Internal Revenue Bulletin 2011-6 (PDF rendition): IRS Revenue Procedures

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

Bulletin No. 201
1-6
February 7, 2011
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2011–4, page 448.
Federal rates; adjusted federal rates; adjusted federal
long-termrateandthelong-termexemptrate.For pur-
poses of sections 382, 642, 1274, 1288, and other sections
of the Code, tables set forth the rates for February 2011.
T.D. 9509, page 450.
Final regulations under section 1301 of the Code provide rules
under the American Jobs Creation Act of 2004 relating to the
averaging of farm and fishing income.
T.D. 9510, page 453.
Final regulations under section 6012 of the Code allow the IRS
to require corporations to file a schedule disclosing uncertain
tax positions related to the tax return as required by the IRS.
T.D. 9511, page 455.
Final regulations under sections 6229(c)(2) and 6501(e) of the
Code define an omission from gross income for purposes of
the six-year minimum period for assessment of tax attributable
to partnership items and the six-year period for assessing tax.
REG–149335–08, page 468.
Proposed regulations under sections 263A and 471 of the
Code provide rules relating to capitalizing and allocating sales-
based royalties, and adjusting the cost of merchandise inven-
tory for sales-based vendor allowances. The regulations mod-
ify the simplified production method and the simplified resale
method.
EXCISE TAX
Notice 2011–9, page 459.
This notice modifies and supersedes Notice 2010–71,
2010–50 I.R.B. 822, which provides guidance on the annual
fee imposed by section 9008 of the Affordable Care Act
on certain manufacturers and importers (covered entities)
of branded prescription drugs sold to certain government
programs. The modifications affect information provided by a
covered entity regarding controlled group members, orphan
drugs, Medicare Part D rebates, and Medicaid rebates. Notice
2010–71 modified and superseded.
Notice 2011–10, page 463.
This notice provides rules under which taxpayers may make a
one-time claim for payment of the credits and payments allow-
able under sections 6426 and 6427 of the Code for biodiesel
(including renewable diesel) mixtures, alternative fuels, and al-
ternative fuel mixtures sold or used during calendar year 2010.
ADMINISTRATIVE
Rev. Proc. 2011–19, page 465.
This procedure sets forth the maximum face amount of Qual-
ified Zone Academy Bonds (“QZABs”) that may be issued for
each state for the calendar year 2011. For this purpose,
“state” includes the District of Columbia and the possessions
of the United States.
Finding Lists begin on page ii.

The IRS Mission
Provide Americ
a’s taxpayers top-quality service by helping
them understa
nd and meet their tax responsibilities and en-
force the law wi
th 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 compiled semiannually into Cumulative Bulletins,
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, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
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 revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
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.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al 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, Leg-
islation 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 par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last 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 last Bulletin of each semiannual period.
The c
ontents 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 7, 20112011–6 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 42.—L
ow-Income
Housing Credi
t
The adjusted a
pplicable federal short-term, mid-
term, and long
-term rates are set forth for the month
of February 20
11. See Rev. Rul. 2011-4, page 448.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of February 2011. See Rev.
Rul. 2011-4, page 448.
Section 382.—Limitation
on Net Operating Loss
Carryforwa
rds and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of February 2011. See Rev.
Rul. 2011-4, page 448.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2011. See Rev. Rul. 2011-4, page 448.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2011. See Rev. Rul. 2011-4, page 448.
Section 468.—Special
Rules for Mining and Solid
Waste
Reclamation and
Closi
ng Costs
The ad
justed applicable federal short-term, mid-
term,
and long-term rates are set forth for the month
of Feb
ruary 2011. See Rev. Rul. 2011-4, page 448.
Section 471.—
General
Rule for Inven
tories
26 CFR 1.471-3: Inventories at cost.
Proposed regulations provide that the amount of
a sales-based vendor allowance is a reduction in the
cost of merchandise sold and does not reduce the in-
ventory cost or value of goods on hand at the end of
the taxable year. See REG-149335-08, page 468.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
Federal short-term, mid-term, and long-term rates
are set forth for the month of February 2011. See Rev.
Rul. 2011-4, page 448.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2011. See Rev. Rul. 2011-4, page 448.
Section 642.—Special
Rules for Credits and
Deductions
Federal short-term, mid-term, and long-term rates
are set forth for the month of February 2011. See Rev.
Rul. 2011-4, page 448.
Section 807.—Rules for
Certain Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2011. See Rev. Rul. 2011-4, page 448.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2011. See Rev. Rul. 2011-4, page 448.
Section 1274.
—Determi-
nation of Issu
ePriceinthe
Case of Certai
n Debt Instru-
ments Issued
for Property
(Also Section
s 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807
, 846, 1288, 7520, 7872.)
Federal rates
; adjusted federal rates;
adjusted fed
eral long-term rate and the
long-term ex
empt rate.For purposes of
sections 382
, 642, 1274, 1288, and other
sections of t
he Code, tables set forth the
rates for Fe
bruary 2011.
Rev. Rul. 20
11–4
This revenu
e ruling provides various
prescribed
rates for federal income tax
purposes fo
r February 2011 (the current
month). Ta
ble 1 contains the short-term,
mid-term,
and long-term applicable fed-
eral rates
(AFR) for the current month
for purpos
es of section 1274(d) of the
Internal R
evenue Code. Table 2 contains
the short
-term, mid-term, and long-term
adjusted
applicable federal rates (ad-
justed AF
R) for the current month for
purposes
of section 1288(b). Table 3 sets
forth the
adjusted federal long-term rate
and the l
ong-term tax-exempt rate de-
scribed
in section 382(f). Table 4 contains
the appr
opriate percentages for deter-
mining t
he low-income housing credit
describ
ed in section 42(b)(1) for build-
ings pl
aced in service during the current
month.
However, under section 42(b)(2),
the app
licable percentage for non-feder-
ally su
bsidized new buildings placed in
servic
e after July 30, 2008, and before
Decem
ber 31, 2013, shall not be less than
9%. Fi
nally, Table 5 contains the federal
rate f
or determining the present value of
an ann
uity, an interest for life or for a term
of yea
rs, or a remainder or a reversionary
inte
rest for purposes of section 7520.
2011–6 I.R.B.448February 7, 2011

REV. RUL. 2011–4 TABLE 1
Applicable Federal Rates (AFR) for February 2011
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR
.51%.51%.51%.51%
110% AFR
.56%.56%.56%.56%
120% AFR.61%.61%.61%.61%
130% AFR.66%.66%.66%.66%
Mid-term
AFR2.33%2.32%2.31%2.31%
110% AFR
2.57%2.55%2.54%2.54%
120% AFR2.80%2.78%2.77%2.76%
130% AFR3.04%3.02%3.01%3.00%
150% AFR3.51%
3.48%3.46%3.46%
175% AFR
4.10%4.06%4.04%4.03%
Long-term
AFR
4.15%
4.11%4.09%4.08%
110% AFR
4.57%4.52%
4.49%4.48%
120% AFR4.99%4.93%4.90%4.88%
130% AFR
5.41%5.34%5.30%5.28%
REV. RUL. 2011–4 TABLE 2
Adjusted AFR for February 2011
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted
AFR
.74%.74%.74%.74%
Mid-term adjusted AFR2.04%2.03%2.02%2.02%
Long-term adjusted
AFR
4.47%4.42%4.40%4.38%
REV. RUL. 2011–4 TABLE 3
Rates Under Section 382 for February 2011
Adjusted federal long-term rate for the current month4.47%
Long-term tax-exempt rate for ownership changes during the cu
rrent month (the highest of the adjusted
federal long-term rates for thecurrent month and the prior two
months.)
4.47%
REV. RUL. 2011–4 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for February 2011
Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after
July 30, 2008, and before December 31, 2013, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income housing credit
7.75%
Appropriate percentage for the 30% present value low-income housing credit3.32%
February 7, 20114492011–6 I.R.B.

REV. RUL. 2011–4 TABLE 5
Rate Under Section 7520 for February 2011
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
or a remainder or reversionary interest2.8%
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2011. See Rev. Rul. 2011-4, page 448.
Section 1301.—Average
of Farm Income
26 CFR 1.1301–1: Averaging of farm and fishing in-
come.
T.D. 9509
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Farmer and Fisherman
Income Averaging
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains fi-
nal regulations relating to the averaging of
farm and fishing income in computing in-
come tax liability. The regulations reflect
changes made by the American Jobs Cre-
ation Act of 2004 and the Tax Extenders
and Alternative Minimum Tax Relief Act
of 2008. The regulations provide guidance
to individuals engaged in a farming or fish-
ing business who elect to reduce their tax
liability by treating all or a portion of the
current taxable year’s farm or fishing in-
come as if one-third of it had been earned
in each of the prior three taxable years.
DATES:Effective Date:These regulations
are effective on December 15, 2010.
Applicability Date:For date of applica-
bility, see §1.1301–1(g).
FOR FURTHER INFORMATION
CONTACT: Erika Reigle, (202) 622–4950
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
This document contains amendments
to 26 CFR part 1. On July 22, 2008, tem-
porary regulations (T.D. 9417, 2008–2
C.B. 693) were published in theFederal
Register(73 FR 42522) relating to the
averaging of farm and fishing income
in computing tax liability. A notice of
proposed rulemaking (REG–161695–04,
2008–37 I.R.B. 699) cross-referencing the
temporary regulations also was published
in theFederal Register(73 FR 42538) on
July 22, 2008. No comments in response
to the notice of proposed rulemaking or
requests to hold a public hearing were
received, and no hearing was held. This
Treasury decision adopts the proposed
regulations with minor changes and re-
moves the temporary regulations.
Section 504 of the Tax Extenders and
Alternative Minimum Tax Relief Act of
2008, Div. C of Public Law 110–343 (122
Stat. 3765), enacted on October 3, 2008,
provides that a taxpayer may treat qual-
ified settlement income received in con-
nection with the civil actionIn re Exxon
Valdez, No. 8–095–CV (HRH) (Consoli-
dated)(D.Alaska),asincomefromafish-
ing business eligible for income averaging.
Therefore, these final regulations include
this qualified settlement income in the def-
inition of income from a fishing business.
Qualified settlement income is limited to
interest and punitive damages. The ex-
tent to which compensatory damages are
treated as income froma fishing business
is determined under the generally applica-
ble rules of section 1301.
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 assessment
is not required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and because
the regulations do not impose a collection
of information on small entities, the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Code, the notice of proposed rule-
making preceding these regulations were
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on their impact on small busi-
ness.
Drafting Information
The principal author of these regula-
tions is Erika Reigle of the Office of As-
sociate Chief Counsel (Income Tax & Ac-
counting). However, other personnel from
the IRS and Treasury Department partici-
pated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1301–1 is amended
by revising the section heading and para-
graphs (a), (b)(1), (b)(3), (c)(1), (d)(3)(ii),
(d)(4), (e), (f)(2), (f)(4), and (g) to read as
follows:
§1.1301–1 Averaging of farm and fishing
income.
(a)Overview. An individual engaged
in a farming or fishing business may make
a farm income averaging election to com-
pute current year (election year) income
tax liability under section 1 by averag-
ing, over the prior three-year period (base
2011–6 I.R.B.450February 7, 2011

years), all or a portion of the individ-
ual’s current year electible farm income
as defined in paragraph (e) of this section.
Electible farm income includes income
from both farming and fishing businesses.
An individual who makes a farm income
averaging election—
(1) Designates all or a portion of the
individual’s electible farm income for the
election year as elected farm income; and
(2) Determines the election year section
1 tax by calculating the sum of—
(i) The section 1 tax that would be im-
posed for the election year if taxable in-
come for the year were reduced by elected
farm income; plus
(ii) The amount by which the section 1
tax would be increased if taxable income
for each base year were increased by one-
third of elected farm income.
(b)Individual engaged in a farming
or fishing business—(1)In general—(i)
Farming or fishing business.“Farm-
ing business” has the same meaning as
provided in section 263A(e)(4) and the
regulations under that section.Fishing
businessmeans the conduct of commer-
cial fishing as defined in section 3 of the
Magnuson-Stevens Fishery Conservation
and Management Act (16 U.S.C. 1802(4)).
Accordingly, a fishing business is fishing
in which the fish harvested are intended to
or do enter commerce through sale, barter,
or trade.Fishingmeans the catching, tak-
ing, or harvesting of fish; the attempted
catching, taking, or harvesting of fish; any
activities that reasonably can be expected
to result in the catching, taking, or har-
vesting of fish; or any operations at sea in
support of or in preparation for the catch-
ing, taking, or harvesting of fish. Fishing
does not include any scientific research
activity conducted by a scientific research
vessel.Fishmeans finfish, mollusks, crus-
taceans, and all other forms of marine
animal and plant life, other than marine
mammals and birds.Catching, taking, or
harvestingincludes activities that result in
the killing of fish or the bringing of live
fish on board a vessel.
(ii)Exxon Valdez settlement payments.
For purposes of this section, a qualified
taxpayer who receives qualified settle-
ment income in any taxable year is treated
asengagedinafishingbusiness,andthe
income is treated as income attributable to
a fishing business, for that taxable year. A
qualified taxpayeris an individual plain-
tiff in the civil actionIn re Exxon Valdez,
No. 89–095–CV (HRH) (Consolidated)
(D. Alaska).Qualified taxpayeralso
means any individual who is a beneficiary
of the estate of such a plaintiff, was
the spouse or immediate relative of that
plaintiff, and acquired the right to receive
the settlement income from that plaintiff.
Qualified settlement incomemeans any
interest and punitive damage awards that
are received in connection with the civil
actionIn re Exxon Valdez(whether as
lump-sum or periodic payments, whether
pre- or post-judgment, and whether related
to a settlement or to a judgment) and that
are otherwise includible in income.
(iii)Form of business. An individual
engaged in a farming or fishing business
includes a sole proprietor of a farming or
fishing business, a partner in a partner-
ship engaged in a farming or fishing busi-
ness, and a shareholder of an S corporation
engaged in a farming or fishing business.
Except as provided in paragraph (e)(1)(i)
of this section, services performed as an
employee are disregarded in determining
whether an individual is engaged in a farm-
ing or fishing business for purposes of sec-
tion 1301 of the Internal Revenue Code.
(iv)Base years. An individual is not
required to have been engaged in a farming
or fishing business in any of the base years
in order to make a farm income averaging
election.
*****
(3)Lessors of vessels used in fishing.A
lessor of a vessel is engaged in a fishing
business for purposes of section 1301 with
respect to payments that are received un-
der the lease and are based on a share of
the catch from the lessee’s use of the ves-
sel in a fishing business (or a share of the
proceeds from the sale of the catch) if this
manner of payment is determined under a
written lease agreement entered into be-
fore the lessee begins any significant fish-
ing activities resulting in the catch. A
lessor of a vessel is not engaged in a fishing
business for purposes of section 1301 with
respect to fixed lease payments or with re-
spect to lease payments based on a share
of the lessee’s catch (or a share of the pro-
ceeds from the sale of the catch) if the
share is determined under either an unwrit-
ten agreement or a written agreement en-
tered into after the lessee begins significant
fishing activities resulting in the catch.
(c)Making, changing, or revoking
an election—(1)In general.Afarmin-
come averaging election is made by filing
Schedule J, “Income Averaging for Farm-
ers and Fishermen,” with an individual’s
Federal income tax return for the election
year (including a late or amended return if
the period of limitation on filing a claim
for credit or refund has not expired).
*****
(d) * * *
(3) * * *
(ii)Example. Therulesofthispara-
graph (d)(3) are illustrated by the follow-
ing example:
Example. (i) T is a fisherman who uses the calen-
dar taxable year. In each of the years 2007, 2008, and
2009, T’s taxable income is $20,000, none of which
is electible farm income. In 2010, T has taxable in-
come of $30,000 (prior to any farm income averaging
election), $10,000 of which is electible farm income.
T makes a farm income averaging election with re-
spect to $9,000 of the electible farm income for 2010.
Under paragraph (a)(2)(ii) of this section, $3,000 of
elected farm income is allocated to each of the base
years 2007, 2008, and 2009. Under paragraph (a)(2)
of this section, T’s 2010 tax liability is the sum of the
following amounts:
(A) The section 1 tax on $21,000, which is T’s tax-
able income of $30,000, minus elected farm income
of $9,000.
(B) For each of the base years 2007, 2008, and
2009, the amount by which the section 1 tax would
be increased if one-third of elected farm income were
allocated to each year. The amount for each year is
the section 1 tax on $23,000 (T’s taxable income of
$20,000, plus $3,000, which is one-third of elected
farm income for the 2010election year), minus the
section 1 tax on $20,000.
(ii) In 2011, T has taxable income of $50,000,
$12,000 of which is electible farm income. T makes
a farm income averaging election with respect to all
$12,000 of the electible farm income for 2011. Under
paragraph (a)(2)(ii) of this section, $4,000 of elected
farm income is allocated to each of the base years
2008, 2009, and 2010. Under paragraph (a)(2) of
this section, T’s 2011 tax liability is the sum of the
following amounts:
(A) The section 1 tax on $38,000, which is T’s
taxable income of $50,000, minus elected farm in-
come of $12,000.
(B) For each of the base years 2008 and 2009, the
amount by which section 1 tax would be increased
if, after adjustments for previous farm income av-
eraging elections pursuant to paragraph (d)(3)(i) of
this section, one-third of 2011 elected farm income
were allocated to each year. The amount for each
year is the section 1 tax on $27,000 (T’s taxable in-
come of $20,000 increased by $3,000 for T’s 2010
farm income averaging election and further increased
by $4,000, which is one-third of elected farm income
for the 2011 election year), minus the section 1 tax on
$23,000 (T’s taxable income of $20,000 increased by
$3,000 for T’s 2010 farm income averaging election).
(C) For base year 2010, the amount by which sec-
tion1taxwouldbeincreasedif, after adjustments
February 7, 20114512011–6 I.R.B.

for previous farm income averaging elections pur-
suant to paragraph (d)(3)(i) of this section, one-third
of elected farm income were allocated to that year.
This amount is the section 1 tax on $25,000 (T’s 2010
taxable income of $30,000 reduced by $9,000 for T’s
2010 farm income averaging election and increased
by $4,000, which is one-third of elected farm income
for the 2011 election year), minus the section 1 tax
on $21,000 (T’s taxable income of $30,000 reduced
by $9,000 for T’s 2010 farm income averaging elec-
tion).
(4)Deposits into Merchant Marine
Capital Construction Fund—(i)Reduc-
tions to taxable income and electible farm
income. Under section 7518(c)(1)(A),
certain deposits to a Merchant Marine
Capital Construction Fund (CCF) reduce
taxable income for purposes of the Internal
Revenue Code (the CCF reduction). The
amount of the CCF reduction is limited
under section 7518(a)(1)(A) to the tax-
payer’s taxable income (determined with-
out regard to the reduction) attributable to
specified maritime operations including
operations in fisheries of the United States.
The CCF reduction is taken into account
in determining the taxable income used
in computations under this section. In
addition, except to the extent the amount
described in section 7518(a)(1)(A) is not
attributable to the individual’s fishing
business, the CCF reduction is treated in
computing electible farm income as an
item of deduction attributable to the indi-
vidual’s fishing business.
(ii)Example. The rules of this para-
graph (d)(4) are illustrated by the follow-
ing example:
Example. (i) T is a fisherman who uses the
calendar taxable year. In each of the years 2007,
2008, and 2009, T’s taxable income (before taking
any CCF reduction into account) is $20,000. For
taxable year 2008, all of T’s income is described
in section 7518(a)(1)(A) and is attributable to T’s
fishing business. T makes a $5,000 deposit into a
CCF for taxable year 2008. In 2010, T has total
taxable income of $30,000 (before taking any CCF
reduction into account). T’s electible farm income
for 2010 (before taking the CCF reduction into
account) is $10,000, all of which is described in sec-
tion 7518(a)(1)(A) and is attributable to T’s fishing
business. For taxable year 2010, T makes a $4,000
deposit into a CCF.
(ii) The amount of the 2010 CCF deposit reduces
taxable income. Accordingly, T’s taxable income for
2010 is $26,000 ($30,000 - $4,000). In addition, the
entire amount of the CCF reduction is treated as an
item of deduction attributable to T’s fishing business.
Accordingly, T’s electible farm income for 2010 is
$6,000 ($10,000 - $4,000). Similarly, the amount of
the 2008 CCF deposit reduces T’s taxable income for
2008. Accordingly, T’s taxable income for 2008 is
$15,000 ($20,000 - $5,000).
(iii) T makes an income averaging election with
respect to all $6,000 of the electible farm income
for 2010. Under paragraph (a)(2)(ii) of this section,
$2,000 of elected farm income is allocated to each of
the base years 2007, 2008, and 2009. Under para-
graph (a)(2) of this section, T’s 2010 tax liability is
the sum of the following amounts:
(A) The section 1 tax on $20,000, which is T’s
taxable income of $26,000 ($30,000 reduced by the
$4,000 CCF deposit), minus elected farm income of
$6,000.
(B) For each of the base years 2007, 2008, and
2009, the amount by which section 1 tax would be
increased if one-third of elected farm income were
allocated to each year. The amount for base years
2007 and 2009 is the section 1 tax on $22,000, (T’s
taxable income of $20,000, plus $2,000, which is one-
third of elected farm income for the election year),
minus the section 1 tax on $20,000. The amount for
base year 2008 is the section 1 tax on $17,000, which
is T’s taxable income of $15,000 ($20,000 reduced
by the $5,000 CCF deposit), plus $2,000 (one-third
of elected farm income for the election year), minus
the section 1 tax on $15,000.
(e)Electible farm income—(1)Identi-
fication of items attributable to a farming
or fishing business—(i)In general.Farm
and fishing income includes items of in-
come, deduction, gain, and loss attribut-
able to an individual’s farming or fish-
ing business. Farm and fishing losses in-
clude, to the extent attributable to a farm-
ing or fishing business, any net operating
loss carryover or carryback or net capi-
tal loss carryover to an election year. In-
come, gain, or loss from the sale of de-
velopment rights, grazing rights, and other
similar rights is not treated as attributable
to a farming business. In general, farm and
fishing income does not include compen-
sation received as an employee. However,
a shareholder of an S corporation engaged
in a farming or fishing business may treat
compensation received from the corpora-
tion as farm or fishing income if the com-
pensation is paid by the corporation in the
conduct of the farming or fishing business.
If a crewmember on a vessel engaged in
commercial fishing (within the meaning of
section 3 of the Magnuson-Stevens Fish-
ery Conservation and Management Act,
16 U.S.C. 1802(4)) is compensated by a
share of the boat’s catch of fish or a share
of the proceeds from the sale of the catch,
the crewmember is treated for purposes
of section 1301 as engaged in a fishing
business and the compensation is treated
for such purposes as income from a fishing
business.
(ii)Gain or loss on sale or other dispo-
sition of property—(A)In general.Gain
or loss from the sale or other disposition of
property that was regularly used in the in-
dividual’s farming or fishing business for
a substantial period of time is treated as
attributable to a farming or fishing busi-
ness. For this purpose, the termprop-
ertydoes not include land, but does in-
clude structures affixed to land. Property
that has always been used solely in the
farming or fishing business by the individ-
ual is deemed to meet both the regularly
used and substantial period tests. Whether
property not used solely in the farming or
fishingbusinesswasregularlyusedinthe
farming or fishing business for a substan-
tial period of time depends on all of the
facts and circumstances.
(B)Cessation of a farming or fishing
business. If gain or loss described in para-
graph (e)(1)(ii)(A) ofthis section is real-
ized after cessation of a farming or fishing
business, the gain or loss is treated as at-
tributable to a farming or fishing business
only if the property is sold within a rea-
sonable time after cessation of the farming
or fishing business. A sale or other dispo-
sition within one year of cessation of the
farming or fishing business is presumed to
be within a reasonable time. Whether a
sale or other disposition that occurs more
than one year after cessation of the farm-
ing or fishing business is within a reason-
able time depends on all of the facts and
circumstances.
(2)Determination of amount that may
be elected farm income—(i)Electible farm
income. (A) The maximum amount of in-
come that an individual may elect to av-
erage (electible farm income) is the sum
of any farm and fishing income and gains,
minus any farm and fishing deductions or
losses (including loss carryovers and car-
rybacks) that are allowed as a deduction
in computing the individual’s taxable in-
come.
(B) Individuals conducting both a farm-
ing business and a fishing business must
calculate electible farm income by com-
bining income, gains, deductions, and
losses derived from the farming business
and the fishing business.
(C) Except as otherwise provided
in paragraph (d)(4) of this section, the
amount of any CCF reduction is treated as
a deduction from income attributable to
a fishing business in calculating electible
farm income.
2011–6 I.R.B.452February 7, 2011

(D) Electible farm income may not ex-
ceed taxable income, and electible farm in-
come from net capitalgain attributable to
a farming or fishing business may not ex-
ceed total net capital gain. Subject to these
limitations, an individual who has both or-
dinary income and net capital gain from a
farming or fishing business may elect to
average any combination of the ordinary
income and net capital gain.
(ii)Examples. The rules of this para-
graph (e)(2) are illustrated by the follow-
ing examples:
Example 1. A has ordinary income from a farm-
ing business of $200,000 and deductible expenses
from a farming business of $50,000. A’s taxable in-
come is $150,000 ($200,000 - $50,000). Under para-
graph (e)(2)(i) of this section, A’s electible farm in-
come is $150,000, all of which is ordinary income.
Example 2. B has capital gain of $20,000 that is
not from a farming or fishing business, capital loss
from a farming business of $30,000, and ordinary in-
come from a farming business of $100,000. Under
section 1211(b), B’s allowable capital loss is limited
to $23,000. B’s taxable income is $97,000 (($20,000
- $23,000) + $100,000). B has a capital loss carryover
from a farming business of $7,000 ($30,000 total loss
- $23,000 allowable loss). Under paragraph (e)(2)(i)
of this section, B’s electible farm income is $77,000
($100,000 ordinary income from a farming business,
minus $23,000 capital loss from a farming business),
all of which is ordinary income.
Example 3. C has ordinary income from a fish-
ing business of $200,000 and ordinary loss from a
farming business of $60,000. C’s taxable income is
$140,000 ($200,000 - $60,000). Under paragraph
(e)(2)(i)(B) of this section, C must deduct the farm
loss from the fishing income in determining C’s
electible farm income. Therefore, C’s electible farm
income is $140,000 ($200,000 - $60,000), all of
which is ordinary income.
Example 4. D has ordinary income from a farm-
ing business of $200,000 and ordinary loss of $50,000
that is not from a farming or fishing business. D’s tax-
able income is $150,000 ($200,000 - $50,000). Under
paragraph (e)(2)(i)(D) of this section, electible farm
income may not exceed taxable income. Therefore,
D’s electible farm income is $150,000, all of which
is ordinary income.
Example 5. E has capital gain from a farming
business of $50,000, capital loss of $40,000 that is not
from a farming or fishing business, and ordinary in-
come from a farming business of $60,000. E’s taxable
income is $70,000 (($50,000 - $40,000) + $60,000).
Under paragraph (e)(2)(i)(D) of this section, electible
farm income may not exceed taxable income, and
electible farm income from net capital gain attribut-
able to a farming or fishing business may not exceed
total net capital gain. Therefore, E’s electible farm
income is $70,000 of which $10,000 is capital gain
and $60,000 is ordinary income.
(f) * * *
(2)Changes in filing status. An individ-
ual 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 is married and
files a joint return in the election year, who
filed as single in one or more of the base
years, may elect to average farm or fishing
income, by using the single filing status to
compute the increase in section 1 taxes for
the base years in which the individual filed
as single.
*****
(4)Alternative minimum tax.Afarm
income averaging election is disregarded
in computing the tentative minimum tax
and the regular tax under section 55 for
the election year or any base year. The
election is taken into account, however, in
determining the regular tax liability under
section 53(c) for the election year.
*****
(g)Effective/applicability date.This
section applies for taxable years beginning
after December 15, 2010. See the provi-
sions of §§1.1301–1 and 1.1301–1T as in
effect on December 14, 2010, for rules that
apply for taxable years beginning on or be-
fore December 15, 2010. In addition, a
taxpayer may apply paragraph (b)(1)(ii) of
this section in taxableyears beginning af-
ter December 31, 2003.
§1.1301–1T [Removed]
Par. 3. Section 1.1301–1T is removed.
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved December 7, 2010.
Michael Mundaca,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on December 10,
2010, 8:45 a.m., and published in the issue of the Federal
Register for December 15, 2010, 75 F.R. 78157)
Section 6012.—Persons
Required to Make Returns
of Income
26 CFR 1.6012–2: Corporations required to make
returns of income.
T.D. 9510
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Requirement of a Statement
Disclosing Uncertain Tax
Positions
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulation.
SUMMARY: This document contains fi-
nal regulations allowing the IRS to require
corporations to file a schedule disclosing
uncertain tax positions related to the tax re-
turn as required by the IRS.
DATES:Effective Date:This regulation is
effective on December 15, 2010.
Applicability Date:For dates of appli-
cability, see §1.6012–2 (a)(5).
FOR FURTHER INFORMATION
CONTACT: Kathryn Zuba at (202)
622–3400 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to
the Income Tax Regulations (26 CFR Part
1) under section 6012 relating to the re-
turns of income corporations are required
to file. Section 6011 provides that per-
sons liable for a tax imposed by Title 26
shall make a return when required by reg-
ulations prescribedby the Secretary of the
Treasury according to the forms and regu-
lations prescribed by the Secretary. Trea-
sury Regulation §1.6011–1 requires every
person liable for income tax to make the re-
turns required by regulation. Section 6012
requires corporations subject to an income
tax to make a return with respect to that
tax. Treasury Regulation §1.6012–2 sets
out the corporations that are required to
February 7, 20114532011–6 I.R.B.

file returns and the form those returns must
take.
A proposed regulation under sec-
tion 6012 (REG–119046–10, 2010–40
I.R.B. 415) was published in theFed-
eral Registeron September 9, 2010.
Requirement of a Statement Disclosing
Uncertain Tax Positions, 75 Fed. Reg.
54802 (proposed Sept. 9, 2010). The
IRS received one written comment con-
cerning the proposed regulation, and a
public hearing regarding the proposed
regulation was held on October 19, 2010.
Neither of the two speakers at the public
hearing had comments relating to the
proposed regulation, although both
organizations the speakers represented had
previously submitted written comments
concerning the draft Schedule UTP and
instructions. Announcement 2010–30,
2010–19 I.R.B. 668. After considering
the comments, the proposed regulation is
adopted by this Treasury decision with
one non-substantive change related to
the effective date. While the proposed
regulation applied to returns filed for tax
years beginning after December 15, 2009
and ending after the date the regulations
were published in theFederal Register,
the final regulation applies to returns
filed for tax years beginning on or after
January 1, 2010.
Explanation and Summary of
Comments
This rule will authorize the IRS to re-
quire certain corporations, as set out in
forms, publications, instructions, or other
guidance, to provide information con-
cerning uncertain tax positions concurrent
with the filing of a return. On Septem-
ber 24, 2010, the IRS released Schedule
UTP with accompanying instructions that
explain how the IRS plans to implement
the authority provided by this regulation.
One commentator asked that the proposed
regulation not be adopted because Sched-
ule UTP would require the disclosure of
privileged information. If the regulation is
adopted, the commentator recommended
it should state that taxpayer may assert
any applicable privileges to providing in-
formation sought by Schedule UTP and
that any disclosure of information on that
schedule will not constitute a waiver of
any applicable privilege.
The final regulation does not adopt
this recommendation. The regulation
addresses the IRS’s authority to require
certain corporations to provide informa-
tion concerning uncertain tax positions.
The IRS has decided to require the filing
of Schedule UTP based on its determina-
tion that the information about uncertain
tax positions taken in a tax return required
by the schedule is essential to achieving
an effective and efficient self-assessment
tax system. Provisions relating to the as-
sertion of privilege are not included in
this regulation, since it does not affect the
existence of any applicable privileges tax-
payers may have concerning information
requested by a return or how they may
assert those privileges.
Special Analyses
It has been determined that this final
rule is not a significant regulatory action as
defined in Executive Order 12866. There-
fore, a regulatory assessment is not re-
quired.
This regulation will only affect taxpay-
ers that prepare or are required to issue au-
dited financial statements. Small entities
rarely prepare or are required to issue au-
dited financial statements due to the ex-
pense involved. It is hereby certified that
this regulation will not have a significant
economic impact on a substantial number
of small entities pursuant to the Regula-
tory Flexibility Act (5 U.S.C. chapter 6).
Accordingly, a regulatory flexibility anal-
ysis is not required. Pursuant to 5 U.S.C.
553(d)(3), it has been determined that there
is good cause for the effective date of this
final rule, which is less than 30 days after
the date of publication.
Pursuant to section 7805(f) of the Inter-
nal Revenue Code, the notice of proposed
rulemaking preceding this regulation was
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on their impact on small busi-
ness.
Drafting Information
The principal author of these regula-
tions is Kathryn Zuba of the Office of the
Associate Chief Counsel (Procedure and
Administration).
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.6012–2 is also issued under
the authority of 26 U.S.C. 6011 and 6012.
Par. 2. Section 1.6012–2 is amended by
adding paragraphs (a)(4) and (a)(5) to read
as follows:
§1.6012–2 Corporations required to make
returns of income.
(a) * * *
(4)Disclosure of uncertain tax posi-
tions.A corporation required to make
a return under this section shall attach
Schedule UTP,Uncertain Tax Position
Statement, or any successor form, to such
return, in accordance with forms, in-
structions, or other appropriate guidance
provided by the IRS.
(5)Effective/applicability date. Para-
graph (a)(4) of this section applies to re-
turns filed for tax years beginning on or af-
ter January 1, 2010.
*****
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved December 9, 2010.
Michael Mundaca,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on December 13,
2010, 11:15 a.m., and published in the issue of the Federal
Register for December 15, 2010, 75 F.R. 78160)
2011–6 I.R.B.454February 7, 2011

Section 6229.—Period
of Limitations for Making
Assessments
26 CFR 301.6229(c)(2)–1: Substantial omission of
income.
T.D. 9511
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301
Definition of Omission from
Gross Income
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations defining an omission from
gross income for purposes of the six-year
minimum period for assessment of tax at-
tributable to partnership items and the six-
year period for assessing tax. The reg-
ulations resolve a continuing issue as to
whether an overstatement of basis in a sold
asset results in an omission from gross in-
come. The regulations will affect any tax-
payer who overstates basis in a sold asset
creating an omission from gross income
exceeding twenty-five percent of the in-
come stated in the return. Additionally,
provisions related to estate, gift and excise
tax are reinstated from the prior final reg-
ulation.
DATES:Effective Date: These regulations
are effective on December 14, 2010.
Applicability Date: The regulations
relating to income taxes apply to taxable
years with respect to which the period
for assessing tax was open on or after
September 24, 2009, which is the date that
the proposed and temporary regulations to
which these regulations relate were filed
with theFederal Register.Fordatesof
applicability regarding the regulations re-
lating to estate, gift and excise taxes, see
§301.6501(e)–1(e)(2).
FOR FURTHER INFORMATION
CONTACT: William A. Heard, III at (202)
622–4570 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to the Procedure and Administration Reg-
ulations (26 CFR Part 301) under section
6229(c)(2) and section 6501(e) of the In-
ternal Revenue Code. On September 28,
2009, temporary regulations (T.D. 9466,
2009–43 I.R.B. 551) regarding the defi-
nition of an omission from gross income
for purposes of the six-year period for
assessment were published in theFed-
eral Register(74 FR 49321). A notice of
proposed rulemaking (REG–108045–08,
2009–43 I.R.B. 557) cross-referencing the
temporary regulations was published in
theFederal Registerfor the same day
(74 FR 49354). One written comment
was received from the public in response
to the notice of proposed rulemaking.
No public hearing was requested or held.
After consideration of the comment,
the proposed regulations are adopted as
amended by this Treasury decision, and
the corresponding temporary regulations
are removed.
Summary of Comments and
Explanation of Revisions
These final regulations amend the Pro-
cedure and Administration Regulations
(26 CFR part 301) relating to sections
6229(c)(2) and 6501(e). In addition to
the revisions set forth in the proposed
regulations cross-referencing the tem-
porary regulations, the final regulations
reflect structural amendments to sections
6229(c)(2) and 6501(e) in the Hiring In-
centives To Restore Employment Act
(Public Law 111–147, 124 Stat. 112) to
accommodate an additional threshold trig-
gering the six-year period of limitations
for omissions from gross income attribut-
able to assets subject to certain reporting
requirements, which is not otherwise ad-
dressed in these final regulations. The
final regulations also clarify the effec-
tive/applicability date provisions in the
section 6229(c)(2) and section 6501(e)
regulations to eliminate a perceived am-
biguity in the temporary regulations, that
was brought to light by the Tax Court in
Intermountain Insurance Service of Vail v.
Commissioner, 134 T.C. No. 11 (2010),
appeal docketed, No.10–1204 (D.C. Cir.).
As explained in the preamble to the
temporary regulations, the United States
Courts of Appeals for the Ninth Cir-
cuit and the Federal Circuit construed
section 6501(e)(1) in cases outside the
trade-or-business context contrary to the
interpretation provided in these final reg-
ulations, holding thatan overstatement of
basis does not constitute an “omission.”
Bakersfield Energy Partners v. Commis-
sioner, 568 F.3d 767 (9th Cir. 2009);
Salman Ranch Ltd v. United States,573
F.3d 1362 (Fed. Cir. 2009). Those courts
relied on the Supreme Court’s opinion in
Colony v. Commissioner,357U.S.28
(1958),whichdealtwithanomissionfrom
gross income in the context of a trade or
business under the predecessor of sec-
tion 6501(e). The Treasury Department
and the Internal Revenue Service dis-
agree with those courts that the Supreme
Court’s reading of the predecessor to sec-
tion 6501(e) inColonyapplies to sections
6501(e)(1) and 6229(c)(2), for the reasons
set forth in the preamble to the temporary
regulations.
After publication of the temporary
regulations, the Tax Court declared the
temporary regulations invalid, adhering
to its prior opinion inBakersfield Energy
Partners v. Commissioner, 128 T.C. 207
(2007).Intermountain Insurance Service
of Vail v. Commissioner,134T.C.No.11
(2010), appeal docketed, No. 10–1204
(D.C. Cir.). In part, the Tax Court inIn-
termountainconcluded that the Supreme
Court’s opinion inColonywas the only
permissible interpretation of the statutory
language in question (“omits from gross
income”). The Treasury Department and
the Internal Revenue Service disagree
withIntermountain. The Supreme Court
stated inColonythat the statutory phrase
“omits from gross income” is ambiguous,
meaning that it is susceptible to more than
one reasonable interpretation. The inter-
pretation adopted by the Supreme Court
inColonyrepresented that court’s inter-
pretation of the phrase but not the only
permissible interpretation of it. Under the
authority ofNat’l Cable & Telecomms.
Ass’n v. Brand X Internet Servs.,545U.S.
967, 982–83 (2005), the Treasury Depart-
ment and the Internal Revenue Service are
permitted to adopt another reasonable in-
terpretation of “omits from gross income,”
particularly as it is used in a new statu-
tory setting.See Hernandez-Carrera v.
February 7, 20114552011–6 I.R.B.

Carlson, 547 F.3d 1237 (10th Cir. 2008)
(agencies are free to promulgate a reason-
able construction of an ambiguous statute
that contradicts any court’s interpretation,
even the Supreme Court’s). The inter-
pretation of the phrase “omits from gross
income” as used in section 6501(e)(1) is
currently pending before several United
States Courts of Appeals.
Because these regulations are a clarifi-
cation of the period oflimitations provided
in sections 6501(e)(1) and 6229(c)(2) and
are consistent with the Secretary’s applica-
tion of those provisions both with respect
to a trade or business (that is, gross income
means gross receipts), as well as outside of
the trade-or-business context (that is, the
section 61 definition of gross income ap-
plies), they are applicable to all cases with
respect to which the period for assessing
tax was open on or after September 24,
2009, the date the temporary regulations
were filed with theFederal Register.
1.Retroactivity
The sole written comment received in
response to the notice of proposed rule-
making by cross-reference to the tempo-
rary regulations questioned the application
of the regulations, characterizing them as
retroactive, and recommended that they
be applied only prospectively. The com-
mentator stated that the temporary regu-
lations apply with retroactive effect “in
that taxable years which had closed are
now reopened.” The Treasury Department
and the Internal Revenue Service disagree
with the characterization of the regulations
as retroactive. The final regulations have
been clarified to emphasize that they only
apply to open tax years, and do not reopen
closed tax years as suggested by the com-
mentator.
The commentator also relied on the
1996 amendments tosection 7805(b) to
argue that retroactively effective Treasury
regulations are impermissible, with lim-
ited exceptions. The 1996 amendments to
section 7805(b), however, do not apply to
the regulations under sections 6229(c)(2)
and 6501(e)(1). That is because those
amendments are only effective for regula-
tions that relate to statutory provisions en-
acted on or after July 30, 1996. Taxpayer
Bill of Rights 2 (Public Law 104–168,
section 1101(a), 110 Stat. 1469). Since
section 6229(c)(2) was enacted in 1982
and section 6501(e)(1)(A) was enacted in
1954 (and redesignated as subparagraph
(B) as part of the HIRE Act in 2010), the
1996 amendments to section 7805(b) are
inapplicable to the regulations. Prior to
the 1996 amendments, section 7805(b)
provided, “The Secretary may prescribe
the extent, if any, to which any ruling or
regulation, relating to the internal revenue
laws, shall be applied without retroactive
effect.” Although these regulations are not
retroactive, a retroactive regulation inter-
preting sections 6229(c)(2) and 6501(e)(1)
is expressly permitted by the applicable
versionofsection7805(b),whichpre-
sumes regulations toapply retroactively
unless otherwise provided.
2.Intermountain
The Tax Court’s majority inIntermoun-
tainerroneously interpreted the applica-
bility provisions of the temporary and
proposed regulations, which provided that
the regulations applied to taxable years
with respect to which “the applicable pe-
riod for assessing tax did not expire before
September 24, 2009.” The Internal Rev-
enue Service will continue to adhere to
the position that “the applicable period” of
limitations is not the “general” three-year
limitations period. The three-year limita-
tions period is one of several limitations
periods in the Internal Revenue Code,
including the six-yearlimitations period
under sections 6229(c)(2) and 6501(e)(1).
The expiration of the three-year period
does not “close” a taxable year if a longer
period applies. Consistent with that posi-
tion, the final regulations apply to taxable
years with respect to which the six-year
period for assessing tax under section
6229(c)(2) or 6501(e)(1) was open on or
after September 24,2009. This includes,
but is not limited to, all taxable years
(1) for which six years had not elapsed
from the later of the date that a tax return
was due or actually filed, (2) that are the
subject of any case pending before any
court of competent jurisdiction (including
the United States Tax Court and Court of
Federal Claims) in which a decision had
not become final (within the meaning of
section 7481) or (3) with respect to which
the liability at issue had not become fixed
pursuant to a closing agreement entered
into under section 7121. The Internal Rev-
enue Service’s position is consistent with
the effective/applicability date provisions
of these final regulations.
3.Other Revisions
The final regulations are amended to
reinstate estate, gift and excise tax provi-
sions that were inadvertently removed by
the temporary regulations.
Special Analyses
It has been determined that these regu-
lations are not a significant regulatory ac-
tion as defined in Executive Order 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
these regulations do not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Pursuant to sec-
tion 7805(f) of the Internal Revenue Code,
the NPRM cross-referencing the tempo-
rary regulations preceding these regula-
tions was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on their impact
on small business.
Drafting Information
The principal author of these regula-
tions is William A. Heard III of the Office
of the Associate Chief Counsel (Procedure
and Administration).
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR Part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding the entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6229(c)(2)–1 is also issued
under 26 U.S.C. 6230(k). * * *
Par. 2. Section 301.6229(c)(2)–1 is
added to read as follows:
2011–6 I.R.B.456February 7, 2011

§301.6229(c)(2)–1 Substantial omission
of income.
(a)Partnership return—(1)General
rule. (i) If any partnership omits from
the gross income stated in its return an
amount properly includible therein and
that amount is described in clause (i) of
section 6501(e)(1)(A), subsection (a) of
section 6229 shall be applied by substitut-
ing “6 years” for “3 years.”
(ii) For purposes of paragraph (a)(1)(i)
of this section, the termgross income,as
it relates to a trade or business, means the
total of the amounts received or accrued
from the sale of goods or services, to the
extent required to be shown on the re-
turn, without reduction for the cost of those
goods or services.
(iii) For purposes of paragraph (a)(1)(i)
of this section, the termgross income,as
it relates to any income other than from
the sale of goods or services in a trade or
business, has the same meaning as pro-
vided under section 61(a), and includes the
total of the amounts received or accrued,
to the extent required to be shown on the
return. In the case of amounts received
or accrued that relate to the disposition of
property, and except as provided in para-
graph (a)(1)(ii) of this section, gross in-
come means the excess of the amount re-
alized from the disposition of the property
over the unrecovered cost or other basis
of the property. Consequently, except as
provided in paragraph (a)(1)(ii) of this sec-
tion, an understated amount of gross in-
come resulting from an overstatement of
unrecovered cost or other basis constitutes
an omission from gross income for pur-
poses of section 6229(c)(2).
(iv) An amount shall not be considered
as omitted from gross income if informa-
tion sufficient to apprise the Commissioner
of the nature and amount of the item is dis-
closed in the return, including any sched-
ule or statement attached to the return.
(b)Effective/applicability date.The
rules of this section apply to taxable
years with respect to which the period
for assessing tax was open on or after
September 24, 2009.
§301.6229(c)(2)–1T [Removed]
Par. 3. Section 6229(c)(2)–1T is re-
moved.
Par. 4. Section 301.6501(e)–1 is added
to read as follows:
§301.6501(e)–1 Omission from return.
(a)Income taxes—(1)General rule.(i)
If a taxpayer omits from the gross income
stated in the return of a tax imposed by
subtitle A of the Internal Revenue Code an
amount properly includible therein that is
in excess of 25 percent of the gross income
so stated, the tax may be assessed, or a
proceeding in court for the collection of
that tax may be begun without assessment,
at any time within 6 years after the return
was filed.
(ii) For purposes of paragraph (a)(1)(i)
of this section, the termgross income,as
it relates to a trade or business, means the
total of the amounts received or accrued
from the sale of goods or services, to the
extent required to be shown on the re-
turn, without reduction for the cost of those
goods or services.
(iii) For purposes of paragraph (a)(1)(i)
of this section, the termgross income,as
it relates to any income other than from
the sale of goods or services in a trade or
business, has the same meaning as pro-
vided under section 61(a), and includes the
total of the amounts received or accrued,
to the extent required to be shown on the
return. In the case of amounts received
or accrued that relate to the disposition of
property, and except asprovidedinpara-
graph (a)(1)(ii)ofthissection,gross in-
comemeans the excess of the amount re-
alized from the disposition of the property
over the unrecovered cost or other basis
of the property. Consequently, except as
provided in paragraph (a)(1)(ii) of this sec-
tion, an understated amount of gross in-
come resulting from an overstatement of
unrecovered cost or other basis constitutes
an omission from gross income for pur-
poses of section 6501(e)(1)(A)(i).
(iv) An amount shall not be considered
as omitted from gross income if informa-
tion sufficient to apprise the Commissioner
of the nature and amount of the item is dis-
closed in the return, including any sched-
ule or statement attached to the return.
(b)Estate and gift taxes—(1) If the tax-
payer omits from the gross estate as stated
in the estate tax return, or from the total
amount of the gifts made during the period
for which the gift tax return was filed (see
§25.6019–1 of this chapter) as stated in the
gift tax return, an item or items properly in-
cludible therein the amount of which is in
excess of 25 percent of the gross estate as
stated in the estate tax return, or 25 percent
of the total amount of the gifts as stated in
the gift tax return, the tax may be assessed,
or a proceeding in court for the collection
thereof may be begun without assessment,
at any time within 6 years after the estate
tax or gift tax return, as applicable, was
filed.
(2) For purposes of this paragraph (b),
an item disclosed in the return or in any
schedule or statement attached to the re-
turn in a manner sufficient to apprise the
Commissioner of the nature and amount
thereof shall not be taken into account in
determining items omitted from the gross
estate or total gifts, as the case may be.
Further, there shall not be taken into ac-
count in computing the 25 percent omis-
sion from the gross estate stated in the es-
tate tax return or from the total gifts stated
in the gift tax return, any increases in the
valuationofassetsdisclosedonthereturn.
(c)Excise taxes—(1)In general.Ifthe
taxpayer omits from a return of a tax im-
posed under a provision of subtitle D an
amount properly includible thereon, which
amount is in excess of 25 percent of the
amount of tax reported thereon, the tax
may be assessed or a proceeding in court
for the collection thereof may be begun
without assessment, at any time within 6
years after the return was filed. For special
rules relating to chapter 41, 42, 43 and 44
taxes, see subparagraphs (2), (3), (4) and
(5) of this paragraph (c).
(2)Chapter 41 excise taxes.Ifanor-
ganization discloses an expenditure in its
return (or in a schedule or statement at-
tached thereto) in a manner sufficient to
apprise the Commissioner of the existence
and nature of the expenditure, the three-
year limitation on assessment and collec-
tion described in section 6501(a) shall ap-
ply with respect to any tax under chapter
41 arising from the expenditure. If a tax-
payer fails to so disclose an expenditure
in its return (or in a schedule or statement
attached thereto), thetax arising from the
expenditure not so disclosed may be as-
sessed, or a proceeding in court for the col-
lection of the tax may be begun without as-
sessment, at any time within 6 years after
the return was filed.
(3)Chapter 42 excise taxes.(i)Ifapri-
vate foundation omits from its annual re-
February 7, 20114572011–6 I.R.B.

turn with respect to the tax imposed by sec-
tion 4940 an amount of tax properly in-
cludible therein that is in excess of 25 per-
cent of the amount of tax imposed by sec-
tion 4940 that is reported on the return,
the tax may be assessed, or a proceeding
in court for the collection of the tax may
be begun without assessment, at any time
within 6 years after the return was filed.
If a private foundation discloses in its re-
turn (or in a schedule or statement attached
thereto) the nature, source, and amount of
any income giving rise to any omitted tax,
the tax arising from the income shall be
counted as reported on the return in com-
puting whether the foundation has omitted
more than 25 percent of the tax reported on
its return.
(ii) If a private foundation, trust, or
other organization (as the case may be) dis-
closes an item in its return (or in a schedule
or statement attached thereto) in a manner
sufficient to apprise the Commissioner of
the existence and nature of the item, the
three-year limitation on assessment and
collection describedin section 6501(a)
shall apply with respect to any tax imposed
under sections 4941(a), 4942(a), 4943(a),
4944(a), 4945(a), 4951(a), 4952(a), 4953
and 4958, arising from any transaction
disclosed by the item. If a private foun-
dation, trust, or other organization (as the
case may be) fails to so disclose an item
in its return (or in a schedule or statement
attached thereto), the tax arising from
any transaction not so disclosed may be
assessed or a proceeding in court for the
collection of the tax may be begun without
assessment, at any time within 6 years
after the return was filed.
(4)Chapter 43 excise taxes.Ifatax-
payer discloses an item in its return (or in
a schedule or statement attached thereto)
in a manner sufficient to apprise the Com-
missioner of the existence and nature of
the item, the three-year limitation on as-
sessment and collection described in sec-
tion 6501(a) shall apply with respect to any
tax imposed under sections 4971(a), 4972,
4973, 4974 and 4975(a), arising from any
transaction disclosed by the item. If a tax-
payer fails to so disclose an item in its re-
turn (or in a schedule or statement attached
thereto), the tax arising from any transac-
tion not so disclosed may be assessed, or a
proceeding in court for the collection of the
tax may be begun without assessment, at
any time within 6 years after the return was
filed. The applicable return for the tax un-
der sections 4971, 4972, 4973 and 4974, is
the return designated by the Commissioner
for reporting the respective tax. The appli-
cable return for the tax under section 4975
isthereturnfiledbytheplanusedtoreport
the act giving rise to the tax.
(5)Chapter 44 excise taxes. If a real
estate investment trust omits from its an-
nual return with respect to the tax imposed
by section 4981 an amount of tax properly
includible therein that is in excess of 25
percent of the amount of tax imposed by
section 4981 that is reported on the return,
the tax may be assessed, or a proceeding
in court for the collection of the tax may
be begun without assessment, at any time
within 6 years after the return was filed.
If a real estate investment trust discloses
in its return (or in a schedule or statement
attached thereto) the nature, source, and
amount of any income giving rise to any
omitted tax, the tax arising from the in-
come shall be counted as reported on the
return in computing whether the trust has
omittedmorethan25percentofthetaxre-
ported on its return.
(d)Exception. The provisions of this
section do not limit the application of sec-
tion 6501(c).
(e)Effective/applicability date—(1)In-
come taxes. The rules set forth in para-
graph (a) of this section apply to taxable
years with respect to which the period for
assessing tax was open on or after Septem-
ber 24, 2009.
(2)Estate, gift and excise taxes. Para-
graphs (b) through (d) of this section con-
tinue to apply as they did prior to being
removed inadvertently on September 28,
2009. Specifically, paragraph (b) of this
section applies to returns filed on or after
May 2, 1956, except for the amendment
to paragraph (b)(1) of this section that ap-
plies to returns filed on or after Decem-
ber 29, 1972. Paragraph (c) of this sec-
tion applies to returns filed on or after Oc-
tober 7, 1982, except for the amendment to
paragraph (c)(3)(ii) of this section that ap-
plies to returns filed on or after January 10,
2001. Paragraph (d) of this section applies
to returns filed on or after May 2, 1956.
§301.6501(e)–1T [Removed].
Par. 5. Section 301.6501(e)–1T is re-
moved.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved December 13, 2010.
Michael Mundaca,
Assistant Secretary of the
Treasury (Tax Policy).
(Filed by the Office of the Federal Register on December 14,
2010, 4:15 p.m., and published in the issue of the Federal
Register for December 17, 2010, 75 F.R. 78897)
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2011. See Rev. Rul. 2011-4, page 448.
Section 7872.—Treatment
of Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of February 2011. See Rev. Rul. 2011-4, page 448.
2011–6 I.R.B.458February 7, 2011

Part III. Administrative, Procedural, and Miscellaneous
Branded Prescription Drug
Sales
Notice 2011–9
Purpose
This notice modifies, restates, and su-
persedes Notice 2010–71, 2010–50 I.R.B.
822, which provides guidance on the an-
nual fee imposed by section 9008 of the
Affordable Care Act on certain manufac-
turers and importers (covered entities) of
branded prescription drugs. The modifica-
tions reflected in this notice affect Part I —
Information Requested from Covered En-
tities, Part II — Preliminary Fee Calcula-
tion for 2011, and Part III — Request for
Comments. All other sections of Notice
2010–71 are restated in this notice without
change.
Modifications Made to Notice 2010–71
Notice 2010–71, Part I — Informa-
tion Requested from Covered Entities,
asks covered entities to submit five gen-
eral items of information on Form 8947,
Report of Branded Prescription Drug In-
formation. The Treasury Department and
the IRS received a number of comments
on the information requested on Form
8947. In response to these comments, this
notice makes the following changes to the
section on Information Requested from
Covered Entities:
•Item 1 (controlled group). The instruc-
tions to Form 8947 provided that each
designated entity should list informa-
tion on “all” members of its controlled
group. This item is modified to clarify
that information is requested for only
those members of the controlled group
that are manufacturers and importers
with gross receipts from the sale of a
branded prescription drug(s) to a spec-
ified government program(s).
•Item 3 (orphan drugs).Notice
2010–71 provided for reporting of
each orphan drug for which a cov-
ered entity was allowed a section 45C
credit. In response to comments, this
item is modified to provide that for
purposes of section 9003(e)(3), the
credit is considered “allowed” for any
particular drug if any person claimed
the credit. Thus, the section 45C credit
is considered to be allowed if any
entity claimed the credit even if that
entity was not part of the covered en-
tity at the time the credit was claimed.
•Item 4 (Medicare Part D rebates). No-
tice 2010–71 provided for reporting
of rebates for drug sales as taken into
account on a covered entity’s tax re-
turn. Commentators indicated that
pharmaceutical manufacturers gener-
ally compile rebate information at an
aggregate entity level for tax purposes,
rather than at the drug product level.
In response to these comments, this
item is revised to provide that rebates
should be reported for drugs dispensed
in the 2009 sales year if the rebates are
paid before Form 8947 is filed.
•Item 5 (Medicaid rebates). This item
is also revised in response to the com-
ments about the difficulty of reporting
rebates as taken into account on the
covered entity’s tax return. This item
is revised to require reporting of re-
bates invoiced by states for drugs reim-
bursed by states in the 2009 sales year
and paid before Form 8947 is filed.
•Reporting of rebate information. This
notice provides that rebate information
will be taken into account in calculat-
ing a covered entity’s annual fee for
2011 only if it is reported on a timely
filed Form 8947.
Notice 2010–71, Part II — Preliminary
Fee Calculation for 2011, provides the due
date for filing Form 8947 and a time sched-
ule for notification of the preliminary fee
calculation for 2011. Commentators re-
quested additional time to file Form 8947.
In response to these comments, the due
date for filing Form 8947 is deferred to
February 11, 2011, and the remaining time
schedule for preparing the preliminary fee
calculation has been revised accordingly.
Notice 2010–71, Part III — Request for
Comments, is revised to defer the deadline
for submitting comments to June 15, 2011.
Restatement of Notice 2010–71, as
modified by this notice
This notice provides guidance on the
annual fee imposed on covered entities en-
gaged in the business of manufacturing
or importing branded prescription drugs
by section 9008 of the Patient Protection
and Affordable Care Act (ACA), Public
Law 111–148 (124 Stat. 119 (2010)), as
amended by section 1404 of the Health
Care and Education Reconciliation Act of
2010 (HCERA), Public Law 111–152 (124
Stat. 1029 (2010)). All references in this
notice to section 9008 are references to
section 9008 of the ACA, as amended by
section1404ofHCERA.
Part I of this notice describes a pro-
posed methodology for calculating the sec-
tion 9008 fee. Part II of this notice de-
scribes how the Internal Revenue Service
(IRS) will use this proposed methodol-
ogy to provide each covered entity with
a preliminary 2011 fee calculation. The
IRS and Treasury Department intend that
a covered entity’s preliminary fee calcula-
tion for 2011 will serve as a basis for com-
ments by the covered entity on the pro-
posed methodology. Part III of this notice
solicits public comments on all aspects of
the notice.
Part I — Proposed Methodology for
Calculating the Fee
Section 9008(b)(4) sets an applicable
fee amount for each year, beginning with
2011, that will be allocated among covered
entities with aggregate branded prescrip-
tion drug sales of over $5 million to spec-
ified government programs or pursuant to
coverage under such programs. Section
9008(e)(2) provides that “branded pre-
scription drug” means (i) any prescription
drug the application for which was sub-
mitted under section 505(b) of the Federal
Food, Drug, and Cosmetic Act (21 U.S.C.
355(b)), or (ii) any biological product the
license for which was submitted under
section 351(a) of the Public Health Ser-
vice Act (42 U.S.C. 262(a)). The specified
government programs are the Medicare
Part B program, the Medicare Part D pro-
gram, the Medicaid program, any program
under which branded prescription drugs
are procured by the Department of Vet-
erans Affairs, any program under which
branded prescription drugs are procured
by the Department of Defense, and the
TRICARE retail pharmacy program (col-
lectively, the Programs). The applicable
fee amount is allocated among the cov-
February 7, 20114592011–6 I.R.B.

ered entities using a formula specified in
section 9008(b) based on sales to the Pro-
grams, which sales data is to be provided
by the Centers for Medicare and Medicaid
Services of the Department of Health and
Human Services (CMS), the Department
of Veterans Affairs (VA), and the Depart-
ment of Defense (DOD) (collectively, the
Agencies).
There are two years relevant to the cal-
culation of the section 9008 fee — the cal-
endar year in which the fee must be paid
(herein referred to as the fee year) and the
calendar year of the branded prescription
drugsales,whichwillbeusedtodetermine
the amount of the fee (herein referred to as
the sales year). As discussed more fully
below, the IRS and Treasury Department
are proposing to use the second calendar
year proceeding the fee year as the sales
year for purposes of calculating the section
9008 fee. An adjustment amount will also
be calculated as discussed below.
Definition of Covered Entity
Section 9008(a) imposes the fee on each
covered entity engaged in the business of
manufacturing or importing branded pre-
scription drugs. Section 9008(d)(1) de-
fines a covered entity as “any manufac-
turer or importer with gross receipts from
branded prescription drug sales.” For pur-
poses of section 9008(a), a manufacturer
or importer is the person identified in the
Labeler Code of the National Drug Code
(NDC) for a branded prescription drug.
The NDC is an identifier assigned by the
Food and Drug Administration (FDA) to a
branded prescription drug, as well as other
drugs. The Labeler Code is the first five
numeric characters of the NDC or the first
six numeric characters when the available
five-character code combinations are ex-
hausted.
Section 9008(d)(2) provides a con-
trolled group rule under which all persons
treated as a single employer under sec-
tion 52(a), 52(b), 414(m), or 414(o) of
the Internal Revenue Code (Code) shall
be treated as a single covered entity. For
this purpose, a foreign entity subject to
tax under section 881 is included within
a controlled group under section 52(a) or
52(b). This controlled group rule will be
appliedasoftheendofthedayonDe-
cember 31 of the sales year. All persons
treated as a single employer under section
9008(d)(2) are jointlyand severally liable
for the fee. See section 9008(d)(3).
In the case of a controlled group that
is treated as a single covered entity under
section 9008(d)(2), the controlled group
must identify a single person as the “des-
ignated entity” that may act for the con-
trolled group with respect to the section
9008 fee. If the controlled group, without
regard to foreign corporations included un-
dersection9008(d)(2)(B),isalsoanaffil-
iated group that filed a consolidated return
for federal income tax purposes, the des-
ignated entity is the common parent of the
affiliated group as identified on the tax re-
turn filed for the sales year. In all other
situations, the controlled group must se-
lect a person as the designated entity on
Form 8947,Report of Branded Prescrip-
tion Drug Information
1
(discussed further
below), which is signed by the designated
entity under penalties of perjury, stating
that all the manufacturers or importers of
branded prescription drugs who are mem-
bers of the covered entity have consented
to the selection of the designated entity.
Sales Taken Into Account
Section 9008(b) provides that the an-
nual fee for each covered entity is calcu-
lated by determining the ratio of (i) the
covered entity’s branded prescription drug
sales taken into account during the pre-
ceding calendar year to (ii) the aggregate
branded prescription drug sales taken into
account for all covered entities during the
same year, and applying this ratio to the ap-
plicable amount as specified in the statute.
“Sales taken into account” means sales ex-
clusive of certain orphan drugs and af-
ter application of the percentage adjust-
ment table in section 9008(b)(2). Sec-
tion 9008(b)(1) provides that the calcula-
tion of the fee in any given year is based
onbrandedprescriptiondrugsalesinthe
immediately preceding calendar year.
Section 9008(b)(3) provides that the
Secretary of the Treasury shall determine
the amount of each covered entity’s fee.
In determining that amount, the Secre-
tarymayrelyonreportssubmittedbythe
Agencies and any other source of infor-
mation. Section 9008(i) also provides
the Secretary with regulatory authority to
carry out the purposes of the statute.
The IRS and Treasury Department have
determined that, although the DOD and
VA are expected to have complete data on
branded prescription drug sales for the cal-
endar year immediately preceding the fee
year within the time frame necessary to
administer the fee, CMS is not expected
to have comparable data because it can-
not complete its data processing within the
necessary time frame. Accordingly, the
IRS and Treasury Department will calcu-
late the fee based on the branded prescrip-
tion drug sales data provided by the Agen-
cies for the second calendar year preced-
ing the fee year. Because the use of the
second preceding year, rather than the im-
mediately preceding year, as the sales year
may affect the amount of the fee paid by
any particular covered entity, the fee due
in every year after 2011 will include an ad-
justment amount.
Adjustment Methodology
An adjustment amount will be calcu-
lated for each NDC and will be added or
subtracted, as appropriate, to the fee other-
wise payable by the covered entity respon-
siblefortheNDCinthefeeyearinwhich
the adjustment is calculated. The adjust-
ment amount added or subtracted to the
amount payable in a fee year will reflect
the difference between the fee determined
for the NDC in the immediately prior fee
year, using data from the second calen-
dar year preceding that fee year, and what
the fee for that NDC would have been for
the immediately prior fee year using data
from the calendar year immediately pre-
ceding that prior fee year. For example,
the amount due from a covered entity in
the 2012 fee year will include an adjust-
ment amount for each NDC for which the
covered entity is responsible in 2012 equal
to the difference between the 2011 fee as-
sociated with that NDC using 2009 data,
and what the 2011 fee for that NDC would
have been using 2010 data.
To calculate the adjustment amount for
an NDC, the IRS will first determine two
ratios: one based on data from the sec-
ond preceding calendar year; and the other
based on data from the third preceding cal-
endar year. In both cases, the numerator of
1
The Office of Management and Budget approved Form 8947 under control number 1545–2192.
2011–6 I.R.B.460February 7, 2011

the ratio is the sales taken into account for
the particular NDC during the relevant cal-
endar year, and the denominator of the ra-
tio is aggregate branded prescription drug
sales taken into account for all NDCs dur-
ing the relevant calendar year. For each
NDC, the IRS will then take the difference
between the ratio using second preceding
year data and the ratio using third pre-
ceding year data and multiply that amount
by the applicable amount of the fee for
the relevant fee year, as set forth in sec-
tion 9008(b)(4), to determine an adjust-
ment for the NDC. The adjustment amount
for any particular NDC will then be added
to, or subtracted from, as appropriate, the
amount of the fee otherwise payable by the
covered entity associated with the NDC
for the fee year in which the adjustment
amount is calculated.
Forexample,in2012thefeepayable
by each covered entity will consist of two
components. First, the applicable amount
for 2012 will be allocated to the covered
entities based on sales data for 2010 (i.e.,
the second preceding calendar year). Sec-
ond, an adjustment amount will be calcu-
lated in 2012 for each NDC with respect
to the 2011 fee year, by multiplying (i)
the difference between the sales ratio de-
termined using 2010 data and the sales ra-
tiodeterminedusing2009databy(ii)the
applicable amount of the fee for 2011. The
adjustment amount for each NDC will then
be added to, or subtracted from, as appro-
priate, the fee otherwise payable in 2012
by the covered entity associated with the
NDC for the 2012 fee year.
The adjustment amount is applied only
with respect to the amount of the fee oth-
erwise payable by the relevant covered en-
tity in the year in which the adjustment is
calculated, and is not a refund, credit, or
recalculation of a fee payable by any cov-
ered entity in any preceding fee year. In
any given fee year, the amount assessed by
theIRSwillbebasedondataprovidedtoit
by the Agencies. The IRS does not intend
to recalculate either the fee allocations or
the adjustment amounts based on data that
becomes available after those amounts are
assessed.
Information Requested from Covered
Entities
Annually, each covered entity should
submit a Form 8947 and provide the infor-
mation specified by the form and instruc-
tions. The designated entity for a covered
entity described in section 9008(d)(2) sub-
mits a single form for the covered entity. A
covered entity should submit a completed
Form 8947 by December 15 of each year
unless an alternative date is prescribed by
the form or instructions. The Form 8947
information is return information subject
to the confidentiality protections of sec-
tion 6103. The IRS will take into account
the rebate information in calculating a cov-
ered entity’s annual fee for 2011 only if
the rebate information is reported in accor-
dance with items 4 and 5 below on a timely
filed Form 8947. Form 8947 is available at
http://www.irs.gov.
Form 8947 solicits the following infor-
mation from each covered entity:
1. For a single-person covered en-
tity, the covered entity’s name, address,
and employer identification number. For
a covered entity described in section
9008(d)(2), the name, address, and em-
ployer identification number of the des-
ignated entity and each manufacturer or
importer with gross receipts from the sale
of branded prescription drugs to speci-
fied government programs (or sales due
to coverage under the programs) that was
included in the covered entity as of the end
of the day on December 31 of the sales
year.
Part I of Form 8947 instructions are re-
vised by this notice to provide that each
designated entity should list the name, ad-
dress, and employer identification num-
ber of itself and each manufacturer or im-
porter with gross receipts from the sale
of branded prescription drugs to specified
government programs (or sales due to cov-
erage under the programs) that was in-
cludedinthecoveredentityasoftheendof
the day on December 31 of the sales year.
2. All of the NDCs for branded pre-
scription drugs in which the covered entity
is identified in the labeler code as of the
end of the day on December 31 of the sales
year. For a covered entity described in sec-
tion 9008(d)(2), this includes all NDCs in
which a member of the covered entity is
identified in the labeler code as of the end
of the day on December 31 of the sales
year.
3. The brand name and NDC for each
orphan drug for which a credit was al-
lowed for any taxable year under section
45C of the Code. For purposes of section
9008(e)(3), the credit was “allowed” for
any particular drug if any person claimed
the credit and there has not been a final as-
sessment or a court order disallowing the
full credit taken for the drug. In addition,
even if the credit has been allowed, a cov-
ered entity must not report an NDC for an
orphan drug for any sales year following
the calendar year in which the FDA ap-
proved the drug for marketing for any indi-
cation other than the treatment of the rare
disease or condition for which the section
45C credit was allowed.
4. The rebates for each NDC paid for
the sales year by the covered entity to
Medicare Part D plans with respect to sales
occurring in that sales year. For this pur-
pose, report rebates paid for drugs dis-
pensed in the 2009 sales year if paid be-
fore Form 8947 is filed. This information
is needed for the 2009 sales year because,
at this time, CMS does not have rebate
data on branded prescription drug sales by
NDC. However, starting in 2011, CMS is
planning to collect this rebate information
by NDC for the 2010 and subsequent sales
years. It is therefore possible that covered
entities will not report this rebate informa-
tion for years following 2009.
5. The state supplemental rebates for
each NDC paid in the sales year by the
covered entity with respect to sales under
Medicaid occurring in that sales year. For
this purpose, report rebates invoiced by
states for drugs reimbursed by states in the
2009 sales year and paid before Form 8947
is filed. This information is needed be-
cause Medicaid data will not include state
supplemental rebates.
Information Provided by the Agencies
The IRS will compile a list of branded
prescription drugs by NDC using the data
submitted on Forms 8947. Appropriate
due diligence will be performed to check
for potential oversights. For example, the
IRS may use information published by the
FDA identifying drugs for which applica-
tions were submitted under section 505(b)
of the Federal Food, Drug, and Cosmetic
Act. The IRS will provide the Agencies
with the compiled list of branded prescrip-
tion drugs.
For each year in which the fee is due,
the Agencies will provide data to the IRS
on the branded prescription drug sales dur-
ing the sales year by Program and NDC.
February 7, 20114612011–6 I.R.B.

The calculation methodology for each Pro-
gram, including any reasonable estimation
techniques and assumptions that the Agen-
cies expect to use, are described below.
1.Medicare Part D. Section 9008 re-
quires CMS to report the product of the
per-unit ingredient cost reported by Part
D sponsors (net of any per-unit rebate or
other price concessions) and the number of
units for each branded prescription drug.
CMS currently collects prescription level
encounter data from Part D sponsors on the
Prescription Drug Event (PDE) records.
On the PDE records, Part D sponsors re-
port the NDC, as well as the ingredient
cost, dispensing fee, sales tax, and units.
CMS will aggregate the ingredient cost re-
ported in the “Ingredient Cost Paid” field
and the units reported in the “Quantity Dis-
pensed” field of the PDE records for Part
D covered drugs. These amounts will be
aggregated at the NDC level for each sales
year. Only PDE data that Part D spon-
sors have submitted by the PDE submis-
sion deadline (within 6 months after the
end of the sales year) and have been ap-
proved for inclusion in the Part D payment
reconciliation will be included.
2.Medicare Part B. First, for Health-
care Common Procedure Coding System
(HCPCS) codes that consist solely and ex-
clusively of branded prescription drugs (as
identified by their respective NDCs) man-
ufactured by a single entity, CMS will pro-
vide the total Medicare-allowed charges
for the HCPCS code for the appropriate
sales year.
Second, for HCPCS codes consisting
of a mixture of branded prescription drugs
made by different manufacturers or a mix-
ture of branded prescription and generic
drugs, CMS will determine: (i) the total
Medicare-allowed charges for the HCPCS
code for the appropriate sales year; (ii) the
entities engaged in manufacturing each
NDC assigned to the HCPCS code; and
(iii) those entities (if any) that are man-
ufacturing branded prescription drugs.
CMS will then: (i) estimate the amount
of Medicare-allowed charges for each
manufacturer by applying the utilization
percentage attributed to each manufacturer
as determined under the Medicare Part B
Program using manufacturer reported Av-
erage Sales Price sales data; (ii) multiply
that percentage by the Medicare-allowed
charge for that HCPCS code; and (iii) as-
sign the result to each manufacturer within
that HCPCS code.
Third, for the remainder of HCPCS
codes that consist of multiple branded pre-
scription drugs (as identified by their re-
spective NDCs) manufactured by multiple
entities that cannot be reliably calculated
using the two methods above, CMS will
determine: (i) the total Medicare-allowed
charges for the HCPCS code for the appro-
priate sales year; (ii) the entities engaged
in manufacturing each NDC assigned to
the HCPCS code; and (iii) those entities
(if any) that are manufacturing branded
prescription drugs. CMS will then: (i)
estimate the amount of Medicare-allowed
charges for each manufacturer by apply-
ing the utilization percentage attributed to
each manufacturer as determined under
the Medicare Part D Program; (ii) multiply
that percentage by the Medicare-allowed
charge for that HCPCS code; and (iii) as-
sign the result to each manufacturer within
that HCPCS code.
Thus, the amounts attributed to branded
prescription drugs within the HCPCS code
will be estimated. CMS will calculate the
sum of these components to arrive at an
estimate of Medicare Part B spending on
branded prescription drugs for each manu-
facturer.
3.Medicaid. The branded prescrip-
tion drug sales for Medicaid may be de-
termined as the per-unit Average Manufac-
turer Price less the Unit Rebate Amounts
(URA) that CMS calculates based on man-
ufacturer-reported pricing data multiplied
by the number of units reported billed by
states to manufacturers. This data would
bebasedonthedatareportedtoMedicaid
by covered entities and the states. CMS
does not currently intend to reduce this cal-
culation for state supplemental rebates.
4.Department of Veterans Affairs.VA
will provide, by NDC, the total amount
paid for each branded prescription drug
procured by the VA for its beneficiaries.
The basis of this information will be na-
tional procurement data reported by VA’s
Pharmaceutical Prime Vendor to the VA
Pharmacy Benefits Management Service
and National Acquisition Center. This
information will not include procurement
data that resides exclusively at the indi-
vidual medical treatment facility level.
5.Department of Defense.TheDOD
will provide, by Labeler Code, the man-
ufacturer’s name, the NDC, brand name,
and the amount paid (net of rebates) for
each branded prescription drug procured
by DOD. TRICARE Management Activ-
ity will provide, by Labeler Code, the man-
ufacturer’s name, the NDC, brand name,
and the amount paid (net of refunds or re-
bates) for each branded prescription drug
procured by DOD through the TRICARE
Retail Pharmacy Program.
Fee calculation
After receiving data from the Agencies
and information from the covered entities,
the IRS will calculate each covered en-
tity’s branded prescription drug sales for
each Program by NDC. A covered entity’s
branded prescription drug sales for each
Program will equal (i) the sum of all the
covered entity’s branded prescription drug
sales reported by the Program, less (ii) the
sum of all branded prescription drug sales
reported by the Program for each NDC for
which the covered entity has appropriately
claimed the orphan drug exclusion, less
(iii) the sum of rebates reported by the cov-
ered entity on Form 8947 for the sales year.
After calculating the branded prescrip-
tion drug sales for each Program, the
IRS will calculate each covered entity’s
branded prescription drug sales taken
into account for purposes of the ratio set
forth in section 9008(b)(1). A covered
entity’s branded prescription drug sales
taken into account for purposes of sec-
tion 9008(b)(1)(A) will equal the sum of
the covered entity’s branded prescription
drug sales for all Programs reduced by
the appropriate percentages set forth in
section 9008(b)(2). The IRS will then
calculate the aggregate branded prescrip-
tion drug sales of all covered entities
taken into account for purposes of section
9008(b)(1)(B), which is the sum of all the
covered entities branded prescription drug
sales taken into account for purposes of
section 9008(b)(1)(A).
To determine each covered entity’s
fee, the IRS will divide each covered
entity’s branded prescription drug sales
taken into account for purposes of section
9008(b)(1)(A) by the aggregate branded
prescription drug sales of all covered en-
tities taken into account for purposes of
section 9008(b)(1)(B) and multiply that
fraction by the applicable amount for the
appropriate year as set forth in section
9008(b)(4).
2011–6 I.R.B.462February 7, 2011

Part II — Preliminary Fee Calculation
for 2011
The IRS will use the proposed method-
ology described in Part I to provide each
covered entity with a preliminary 2011 fee
calculation. The notification of the prelim-
inary fee calculation will include the fol-
lowing: (1) the covered entity’s fee; (2) the
covered entity’s branded prescription drug
sales, by NDC, for each Program; (3) the
covered entity’s branded prescription drug
sales taken into account after application
of section 9008(a)(2); and (4) the aggre-
gatebrandedprescriptiondrugsalestaken
into account for all covered entities.
To facilitate the preliminary 2011 fee
calculation, Form 8947 should be submit-
ted to the IRS by February 11, 2011. From
the data on the Forms 8947, the IRS will
compile a list of NDCs and provide that
list to the Agencies as soon as the data has
been processed. The IRS will use the data
submitted on the Forms 8947 and the sales
data provided by the Agencies to calculate
the preliminary fee and will send to each
covered entity notification of its prelimi-
nary fee calculation by May 16, 2011.
If the IRS and Treasury Department
subsequently promulgate regulations that
modify the methodology for calculating
each covered entity’s fee, the modified
methodology will be adopted in determin-
ing the final fee amount for each covered
entity for 2011. Thus, if the methodology
changes, the amount of the final fee for
2011 may vary from the preliminary fee
calculation. The IRS will send the final
fee calculation to each covered entity by
August 15, 2011.
Part III — Request for comments
The IRS and Treasury Department
request comments on the procedures de-
scribed in this notice for consideration
when promulgating regulations setting
forth procedures for 2011 and the follow-
ing years. The deadline for submission
of comments is June 15, 2011. This
date will give covered entities the op-
portunity to consider the information
received in their preliminary fee calcu-
lation when providing comments. All
materials submitted will be available for
public inspection and copying. Written
comments should be submitted to: In-
ternal Revenue Service, CC:PA:LPD:PR
(Notice 2011–9), Room 5203, Internal
Revenue Service, PO Box 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand-delivered Mon-
day through Friday between the hours of
8a.m. and4p.m. toCC:PA:LPD:PR
(Notice 2011–9), Courier’s Desk, Internal
Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC. Comments
may be transmitted electronically
via the following e-mail address:
Notice.Comments@irscounsel.treas.gov.
Please include “Notice 2011–9” in
the subject line of any electronic
communications.
Effect on Ot
her Documents
Notice 2010–71 is modified and super-
seded.
Drafting Information
The principal author of this notice is
CeliaA.GabryshoftheOfficeofAs-
sociate Chief Counsel (Passthroughs &
Special Industries). For further infor-
mation regarding this notice, contact
Celia A. Gabrysh at (202) 622–3130 (not
a toll-free call). For further information
regarding Form 8947, contact Lou Milano
at (908) 301–2118 (not a toll-free call).
Biodiesel and Alternative
Fuels; Claims for 2010;
Excise Tax
Notice 2011–10
Section 1. PURPOSE
This notice provides rules under which
taxpayers may make a one-time claim for
payment of the credits and payments al-
lowable under §§ 6426 and 6427 of the In-
ternal Revenue Code (Code) for biodiesel
(including renewable diesel) mixtures, al-
ternative fuels, and alternative fuel mix-
tures sold or used during calendar year
2010 (collectively, 2010 biodiesel and al-
ternative fuel incentives). These rules are
prescribed under §§ 701(c) (biodiesel) and
704(c) (alternative fuel) of the Tax Re-
lief, Unemployment Insurance Reautho-
rization, and Job Creation Act of 2010
(Act) (Pub. L. 111–312).
Section 2. BACKGROUND
Sections 6426(a)and (c) allow a
blender of a biodiesel (including re-
newable diesel) mixture to claim a
$1.00-per-gallon credit against its tax li-
ability under § 4081 (relating to the tax
imposed on taxable fuel). The blender
may claim any excess as a payment under
§ 6427(e) or as a refundable income tax
credit under § 34. Similar rules apply
to blenders of alternative fuel mixtures
(§ 6426(e)) and to persons that sell or
use alternative fuel as a fuel in a motor
vehicle or a motorboat and in aviation
(§ 6426(d)), except that the credit amount
is $0.50 per gallon and the credit for alter-
native fuel is taken against the claimant’s
tax liability under § 4041 (relating to the
tax imposed on diesel fuel and alternative
fuel). As an alternative to the payments
and credits allowed under §§ 6426, 6427,
and 34, a blender of a biodiesel (including
renewable diesel) mixture may claim a
nonrefundable income tax credit under
§ 40A (see Section 3 of this notice for
additional information).
The Code provisions that authorize
these credits and payments expired for
sales and uses after December 31, 2009,
but were reinstated by the Act for sales
and uses during 2010 and 2011. Sections
701(c) and 704(c) of the Act direct the
Secretary of the Treasury (Secretary) to
issue guidance providing for a one-time
submission of claims under §§ 6426 and
6427 covering periods during 2010. The
Act requires the guidance to provide for
a 180-day period for the submission of
claims (in such manner as prescribed by
the Secretary) to begin not later than 30
days after the guidance is issued.
Section 3. SCOPE
This notice provides the only method
for claiming 2010 biodiesel and alterna-
tive fuel incentives. The Internal Revenue
Service (IRS) will neither process nor pay
claims for 2010 biodiesel and alternative
fuel incentives submitted by any method,
or on any form, that is not described in this
notice. Thus, the IRS will neither process
nor pay 2010 biodiesel and alternative
fuel incentive claims that are submitted
on Form 720,Quarterly Federal Excise
Tax Return. In addition, claimants that
filed “protective” or anticipatory claims
February 7, 20114632011–6 I.R.B.

during 2010 for biofuel and alternative
fuel incentives covered by this notice must
refile their claims pursuant to the proce-
dures provided in this notice. The IRS
will neither process nor pay protective or
anticipatory claims previously filed with
the IRS.
Except as provided by this notice,
the rules in Notice 2005–4, 2005–1 C.B.
289 (as modified by Notice 2005–62,
2005–2 C.B. 443), and Notice 2006–92,
2006–2 C.B. 774, apply to claims for
2010 biodiesel and alternative fuel in-
centives. However, § 704(b) of the Act
modifies the definition of alternative fuel
under § 6426(d)(2) to exclude any fuel
(including lignin, wood residues, or spent
pulping liquors) derived from the pro-
duction of paper or pulp. Thus, black
liquor, a byproduct of the paper milling
process in kraft mills, is not eligible for
credits and payments related to the sale
or use of alternative fuel mixtures after
December 31, 2009.
This notice does not affect 2010 claims
for the alcohol fuel mixture credit under
§ 6426(b) or the alcohol fuel mixture pay-
ment under § 6427(e). Taxpayers should
continue to submit these claims separately
on, and in accordance with, the appropri-
ate form and form instructions for those
claims.
The credit for liquefied hydrogen did
not expire at the end of 2009, and claims
relating to liquefied hydrogen sold or used
during 2010 may be submitted by the
method prescribed in this notice (if the
credit was not previously claimed) or by
any method that was permitted for claims
relating to liquefied hydrogen sold or used
before calendar year 2010.
This notice does not affect 2010 claims
for the nonrefundable income tax credit
under § 40A(b)(1) for biodiesel (includ-
ing renewable diesel) mixtures, under
§ 40A(b)(2) for biodiesel (including re-
newable diesel), or under § 40A(b)(4) for
the small agri-biodiesel producer credit.
Taxpayers should continue to submit these
claims separately on, and in accordance
with, Form 8864,Biodiesel and Renew-
able Diesel Fuels Credit. A taxpayer must
submit Form 8864 with its income tax
return in accordance with the instructions
to its income tax return form. Taxpayers
are reminded that under § 40A(c), credits
allowable under § 40A must be reduced
to the extent that any benefit is claimed
under §§ 6426 and 6427 with respect to
the same biodiesel (including renewable
diesel).
Similarly, this notice does not affect
2010 claims for the refundable income tax
credit under § 34 for biodiesel mixtures, al-
ternative fuel, or alternative fuel mixtures.
Taxpayers should continue to submit these
claims separately on, and in accordance
with, Form 4136,Credit for Federal Tax
Paid on Fuels. A taxpayer must submit
Form 4136 with its income tax return in
accordance with the instructions to its in-
come tax return form. Taxpayers are re-
minded that under § 34(b), credits are not
allowed under § 34 for any amount prop-
erly payable under § 6427 and claimed in
a timely filed claim. For this purpose, the
IRS will treat as timely filed any claim sub-
mitted for amounts payable under § 6427
that conforms to the rules provided in this
notice.
Section 4. HOW TO MAKE A CLAIM
FOR PAYMENT OF CREDITS AND
PAYMENTS ALLOWABLE UNDER
§§ 6426 AND 6427
Claimants must follow the procedures
listed below to make a claim under this
notice for payment of credits and payments
allowable under §§ 6426 and 6427.
•Claimants must submit claims for 2010
biodiesel and alternative fuel incen-
tives on Form 8849,Claim for Refund
of Excise Taxes.
•Claimants must include Schedule 3
(Form 8849),Certain Fuel Mixtures
and the Alternative Fuel Credit,with
their submission and enter amounts
for 2010 biodiesel and alternative fuel
incentives on Line 2 and Line 3 of
Schedule 3, as appropriate.
•Claimants must follow the instructions
to Form 8849 and Schedule 3 when
preparing their submission to the ex-
tent that those instructions do not con-
flict with this notice.
•Each claimant must claim all 2010
biodiesel and alternative fuel incen-
tives on a single Form 8849; the IRS
will not process multiple submissions
from a single claimant. Therefore, a
claimant’s single submission should
encompass all 2010biodiesel and al-
ternative fuel incentives for which the
claimant is eligible.
•Each claimant must mail its submis-
sion to the address listed for Sched-
ule 3 in the instructions to Form 8849
underWhere To File. Alternatively,
claimants may electronically file Form
8849 and Schedule 3 through any elec-
tronic return originator, transmitter, or
intermediate service provider partici-
pating in the IRSe-fileprogram for ex-
cise taxes.
•Claimants are reminded that they must
be registered by the IRS in order to
make alternative fuel and alternative
fuel mixture claims under §§ 6426(d),
6426(e), and 6427(e). Claimants that
are not already registered by the IRS
may apply to the IRS for registration
by filing Form 637,Application for
Registration (For Certain Excise Tax
Activities), in accordance with the in-
structions to Form 637.
Section 5. CLAIM PERIOD AND DUE
DATE
Although a claimant may submit
its claim under this notice as early as
January 14, 2011, the 180-day claim
period for 2010 biodiesel and alternative
fuel incentives begins on February 2,
2011. The IRS will deem any claim that is
submitted by the method prescribed in this
notice before February 2, 2011, as filed
on February 2, 2011. Consequently, all
claims for 2010 biodiesel and alternative
fuel incentives must be filed on or before
August 1, 2011. The IRS will not process
claims filed after that date. If the IRS does
not pay a 2010 biodiesel and alternative
fuel incentives claim that conforms to
this notice within 60 days after the claim
is received, the IRS will pay the claim
with interest from the claim filing date
(February 2, 2011, in the case of claims
submitted before that date) using the
overpayment rate and method provided by
§ 6621 of the Code.
Section 6. DRAFTING INFORMATION
The principal author of this notice
is Michael H. Beker of the Office of
Associate Chief Counsel (Passthroughs
2011–6 I.R.B.464February 7, 2011

& Special Industries). For further in-
formation regarding this notice, contact
Michael H. Beker at (202) 622–3130 (not
a toll-free call).
Qualified Zone Academy Bond
Allocations for 2011
Rev. Proc. 2011–19
SECTION 1. PURPOSE
This revenue procedure sets forth the
maximum face amount of Qualified Zone
Academy Bonds (“QZABs”) that may be
issued for each State for the calendar year
2011 under § 54E(c)(2) of the Internal
Revenue Code. Under § 54A(e)(3), the
term State includes the District of Co-
lumbia and any possession of the United
States.
SECTION 2. BACKGROUND
.01 INTRODUCTION
Section 313 of the Tax Extenders and
Alternative Minimum Tax Relief Act of
2008, Div. C of Pub. L. No. 110–343,
122 Stat. 3765 (2008) (“Act”) added new
§ 54E, which provides revised program
provisions for QZABs in lieu of the ex-
isting provisions under §1397E, effective
for obligations issued after October 3,
2008. The Act amended § 54A(d)(1) to
provide that the term qualified tax credit
bond (“QTCB”) means, in part, a qual-
ified zone academy bond which is part
of an issue that meets the requirements
of §§ 54A(d)(2), (3), (4), (5), and (6) re-
garding expenditures of bond proceeds,
information reporting, arbitrage, matu-
rity limitations, and prohibitions against
financial conflicts of interest. The Act
also amended § 54A(d)(2)(C) to provide
that, for purposes of § 54A(d)(2), the term
“qualified purpose” for a QZAB means
a purpose specifiedin§54E(a)(1),de-
scribed below.
The Act added § 54E(c)(1) to provide
a national zone academy bond limitation
authorization for QZABs of $400 million
for each of calendar years 2008 and 2009.
Section 1522 of Title I of Division B of the
American Recovery and Reinvestment Act
of 2009, Pub. L. No. 111–5, 123 Stat. 115
(2009) (“2009 Act”) amended § 54E(c)(1)
to provide an increased national zone
academy bond limitation authorization for
QZABs of $1.4 billion for each of cal-
endar years 2009 and 2010. Section 758
of the Tax Relief, Unemployment Insur-
ance Reauthorization, and Job Creation
Act of 2010, Public L. No. 111–312, 124
Stat. 3296 (2010) (“2010 Act”) further
amended § 54E(c)(1) to provide an autho-
rization for QZABs of $400 million for
calendar year 2011.
.02 QUALIFIED ZONE ACADEMY
BOND UNDER § 54E
Section 54E(d) defines “qualified zone
academy” as any public school (or aca-
demic program within a public school)
which is established by and operated un-
der the supervision of an eligible local
education agency to provide education
or training below thepostsecondary level
provided: (A) the public school or pro-
gram is designed in cooperation with
business to enhance the academic curricu-
lum, increase graduation and employment
rates and prepare students for college and
the workforce; (B) students will be sub-
ject to the same academic standards and
assessments as other students educated
by the eligible local education agency;
(C) the comprehensive education plan is
approved by the eligible local education
agency; and (D)(i)such public school
is located in an empowerment zone or
enterprise communityincluding such des-
ignated after October 3, 2008; or (ii) there
is a reasonable expectation (as of the date
of bond issuance) that at least 35 percent
of the students will be eligible for free
or reduced cost lunches under the school
lunch program established under the Na-
tional School Lunch Act.
Section 54E(a) provides that a “quali-
fied zone academy bond” or QZAB means
anybondissuedaspartofanissueif:(1)
100 percent of the available project pro-
ceeds of such issue are to be used for a
qualified purpose with respect to a quali-
fied zone academy established by an eli-
gible local education agency; (2) the bond
is issued by a State or local government
within the jurisdiction of which such acad-
emy is located, and (3) the issuer: (A) des-
ignates such bond for purposes of this sec-
tion; (B) certifies that it has written assur-
ances that the private business contribution
requirement of § 54E(b) will be met; and,
(C) certifies that it has the written approval
of the eligible local education agency for
such bond issuance.
Section 54E(d)(3) provides that a qual-
ified purpose with respect to each acad-
emy means: (A) rehabilitating or repair-
ing the public school facility; (B) provid-
ing equipment; (C) developing course ma-
terials; and, (D) training teachers and other
school personnel. The private business
contribution requirement of § 54E(b) is
met if the eligible local education agency
that established the qualified zone acad-
emy has written commitments from pri-
vate entities to make qualified contribu-
tions having a present value (as of the date
of issuance of the issue) of not less than
10 percent of the proceeds of the issue.
Section 54E(d)(4) defines “qualified con-
tributions” as any contribution (of a type
and quality acceptable to the eligible lo-
cal education agency) of: (A) equipment
for use in the qualified zone academy (in-
cluding state-of-the-art technology and vo-
cational equipment);(B) technical assis-
tance in developing curriculum or in train-
ing teachers to promote appropriate market
driven technology in the classroom; (C)
employees’ services as volunteer mentors;
(D) internships, field trips, or other educa-
tional opportunities outside the academy;
or (E) any other property or service speci-
fied by the eligible education agency. Sec-
tion 54E(d)(2) defines “eligible local ed-
ucation agency” as any local educational
agency as defined in § 9101 of the Elemen-
tary and Secondary Education Act of 1965.
Section 54E(c)(2) provides that the
Department of the Treasury shall allocate
the national zone academy bond limitation
among the States on the basis of their re-
spective populations of individuals below
the poverty line (as defined by the Office
of Management and Budget). The limi-
tation amount allocated to a State under
the preceding sentence shall be allocated
by the State education agency to qualified
zone academies within such State.
Under § 54E(c)(3), the maximum ag-
gregate face amount of bonds issued
during any calendar year which may be
designated as QZABs with respect to any
qualified zone academy shall not exceed
the limitation amount allocated to such
academy for such calendar year. However,
under § 54E(c)(4)(A), if for any calendar
year the limitation amount for any State
February 7, 20114652011–6 I.R.B.

exceeds the amount of bonds issued during
such year which are designated QZABs
with respect to qualified zone academies
within such State, the limitation amount
for such State for the following calendar
year shall be increased by the amount
of such excess. Under § 54E(c)(4)(B),
however, any carryforward of a limitation
amount may be carried only to the first
2 years following the unused limitation
year. For these purposes, the limitation
amount shall be treated as used on a first-in
first-out basis.
Sections 1.1397–1 (the “Final Regula-
tions”) and 1.1397–1T (the “Temporary
Regulations”) set forth regulations that
were issued under § 1397E. For other
guidance concerning the applicability of
the regulations issued under § 1397E, the
credit rate, and the sinking fund yield see
Notice 2009–15, 2009–6 I.R.B. 449, No-
tice 2009–30, 2009–16 I.R.B. 852, and
Notice 2010–22, 2010–10 I.R.B. 435.
SECTION 3. NATIONAL ZONE
ACADEMY BOND LIMITATION
FOR 2011
The national limitation for QZABs is-
sued under § 54E for calendar year 2011
is $400 million. This amount is allocated
among the States as follows:
Qualified Zone Academy Bond Allocations by State or Territory, 2011
State or TerritoryQZAB Allocation (in dollars)
Alabama
$7,194,000
Alaska
$553,000
Arizona
$9,521,000
Arkansas
$4,637,000
California
$45,855,000
Colorado
$5,527,000
Connecticut
$2,841,000
Delaware
$861,000
DC
$898,000
Florida
$24,235,000
Georgia
$14,161,000
Hawaii
$1,178,000
Idaho
$1,943,000
Illinois
$14,932,000
Indiana
$8,001,000
Iowa
$3,058,000
Kansas
$3,213,000
Kentucky
$6,896,000
Louisiana
$6,870,000
Maine
$1,443,000
Maryland
$4,549,000
Massachusetts
$5,883,000
Michigan
$13,987,000
Minnesota
$4,986,000
Mississippi
$5,543,000
Missouri
$7,597,000
Montana
$1,271,000
Nebraska
$1,897,000
Nevada
$2,892,000
New Hampshire
$990,000
New Jersey
$7,132,000
New Mexico
$3,208,000
New York
$24,194,000
North Carolina
$13,178,000
North Dakota
$651,000
Ohio
$15,181,000
Oklahoma
$5,143,000
Oregon
$4,796,000
Pennsylvania
$13,556,000
Rhode Island
$1,093,000
South Carolina
$6,730,000
South Dakota
$990,000
Tennessee
$9,431,000
Texas
$37,014,000
Utah
$2,872,000
Vermont
$618,000
Virginia
$7,197,000
2011–6 I.R.B.466February 7, 2011

Qualified Zone Academy Bond Allocations by State or Territory, 2011
State or TerritoryQZAB Allocation (in dollars)
Washington
$7,176,000
West Virginia
$2,824,000
Wisconsin
$6,102,000
Wyoming
$482,000
American Samoa
$358,000
Guam
$366,000
Northern Mariana Islands
$212,000
Puerto Rico
$15,765,000
Virgin Islands
$319,000
Total Allocation
$400,000,000
SECTION 4. EFFECTIVE DATE OF
NATIONAL ZONE ACADEMY BOND
LIMITATIONS
The national limitation allocated in sec-
tion3iseffectiveforQZABsissuedonor
after January 1, 2011.
SECTION 5. DRAFTING
INFORMATION
The principal authors of this revenue
procedure are Timothy L. Jones and
David E. White of the Office of Associate
Chief Counsel (Financial Institutions
and Products). For further information
regarding this revenue procedure, contact
David E. White or Timothy L. Jones at
(202) 622–3980 (not a toll-free call).
February 7, 20114672011–6 I.R.B.

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking
Sales-Based R
oyalties and
Vendor Allowa
nces
REG–149335–08
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations relating to the capi-
talization and allocation of royalties that
are incurred only upon the sale of prop-
erty produced or property acquired for
resale (sales-based royalties). This docu-
ment also contains proposed regulations
on adjusting the cost of merchandise in-
ventory for an allowance, discount, or
price rebate based on merchandise sales
(sales-based vendor allowances). The reg-
ulations modify the simplified production
method and the simplified resale method
of allocating capitalized costs between
ending inventory and cost of goods sold.
The regulations affect taxpayers that in-
cur capitalizable sales-based royalties and
earn sales-based vendor allowances.
DATES: Written or electronic comments
and a request for a public hearing must be
received by March 17, 2011.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–149335–08),
room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may
be hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to: CC:PA:LPD:PR (REG–149335–08),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers
may submit comments electronically
viatheFederaleRulemaking
Portal atwww.regulations.gov(IRS
REG–149335–08).
FO
R FURTHER INFORMATION
C
ONTACT: Concerning the proposed
r
egulations, John Roman Faron, (202)
622–4930 (not
a toll-free number); con-
cerning submi
ssion of comments or a
request for a p
ublic hearing, Richard Hurst
atRichard.A.
Hurst@irscounsel.treas.gov.
SUPPLEMENTAR
Y INFORMATION:
Background
This documen
t contains proposed
amendments t
o26CFRpart1relatingto
the allocati
on under section 263A of the
Internal Re
venue Code (Code) of certain
sales-base
d royalties. Sales-based roy-
alties are r
oyalty costs that become due
only upon th
e sale of property. Thus, the
fact of the
liability arises, and the royalty
is incurre
d within the meaning of section
461, only u
pon sale.
This docum
ent also contains proposed
amendment
sto26CFRpart1relatingto
the determ
ination of cost of goods in in-
ventory u
nder section 471 when a tax-
payer rec
eives a sales-based vendor al-
lowance.
Sales-based vendor allowances
are allow
ances, discounts, or price rebates
that a res
eller receives, earns, or otherwise
becomes
entitled to based on the resale of
avendor
’s merchandise to a third party.
Capital
ization and Allocation of
Sales-B
ased Royalties Under Section
263A
Sectio
n 263A requires taxpayers to
capita
lize the direct costs and indirect
costs t
hat are properly allocable to (1) real
or tang
ible personal property the taxpayer
produc
es, and (2) real property or personal
prope
rty described in section 1221(a)(1)
that t
he taxpayer acquires for resale. Tax-
payer
s must allocate costs required to be
capit
alized under section 263A to property
produ
ced or acquired for resale during
the t
axable year using acost allocation
meth
od described in the regulations. A
taxp
ayer generally determines whether the
cost
of goods is included in cost of goods
sold
or in ending inventory using a cost
flo
w assumption (for example, first-in,
fir
st-out or last-in, first-out). However, as
exp
lained later in this preamble, a taxpayer
may
use a simplified method to allocate
cos
ts required to be capitalized under sec-
tio
n 263A between cost of goods sold and
en
ding inventory.
Section 1.263
A–1(e)(3)(i) defines indi-
rect costs as a
ll costs other than direct ma-
terial costs a
nd direct labor costs (in the
case of proper
ty produced) or acquisition
costs (in the c
ase of property acquired for
resale). Ind
irect costs are properly alloca-
ble to proper
ty produced or acquired for re-
sale when the
costs directly benefit or are
incurred by r
eason of the performance of
production
or resale activities.
Section 1.26
3A–1(e)(3)(ii) provides a
non-exclus
ive list of indirect costs that
must be capi
talized to the extent they are
properly al
locable to property produced
or property
acquired for resale. These
costs incl
ude licensing and franchise costs
incurred i
n securing the contractual right
touseatra
demark, corporate plan, man-
ufacturin
g procedure, special recipe, or
other simi
lar right associated with prop-
erty prod
uced or property acquired for
resale. S
ection 1.263A–1(e)(3)(ii)(U).
Thus, roy
alty costs, including sales-based
royalty c
osts, incurred in securing the con-
tractua
l right to use a trademark, corporate
plan, ma
nufacturing procedure, special
recipe,
or other similar right associated
with pro
perty produced or property ac-
quired f
or resale, are indirect costs that
are pro
perly allocable to the property pro-
duced o
r acquired for resale to the extent
the cos
ts directly benefit or are incurred by
reason
of production or resale activities.
See,fo
rexample,Plastic Engineering &
Techn
ical Services, Inc. v. Commissioner,
TC Mem
o. 2001–324;but see Robinson
Knife
Manufacturing Company, Inc. v.
Commi
ssioner, No. 09–1496–ag, 2010
WL 986
532 (2d Cir. March 19, 2010).
Secti
on 1.263A–1(f) provides various
“fact
s-and-circumstances” cost allocation
meth
ods that taxpayers may use to allocate
dire
ct and indirect costs to units of prop-
erty
produced or acquired for resale. The
fact
s-and-circumstances methods allocate
cost
s based on a relationship between the
cos
ts incurred and the units of property
pro
duced or acquired for resale.
In l
ieu of a facts-and-circumstances
all
ocation method, taxpayers may use
the
simplified methods provided in
§1.
263A–2(b) (the simplified production
met
hod) or §1.263A–3(d) (the simplified
res
ale method) to allocate costs to eligible
pr
operty produced or eligible property
2011–6 I.R.B.468February 7, 2011

acquired for resale. The simplified meth-
ods differ from facts-and-circumstances
methods in that they allocate a pool of cap-
italizable costs (additional section 263A
costs) between ending inventory and cost
of goods sold using a defined ratio rather
than allocating specific costs to particular
goods. Additional section 263A costs are
defined in §1.263A–1(d)(3) as the costs,
other than interest, that were not capi-
talized under the taxpayer’s method of
accounting immediately prior to the ef-
fective date of section 263A, but that are
required to be capitalized under section
263A. Under the simplified methods, tax-
payers allocate additional section 263A
costs between ending inventory and cost
of goods sold using a formula that includes
all additional section 263A costs incurred
during the taxable year (including capital-
izable sales-based royalties, if any).
Section 471 Inventory Rules Related to
Sales-Based Vendor Allowances
Section 471 provides that inventories
must be taken on the basis the Secretary
prescribes as conforming to the best ac-
counting practice in the trade or business
and as most clearly reflecting income.
Section 1.471–2(c) permits merchants
and manufacturers to value inventories
at either (1) cost, or (2) cost or market,
whichever is lower. Under §1.471–3(b),
the cost of merchandise purchased by tax-
payers in general is the invoice price less
trade or other discounts.
Section 1.471–8 allows a retail mer-
chant to use the retail inventory method to
arrive at an approximate cost of goods in
ending inventory. This cost is determined
by multiplying the aggregate selling prices
of the goods in ending inventory by the
ratio of (1) the cost of the goods in be-
ginning inventory plus the cost of goods
purchased during the year, to (2) the re-
tail selling prices of the goods in beginning
inventory plus the retail selling prices of
inventory purchased during the year, with
proper adjustments to the selling prices for
mark-ups and mark-downs. However, re-
tail selling prices arenot adjusted for tem-
porary mark-downs. Rev. Rul. 79–115,
1979–1 C.B. 185, see §601.601(d)(2).
Explanation of Provisions
1.Capitalization and Allocation of
Sales-Based Royalties Under Section
263A
The proposed regulations clarify that
sales-based royalties, like other royalties,
may be capitalizable to property a taxpayer
produces or acquires for resale, but also
provide that sales-based royalties required
to be capitalized are allocable only to prop-
erty that a taxpayer has sold.
InRobinson Knife, the Court of Ap-
peals for the Second Circuit held that
royalties for the right to use certain trade-
marksinmanufacturingkitchentoolswere
not allocable to the property produced
because the taxpayer’s royalty payments
were calculated as a percentage of net sales
and were incurred only on the sale of the
product. The court stated that the royalty
costs were not incurred by reason of and
did not directly benefit the performance of
production activities, and therefore were
not capitalizable under the section 263A
regulations. The court reasoned that, al-
though the licensing agreements may have
directly benefited or been incurred by
reason of production activities, the regula-
tions did not require the capitalization of
the royalty costs because thecosts them-
selvesdid not directly benefit and were
not incurred by reason of the performance
of production activities.
The proposed regulations are consistent
with the court’s conclusion that, because
of their relationship to sales, sales-based
royalties inherently should not be capital-
ized to ending inventory. Because sales-
based royalties are not incurred (within the
meaning of section 461) until a unit of
property is sold, sales-based royalties are
more directly related to units of property
sold during the taxable year than to un-
sold units. Therefore, the proposed regula-
tions provide that capitalizable sales-based
royalties are properly allocable to units of
property produced oracquired for resale
that are sold, or deemed sold, during the
taxable year.
However,Robinson Knifemisconstrued
the nature of costs required to be capital-
ized. Royalties are thecostsassociated
with the right to use intellectual property
such as copyrighted works or patented in-
ventions. If the use of those rights directly
benefits or is incurred by reason of pro-
duction activities, then the cost of securing
those rights do as well. The fact that the
amount of sales-based royalties is deter-
mined by reference to the number of units
of property a taxpayer sells or is calculated
as a percentage of revenue from the sale
of inventory affects when a taxpayer in-
curs (within the meaning of section 461)
that amount, but does not change an oth-
erwise capitalizable production or resale
cost into a non-capitalizable cost. There-
fore, the proposed regulations also clar-
ify that an indirect cost may directly ben-
efit or be incurred by reason of the per-
formance of production or resale activities
even if the costs are incurred only upon
the sale of inventory. Sales-based royal-
ties, like other costs that directly benefit
or are incurred by reason of production or
resale activities, are capitalizable licensing
and franchise costs within the meaning of
§1.263A–1(e)(3)(ii)(U).
The proposed regulations achieve a
similarresulttothatinRobinson Knife,but
rather than determining that sales-based
royalty costs are inherently non-capital-
izable, the proposed regulations provide
that otherwise capitalizable sales-based
royalty costs are properly allocable to
property sold during the taxable year.
2.Sales-Based Vendor Allowances
Under §1.471–3(b), the cost of mer-
chandise a taxpayer purchases generally is
the invoice price less trade or other dis-
counts. A sales-based vendor allowance is
an allowance, discount, or price rebate a
taxpayer earns as a result of selling a ven-
dor’s merchandise, typically at a temporar-
ily reduced price. The taxpayer’s right to
receive the sales-based vendor allowance
depends on actual sales of the vendor’s
products. The amount received directly re-
lates to the specific merchandise the tax-
payer sells and properly is treated as a re-
duction in the cost of that merchandise.
Therefore, the proposed regulations clarify
that a sales-based vendor allowance is an
adjustment to the cost of the merchandise
sold or deemed sold under the taxpayer’s
cost flow assumption.
3.Adjusting the Cost of Goods Sold and
Goods in Ending Inventory
Sales-based royalties and sales-based
vendor allowances are properly alloca-
ble to property sold during the taxable
February 7, 20114692011–6 I.R.B.

year. Therefore, it is inappropriate to
treat sales-based royalties and sales-based
vendor allowances as adjustments to
the cost of goods in ending inventory.
The proposed regulations provide that
sales-based royalties and sales-based ven-
dor allowances are allocable to the units
of property sold or deemed sold under the
taxpayer’s cost flow assumption and are
not included in determining the inventory
cost or value of goods on hand at the end
of the taxable year under any inventory
method.
Because the proposed regulations ex-
pressly allocate sales-based royalties and
sales-based vendor allowances to property
that has been sold or deemed sold, the
proposed regulations revise the simplified
production and simplified resale methods
to remove costs such as capitalizable sales-
based royalties and cost reductions such
as sales-based vendor allowances, which
are properly allocable to property that has
been sold, from the formulas used to allo-
cate additional section 263A costs to end-
ing inventory. Taxpayers must continue
to include capitalizable sales-based royalty
costs in both the numerator and denomina-
tor of the production cost allocation ratio
under §1.263A–1(h)(5) for purposes of de-
termining capitalized mixed service costs
under the simplified service cost method.
The proposed regulations do not mod-
ify the retail inventory method under
§1.471–8 specifically. Section 1.471–3
and section 263A determine the cost of
purchases for purposes of the retail inven-
tory method, and the proposed regulations
under §§1.263A–1 and 1.471–3 preclude a
taxpayer from including sales-based roy-
alties and sales-based vendor allowances
in the cost of goods in the fraction used to
determine the value of ending inventory
under §1.471–8. Similarly, if the selling
price markdown in a sales-based vendor
allowance arrangement is temporary, the
retail selling price component of the frac-
tion is not adjusted.
Effective/Applicability Date
These regulations are proposed to apply
for taxable years ending on or after the
date the regulations are published as final
regulations in theFederal Register.
Special Analyses
This notice of proposed rulemaking is
not a significant regulatory action as de-
fined in Executive Order 12866. There-
fore, a regulatory assessment is not re-
quired. It also has been determined that
section553(b)oftheAdministrativePro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations. Because the
regulations do not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Code, this notice of proposed rule-
making has been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments that
are submitted timely to the IRS. Comments
may be submitted electronically or via a
signed original with eight (8) copies. The
IRS and the Treasury Department request
comments on the clarity of the proposed
rules and how they can be made easier to
understand. All comments will be avail-
able for public inspection and copying.
A public hearing will be scheduled if
requested in writing by any person that
timely submits comments. If a public hear-
ing is scheduled, notice of the date, time,
and place for the hearing will be published
in theFederal Register.
Drafting Information
The principal author of these regula-
tions is John Roman Faron of the Office of
the Associate Chief Counsel (Income Tax
and Accounting). However, other person-
nel from the IRS and Treasury Department
participated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section1.263A–1alsoissuedunder
26 U.S.C. 263A.
Section1.263A–2alsoissuedunder
26 U.S.C. 263A.
Section1.263A–3alsoissuedunder
26 U.S.C. 263A. * * *
Section 1.471–3 also issued under
26 U.S.C. 471. * * *
Par.2.Section 1.263A–0 is
amended by adding new entries for
§§1.263A–1(c)(5),1.263A–1(k),
1.263A–1(l),1.263A–2(b)(3)(ii)(C),
1.263A–2(e),1.263A–2(f),
1.263A–3(d)(3)(i)(C)(3),and
1.263A–3(f) and revising the entry for
§§1.263A–1(e)(3)(ii) in the table of
contents to read as follows:
§1.263A–0 Outline of regulations under
section 263A.
*****
§1.263A–1 Uniform Capitalization of
Costs.
*****
(c) * * *
(5) Costs allocable only to sold prop-
erty.
*****
(e) * * *
(3) * * *
(ii) Types of indirect costs required to
be capitalized.
*****
(k) Change in method of accounting.
(1) In general.
(2) Scope limitations.
(3) Audit protection.
(4) Section 481(a) adjustment.
(5) Time for requesting change.
(l) Effective/applicability date.
§1.263A–2 Rules Relating to Property
Produced by the Taxpayer.
*****
(b) * * *
(3) * * *
(ii) * * *
2011–6 I.R.B.470February 7, 2011

(C) Costs allocable only to sold prop-
erty.
*****
(e) Change in method of accounting.
(1) In general.
(2) Scope limitations.
(3) Audit protection.
(4) Section 481(a) adjustment.
(5) Time for requesting change.
(f) Effective/applicability date.
§1.263A–3 Rules Relating to Property
Acquired for Resale.
*****
(d) * * *
(3) * * *
(i) * * *
(C)***
(3) Costs allocable only to sold prop-
erty.
*****
(f) Effective/applicability date.
*****
Par. 3. Section 1.263A–1 is amended
by:
1. Adding a new paragraph (c)(5).
2. Revising paragraph (e)(3)(i).
3. Revising the introductory text of
paragraph (e)(3)(ii).
3.Redesignating paragraph
(e)(3)(ii)(U) as paragraph (e)(3)(ii)(U)(1)
and adding a sentence to the end
ofnewly-designatedparagraph
(e)(3)(ii)(U)(1).
4.Adding a new paragraph
(e)(3)(ii)(U)(2).
5. Revising paragraph (l).
The additions and revisions read as fol-
lows:
§1.263A–1 Uniform capitalization of
costs.
*****
(c) * * *
(5)Costs allocable only to sold prop-
erty. Any cost that is required under this
section, §1.263A–2, or §1.263A–3, to be
allocated only to property sold, or deemed
to be sold under the inventory cost flow as-
sumption (such as first-in, first-out, last-in,
first-out, or a specific-goods method) the
taxpayer uses to identify the costs in end-
ing inventory, must be included in cost of
goods sold and is not included in determin-
ing the inventory cost or value of goods on
hand at the end of the taxable year.
*****
(e) * * *
(3) * * *
(i)In general.(A) Indirect costs are
defined as all costs other than direct ma-
terial costs and direct labor costs (in the
case of property produced) or acquisition
costs (in the case of property acquired for
resale). Taxpayers subject to section 263A
must capitalize all indirect costs properly
allocable to property produced or prop-
erty acquired for resale. Indirect costs are
properly allocable toproperty produced or
property acquired for resale when the costs
directly benefit or are incurred by reason
of the performance of production or resale
activities. Indirect costs may directly ben-
efit or be incurred by reason of the per-
formance of production or resale activities
even if the costs are calculated as a per-
centage of sales revenue from inventory
or are incurred only upon the sale of in-
ventory. Indirect costs may be allocable
to both production and resale activities, as
well as to other activities that are not sub-
ject to section 263A. Taxpayers must make
a reasonable allocation of indirect costs be-
tween production, resale, and other activi-
ties.
(B)Example. The following example
illustrates the provisions of this paragraph
(e)(3)(i):
Example. (i) Taxpayer A manufactures table-
cloths and other linens.A enters into a licensing
agreement with Company L under which A may label
its tablecloths with L’s trademark if the tablecloths
meet certain specified quality standards. In exchange
for its right to use L’s trademark, the licensing agree-
ment requires A to pay L a royalty of $X for each
tablecloth carrying L’s trademark that A sells. The
licensing agreement does not require A to pay L any
minimum or lump-sum royalties.
(ii) The licensing agreement provides A with the
right to use L’s intellectual property, a trademark. The
licensing agreement also requires A to conduct its
production activities according to certain standards as
a condition of exercising that right. Thus, A’s right to
use L’s trademark under the licensing agreement is
directly related to A’s production of tablecloths. The
royalties the licensing agreement requires A to pay
for using L’s trademark are the costs A incurs in ex-
change for these rights. Therefore, although A incurs
royalty costs only when A sells a tablecloth carry-
ing L’s trademark, the royalty costs directly benefit
production activities and are incurred by reason of
production activities within the meaning of paragraph
(e)(3)(i) of this section.
(ii)Types of indirect costs required to
be capitalized. The following are types
of indirect costs that must be capitalized
to the extent they are properly allocable to
property produced or property acquired for
resale:
*****
(U)Licensing and franchise costs.(1)
***Thesecostsalsoincludefees,pay-
ments, and royalties otherwise described in
this paragraph (e)(3)(ii)(U) that a taxpayer
incurs (within the meaning of section 461)
only upon the sale of property produced or
acquired for resale.
(2) If a taxpayer incurs (within the
meaning of section 461) a fee, payment,
or royalty described in this paragraph
(e)(3)(ii)(U) only upon the sale of property
produced or acquired for resale and the
cost is required to be capitalized under this
paragraph (e)(3), the cost is allocable only
to the property that has been sold or, for in-
ventory property, deemed to be sold under
the inventory cost flow assumption (such
as first-in, first-out; last-in, first-out; or a
specific-goods method) the taxpayer uses
to identify the costs in ending inventory.
*****
(l)Effective/applicability date.(1)
Paragraphs (h)(2)(i)(D), (k), and (l) of this
section apply for taxable years ending on
or after August 2, 2005.
(2) Paragraphs (c)(5), (e)(3)(i), and
(e)(3)(ii)(U) of this section apply for tax-
able years ending on or after the date these
regulations are published as final regula-
tions in theFederal Register.
Par. 4. Section 1.263A–2 is amended
by:
1. Adding paragraphs (b)(3)(ii)(C) and
(b)(4)(ii)(A)(4).
2. Revising paragraph (f).
The additions and revision read as fol-
lows:
§1.263A–2 Rules relating to property
produced by the taxpayer.
*****
(b) * * *
(3) * * *
(ii) * * *
(C)Costs allocable only to sold prop-
erty. Additional section 263A costs in-
curred during the taxable year, as defined
in paragraph (b)(3)(ii)(A)(1)ofthissec-
tion, section 471 costs incurred during
the taxable year, as defined in paragraph
(b)(3)(ii)(A)(2) of this section, and section
471 costs remaining on hand at year end,
as defined in paragraph (b)(3)(ii)(B) of
February 7, 20114712011–6 I.R.B.

this section, do not include costs specifi-
cally described in §1.263A–1(e)(3)(ii) or
cost reductions described in §1.471–3(e)
as properly allocable only to property that
has been sold or, for inventory property,
deemed to be sold under the inventory cost
flow assumption (such as first-in, first-out;
last-in, first-out; or a specific-goods
method) a taxpayer uses to identify the
costs in ending inventory.
*****
(4) * * *
(ii) * * *
(A) * * *
(4) Additional section 263A costs in-
curred during the test period, as defined
in paragraph (b)(4)(ii)(A)(2)ofthissec-
tion and section 471 costs incurred dur-
ing the test period, as defined in para-
graph (b)(4)(ii)(A)(3) of this section, do
not include costs specifically described in
§1.263A–1(e)(3)(ii) or cost reductions de-
scribed in §1.471–3(e) as properly alloca-
ble only to property that has been sold or,
for inventory property, deemed to be sold
under the inventory cost flow assumption
(such as first-in, first-out; last-in, first-out;
or a specific-goods method) a taxpayer
uses to identify the costs in ending inven-
tory.
*****
(f)Effective/applicability date.(1)
Paragraphs (b)(2)(i)(D), (e), and (f) of this
section apply for taxable years ending on
or after August 2, 2005.
(2) Paragraphs (b)(3)(ii)(C) and
(b)(4)(ii)(A)(4) of this section apply for
taxable years ending on or after the date
these regulations are published as final
regulations in theFederal Register.
Par.5.In §1.263A–3, para-
graphs (d)(3)(i)(C)(3), (d)(3)(i)(D)(3),
(d)(3)(i)(E)(3), and (f) are added to read
as follows:
§1.263A–3 Rules relating to property
acquired for resale.
*****
(d) * * *
(3) * * *
(i) * * *
(C)***
(3)Costs allocable only to sold prop-
erty. Section 471 costs remaining on
hand at year end, as defined in paragraph
(d)(3)(i)(C)(2) of this section, do not in-
clude costs that are specifically described
in §1.263A–1(e)(3)(ii) or cost reductions
described in §1.471–3(e) as properly allo-
cable only to property that has been sold or,
for inventory property, deemed to be sold
under the inventory cost flow assumption
(such as first-in, first-out; last-in, first-out;
or a specific-goods method) a taxpayer
uses to identify the costs in ending inven-
tory.
(D)***
(3) Current year’s storage and handling
costs, beginning inventory, and current
year’s purchases, as defined in paragraph
(d)(3)(i)(D)(2) of this section, do not in-
clude costs that are specifically described
in §1.263A–1(e)(3)(ii) or cost reductions
described in §1.471–3(e) as properly allo-
cable only to property that has been sold or,
for inventory property, deemed to be sold
under the inventory cost flow assumption
(such as first-in, first-out; last-in, first-out;
or a specific-goods method) a taxpayer
uses to identify the costs in ending inven-
tory.
(E) * * *
(3) Current year’s purchasing costs and
current year’s purchases, as defined in
paragraph (d)(3)(i)(E)(2) of this section,
do not include costs that are specifically
described in §1.263A–1(e)(3)(ii) or cost
reductions described in §1.471–3(e) as
properly allocable only to property that
has been sold or, for inventory property,
deemed to be sold under the inventory cost
flow assumption (such as first-in, first-out;
last-in, first-out; or a specific-goods
method) a taxpayer uses to identify the
costs in ending inventory.
*****
(f)Effective/applicability date. Para-
graphs (d)(3)(i)(C)(3), (d)(3)(i)(D)(3), and
(d)(3)(i)(E)(3) of this section apply for tax-
able years ending on or after the date these
regulations are published as final regula-
tions in theFederal Register.
Par. 6. Section 1.471–3 is amended by:
1. Adding paragraphs (e) and (g).
2. Designating the undesignated text
following paragraph (d) as paragraph (f).
The additions read as follows:
§1.471–3 Inventories at cost.
*****
(e) The amount of an allowance, dis-
count, or price rebate a taxpayer earns by
selling specific merchandise is a reduction
in the cost (as determined under paragraph
(a), (b), or (d) of this section) of the mer-
chandise sold or deemed to be sold under
the inventory cost flow assumption (such
as first-in, first-out; last-in, first-out; or a
specific-goods method) the taxpayer uses
to identify the costs in ending inventory.
This amount decreases cost of goods sold
and does not reduce the inventory cost or
value of goods on hand at the end of the
taxable year.
*****
(g)Effective/applicability date. Para-
graph (f) of this section applies to taxable
years ending on or after the date these reg-
ulations are published as final regulations
in theFederal Register.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 16,
2010, 8:45 a.m., and published in the issue of the Federal
Register for December 17, 2010, 75 F.R. 78940)
2011–6 I.R.B.472February 7, 2011

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 ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
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 published position. (Compare
withamplifiedandclarified, 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 rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
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 rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings 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 fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
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—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
February 7, 2011i2011–6 I.R.B.

Numerical Finding List
1
Bulletin 2011–1 through 2011–6
Announcements:
2011-1, 2011-2 I.R.B.304
2011-2, 2011-3 I.R.B.324
2011-3, 2011-3 I.R.B.324
2011-4, 2011-4 I.R.B.424
2011-5, 2011-4 I.R.B.430
2011-6, 2011-4 I.R.B.433
2011-7, 2011-5 I.R.B.446
2011-8, 2011-5 I.R.B.446
Notices:
2011-1, 2011-2 I.R.B.259
2011-2, 2011-2 I.R.B.260
2011-3, 2011-2 I.R.B.263
2011-4, 2011-2 I.R.B.282
2011-5, 2011-3 I.R.B.314
2011-6, 2011-3 I.R.B.315
2011-7, 2011-5 I.R.B.437
2011-9, 2011-6 I.R.B.459
2011-10, 2011-6 I.R.B.463
Proposed Regulations:
REG-149335-08, 2011-6 I.R.B.468
REG-124018-10, 2011-2 I.R.B.301
Revenue Procedures:
2011-1, 2011-1 I.R.B.1
2011-2, 2011-1 I.R.B.90
2011-3, 2011-1 I.R.B.111
2011-4, 2011-1 I.R.B.123
2011-5, 2011-1 I.R.B.167
2011-6, 2011-1 I.R.B.195
2011-7, 2011-1 I.R.B.233
2011-8, 2011-1 I.R.B.237
2011-9, 2011-2 I.R.B.283
2011-10, 2011-2 I.R.B.294
2011-11, 2011-4 I.R.B.329
2011-12, 2011-2 I.R.B.297
2011-13, 2011-3 I.R.B.318
2011-14, 2011-4 I.R.B.330
2011-15, 2011-3 I.R.B.322
2011-16, 2011-5 I.R.B.440
2011-17, 2011-5 I.R.B.441
2011-18, 2011-5 I.R.B.443
2011-19, 2011-6 I.R.B.465
Revenue Rulings:
2011-1, 2011-2 I.R.B.251
2011-2, 2011-2 I.R.B.256
2011-3, 2011-4 I.R.B.326
2011-4, 2011-6 I.R.B.448
Treasury Decisions:
9507, 2011-3 I.R.B.305
9509, 2011-6 I.R.B.450
9510, 2011-6 I.R.B.453
9511, 2011-6 I.R.B.455
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2010–27 through 2010–52 is in Internal Revenue Bulletin
2010–52, dated December 27, 2010.
2011–6 I.R.B.iiFebruary 7, 2011

Finding List of Current Actions on
Previously Published Items
1
Bulletin 2011–1 through 2011–6
Announcements:
85-88
Obsoleted by
Rev. Proc. 2011-10, 2011-2 I.R.B.294
2008-11
Modified by
Ann. 2011-6, 2011-4 I.R.B.433
2009-62
Obsoleted by
Rev. Proc. 2011-10, 2011-2 I.R.B.294
Notices:
2010-59
Modified by
Notice 2011-5, 2011-3 I.R.B.314
2010-71
Modified and superseded by
Notice 2011-9, 2011-6 I.R.B.459
2010-79
Clarified and modified by
Notice 2011-4, 2011-2 I.R.B.282
Revenue Procedures:
72-50
Modified and superseded by
Rev. Proc. 2011-10, 2011-2 I.R.B.294
76-34
Modified and supersed by
Rev. Proc. 2011-10, 2011-2 I.R.B.294
83-23
Modified and superseded by
Rev. Proc. 2011-15, 2011-3 I.R.B.322
94-17
Modified and superseded by
Rev. Proc. 2011-15, 2011-3 I.R.B.322
97-27
Clarified and modified by
Rev. Proc. 2011-4, 2011-1 I.R.B.330
2001-10
Modified by
Rev. Proc. 2011-4, 2011-4 I.R.B.330
2002-28
Modified by
Rev. Proc. 2011-4, 2011-4 I.R.B.330
2003-21
Modified and superseded by
Rev. Proc. 2011-15, 2011-3 I.R.B.322
Revenue Procedures— Continued:
2004-34
Modified by
Rev. Proc. 2011-14, 2011-4 I.R.B.330
Modified and clarified by
Rev. Proc. 2011-18, 2011-5 I.R.B.443
2006-44
Modified by
Ann. 2011-6, 2011-4 I.R.B.433
2006-56
Modified by
Rev. Proc. 2011-14, 2011-4 I.R.B.330
2008-52
Modified by
Notice 2011-4, 2011-2 I.R.B.282
Rev. Proc. 2011-17, 2011-5 I.R.B.441
Superseded in part by
Rev. Proc. 2011-14, 2011-4 I.R.B.330
2009-39
Superseded in part by
Rev. Proc. 2011-14, 2011-4 I.R.B.330
2009-44
Modified by
Ann. 2011-6, 2011-4 I.R.B.433
2010-1
Superseded by
Rev. Proc. 2011-1, 2011-1 I.R.B.1
2010-2
Superseded by
Rev. Proc. 2011-2, 2011-1 I.R.B.283
2010-3
Superseded by
Rev. Proc. 2011-3, 2011-1 I.R.B.111
2010-4
Superseded by
Rev. Proc. 2011-4, 2011-1 I.R.B.123
2010-5
Superseded by
Rev. Proc. 2011-5, 2011-1 I.R.B.167
2010-6
Superseded by
Rev. Proc. 2011-6, 2011-1 I.R.B.195
2010-7
Superseded by
Rev. Proc. 2011-7, 2011-1 I.R.B.233
2010-8
Superseded by
Rev. Proc. 2011-8, 2011-1 I.R.B.237
2010-9
Superseded by
Rev. Proc. 2011-9, 2011-2 I.R.B.283
Revenue Procedures— Continued:
2010-15
Updated by
Rev. Proc. 2011-13, 2011-3 I.R.B.318
2011-1
Corrected by
Ann. 2011-7, 2011-5 I.R.B.446
2011-8
Corrected by
Ann. 2011-8, 2011-5 I.R.B.446
Revenue Rulings:
81-100
Modified by
Rev. Rul. 2011-1, 2011-2 I.R.B.251
2004-67
Modified by
Rev. Rul. 2011-1, 2011-2 I.R.B.251
2008-40
Modified by
Rev. Rul. 2011-1, 2011-2 I.R.B.251
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2010–27 through 2010–52 is in Internal Revenue Bulletin 2010–52, dated December 27,
2010.
February 7, 2011iii2011–6 I.R.B.

INTERNAL REVENUE BULLETIN
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