(B)(2)(ii)
of this section.
(ii)Simplified Transition Method.
Under the simplified transition method,
the Commissioner will recompute the
LIFO value of each dollar-value pool as
of the beginning of the year of change
using the double-extension IPIC method
or the link-chain IPIC method. The
adjustment under section 481 is equal to
the difference between the recomputed
LIFO value and the LIFO value of the
pool determined under the taxpayer’s
former method. The Commissioner will
compute an IPI using the double-
extension IPIC method or link-chain IPIC
method for each taxable year in which the
LIFO method was used by the taxpayer
February 4, 20024402002–5 I.R.B.

based on the assumptions that the ending
inventory of the pool in each taxable year
was comprised of items that fall into the
same BLS categories as the items in the
ending inventory of the year of change
and that the relative weights of those BLS
categories in all prior years were the same
as the relative weights of those BLS cat-
egories in the ending inventory of the
year of change. The base-year cost of the
items in a dollar-value pool at the end of
a taxable year will be determined by
dividing the IPI computed for the taxable
year into the current-year cost of the
items in that pool determined in accor-
dance with paragraph (e)(2)(ii) of this
section. If the comparison of the base-
year cost of the beginning and ending
inventory produces a current-year incre-
ment, the base-year cost of that increment
will be multiplied by the IPI computed
for that taxable year to determine the
LIFO value of that layer.
(iii)Example. The following example
illustrates the rules of this paragraph
(e)(3)(iv)(B)(2)(ii).
Example. (i) Z began using a dollar-value LIFO method other than the IPIC method in the taxable year ending December 31, 1998, and maintains a single
dollar-value pool. Z’s beginning inventory as of January 1, 2000, computed using its method of accounting, was as follows:
Layer
(I)
Base-Year
Cost
(II)
Inflation
Index
(III)
LIFO Value:
(I) * (II)
Base layer$105,0001.00$105,000
1998 layer3,000
1.404,200
Total$108,000$109,200
(ii) Upon examining Z’s federal income tax return for the taxable year ending December 31, 2000, the examining agent determines that Z’s dollar-value LIFO
method does not clearly reflect income. The examining agent chooses to change Z to the double-extension IPIC method for 2000 and implements the changeusing
the simplified transition method as follows. First, the inventory in Z’s dollar-value pool at the end of 2000 is assigned to the most-detailed categories in the CPI or
PPI, whichever is appropriate. Assume that 80 percent of the current-year cost of Z’s inventory as of December 31, 2000, is assigned to Category 1, 10 percent is
assigned to Category 2, and 10 percent is assigned to Category 3. Assume further that the current-year cost of the inventory in Z’s dollar-value pool at the end of
1998 and 1999 was $133,000 and $145,000, respectively.
(iii) The category inflation indexes for 1998 computed under the double-extension IPIC method are 1.17 for Category 1, 1.26 for Category 2, and 1.19 for Cat-
egory 3. The weights to be used in computing the IPI for 1998 are $106,400 ($133,000 * 80 percent) for Category 1, $13,300 ($133,000 * 10 percent) for Category
2, and $13,300 ($133,000 * 10 percent) for Category 3. The IPI for 1998 is computed as follows:
Category
(I)
Weight
(II)
Category Inflation
Index
(III)
Quotient:
(I) / (II)
1$106,4001.1790,940
213,3001.2610,556
313,300
1.1911,176
Total$133,000$112,672
(IV)
Sum
of
Weights
(V)
Sum of (Weight /
Category Inflation Index)
(VI)
Inventory Price Index:
(IV) / (V )
$133,000$112,6721.180417
(iv) The base-year cost of the inventory in Z’s pool at the end of 1998 is $112,672 ($133,000 / 1.180417), and the base-year cost of the 1998 increment is
$7,672 ($112,672 - $105,000). The LIFO value of the 1998 layer is $9,056 ($7,672 * 1.180417).
(v) The category inflation indexes for 1999 computed under the double-extension IPIC method were 1.21 for Category 1, 1.29 for Category 2 and 1.23 for Cat-
egory 3. The weights to be used in computing the IPI for 1999 are $116,000 ($145,000 * 80 percent) for Category 1, $14,500 ($145,000 * 10 percent) for Category
2, and $14,500 ($145,000 * 10 percent) for Category 3. The IPI for 1999 is computed as follows:
Category
(I)
Weight
(II)
Category Inflation
Index
(III)
Quotient:
(I) / (II)
1$116,0001.21$ 95,868
214,5001.2911,240
314,500
1.2311,789
Total$145,000$118,897
2002–5 I.R.B.441February 4, 2002

(IV)
Sum of Weights
(V)
Sum of (Weight /
Category Inflation Index)
(VI)
Inventory Price Index:
(IV) / (V )
$145,000$118,8971.219543
(vi) The base-year cost of the inventory in Z’s pool at the end of 1999 is $118,897 ($145,000 / 1.219543), and the base-year cost of the 1999 layer is $6,225
($118,897 - $112,672). The LIFO value of the 1999 layer is $7,592 ($6,225 * 1.219543).
(vii) The LIFO value of Z’s dollar-value pool at the end of 1999 computed under the double-extension IPIC method is as follows:
Layer
(I)
Base-Year
Cost
(II)
Inventory Price
Index
(III)
LIFO Value:
(I) * (II)
Base layer$105,0001.000000$105,000
1998 layer7,6721.1804179,056
1999 layer6,225
1.2195427,592
Total$118,897$121,648
(viii) The section 481(a) adjustment is equal to the difference between the LIFO value of the inventory at the beginning of 2000 computed under Z’s former
method of accounting and recomputed by the examining agent under the double-extension IPIC method, or $12,448 ($121,648 - $109,200).
(ix) Finally, the examining agent will recompute Z’s taxable income for 2000 and succeeding taxable years using the double-extension IPIC method.
(v)Effective date—(A)In general. The
rules of this paragraph (e)(3) and para-
graphs (b)(4) and (c)(2) of this section are
applicable for taxable years ending on or
after December 31, 2001.
(B)Change in method of accounting.
Any change in a taxpayer’s method of
accounting necessary to comply with this
paragraph (e)(3) or with paragraphs (b)(4)
or (c)(2) of this section is a change in
method of accounting to which the provi-
sions of section 446 and the regulations
thereunder apply. For the first or second
taxable year ending on or after December
31, 2001, a taxpayer is granted the con-
sent of the Commissioner to change its
method of accounting to a method
required or permitted by this paragraph
(e)(3) and paragraphs (b)(4) and (c)(2) of
this section. A taxpayer that wants to
change its method of accounting under
this paragraph (e)(3)(v) must follow the
automatic consent procedures in Rev.
Proc. 2002–9 (2002–3 I.R.B. 327) (see
§601.601(d)(2) of this chapter). How-
ever, the scope limitations in section 4.02
of Rev. Proc. 2002–9 do not apply, and
the five-year limitation on the readoption
of the LIFO method under section
10.01(2) of the Appendix is waived. In
addition, if the taxpayer’s method of
accounting for its LIFO inventories is an
issue under consideration at the time the
application is filed with the national
office, the audit protection of section 7 of
Rev. Proc. 2002–9 does not apply. If a
taxpayer changing its method of account-
ing under this paragraph (e)(3)(v)(B) is
under examination, before an appeals
office, or before a federal court with
respect to any income tax issue, the tax-
payer must provide a copy of the applica-
tion to the examining agent(s), appeals
officer or counsel for the government, as
appropriate, at the same time it files the
application with the national office. Any
change under this paragraph (e)(3)(v)(B)
must be made using a cut-off method and
new base year as required by paragraph
(e)(3)(iv)(B)(1) of this section. Because a
change under this paragraph (e)(3)(v)(B)
is made using a cut-off method, a section
481(a) adjustment is not permitted. How-
ever, a taxpayer changing its method of
accounting under this paragraph
(e)(3)(v)(B) must comply with the
requirements of section 10.06(3) of the
APPENDIX of Rev. Proc. 2002–9 (con-
cerning bargain purchases).
*****
(h)LIFO inventories received in cer-
tain nonrecognition transactions—(1)In
general. Except as provided in paragraph
(h)(3) of this section, if inventory items
accounted for under the LIFO method are
received in a transaction described in
paragraph (h)(2) of this section, then, for
the purpose of determining future incre-
ments and liquidations, the transferee
must use the year of transfer as the base
year and must use its current-year cost
(computed under the transferee’s method
of accounting) of those items as their new
base-year cost. If the transferee had open-
ing inventories in the year of transfer,
then, for the purpose of determining
future increments and liquidations, the
transferee must use its current-year cost
(computed under the transferee’s method
of accounting) of those inventories as
their new base-year cost. For this pur-
pose,“opening inventory”refers to all
items owned by the transferee before the
transfer for which the transferee uses, or
elects to use, the LIFO method. The total
new base-year cost of the transferee’s
inventory as of the beginning of the year
of transfer is equal to the new base-year
cost of the inventory received from the
transferor and the new base-year cost of
the transferee’s opening inventory. The
index (or, the cumulative index in the
case of the link-chain method) for the
year immediately preceding the year of
transfer is 1.00. The base-year cost of any
layers in the dollar-value pool, as deter-
mined after the transfer, must be recom-
putedaccordingly.Seeparagraph
(e)(3)(iv)(B)(1) of this section for an
example of this computation.
(2)Transactions to which this para-
graph (h) applies. The rules in this para-
graph (h) apply to a transaction in
which—
(i) The transferee determines its basis
in the inventories, in whole or in part, by
reference to the basis of the inventories in
the hands of the transferor;
February 4, 20024422002–5 I.R.B.

(ii) The transferor used the dollar-
value LIFO method to account for the
transferred inventories;
(iii) The transferee uses the dollar-
value LIFO method to account for the
inventories in the year of the transfer; and
(iv) The transaction is not described in
section 381(a).
(3)Anti-avoidance rule. The rules in
this paragraph (h) do not apply to a trans-
action entered into with the principal pur-
pose to avail the transferee of a method of
accounting that would be unavailable to
the transferor (or would be unavailable to
the transferor without securing consent
from the Commissioner). In determining
the principal purpose of a transfer, con-
sideration will be given to all of the facts
and circumstances. However, a transfer is
deemed made with the principal purpose
to avail the transferee of a method of
accounting that would be unavailable to
the transferor without securing consent
from the Commissioner if the transferor
acquired inventory in a bargain purchase
within the five taxable years preceding
the year of the transfer and used a dollar-
value LIFO method to account for that
inventory that did not treat the bargain
purchase inventory and physically identi-
cal inventory acquired at market prices as
separate items. Inventory is deemed
acquired in a bargain purchase if the
actual cost of the inventory (or, if appro-
priate, the allocated cost of the inventory)
was less than or equal to 50 percent of the
replacement cost of physically identical
inventory. Inventory is not considered
acquired in a bargain purchase if the
actual cost of the inventory (or, if appro-
priate, the allocated cost of the inventory)
was greater than or equal to 75 percent of
the replacement cost of physically identi-
cal inventory.
(4)Effective date. The rules of this
paragraph (h) are applicable for transfers
that occur during a taxable year ending on
or after December 31, 2001.
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par.4.In§602.101, the table in para-
graph (b) is amended by revising the
entry for 1.472–8 to read as follows:
§602.101 OMB Control numbers.
*****
(b)***
CFR part or section where
identified and described
Current OMB
control No.
*****
1.472–8 ........................................................................................................................................................... 1545–0028
........................................................................................................................................................................ 1545–0042
........................................................................................................................................................................ 1545–1767
*****
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved December 21, 2001.
Mark Weinberger,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on Janu-
ary 8, 2002, 8:45 a.m., and published in the issue of
the Federal Register for January 9, 2002, 67 F.R.
1075)
Section 1301.—Averaging of
Farm Income
26 CFR 1.1301–1: Averaging of farm income.
T.D. 8972
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Averaging of Farm Income
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the election to
average farm income in computing tax
liability. The regulations reflect changes
to the law made by the Taxpayer Relief
Act of 1997, as amended by the Tax and
Trade Relief Extension Act of 1998, and
provide guidance to individuals engaged
in a farming business.
DATES:Effective Date: These regula-
tions are effective January 8, 2002.
Applicability Date: These regulations
apply to taxable years beginning after
December 31, 2001. However, taxpayers
may rely on the rules in these final regu-
lations in computing tax liability for tax-
able years beginning on or before Decem-
ber 31, 2001.
2002–5 I.R.B.443February 4, 2002

FOR FURTHER INFORMATION CON-
TACT: John M. Moran (202) 622–4940
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507) under control
number 1545–1662. Taxpayers provide
the information on Schedule J,“Farm
Income Averaging,”which is attached to
Form 1040,“U.S. Individual Income Tax
Return,”for the taxable year in which
income averaging is elected.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the Office of Management
and Budget.
The burden for this requirement is
reflected in the burden estimate for
Schedule J. The estimated burden for the
2000 Schedule J is 2 hours per respon-
dent.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service, Attn: IRS
ReportsClearanceOfficer,W:CAR:
MP:FP:S:O, Washington, DC 20224, and
to theOffice of Management and Bud-
get, Attn: Desk Officer for the Depart-
ment of the Treasury, Office of Informa-
tion and Regulatory Affairs, Washington,
DC 20503.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
Section 1301 was added to the Internal
Revenue Code (the Code) by section
933(a) of the Taxpayer Relief Act of 1997
(Public Law 105–34; (111 Stat. 788, 881–
82)), as amended by section 2011 of the
Tax and Trade Relief Extension Act of
1998 (Division J of H.R. 4328, Omnibus
Consolidated and Emergency Supplemen-
tal Appropriations Act, 1999) (Public Law
105–277 (112 Stat. 2681, 2681–886,
2681–902)). On October 8, 1999, a notice
of proposed rulemaking (REG–121063–
97, 1999–2 C.B. 540) containing pro-
posed regulations under section 1301 was
published in theFederal Register(64 FR
54836). A number of comments respond-
ing to the notice were received and a pub-
lic hearing was held on February 15,
2000. After consideration of the com-
ments, the proposed regulations are
adopted as revised by this Treasury deci-
sion.
Explanation of Provisions
Treatment of Wages
The income averaging election is
available only to individuals engaged in a
farming business and only with respect to
income from that business. The proposed
regulations provide that farm income
does not include wages but the notice of
proposed rulemaking invited public com-
ment on whether a different rule should
apply to wages paid to a shareholder of
an S corporation. Several comments on
this issue supported a rule that would per-
mit wages paid by an S corporation to a
shareholder to qualify as income from a
farming business, and the final regula-
tions adopt this rule.
This change results in comparable
treatment for S corporation shareholders,
partners, and sole proprietors. A sole pro-
prietor’s Schedule F income, whether
attributable to capital or labor, is treated
as income from the business conducted
through the proprietorship. In the case of
a partnership engaged in a farming busi-
ness, income earned by the partners that
is attributable to the farming business is
similarly treated as farm income for pur-
poses of the income averaging rules
whether the income takes the form of a
distributive share or a guaranteed pay-
ment.
S corporations, like partnerships, are
passthrough entities for Federal income
tax purposes. In an S corporation,
amounts paid to shareholders as wages
would, if retained by the corporation,
increase the shareholders’income quali-
fying for the income averaging election.
There is no indication in the legislative
history of section 1301 that Congress
intended disparate treatment of S corpora-
tion shareholders depending on whether
amounts are paid to the shareholders as
wages or allocated to shareholders as a
pro ratashare of the corporation’s
income. Accordingly, the final regulations
provide consistent treatment for share-
holders in S corporations and partners in
partnerships. Thus, a shareholder’s
income that is attributable to the S corpo-
ration’s farming business qualifies as
farm income for purposes of the income
averaging rules whether paid to the share-
holder as wages or allocated to the share-
holder as apro ratashare.
In contrast, a C corporation is not a
passthrough entity for Federal income tax
purposes. Accordingly, the final regula-
tions do not treat any amounts paid by a
C corporation to its shareholder-
employees as farm income.
Treatment of Rental Income
The proposed regulations contain no
provision for treating rental income as
income from a farming business. This is
consistent with the general principle that
lessors of farmland are not ordinarily
treated as engaged in a farming business
with respect to the leased land. Commen-
tators were divided over whether rental
income based on a tenant’s production
(e.g., a crop share) should be treated as
income from a farming business for pur-
poses of section 1301. The final regula-
tions provide that income from such
arrangements is treated, subject to an
anti-abuse rule, as income from a farming
business. This rule is consistent with the
policy underlying section 1301 of limit-
ing the adverse effects of a progressive
rate structure on farmers whose income
varies significantly from year to year in
response to fluctuations in the farm
economy. A landlord’s income from a
crop-share lease or similar arrangement is
affected by fluctuations in the farm
economy to the same extent as that of any
other farmer. Moreover, regulations under
other Code sections provide precedent for
the rule in the final regulations. For
example, a similar rule in the regulations
under section 175 (relating to the deduc-
tion for certain soil and water conserva-
tion expenditures) treats a landlord who
receives rent (either cash or in kind)
February 4, 20024442002–5 I.R.B.

based on farm production as engaged in
the business of farming.
Under the final regulations, a land-
lord’s crop share income reported on
Form 4835,“Farm Rental Income and
Expenses,”Schedule F,“Profit or Loss
From Farming,”or Part II of Schedule E,
“Supplemental Income or Loss,”is eli-
gible for income averaging if the land-
lord’s share of a tenant’s production is set
in a written rental agreement before the
tenant begins significant activities on the
land. If a landlord receives a fixed rent or
a share of a tenant’s production that is set
after the tenant begins significant activi-
ties, the landlord is not considered to be
engaged in a farming business with
respect to the leased land, and the rental
income is not eligible for income averag-
ing, even if the landlord materially par-
ticipates in the tenant’s farming business.
Treatment of Income from Partnerships
A commentator asked whether income
attributable to a farming business carried
on by a partnership is farm income with-
out regard to the size of a partner’s inter-
est in the partnership or the activities of
the partner. The commentator also asked
how the farm income of a partnership
may be allocated. Farm income is allo-
cated under the partnership rules in Sub-
chapter K of the Code, and these regula-
tions do not modify those rules. The final
regulations, like the proposed regulations,
permit income attributable to a farming
business carried on by a partnership to be
averaged without regard to the partner’s
level of participation in the partnership or
size of ownership interest.
Effect of Adjustments
A commentator requested that the final
regulations expressly require an amended
return if there is a change to a base year
return as a result of either an IRS or tax-
payer initiated adjustment. The IRS and
Treasury do not believe that a special rule
in the final regulations is necessary to
address this point, as the situation is not
unique to section 1301. If the election
year tax liability is changed as a result of
an adjustment to a base year, then, as with
any correction, an amended return should
be made for the election year if the stat-
ute of limitations is open.
Making, Changing, or Revoking an
Election
Under the proposed regulations an
individual may not make a late election,
change an election, or revoke an election
unless there has been an adjustment to
taxable income or tax liability or the
Commissioner has consented. One com-
ment suggested that these limitations on a
taxpayer’s ability to make, change, or
revoke an election should be eliminated.
This suggestion has been adopted. Under
the final regulations, a taxpayer may
make a late election, change an election,
or revoke an election subject only to the
generally applicable rules on the period of
limitations on filing a claim for credit or
refund.
Negative Taxable Income
A number of commentators criticized
the computational rules contained in
Schedule J,Farm Income Averaging, for
1999 and earlier years. These rules pro-
hibited the use of a negative amount for a
base year’s taxable income. The commen-
tators suggested that taxpayers should be
permitted to use a negative amount if
appropriate adjustments are made for
amounts, such as net operating losses,
that may provide a tax benefit in another
taxable year.
The final regulations adopt this sug-
gestion. Thus, a base year’s taxable
income may be negative but amounts,
such as a net operating loss or certain
capital losses, that may be deducted in
one or more other taxable years in the
form of a carryover or carryback must be
added back in computing negative taxable
income. The Schedule J for years after
1999 includes worksheets and instruc-
tions for determining negative taxable
income for purposes of the income aver-
aging computation.
Calculation of Section 1 Tax
The proposed regulations provide that
the tax is computed by reducing the elec-
tion year taxable income by the appli-
cable amount and increasing taxable
income for the base years by one-third of
that amount. One commentator suggested
that taxable income for the election year
should be computed by excluding the
elected amount from the taxpayer’s gross
income. This would reduce adjusted gross
income, which in turn might reduce the
effect of limitations and phase-outs based
on adjusted gross income. The statutory
language unambiguously provides, how-
ever, that any election-year decrease (or
base-year increase) must be made to tax-
able income. Moreover, consistent appli-
cation of the rule suggested in the com-
ment would require recomputation of
adjusted gross income and all related
limitations and phase-outs in base years.
This would substantially increase the
complexity of the income averaging com-
putation. Accordingly, the final regula-
tions do not adopt this suggestion.
Farm Income
A commentator suggested that the final
regulations list specific items of income
and deductions to clarify which items are
attributable to a farming business under
section 1301. The regulations are not a
suitable format for providing the compre-
hensive guidance requested because of
the difficulty in identifying the myriad
items of income and expense that may be
attributable to a farming business and
because, in each case, a determination
based on specific facts and circumstances
is necessary. Taxpayers are encouraged to
raise questions they may have concerning
any specific types of income so that guid-
ance can be given by revenue ruling,
instructions, or other appropriate means.
The proposed regulations treat gain
from the sale or other disposition of prop-
erty (other than land) as attributable to a
farming business if, taking into account
all the facts and circumstances, the prop-
erty was regularly used in the farming
business for a substantial period of time.
A commentator asked that the final regu-
lations provide more specific guidance on
what constitutes a substantial period of
time. The final regulations provide that
property that has always been used solely
in the farming business by the individual
is deemed to meet both the regularly used
and substantial period tests. For property
not used solely in the farming business,
what constitutes regular use or a substan-
tial period of time is likely to vary signifi-
cantly, depending upon the facts of the
taxpayer’s business. Accordingly, the
final regulations retain the facts-and-
circumstances test for such property.
2002–5 I.R.B.445February 4, 2002

The proposed regulations establish a
presumption that sales or dispositions of
property used in a farming business are
attributable to that business if they occur
within one year of its cessation. One
comment expressed concern that this pre-
sumption may be construed as establish-
ing a contrary presumption for sales or
dispositions occurring after that one-year
period. The comment suggested extend-
ing the period to two years, arguing that it
is not uncommon for sales or dispositions
of farm property to continue for more
than one year after the cessation of the
farming business, particularly in eco-
nomically depressed areas.
The final regulations do not adopt this
suggestion. The regulatory presumption
is, however, only a safe harbor for sales
or dispositions of property occurring
within the one-year period; no contrary
presumption is stated or implied for sales
or dispositions occurring after that period.
Rather, the determination of whether
those sales or dispositions are attributable
to a farming business appropriately
depends upon all the facts and circum-
stances.
One commentator proposed an
example to illustrate that elected farm
income may not exceed taxable income,
using a gross farm income amount
reduced by farming deductions and the
standard deduction. The regulations illus-
trate, as simply as possible, that elected
farm income cannot exceed taxable
income. These computations are illus-
trated in greater detail in Pub. 225,
“Farmer’s Tax Guide,”which provides a
sample tax return including a Schedule J.
Similarly, one commentator requested
examples demonstrating calculations
involving capital gains. Although no such
examples are provided in the final regula-
tions, Pub. 225 does provide an example,
and the IRS will consider including other
examples in future guidance.
Married Taxpayers
Several comments were received
regarding the application of the rules to
married taxpayers. Two commentators
asked how farm income reported on a
joint return is associated with the proper
spouse in a noncommunity property state.
Two other commentators asked about the
application of community property laws.
The final regulations do not provide
specific guidance on these issues. As a
general matter, however, an individual’s
filing status does not affect determina-
tions regarding whether the individual is
engaged in a farming business or the
amount of profit or loss from that busi-
ness reported on the individual’s Sched-
ule F,Profit or Loss From Farming,or
Schedule K–1,Partner’s (Shareholder’s)
Share of Income, Credits, Deductions, etc.
Thus, if only one spouse engages in farm-
ing in the election year, only that spouse
may have elected farm income, and if
both spouses engage in farming, each
spouse may have elected farm income
from the business in which that spouse is
engaged. Similarly, as a general matter,
community property laws determine
income and property ownership for Fed-
eral income tax purposes. Although the
Code may provide otherwise in specific
instances, there are no such exceptions in
either section 1301 or the final regula-
tions.
Alternative Minimum Tax
One commentator requested that the
final regulations provide an example
showing that the alternative minimum tax
limits the benefits of an income averaging
election. Although the final regulations do
not provide an example of the application
of the alternative minimum tax, they con-
tinue to note that the income averaging
election does not apply for purposes of
determining the alternative minimum tax
in the election year or any base year,
except to the extent the election is taken
into account in determining the regular
tax offset to the tentative minimum tax.
There is no exception in the Code provi-
sions relating to the alternative minimum
tax that would permit the minimum tax to
be computed without regard to the effect
of farm income averaging on the regular
tax.
Special Analyses
It has been determined that these final
regulations are not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment 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 regula-
tions. It is hereby certified that the collec-
tion of information in these regulations
will not have a significant economic
impact on a substantial number of small
entities. This certification is based on the
fact that the collection of information
imposed by these regulations is not sig-
nificant as reflected in the estimated bur-
den of information collection for Sched-
ule J, which is 2 hours per respondent.
Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Code,
the IRS submitted the notice of proposed
rulemaking to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is John M. Moran of the Office of
Associate Chief Counsel, Procedure and
Administration (Administrative Provi-
sions and Judicial Practice Division).
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805***
Section 1.1301–1 also issued under 26
U.S.C. 1301(c).***
Par. 2. An undesignated center heading
and§1.1301–1 are added immediately
following the center heading“Readjust-
ment of Tax Between Years and Special
Limitations”to read as follows:
INCOME AVERAGING
§1.1301–1 Averaging of farm income.
(a)Overview. An individual engaged
in a farming business may elect to com-
pute current year (election year) income
tax liability under section 1 by averaging,
February 4, 20024462002–5 I.R.B.

over the prior three-year period (base
years), all or a portion of the individual’s
current year electible farm income as
defined in paragraph (e) of this section.
To average farm income, the individual—
(1) Designates all or a portion of his or
her electible farm income for the election
year as elected farm income; and
(2) Determines the election year sec-
tion 1 tax by determining the sum of—
(i) The section 1 tax that would be
imposed for the election year if taxable
income for the year were reduced by
elected farm income; plus
(ii) For each base year, the amount by
which the section 1 tax would be
increased if taxable income for the year
were increased by one-third of elected
farm income.
(b)Individual engaged in a farming
business—(1)In general.Farming busi-
nesshas the same meaning as provided in
section 263A(e)(4) and the regulations
thereunder. An individual engaged in a
farming business includes a sole propri-
etor of a farming business, a partner in a
partnership engaged in a farming busi-
ness, and a shareholder of an S corpora-
tion engaged in a farming business. Ser-
vices performed as an employee are
disregarded in determining whether an
individual is engaged in a farming busi-
ness for purposes of section 1301. An
individual is not required to have been
engaged in a farming business in any of
the base years in order to make a farm
income averaging election.
(2)Certain landlords. A landlord is
engaged in a farming business for pur-
poses of section 1301 with respect to
rental income that is based on a share of
production from a tenant’s farming busi-
ness and, with respect to amounts
received on or after January 1, 2003, is
determined under a written agreement
entered into before the tenant begins sig-
nificant activities on the land. A landlord
is not engaged in a farming business for
purposes of section 1301 with respect to
either fixed rent or, with respect to
amounts received on or after January 1,
2003, rental income based on a share of a
tenant’s production determined under an
unwritten agreement or a written agree-
ment entered into after the tenant begins
significant activities on the land. Whether
the landlord materially participates in the
tenant’s farming business is irrelevant for
purposes of section 1301.
(c)Making, changing, or revoking an
election—(1)In general. A farm income
averaging election is made by filing
Schedule J,“Farm Income Averaging,”
with an individual’s Federal income tax
return for the election year (including a
late or amended return if the period of
limitations on filing a claim for credit or
refund has not expired).
(2)Changing or revoking an election.
An individual may change the amount of
the elected farm income in a previous
election or revoke a previous election if
the period of limitations on filing a claim
for credit or refund has not expired for
the election year.
(d)Guidelines for calculation of sec-
tion 1 tax—(1)Actual taxable income not
affected. Under paragraph (a)(2) of this
section, a determination of the section 1
tax for the election year involves a com-
putation of the section 1 tax that would be
imposed if taxable income for the election
year were reduced by elected farm
income and taxable income for each of
the base years were increased by one-
third of elected farm income. The reduc-
tion and increases required for purposes
of this computation do not affect the
actual taxable income for either the elec-
tion year or the base years. Thus, for each
of those years, the actual taxable income
is taxable income determined without
regard to any hypothetical reduction or
increase required for purposes of the
computation under paragraph (a)(2) of
this section. The following illustrates this
principle:
(i) Any reduction or increase in taxable
income required for purposes of the com-
putation under paragraph (a)(2) of this
section is disregarded in determining the
taxable year in which a net operating loss
carryover or net capital loss carryover is
applied.
(ii) The net section 1231 gain or loss
and the character of any section 1231
items for the election year is determined
without regard to any reduction in taxable
income required for purposes of the com-
putation under paragraph (a)(2) of this
section.
(iii) The section 68 overall limitation
on itemized deductions for the election
year is determined without regard to any
reduction in taxable income required for
purposes of the computation under para-
graph (a)(2) of this section. Similarly, the
section 68 limitation for a base year is not
recomputed to take into account any allo-
cation of elected farm income to the base
year for such purposes.
(iv) If a base year had a partially used
capital loss, the remaining capital loss
may not be applied to reduce the elected
farm income allocated to the year for pur-
poses of the computation under paragraph
(a)(2) of this section.
(v) If a base year had a partially used
credit, the remaining credit may not be
applied to reduce the section 1 tax attrib-
utable to the elected farm income allo-
cated to the year for purposes of the com-
putation under paragraph (a)(2) of this
section.
(2)Computation in base years—(i)In
general. As provided in paragraph
(a)(2)(ii) of this section, the election year
section 1 tax includes the amounts by
which the section 1 tax for each base year
would be increased if taxable income for
the year were increased by one-third of
elected farm income. For this purpose, all
allowable deductions (including the full
amount of any net operating loss carry-
over) are taken into account in determin-
ing the taxable income for the base year
even if the deductions exceed gross
income and the result is negative. If the
result is negative, however, any amount
that may provide a benefit in another tax-
able year is added back in determining
base year taxable income. Amounts that
may provide a benefit in another year
include—
(A) The net operating loss (as defined
in section 172(c)) for the base year;
(B) The net operating loss for any
other year to the extent carried forward
from the base year under section
172(b)(2); and
(C) The capital loss deduction allowed
for the base year under section 1211(b)(1)
or (2) to the extent such deduction does
not reduce the capital loss carryover from
the base year because it exceeds adjusted
taxable income (as defined in section
1212(b)(2)(B)).
(ii)Example. The rules of this para-
graph (d)(2)are illustrated by the follow-
ing example:
Example. In 2001, F and F’s spouse on their
joint return elect to average $24,000 of income
attributable to a farming business. One-third of the
elected farm income, $8,000, is added to the 1999
2002–5 I.R.B.447February 4, 2002

base year income. In 1999, F and F’s spouse
reported adjusted gross income of $7,300 and
claimed a standard deduction of $7,200 and a
deduction for personal exemptions of $8,250. There-
fore, their 1999 base year taxable income is -$8,150
[$7,300-($7,200+$8,250)]. After adding the elected
farm income to the negative taxable income, their
1999 base year taxable income would be zero
[$8,000+(-$8,150)=-$150]. If F and F’s spouse
elected to income average in 2002, and made the
adjustments described in paragraph (d)(3) of this
section to account for the 2001 election, their 1999
base year taxable income for the 2002 election
would be -$150.
(3)Effect on subsequent elections—(i)
In general. The reduction and increases in
taxable income assumed in computing the
election year section 1 tax (within the
meaning of paragraph (a)(2) of this sec-
tion) for an election year are treated as
having actually occurred for purposes of
computing the election year section 1 tax
for any subsequent election year. Thus, if
a base year for a farm income averaging
election is also an election year for
another farm income averaging election,
the increase in the section 1 tax for that
base year is determined after reducing
taxable income by the elected farm
income from the earlier election year.
Similarly, if a base year for a farm
income averaging election is also a base
year for another farm income averaging
election, the increase in the section 1 tax
for that base year is determined after
increasing taxable income by elected
farm income allocated to the year from
the earlier election year.
(ii)Example. The rules of this para-
graph (d)(3) are illustrated by the follow-
ing example:
Example. (i) In each of years 1998, 1999, and
2000, T had taxable income of $20,000. In 2001, T
had taxable income of $30,000 (prior to any farm
income averaging election) and electible farm
income of $10,000. T makes a farm income averag-
ing election with respect to $9,000 of his electible
farm income for 2001. Thus, for purposes of the
computation under paragraph (a)(2) of this section,
$3,000 of elected farm income is allocated to each
of years 1998, 1999, and 2000. T’s 2001 tax liabil-
ity is the sum of—
(A) The section 1 tax on $21,000 (2001 taxable
income minus elected farm income); plus
(B) For each of years 1998, 1999, and 2000, the
section 1 tax on $23,000 minus the section 1 tax on
$20,000 (the amount by which section 1 tax would
be increased if one-third of elected farm income
were allocated to such year).
(ii) In 2002, T has taxable income of $50,000
and electible farm income of $12,000. T makes a
farm income averaging election with respect to all
$12,000 of his electible farm income for 2002.
Thus, for purposes of the computation under para-
graph (a)(2) of this section, $4,000 of elected farm
income is allocated to each of years 1990, 2000, and
2001. T’s 2002 tax liability is the sum of—
(A) The section 1 tax on $38,000 (2002 taxable
income minus elected farm income); plus
(B) For each of years 1999 and 2000, the section
1 tax on $27,000 minus the section 1 tax on $23,000
(the amount by which section 1 tax would be
increased if one-third of elected farm income were
allocated to such years after increasing taxable
income for such years by the elected income allo-
cated to such years from the 2001 election year);
plus
(C) For year 2001, the section 1 tax on $25,000
minus the section 1 tax on $21,000 (the amount by
which section 1 tax would be increased if one-third
of elected farm income were allocated to such year
after reducing taxable income for such year by the
2001 elected farm income).
(e)Electible farm income—(1)Identi-
fication of items attributable to a farming
business—(i)In general. Farm income
includes items of income, deduction,
gain, and loss attributable to the individu-
al’s farming business. Farm losses include
a net operating loss carryover or carry-
back, or a net capital loss carryover, to an
election year that is attributable to a farm-
ing business. Income, gain, or loss from
the sale of development rights, grazing
rights, and other similar rights is not
treated as attributable to a farming busi-
ness. In general, farm income does not
include compensation received by an
employee. However, a shareholder of an
S corporation engaged in a farming busi-
ness may treat compensation received
from the corporation that is attributable to
the farming business as farm income.
(ii)Gain or loss on sale or other dis-
position of property—(A)In general.
Gain or loss from the sale or other dispo-
sition of property that was regularly used
in the individual’s farming business for a
substantial period of time is treated as
attributable to a farming business. For
this purpose, the termpropertydoes not
include land, but does include structures
affixed to land. Property that has always
been used solely in the farming business
by the individual is deemed to meet both
the regularly used and substantial period
tests. Whether property not used solely in
the farming business was regularly used
in the farming business for a substantial
period of time depends on all of the facts
and circumstances.
(B)Cessation of a farming business.If
gain or loss described in paragraph
(e)(1)(ii)(A) of this section is realized
after cessation of a farming business,
such gain or loss is treated as attributable
to a farming business only if the property
is sold within a reasonable time after ces-
sation of the farming business. A sale or
other disposition within one year of ces-
sation of the farming business is pre-
sumed to be within a reasonable time.
Whether a sale or other disposition that
occurs more than one year after cessation
of the farming business is within a rea-
sonable time depends on all of the facts
and circumstances.
(2)Determination of amount that may
be elected farm income—(i)Electible
farm income. The maximum amount of
income that an individual may elect to
average (electible farm income) is the
sum of any farm income and gains minus
any farm deductions or losses (including
loss carryovers and carrybacks) that are
allowed as a deduction in computing the
individual’s taxable income. However,
electible farm income may not exceed
taxable income. In addition, electible
farm income from net capital gain attrib-
utable to a farming business cannot
exceed total net capital gain. Subject to
these limitations, an individual who has
both ordinary and net capital gain farm
income may elect to average any combi-
nation of such ordinary and net capital
gain farm income.
(ii)Examples. The rules of paragraph
(e)(2)(i) of this section are illustrated by
the following examples:
Example 1. A has farm gross receipts of
$200,000 and farm ordinary deductions of $50,000.
A’s taxable income is $150,000 ($200,000-$50,000).
A’s electible farm income is $150,000, all of which
is ordinary income.
Example 2. B has ordinary farm income of
$200,000 and ordinary nonfarm losses of $50,000.
B’s taxable income is $150,000 ($200,000-$50,000).
B’s electible farm income is $150,000, all of which
is ordinary income.
Example 3. C has a farm capital gain of $50,000
and a nonfarm capital loss of $40,000. C also has
ordinary farm income of $60,000. C has taxable
income of $70,000 ($50,000-$40,000+$60,000). C’s
electible farm income is $70,000. C can elect to
average up to $10,000 of farm capital gain and up to
$60,000 of farm ordinary income.
Example 4. D has a nonfarm capital gain of
$40,000 and a farm capital loss of $30,000. D also
has ordinary farm income of $100,000. D has tax-
ableincomeof$110,000($40,000-
$30,000+$100,000). D’s electible farm income is
$70,000 ($100,000 ordinary farm income minus
$30,000 farm capital loss), all of which is ordinary
income.
Example 5. E has a nonfarm capital gain of
$20,000 and a farm capital loss of $30,000. E also
has ordinary farm income of $100,000. E has tax-
able income of $97,000 ($20,000-$23,000 ($30,000
February 4, 20024482002–5 I.R.B.

loss limited by section 1211(b))+$100,000). E has a
farm capital loss carryover of $7,000 ($30,000-
$23,000 allowed as a deduction). E’s electible farm
income is $77,000 ($100,000 ordinary farm income
minus $23,000 farm capital loss), all of which is
ordinary income.
(f)Miscellaneous rules—(1)Short tax-
able year—(i)In general. If a base year
or an election year is a short taxable year,
the rules of section 443 and the regula-
tions thereunder apply for purposes of
calculating the section 1 tax.
(ii)Base year is a short taxable year.
If a base year is a short taxable year,
elected farm income is allocated to such
year for purposes of paragraph (a)(2) of
this section after the taxable income for
such year has been annualized.
(iii)Election year is a short taxable
year. In applying paragraph (a)(2) of this
section for purposes of determining tax
computed on the annual basis (within the
meaning of section 443(b)(1)) for an elec-
tion year that is a short taxable year—
(A) The taxable income and the elect-
ible farm income for the year are annual-
ized; and
(B) The taxpayer may designate all or
any part of the annualized electible farm
income as elected farm income.
(2)Changes in filing status. An indi-
vidual is not prohibited from making a
farm income averaging election solely
because the individual’s filing status is
not the same in an election year and the
base years. For example, an individual
who files married filing jointly in the
election year, but filed as single in one or
more of the base years, may still elect to
average farm income using the single fil-
ing status used in the base year.
(3)Employment tax. A farm income
averaging election has no effect in deter-
mining the amount of wages for purposes
of the Federal Insurance Contributions
Act (FICA), the Federal Unemployment
Tax Act (FUTA), and the Collection of
Income Tax at Source on Wages (Federal
income tax withholding), or the amount
of net earnings from self-employment for
purposes of the Self-Employment Contri-
butions Act (SECA).
(4)Alternative minimum tax. A farm
income averaging election does not apply
in determining the section 55 alternative
minimum tax for any base year or the
section 55(b) tentative minimum tax for
the election year or any base year. The
election does, however, apply in deter-
mining the regular tax under sections
53(c) and 55(c) for the election year.
(5)Unearned income of minor child.
In an election year, if a minor child’s
investment income is taxable under sec-
tion 1(g) and a parent makes a farm
income averaging election, the tax rate
used for purposes of applying section 1(g)
is the rate determined after application of
the election. In a base year, however, the
tax on a minor child’s investment income
is not affected by a farm income averag-
ing election.
(g)Effective date. The rules of this
section apply to taxable years beginning
after December 31, 2001, except with
respect to the written agreement require-
ment of paragraph (b)(2) of this section.
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par.4.In§602.101, paragraph (b) is
amended by adding an entry in numerical
order to the table to read as follows:
§602.101 OMB control numbers.
*****
(b)***
CFR part or section where
identified and described
Current OMB
control No.
*****
1.1301–1 ......................................................................................................................................................... 1545–1662
*****
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved December 12, 2001.
Mark Weinberger,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on January 7, 2002, 8:45 a.m., and published in the issue of the Federal Register for January 8, 2002, 67 F.R.817)
2002–5 I.R.B.449February 4, 2002

Part III. Administrative, Procedural, and Miscellaneous
Weighted Average Interest
Rate Update
Notice 2002–9
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 fund-
ing limitation of§412(c)(7) of the Inter-
nal Revenue Code as amended by the
Omnibus Budget Reconciliation Act of
1987 and as further amended by the Uru-
guay Round Agreements Act, Pub. L.
103–465 (GATT).
The average yield on the 30-year Trea-
sury Constant Maturities for December
2001 is 5.48 percent.
The following rates were determined
for the plan years beginning in the month
shown below.
MonthYear
Weighted
Average
90% to 105%
Permissible
Range
90% to 110%
Permissible
Range
January20025.715.14 to 6.005.14 to 6.28
Drafting Information
The principal author of this notice is
Todd Newman of the Employee Plans,
Tax Exempt and Government Entities
Division. For further information regard-
ing this notice, please call Mr. Newman at
(202) 283–9888 (not a toll-free number).
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I,§61, 280F; 1.61–21, 1.280F–7.)
Rev. Proc. 2002–14
SECTION 1. PURPOSE
This revenue procedure provides: (1)
limitations on depreciation deductions for
owners of passenger automobiles first
placed in service during calendar year
2002, including separate limitations on
passenger automobiles designed to be
propelled primarily by electricity and
built by an original equipment manufac-
turer (electric automobiles); (2) the
amounts to be included in income by les-
sees of passenger automobiles first leased
during calendar year 2002, including
separate inclusion amounts for electric
automobiles; and (3) the maximum allow-
able value of employer-provided automo-
biles first made available to employees
for personal use in calendar year 2002 for
which the vehicle cents-per-mile valua-
tion rule provided under§1.61–21(e) of
the Income Tax Regulations may be
applicable. The tables detailing these
depreciation limitations and lessee inclu-
sion amounts reflect the automobile price
inflationadjustmentsrequiredby
§280F(d)(7) of the Internal Revenue
Code. The maximum allowable automo-
bile value for applying the vehicle cents-
per-mile valuation rule reflects the auto-
mobile price inflation adjustment of
§280F(d)(7) as required by§1.61–
21(e)(1)(iii)(A).
SECTION 2. BACKGROUND
For owners of automobiles,§280F(a)
imposes dollar limitations on the depre-
ciation deduction for the year that the
automobile is placed in service and each
succeeding year. In the case of electric
automobiles placed in service after
August 5, 1997, and before January 1,
2005,§280F(a)(1)(C) requires tripling of
these limitation amounts. Section
280F(d)(7) requires the amounts allow-
able as depreciation deductions to be
increased by a price inflation adjustment
amount for passenger automobiles placed
in service after 1988.
For leased automobiles,§280F(c)
requires a reduction in the deduction
allowed to the lessee of the automobile.
The reduction must be substantially
equivalent to the limitations on the depre-
ciation deductions imposed on owners of
automobiles. Under§1.280F–7(a), this
reduction requires the lessees to include
in gross income an inclusion amount
determined by applying a formula to the
amount obtained from a table. There is a
table for lessees of electric automobiles
and a table for all other passenger auto-
mobiles. Each table shows inclusion
amounts for a range of fair market values
for each tax year after the automobile is
first leased.
For automobiles first provided by
employers to employees that meet the
requirements of§1.61–21(e)(1), the
value to the employee of the use of the
automobile may be determined under the
vehicle cents-per-mile valuation rule of
§1.61–21(e). Section 1.61–21(e)(1)(iii)
(A) provides that for an automobile first
made available after 1988 to any
employee of the employer for personal
use, the value of the use of the automo-
bile may not be determined under the
vehicle cents-per-mile valuation rule for a
calendar year if the fair market value of
the automobile (determined pursuant to
§1.61–21(d)(5)(i) through (iv)) on the
first date the automobile is made avail-
able to the employee exceeds $12,800 as
adjusted by§280F(d)(7).
SECTION 3. SCOPE AND OBJECTIVE
01. The limitations on depreciation
deductions in section 4.02 of this revenue
procedure apply to automobiles (other
than leased automobiles) that are placed
in service in calendar year 2002 and con-
tinue to apply for each tax year that the
automobile remains in service.
02. The tables in section 4.03 of this
revenue procedure apply to leased auto-
mobiles for which the lease term begins
in calendar year 2002. Lessees of such
automobiles must use these tables to
February 4, 20024502002–5 I.R.B.

determine the inclusion amount for each
tax year during which the automobile is
leased.
03. See Rev. Proc. 96–25 (1996–1
C.B. 681) for information on determining
inclusion amounts for automobiles first
leased before January 1, 1997; Rev. Proc.
97–20 (1997–1 C.B. 647) for automobiles
first leased during calendar year 1997,
including electric automobiles first leased
on or after January 1, 1997, and before
August 6, 1997; Rev. Proc. 98–24
(1998–1 C.B. 663) for electric automo-
biles first leased after August 5, 1997, and
before January 1, 1998; Rev. Proc. 98–30
(1998–1 C.B. 930) for all automobiles
first leased in calendar year 1998; Rev.
Proc. 99–14 (1999–1 C.B. 413) for all
automobiles first leased in calendar year
1999; Rev. Proc. 2000–18 (2000–9 I.R.B.
722) for all automobiles first leased in
calendar year 2000, and Rev. Proc.
2001–19 (2001–9 I.R.B. 732) for all auto-
mobiles first leased in calendar year
2001.
04. The maximum fair market value
figure in section 4.04(2) of this revenue
procedure applies to employer-provided
automobiles first made available to any
employee for personal use in calendar
year 2002.SeeRev. Proc. 97–20, for the
maximum fair market value figure for
automobiles first made available in calen-
dar year 1997; Rev. Proc. 98–30, for the
maximum fair market value figure for
automobiles first made available in calen-
dar year 1998; Rev. Proc. 99–14, for the
maximum fair market value figure for
automobiles first made available in calen-
dar year 1999; Rev. Proc. 2000–18, for
the maximum fair market value figure for
automobiles first made available in calen-
dar year 2000; and Rev. Proc. 2001–19,
for the maximum fair market value figure
for automobiles first made available in
calendar year 2001.
SECTION 4. APPLICATION
01. A taxpayer placing an automobile
in service for the first time during calen-
dar year 2002 is limited to the deprecia-
tion deduction shown in Table 1 of sec-
tion 4.02(2) of this revenue procedure or,
in the case of an electric automobile,
Table 2 of this revenue procedure. A tax-
payer first leasing an automobile in calen-
dar year 2002 must determine the inclu-
sion amount that is added to gross income
using Table 3 of section 4.03 of this rev-
enue procedure or, in the case of an elec-
tric automobile, Table 4 of this revenue
procedure. In addition, the procedures of
§1.280F–7(a) must be followed. An
employer providing an automobile for the
first time in calendar year 2002 for the
personal use of any employee may deter-
mine the value of the use of the automo-
bile by using the cents-per-mile valuation
rule in§1.61–21(e) if the fair market
value of the automobile does not exceed
the amount specified in section 4.04(2) of
this revenue procedure. If the fair market
value of the automobile exceeds the
amount specified in section 4.04(2) of
this revenue procedure, the employer may
determine the value of the use of the
automobile under the general valuation
rules of§1.61–21(b) or under the special
valuation rules of§1.61–21(d) (Automo-
bile lease valuation) or§1.61–21(f)
(Commuting valuation) if the applicable
requirements are met.
02.Limitations on Depreciation
Deductions for Certain Automobiles.
(1)Amount of the Inflation Adjust-
ment. Under§280F(d)(7)(B)(i), the auto-
mobile price inflation adjustment for any
calendar year is the percentage (if any) by
which the CPI automobile component for
October of the preceding calendar year
exceeds the CPI automobile component
for October 1987. The term“CPI automo-
bile component”is defined in§280F(d)
(7)(B)(ii) as the“automobile component′′
of the Consumer Price Index for all
Urban Consumers published by the
Department of Labor (the CPI). The new
car component of the CPI was 115.2 for
October 1987 and 137.7 for October
2001. The October 2001 index exceeded
the October 1987 index by 22.5. The
Internal Revenue Service has, therefore,
determined that the automobile price
inflation adjustment for 2002 is 19.53125
percent (22.5/115.2 x 100%). This adjust-
ment is applicable to all automobiles that
are first placed in service in calendar year
2002. The dollar limitations in§280F(a)
must therefore be multiplied by a factor
of 0.1953125, and the resulting increases,
after rounding to the nearest $100, are
added to the 1988 limitations to give the
depreciation limitations applicable to pas-
senger automobiles (other than electric
automobiles) for calendar year 2002. To
determine the dollar limitations appli-
cable to an electric automobile first
placed in service during calendar year
2002, the dollar limitations in§280F(a)
aretripledinaccordancewith
§280F(a)(1)(C) and are then multiplied
by a factor of 0.1953125; the resulting
increases, after rounding to the nearest
$100, are added to the tripled 1988 limi-
tations to give the depreciation limitations
for calendar year 2002.
(2)Amount of the Limitation. For
automobiles (other than electric automo-
biles) placed in service in calendar year
2002, Table 1 of this revenue procedure
contains the dollar amount of the depre-
ciation limitations for each tax year. For
electric automobiles placed in service in
calendar year 2002, Table 2 of this rev-
enue procedure contains these amounts.
2002–5 I.R.B.451February 4, 2002

REV. PROC. 2002–14 TABLE 1
DEPRECIATION LIMITATIONS FOR AUTOMOBILES
(OTHER THAN ELECTRIC AUTOMOBILES)
FIRST PLACED IN SERVICE IN CALENDAR YEAR 2002
Tax YearAmount
1st Tax Year$3,060
2nd Tax Year$4,900
3rd Tax Year$2,950
Each Succeeding Year$1,775
REV. PROC. 2002–14 TABLE 2
DEPRECIATION LIMITATIONS FOR ELECTRIC AUTOMOBILES
FIRST PLACED IN SERVICE IN CALENDAR YEAR 2002
Tax YearAmount
1st Tax Year$ 9,180
2nd Tax Year$14,700
3rd Tax Year$ 8,750
Each Succeeding Year$ 5,325
03.Inclusions in Income of Lessees of Automobiles.
The inclusion amounts for automobiles first leased in calendar year 2002 are calculated under the procedures described in
§1.280F–7(a). Lessees of automobiles other than electric automobiles should use Table 3 of this revenue procedure in applying
these procedures, while lessees of electric automobiles should use Table 4 of this revenue procedure.
REV. PROC. 2002–14 TABLE 3
DOLLAR AMOUNTS FOR AUTOMOBILES (OTHER THAN
ELECTRIC AUTOMOBILES)
WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2002
Fair Market Value
of Automobile
Tax Year During Lease
OverNot Over
1st2nd3rd4th5th
and
Later
$15,50015,80023566
15,80016,1003791113
16,10016,400410141719
16,40016,700613182226
16,70017,000716232831
17,00017,500920293540
17,50018,0001125374450
18,00018,5001430445361
18,50019,0001635526272
19,00019,5001840607182
February 4, 20024522002–5 I.R.B.

REV. PROC. 2002–14 TABLE 3—CONTINUED
DOLLAR AMOUNTS FOR AUTOMOBILES (OTHER THAN
ELECTRIC AUTOMOBILES)
WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2002
Fair Market Value
of Automobile
Tax Year During Lease
OverNot Over
1st2nd3rd4th5th
and
Later
19,50020,0002145678093
20,00020,50023507589103
20,50021,00025568298114
21,00021,500286090108123
21,50022,000306697117134
22,00023,0003374108130150
23,00024,0003884123149171
24,00025,0004394139166192
25,00026,00047104154185213
26,00027,00052114169203234
27,00028,00057124185220255
28,00029,00061135199239276
29,00030,00066145214258296
30,00031,00071155230275318
31,00032,00075165245294338
32,00033,00080175260312360
33,00034,00085185276329381
34,00035,00089196290348402
35,00036,00094206305367422
36,00037,00099216321384443
37,00038,000103226336403464
38,00039,000108236351421485
39,00040,000112247366439506
40,00041,000117257381457527
41,00042,000122267396475549
42,00043,000126278411493570
43,00044,000131288426512590
44,00045,000136298441530611
45,00046,000140308457548632
46,00047,000145318472566653
47,00048,000150328487584674
48,00049,000154339502602695
49,00050,000159349517620717
50,00051,000164359532639737
51,00052,000168369548657758
52,00053,000173379563675779
53,00054,000177390578693800
54,00055,000182400593711821
2002–5 I.R.B.453February 4, 2002

REV. PROC. 2002–14 TABLE 3—CONTINUED
DOLLAR AMOUNTS FOR AUTOMOBILES (OTHER THAN
ELECTRIC AUTOMOBILES)
WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2002
Fair Market Value
of Automobile
Tax Year During Lease
OverNot Over
1st2nd3rd4th5th
and
Later
55,00056,000187410608729842
56,00057,000191420624747863
57,00058,000196430639766883
58,00059,000201440654784905
59,00060,000205451669802925
60,00062,000212466692829957
62,00064,000222486722866999
64,00066,0002315077529021,041
66,00068,0002405277839381,083
68,00070,0002505478139741,125
70,00072,0002595688431,0111,166
72,00074,0002685898731,0471,208
74,00076,0002776099041,0831,250
76,00078,0002876299341,1201,292
78,00080,0002966509641,1561,334
80,00085,0003126861,0171,2191,408
85,00090,0003357371,0921,3111,512
90,00095,0003597871,1691,4011,617
95,000100,0003828381,2451,4911,722
100,000110,0004179151,3581,6271,880
110,000120,0004631,0171,5091,8102,089
120,000130,0005101,1191,6601,9912,299
130,000140,0005561,2211,8122,1722,509
140,000150,0006031,3231,9632,3542,718
150,000160,0006491,4252,1152,5352,928
160,000170,0006961,5272,2662,7173,137
170,000180,0007421,6292,4182,8983,347
180,000190,0007891,7312,5693,0803,556
190,000200,0008351,8332,7203,2623,766
200,000210,0008811,9352,8723,4433,976
210,000220,0009282,0373,0233,6254,185
220,000230,0009742,1393,1753,8064,395
230,000240,0001,0212,2413,3263,9884,604
240,000250,0001,0672,3433,4784,1694,814
February 4, 20024542002–5 I.R.B.

REV. PROC. 2002–14 TABLE 4
DOLLAR AMOUNTS FOR ELECTRIC AUTOMOBILES
WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2002
Fair Market Value
of Automobile
Tax Year During Lease
OverNot Over
1st2nd3rd4th5th
and
Later
$46,00047,00036101112
47,00048,000716262933
48,00049,0001226414754
49,00050,0001736566674
50,00051,0002147718396
51,00052,000265786102117
52,00053,0003167101120138
53,00054,0003577117138159
54,00055,0004087132156180
55,00056,0004598146174201
56,00057,00049108161193222
57,00058,00054118177211242
58,00059,00059128192229264
59,00060,00063139206248284
60,00062,00070154229275316
62,00064,00079174260311358
64,00066,00089195290347400
66,00068,00098215320384442
68,00070,000107236350420484
70,00072,000117256381456525
72,00074,000126276411493567
74,00076,000135297441529609
76,00078,000145317472564652
78,00080,000154337502602693
80,00085,000170373555665767
85,00090,000193424631756871
90,00095,000217475706847976
95,000100,0002405267829371,081
100,000110,0002756028961,0731,239
110,000120,0003217051,0471,2551,448
120,000130,0003688061,1991,4361,658
130,000140,0004149091,3501,6171,868
140,000150,0004601,0111,5011,8002,076
150,000160,0005071,1131,6521,9812,287
160,000170,0005531,2151,8042,1632,496
170,000180,0006001,3171,9552,3442,706
180,000190,0006461,4192,1072,5252,916
2002–5 I.R.B.455February 4, 2002

REV. PROC. 2002–14 TABLE 4—CONTINUED
DOLLAR AMOUNTS FOR ELECTRIC AUTOMOBILES
WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2002
Fair Market Value
of Automobile
Tax Year During Lease
OverNot Over
1st2nd3rd4th5th
and
Later
190,000200,0006931,5212,2582,7073,125
200,000210,0007391,6232,4102,8883,335
210,000220,0007861,7252,5613,0703,544
220,000230,0008321,8272,7123,2523,754
230,000240,0008791,9292,8633,4343,963
240,000250,0009252,0313,0153,6154,173
04.Maximum Automobile Value for
Using the Cents-per-mile Valuation Rule.
(1)Amount of Adjustment. Under
§1.61–21(e)(1)(iii)(A), the limitation on
the fair market value of an employer-
provided automobile first made available
to any employee for personal use after
1988 is to be adjusted in accordance with
§280F(d)(7). Accordingly, the adjustment
for any calendar year is the percentage (if
any) by which the CPI automobile com-
ponent for October of the preceding cal-
endar year exceeds the CPI automobile
component for October 1987.See, section
4.02(1) of this revenue procedure. The
new car component of the CPI was 115.2
for October 1987 and 137.7 for October
2000. The October 2000 index exceeded
the October 1987 index by 22.5. The
Internal Revenue Service has, therefore,
determined that the adjustment for 2002
is 19.53125 percent (22.5/115.2 x 100%).
This adjustment is applicable to all
employer-provided automobiles first
made available to any employee for per-
sonal use in calendar year 2002. The
maximum fair market value specified in
§1.61–21(e)(1)(iii)(A) must therefore be
multiplied by a factor of 0.1953125, and
the resulting increase, after rounding to
the nearest $100, is added to $12,800 to
give the maximum value for calendar
year 2002.
(2)The Maximum Automobile Value.
For automobiles first made available in
calendar year 2002 to any employee of
the employer for personal use, the vehicle
cents-per-mile valuation rule may be
applicable if the fair market value of the
automobile on the date it is first made
available does not exceed $15,300.
SECTION 5. EFFECTIVE DATE
This revenue procedure applies to
automobiles (other than leased automo-
biles) that are first placed in service dur-
ing calendar year 2002, to leased automo-
biles that are first leased during calendar
year 2002, and to employer-provided
automobiles first made available to
employees for personal use in calendar
year 2002.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Bernard P. Harvey of the
Office of the Associate Chief Counsel
(Passthroughs and Special Industries). For
further information regarding the depre-
ciation limitations and lessee inclusion
amounts in this revenue procedure, con-
tact Mr. Harvey at (202) 622–3110; for
further information regarding the maxi-
mum automobile value for applying the
vehicle cents-per-mile valuation rule,
contact Dan E. Boeskin of the Office of
the Associate Chief Counsel (Tax Exempt
and Government Entities) at (202) 622–
6040 (not toll-free calls).
February 4, 20024562002–5 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Liability for Insurance
Premium Excise Tax
REG–125450–01
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed amendments to the regulations
relating to liability for the insurance pre-
mium excise tax. This document affects
persons who make, sign, issue, or sell a
policy of insurance, indemnity bond,
annuity contract, or policy of reinsurance
issued by any foreign insurer or reinsurer.
This document also provides a notice of
public hearing on these proposed regula-
tions.
DATES: Written or electronic comments,
requests to speak and outlines of topics to
be discussed at the public hearing sched-
uled for March 19, 2002, at 10 a.m. must
be received by February 26, 2002.
ADDRESSES: Send submissions to:
CC:ITA:RU (REG–125450–01), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
D.C. 20044. Submissions may be hand
delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m.
to: CC:ITA:RU (REG–125450–01), Cou-
rier’s Desk, Internal Revenue Service,
1111Constitution Avenue, NW, Washing-
ton, D.C. Alternatively, taxpayers may
submit comments electronically via the
Internet by selecting the“Tax Regs”
option on the IRS Home Page, or by sub-
mitting comments directly to the IRS
Internet site athttp://www.irs.gov/
tax_regs/regslist.html. The public hearing
will be held in room 4718, Internal Rev-
enue Building,1111Constitution Avenue,
NW, Washington, D.C.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Amanda Ehrlich, (202) 622–3880;
concerning submissions, the hearing,
and/or to be placed on the building access
list to attend the hearing, Treena Garrett,
(202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
The insurance premium excise tax
imposed by section 4371 originated as a
stamp tax on certain insurance policies in
the Act of February 24, 1919, Title IX,
section 1100. This provision was
re-enacted unchanged in the Revenue Act
of 1924, as section 800; in the Revenue
Act of 1926, as section 800; and in the
Internal Revenue Code of 1939 (1939
Code), as section 1804. Section 1809(a)
of the 1939 Code required the tax
imposed by section 1804 to be paid“by
any person who makes, signs, issues, [or]
sells ... any of the documents [or] instru-
ments ... [including insurance policies
subject to tax] ... or for whose use or ben-
efit the same are made, signed, issued,
[or] sold ....”Section 1809(b)(1) of the
1939 Code required the tax to be paid by
the purchase of stamps to be affixed to
taxable documents.
The insurance premium excise tax
imposed by section 1804 of the 1939
Code was reenacted in the Internal Rev-
enue Code of 1954 (1954 Code) as sec-
tion 4371. Section 1809(a) and (b)(1) of
the 1939 Code (relating to who is liable
for the tax and how it is to be paid) were
reenacted as sections 4383 and 4374 of
the 1954 Code, respectively. Section 4383
of the 1954 Code was renumbered as sec-
tion 4384 by the Excise Technical
Changes Act of 1958.
Section 4374 was amended in 1965 to
authorize the Secretary or the Secretary’s
delegate to provide by regulations that the
tax imposed by section 4371 shall be paid
on the basis of a return, instead of by
stamp. Excise Tax Reduction Act of 1965,
Public Law 89–44, section 804(a), 79
Stat. 136, 160 (1965). Pursuant to this
statutory authorization, the Secretary pro-
mulgated 26 CFR§46.4374–1 in 1970,
which provides that the tax imposed by
section 4371 shall be paid on the basis of
a return and remitted by the person who
pays the premium to a foreign insurer or
reinsurer. T.D. 7023 (1970–1 C.B. 233,
236). For these purposes, the person who
makes payment of the premium is the
resident person who actually transferred
the money, check, or its equivalent to the
foreign insurer or reinsurer. The regula-
tion further provided a reference to sec-
tion 4384 for purposes of determining the
persons liable for the tax.§46.4374–1(a).
The Tax Reform Act of 1976 (1976
Act) combined sections 4374 and 4384
into a single Code section, and eliminated
any references therein to the payment of
the tax by stamps. Tax Reform Act of
1976, Public Law 94–455, section
1904(a)(12), 90 Stat. 1520, 1812–14
(1976). The 1976 Act repealed section
4374, which had required payment of the
tax by stamps or by return pursuant to
regulations. It renumbered section 4384
as section 4374, which imposes liability
for the tax. Finally, the 1976 Act amended
the new section 4374 to require payment
of the tax by return. The regulations
under section 4374 have not been
changed to reflect the 1976 statutory
amendments.
Some taxpayers have taken the posi-
tion,contrarytothestatute,that
§46.4374–1 (which does not reflect the
1976 legislative changes) imposes liabil-
ity and requires payment of tax only if a
premium is paid by a resident of the
United States. This interpretation ignores
the cross-reference in§46.4374–1(a) to
prior Code section 4384 for purposes of
determining the persons who are liable
for the tax. The proposed regulations
revise§46.4374–1(a) to conform the
regulations to the 1976 statutory amend-
ments by providing that any person who
makes, signs, issues, or sells any of the
documents and instruments subject to the
tax, or for whose use or benefit the same
are made, signed, issued, or sold, is liable
for the tax imposed by section 4371. Sec-
tion 46.4374–1(c) also provides that the
tax imposed by section 4371 shall be paid
on the basis of a return by the person who
makes payment of the premium to a for-
eign insurer or reinsurer or to any non-
resident agent, solicitor, or broker. If the
tax is not paid by the person who paid the
premium, the tax imposed by section
2002–5 I.R.B.457February 4, 2002

4371 shall be paid on the basis of a return
by any person who makes, signs, issues,
or sells any of the documents or instru-
ments subject to the tax imposed by sec-
tion 4371, or for whose use or benefit
such document or instrument is made,
signed, issued, or sold.
Proposed Effective Date
These regulations are proposed to
apply to premiums paid on or after the
date final regulations are published in the
Federal Register.
Special Analysis
It 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 regula-
tion does not impose a collection of infor-
mation on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments (a
signed original and eight (8) copies) that
are submitted timely to the IRS. Treasury
and the IRS request comments on the
clarity of the proposed rule and how it
may be made easier to understand. All
comments will be made available for pub-
lic inspection and copying.
A public hearing has been scheduled
for March 19, 2002, at 10 a.m., in room
4718, Internal Revenue Building,1111
Constitution Ave., NW, Washington, DC.
All visitors must present photo identifica-
tion to enter the building. Because of
access restrictions, visitors will not be
admitted beyond the immediate entrance
area more than 15 minutes before the
hearing starts. For information about hav-
ing your name placed on the building
access list to attend the hearing, see the
“FOR FURTHER INFORMATION
CONTACT”section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to this hearing. Persons who wish
to present oral comments at the hearing
must submit written comments and an
outline of the topics to be discussed and
the time to be devoted to each topic
(signed original and eight (8) copies) by
February 26, 2002. A period of 10 min-
utes 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 regula-
tions is Amanda Ehrlich of the Office of
Associate Chief Counsel (International).
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 46 is pro-
posed to be amended as follows:
PA RT 4 6—EXCISE TAX ON POLI-
CIES ISSUED BY FOREIGN INSUR-
ERS AND OBLIGATIONS NOT IN
REGISTERED FORM
Paragraph 1. The authority citation for
part 46 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 2. Section 46.4374–1 is revised to
read as follows:
§46.4374–1 Liability for tax.
(a)In general. Any person who makes,
signs, issues, or sells any of the docu-
ments and instruments subject to the tax,
or for whose use or benefit the same are
made, signed, issued, or sold, shall be
liable for the tax imposed by section
4371.
(b)When liability for tax attaches. The
liability for the tax imposed by section
4371 shall attach at the time the premium
payment is transferred to the foreign
insurer or reinsurer (including transfers to
any bank, trust fund, or similar recipient,
designated by the foreign insurer or rein-
surer), or to any nonresident agent, solici-
tor, or broker. A person required to pay
tax under this section may remit such tax
before the time the tax attaches if he
keeps records consistent with such prac-
tice.
(c)Payment of tax. The tax imposed
by section 4371 shall be paid on the basis
of a return by the person who makes pay-
ment of the premium to a foreign insurer
or reinsurer or to any nonresident agent,
solicitor, or broker. If the tax is not paid
by the person who paid the premium, the
tax imposed by section 4371 shall be paid
on the basis of a return by any person
who makes, signs, issues, or sells any of
the documents or instruments subject to
the tax imposed by section 4371, or for
whose use or benefit such document or
instrument is made, signed, issued, or
sold.
(d)Penalty for failure to pay tax. Any
person who fails to comply with the
requirements of this section with intent to
evade the tax shall, in addition to other
penalties provided therefor, pay a fine of
double the amount of tax. (See section
7270.)
(e)Effective date. This section is appli-
cable for premiums paid on or after the
date final regulations are published in the
Federal Register.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on Janu-
ary 4, 2002, 8:45 a.m., and published in the issue of
the Federal Register for January 7, 2002, 67 F.R.
707)
Certain Transfers of Property
to Regulated Investment
Companies and Real Estate
Investment Trusts; Hearing
Announcement 2002–6
AGENCY: Internal Revenue Service
(IRS), Treasury
ACTION: Notice of Public Hearing on
proposed rulemaking by cross-reference
to temporary regulations (REG–
142299–01 and REG–209135–88,
2002–4 I.R.B. 417).
SUMMARY: This document contains a
notice of public hearing on proposed rule-
making by cross-reference to temporary
regulations relating to certain transfers of
property to regulated investment compa-
nies and real estate investment trusts.
February 4, 20024582002–5 I.R.B.

DATES: The public hearing is being held
on May 1, 2002, at 10 a.m. The IRS must
receive outlines of the topics to be dis-
cussed at the hearing by April 10, 2002.
ADDRESSES: The public hearing is
being held in the Auditorium, Internal
Revenue Building,1111Constitution
Avenue, NW, Washington, DC. Due to
building security procedures, visitors
must enter at the Main entrance, located
on Constitution Avenue, NW. In addition,
all visitors must present photo identifica-
tion to enter the building.
Mail outlines to: CC:IT&A:RU (REG–
142299–01), Room 5226, Internal Rev-
enue Service, POB 7604, Ben Franklin
Station, Washington, DC 20044. Hand
deliver outlines Monday through Friday
between the hours of 8 a.m. and 5 p.m.
to: CC:IT&A:RU (REG–142299–01),
Courier’s Desk, Internal Revenue Ser-
vice,1111Constitution Avenue, NW,
Washington, DC. Submit outlines elec-
tronically via the Internet by selecting the
“Tax Regs”option on the IRS Home
Page, or by submitting them directly to
the IRS Internet site athttp://www.irs.gov/
tax_regs/regslist.html.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Lisa
Fuller (202), 622–7750; concerning sub-
missions of comments, the hearing,
and/or to be placed on the building access
list to attend the hearing, Donna Poindex-
ter (202) 622–7180 (not toll-free num-
bers).
SUPPLEMENTARY INFORMATION:
The subject of the public hearing is the
notice of proposed rulemaking by cross-
reference to temporary regulations (REG–
142299–01) that was published in the
Federal Registeron Wednesday, January
2, 2002 (67 FR 48).
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who have submitted written
comments and wish to present oral com-
ments at the hearing, must submit an out-
line of the topics to be discussed and the
amount of time to be devoted to each
topic (signed original and eight (8) cop-
ies) by April 10, 2002.
A period of 10 minutes is allotted to
each person for presenting oral com-
ments.
After the deadline for receiving out-
lines has passed, the IRS will prepare an
agenda containing the schedule of speak-
ers. Copies of the agenda will be made
available, free of charge, at the hearing.
Because of access restrictions, the IRS
will not admit visitors beyond the imme-
diate entrance area more than 15 minutes
before the hearing starts. For information
about having your name placed on the
building access list to attend the hearing,
see the“FOR FURTHER INFORMA-
TION CONTACT”section of this docu-
ment.
LaNita VanDyke,
Acting Chief, Regulations Unit,
Associate Chief Counsel (Income Tax
and Accounting).
(Filed by the Office of the Federal Register on Janu-
ary 11, 2002, 8:45 a.m., and published in the issue
of the Federal Register for January 14, 2002, 67 F.R.
1672)
Disclosure of Returns and
Return Information by Other
Agencies; Correction
Announcement 2002–7
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY: This document contains
corrections to proposed regulations
(REG–105344–01, 2002–2 I.R.B. 302)
which were published in theFederal
Registeron Thursday, December 13,
2001 (66 FR 64386). These regulations
relate to the disclosure of returns and
return information by other agencies.
DATES: These corrections are effective
December 13, 2001.
FOR FURTHER INFORMATION CON-
TACT: Julie C. Schwartz (202) 622–4570
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The proposed rulemaking by cross-
reference to temporary regulations that
are the subject of this correction is under
section 6103 of the Internal Revenue
Code.
Need for Correction
As published, proposed rulemaking by
cross-reference to temporary regulations
(REG–105344–01) contain errors which
may prove to be misleading and are in
need of clarification.
Correction of Publication
Accordingly, the publication of notice
of proposed rulemaking by cross-
reference to temporary regulations (REG–
105344–01), which are the subject of FR
Doc. 01–30620, is corrected as follows:
1. On page 64386, column 2, in the
preamble, under the paragraph heading
“Paperwork Reduction Act,”paragraph 3,
line 4, the language“Internal revenue
Service, including”is corrected to read
“Internal Revenue Service, including”.
2. On page 64386, column 3, in the
preamble, under the paragraph heading
“Paperwork Reduction Act,”line 11, the
language“recordkeepers are federal agen-
cies and”is corrected to read“record-
keepers are Federal agencies and”.
LaNita VanDyke,
Acting Chief, Regulations Unit,
Associate Chief Counsel (Income Tax
and Accounting).
2002–5 I.R.B.459February 4, 2002

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:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished 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
withmodified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modifiedis 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
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. 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 sub-
stance has been included in regulations
subsequently adopted.
Revokeddescribes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Supersededdescribes 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
andsupersededdescribes a situation
where the substance of a previously pub-
lished 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 super-
seded.
Supplementedis 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 rul-
ings in the series.
Suspendedis 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
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.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security
Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions 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.—Intemal 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 Procedural 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.
February 4, 2002i2002–5 I.R.B.

Numerical Finding List
1
Bulletins 2002–1 through 2002–4
Announcements:
2002–1, 2002–2 I.R.B.304
2002–2, 2002–2 I.R.B.304
2002–3, 2002–2 I.R.B.305
2002–4, 2002–2 I.R.B.306
2002–5, 2002–4 I.R.B.420
Notices:
2002–1, 2002–2 I.R.B.283
2002–2, 2002–2 I.R.B.285
2002–3, 2002–2 I.R.B.289
2002–4, 2002–2 I.R.B.298
2002–5, 2002–3 I.R.B.320
2002–6, 2002–3 I.R.B.326
2002–8, 2002–4 I.R.B.398
Proposed Regulations:
REG–209135–88, 2002–4 I.R.B.418
REG–105344–01, 2002–2 I.R.B.302
REG–112991–01, 2002–4 I.R.B.404
REG–119436–01, 2002–3 I.R.B.376
REG–142299–01, 2002–4 I.R.B.418
Revenue Procedures:
2002–1, 2002–1 I.R.B.1
2002–2, 2002–1 I.R.B.82
2002–3, 2002–1 I.R.B.117
2002–4, 2002–1 I.R.B.127
2002–5, 2002–1 I.R.B.173
2002–6, 2002–1 I.R.B.203
2002–7, 2002–1 I.R.B.249
2002–8, 2002–1 I.R.B.252
2002–9, 2002–3 I.R.B.327
2002–10, 2002–4 I.R.B.400
2002–12, 2002–3 I.R.B.374
Revenue Rulings:
2002–1, 2002–2 I.R.B.268
2002–2, 2002–2 I.R.B.271
2002–3, 2002–3 I.R.B.316
2002–4, 2002–4 I.R.B.389
Treasury Decisions:
8968, 2002–2 I.R.B.274
8969, 2002–2 I.R.B.276
8970, 2002–2 I.R.B.281
8971, 2002–3 I.R.B.308
8973, 2002–4 I.R.B.391
8974, 2002–3 I.R.B.318
8975, 2002–4 I.R.B.379
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2001–27 through 2001–53 is
in Internal Revenue Bulletin 2002–1, dated January 7, 2002.
2002–5 I.R.B.iiFebruary 4, 2002

Finding List of Current Actions
on Previously Published Items
2
Bulletins 2002–1 through 2002–4
Notices:
98–43
Modified and superseded by
Notice 2002–5, 2002–3 I.R.B.320
2001–10
Revoked by
Notice 2002–8, 2002–4 I.R.B.398
2000–11
Obsoleted by
Notice 2002–3, 2002–2 I.R.B.289
Revenue Procedures:
84–37
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
87–50
Modified by
Rev. Proc. 2002–10, 2002–4 I.R.B.400
96–13
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
99–49
Modified and superseded by
Rev. Proc. 2002–9, 2002–3 I.R.B.327
2002–6
Modified by
Notice 2002–1, 2002–2 I.R.B.283
2002–8
Modified by
Notice 2002–1, 2002–2 I.R.B.283
2000–20
Modified by
Rev. Proc. 2002–6, 2002–1 I.R.B.203
2001–1
Superseded by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
2001–2
Superseded by
Rev. Proc. 2002–2, 2002–1 I.R.B.82
2001–3
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2001–4
Superseded by
Rev. Proc. 2002–4, 2002–1 I.R.B.127
2001–5
Superseded by
Rev. Proc. 2002–5, 2002–1 I.R.B.173
Revenue Procedures:—Continued
2001–6
Superseded by
Rev. Proc. 2002–6, 2002–1 I.R.B.203
2001–7
Superseded by
Rev. Proc. 2002–7, 2002–1 I.R.B.249
2001–8
Superseded by
Rev. Proc. 2002–8, 2002–1 I.R.B.252
2001–13
Corrected by
Ann. 2002–5, 2002–4 I.R.B.420
2001–36
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2001–41
Superseded by
Rev. Proc. 2002–2, 2002–1 I.R.B.82
2001–51
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
Revenue Rulings:
55–747
Revoked by
Notice 2002–8, 2002–4 I.R.B.398
61–146
Distinguished by
Rev. Rul. 2002–3, 2002–3 I.R.B.316
64–328
Modified by
Notice 2002–8, 2002–4 I.R.B.398
66–110
Modified by
Notice 2002–8, 2002–4 I.R.B.398
2
A cumulative list of current actions on previously published
items in Internal Revenue Bulletins 2001–27 through 2001–53 is
in Internal Revenue Bulletin 2002–1, dated January 7, 2002.
February 4, 2002iii2002–5 I.R.B.

INDEX
Internal Revenue Bulletins
2002–1 through 2002–4
The abbreviation and number in paren-
thesis following the index entry refer to
the specific item; numbers in roman and
italic type following the parenthesis refer
to the Internal Revenue Bulletin in which
the item may be found and the page num-
ber on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction
Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural
Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associates Chief Counsel and Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1,117
Associate Chief Counsel (Interna-
tional) (RP 7) 1,249
Contributions by employer to accident
and health plans (RR 3) 3,316
Determination letters:
Issuing procedures (RP 6) 1,203
Temporary use of draft Form 8717
(Ann 1) 2,304
User fees (Notice 1) 2,283
EGTRRA, section 401(k) hardship distri-
butions; section 414(v) catch-up contri-
butions (Notice 4) 2,298
Eligible rollover distributions, safe harbor
explanation (Notice 3) 2,289
Employee stock ownership plans, divi-
dend elections (Notice 2) 2,285
EMPLOYEE PLANS—
Cont.
Family and Medical Leave Act and caf-
eteria plans (Ann 4) 2,306
Individual retirement arrangements, sim-
plified employee pension plans, etc.,
opinion letters (RP 10) 4,401
Letter rulings:
Determination letters and information
letters issued by Associates Chief
Counsel and Division Counsel/
Associate Chief Counsel (TE/GE)
(RP 1) 1,1
Information letters, etc. (RP 4) 1,127
Regulations:
26 CFR 1.125–3; effect of the Family
and Medical Leave Act on the
operation of cafeteria plans; correc-
tion (Ann 4) 2,306
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel and
Division Counsel/Associate Chief
Counsel (TEGE) (RP 2) 1,82
IRS employees (RP 5) 1,173
User fees, request for letter rulings
(RP 8) 1,252
EMPLOYMENT TAX
Contributions by employer to accident
and health plans (RR 3) 3,316
Notice of Determination of Worker Clas-
sification, procedures (Notice 5) 3,320
EXEMPT
ORGANIZATIONS
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associates Chief Counsel and Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1,117
Letter rulings:
Determination letters and information
letters issued by Associates Chief
Counsel and Division Counsel/
Associate Chief Counsel (TE/GE)
(RP 1) 1,1
Information letters, etc. (RP 4) 1,127
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel and
Division Counsel/Associate Chief
EMPLOYEE PLANS—
Cont.
Counsel (TEGE) (RP 2) 1,82
IRS employees (RP 5) 1,173
User fees, request for letter rulings (RP 8)
1,252
INCOME TAX
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associates Chief Counsel and Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1,117
Associate Chief Counsel (Interna-
tional) (RP 7) 1,249
Allocation of loss with respect to stock
and other personal property (TD 8973)
4,391
Classification of certain business entities,
check-the-box regulations (TD 8970)
2,281
Contributions by employer to accident
and health plans (RR 3) 3,316
Credits, new markets tax credit (TD
8971) 3,308; (REG–119436–01)
3,377
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01)
2,302
Inflation-adjusted items for 2001, expa-
triation, correction (Ann 5) 4,420
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for:
January 2002 (RR 2) 2,271
Inventory:
LIFO:
Price indexes used by department
stores for:
November 2001 (RR 4) 4,389
Letter rulings; Determination letters, and
information letters issued by Associates
Chief Counsel and Division Counsel/
Associate Chief Counsel (TE/GE) (RP
1) 1,1
Materials and supplies, restaurant small-
wares (RP 12) 3,374
Methods of accounting, automatic con-
sent (RP 9) 3,327
Partnership, Form 1065 electronic filing
waiver request (Ann 3) 2,305
2002–5 I.R.B.ivFebruary 4, 2002

INCOME TAX—Cont.
Payment of internal revenue taxes by
credit card and debit card (TD 8969)
2,276
Proposed Regulations:
26 CFR 1.41–0,–3,–8, amended;
1.41–4, revised; credit for increasing
research activities (REG–112991–
01) 4,404
26 CFR 1.45D–1, added; new markets
tax credit (REG–119436–01) 3,377
26 CFR 1.337(d)–6,–7, added; certain
transfers of property to regulated
investment companies (RICs) and
real estate investment trusts (REITs)
(REG–142299–01, REG–209135–
88) 4,418
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302
Qualified research, credit computation
(REG–112991–01) 4,404
Regulations:
26 CFR 1.45D–1T, added; 602.101(b),
amended; new markets tax credit
(TD 8971) 3,308
26 CFR 1.337(d)–5T, amended;
1.337(d)–6T,–7T, added; 602.101,
amended; certain transfers of prop-
erty to regulated investment compa-
nies (RICs) and real estate invest-
ment trusts (REITs) (TD 8975)
4,379
26 CFR 1.861–8,–8T, amended;
1.865–1, added; 1.865–1T,–2T,
removed; 1.865–2, amended;
1.904–4, amended; allocation of loss
with respect to stock and other per-
sonal property (TD 8973) 4,391
26 CFR 1.6050I–0,–1, amended; cross
referencing section 5331 of title 31
relating to reporting of certain cur-
rency transactions by nonfinancial
trades or businesses under the Bank
Secrecy Act (TD 8974) 3,318
INCOME TAX—Cont.
26 CFR 301.6103(k)(9)–1, added;
301.6103(k)(9)–1T, removed;
301.6311–1, revised; 301.6311–2,
added; 301.6311–2T, removed; pay-
ment by credit card and debit card
(TD 8969) 2,276
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
26 CFR 301.7701–3, amended; classi-
fication of certain business entities,
check–the–box regulations (TD
8970) 2,281
Reporting of certain currency transactions
by nonfinancial trades or businesses to
the IRS and FinCEN (TD 8974) 3,318
Restrictions on disclosure and use of tax
return information by tax return prepar-
ers (Notice 6) 3,326
Spin–offs, employee stock options and
restricted stock (RR 1) 2,268
Split–dollar life insurance arrangements
(Notice 8) 4,398
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel and
Division Counsel/Associate Chief
Counsel (TEGE)(RP 2) 1,82
IRS employees (RP 5) 1,173
Transfers of property to RICs and REITs
(TD 8975) 4,379; (REG–142299–01,
REG–209135–88) 4,418
Waiver of accuracy-related penalty for
disclosure of tax shelter treatment (Ann
2) 2,304
February 4, 2002v2002–5 I.R.B.