Internal Revenue Bulletin 1997-37 (PDF rendition): IRS Revenue Rulings

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INCOME TAX
Rev. Rul. 97–37, page 15.
LIFO; price indexes; department stores. The July 1997
Bureau of Labor Statistics price indexes are accepted for
use by department stores employing the retail inventory and
last-in, first-out inventory methods for valuing inventories for
tax years ended on, or with reference to, July 31, 1997.
T.D. 8725, page 16.
This final regulation contains miscellaneous sections of the
Code affected by the Taxpayer Bill of Rights 2 and the
Personal Responsibility and Work Opportunity Reconciliation
Act of 1996.
T.D. 8728, page 4.
Final and temporary regulations relate to the requirements
for changing a method of accounting for costs subject to
section 263A of the Code.
REG–105160–97, page 22.
The proposed regulations relate to qualified nonrecourse
financing under section 465 of the Code. A public hearing
will be held on December 10, 1997.
EMPLOYEE PLANS
REG–106043–97, page 24.
Proposed regulations under section 401 of the Code relate
to the remedial amendment period during which a sponsor
of a qualified retirement plan or an employer maintaining a
qualified retirement plan can make retroactive amendments
to the plan to eliminate certain qualification defects for the
entire period.
EXEMPT ORGANIZATIONS
Announcement 97–92, page 26.
A list is given of organizations now classified as private foun-
dations.
EXCISE TAX
Announcement 97–91, page 25.
This announcement provides additional excise tax changes
made by the Taxpayer Relief Act of 1997. These changes
affect taxes on fuels, communications, air transportation,
heavy highway vehicles, luxury automobiles, and arrow com-
ponents.
ADMINISTRATIVE
Notice 97–50, page 21.
Timely filing or payment; private delivery services.
Taxpayers are informed that the list of private delivery ser-
vices designed under section 7502 of the Code in Notice
97–26, 1997–17 I.R.B. 6, will remain in effect until further
notice. The rules for application periods and issuance of
new designation lists by the Service are modified.
Internal Revenue
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Bulletin No. 1997–37
September 15, 1997
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page 29.

Mission of the Service
The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve
the public by continually improving the quality of our prod-
ucts and services; and perform in a manner warranting
the highest degree of public confidence in our integrity, effi-
ciency, and fairness.
2
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to adminis-
ter the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provi-
sions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.
At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protect-
ing the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesi-
tate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.
Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, howev-
er, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.

The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consoli-
dated 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,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management 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 pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumu-
lative Bulletins.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a quarterly and
semiannual basis, and are published in the first Bulletin of the
succeeding quarterly and semiannual period, respectively.
3
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. Acitation 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.

September 15, 199741997–37 I.R.B.
Section 263A.—Capitalization
and Inclusion in Inventory Costs
of Certain Expenses
26 CFR 1.263A–7: Changing a method of account-
ing under section 263A.
T.D. 8728
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Procedure for Changing a
Method of Accounting under
Section 263A
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
final regulations relating to the require-
ments for changing a method of account-
ing for costs subject to section 263A. The
regulations provide guidance regarding
changes in method of accounting for costs
incurred in producing property and ac-
quiring property for resale. The regula-
tions affect taxpayers changing their
method of accounting for costs subject to
section 263A.
DATES: These regulations are effective
August 5, 1997.
FOR FURTHER INFORMATION CON-
TACT: Cheryl Lynn Oseekey, (202) 622-
4970 (not a toll-free number).
SUPPLEMENTARYINFORMATION:
Background
On March 30, 1987 and August 7,
1987, temporary regulations under sec-
tion 263Awere published in the Federal
Register(T.D. 8131, 52 F.R. 10052
[1987–1 C.B. 98] and T.D. 8148, 52 F.R.
29375 [1987–2 C.B. 70]), and cross-refer-
enced to notices of proposed rulemaking
published in the Federal Registeron the
same date (52 F.R. 10118 [LR–168–86,
1987–1 C.B. 808]and 52 F.R. 29391
[LR–37–87, 1987–2 C.B. 1054]). The
temporary regulations contain rules for
taxpayers changing their method of ac-
counting to comply with the capitalization
rules of section 263A. Apublic hearing
on these temporary and proposed regula-
tions was held on December 7, 1987.
On August 9, 1993, final regulations
under section 263Awere published in the
Federal Register(T.D. 8482, 58 F.R.
42198 [1993 C.B. 77]). These final regu-
lations did not address the accounting
method provisions in the 1987 temporary
regulations, which continued in effect.
On August 5, 1994, final and temporary
regulations were published in the Federal
Register(T.D. 8559, 59 F.R. 39958
[1994–2 C.B. 32]). These final regula-
tions address “pick and pack costs” and
other expenses. The August 5, 1994 tem-
porary regulations renumbered the ac-
counting method provisions in the 1987
temporary regulations from §1.263A–
1T(e) to §1.263A–7T.
This document adopts, with modifica-
tions, §1.263A–7Tas final regulations.
Explanation of Provisions
In 1987, the IRS and the Treasury De-
partment issued temporary regulations
that provide guidance to taxpayers chang-
ing their method of accounting to comply
with the capitalization rules of section
263A. The regulations provide automatic
consent for taxpayers required to change
their method of accounting for the first
taxable year section 263Awas effective.
Subsequent to promulgation of the
1987 temporary regulations, the IRS and
the Treasury Department issued various
revenue procedures that set forth rules
and procedures applicable to certain
changes in method of accounting for costs
subject to section 263Afor which taxpay-
ers can obtain automatic consent. These
revenue procedures provide automatic
consent to change the method of account-
ing in years other than the first taxable
year section 263Awas effective. Where
automatic consent is not available by rev-
enue procedure, taxpayers can obtain the
Commissioner’s consent to change a
method of accounting for costs subject to
section 263Aunder Rev. Proc. 97–27
(1997–21 I.R.B. 10).
Rev. Proc. 97–27 and the automatic
change revenue procedures describe how
a change in method of accounting may be
effected, but they do not describe how in-
ventory and other property on hand at the
beginning of the year of change should be
revalued. These final regulations provide
guidance regarding how taxpayers must
revalue property in connection with a
change in method of accounting for costs
subject to section 263A. The revaluation
rules for inventory are substantially simi-
lar to the revaluation rules contained in
the 1987 temporary regulations. Section
1.263A–7(c) provides guidance regarding
how items or costs included in beginning
inventory in the year of change must be
revalued. Section 1.263A–7(d) provides
guidance regarding how non-inventory
property on hand at the beginning of the
year of change must be revalued.
The regulations also provide certain
rules that apply to changes in method of
accounting for costs subject to section
263A, in addition to the rules and proce-
dures that apply under the applicable rev-
enue procedures. See, §1.263A–7(b).
In addition, the regulations clarify
whether certain changes are changes in
method of accounting under section 263A
and therefore are within the scope of the
regulations. For example, a change from
one permissible capitalization method,
such as the simplified resale method in
former §1.263A–1T(d)(4), to another per-
missible capitalization method, such as
the simplified resale method in §1.263A-
3(d), is a change in method of accounting
under section 263Aand is therefore
within the scope of the regulations. See
§1.263A–7(a)(5).
The final regulations delete certain pro-
visions of §1.263A–7Tthat were primar-
ily applicable to accounting method
changes made in 1987. For example, the
final regulations do not incorporate provi-
sions such as §1.263A–7T(e)(2), which
provide automatic consent to make the
change in method of accounting for the
first taxable year section 263Awas effec-
tive, and §1.263A–7T(e)(7)(iii), (iv) and
(v) and §1.263A–7T(e)(8), which provide
special rules for adjusting the revaluation
factor for costs attributable to different
methods of accounting for depreciation
(including cost recovery) and differences
in the percentage of fixed indirect produc-
tion costs that were expensed by taxpay-
ers using the practical capacity concept.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Certain Administrative Guidance
The final regulations incorporate the
provisions of Notice 88–23 (1988–1 C.B.
490) (ordering rules for accounting
method changes), and sections IV(A)
(guidance regarding deferred intercom-
pany exchanges) and IV(B) (permission
to elect a new base year for taxpayers
using the last-in, first-out (LIFO) inven-
tory method) of Notice 88-86 (1988–2
C.B. 401). These notices or portions
thereof are withdrawn for taxable years to
which this Treasury decision applies.
Effect on other documents
The following publications are obsolete
as of August 5, 1997:
Notice 88–23 (1988–1 C.B. 490).
Notice 88–86 (1988–2 C.B. 401), sec-
tions IV(A) and IV(B).
Public Comments
The IRS and the Treasury Department
received a number of comments in re-
sponse to the 1987 temporary and pro-
posed regulations. Most of the comments
received in response to the temporary reg-
ulations issued in March 1987 were con-
sidered in connection with the temporary
regulations issued in August 1987. In
general, those comments are not dis-
cussed again here.
REVALUING BEGINNING
INVENTORY—THE 3-YEAR
AVERAGE METHOD
A. Extending availability of the method
Under the temporary regulations, tax-
payers using the dollar-value LIFO inven-
tory method were permitted to use a 3-
year average method for revaluing their
beginning inventory in the year they
changed their method of accounting to
comply with section 263A. Several com-
mentators suggested that taxpayers other
than those on the dollar-value LIFO in-
ventory method should also be permitted
to use this 3-year average method for
revaluing beginning inventory in the year
of change. Specifically, commentators
suggested that the 3-year average method
be made available to taxpayers using the
specific goods LIFO inventory method.
Another suggestion was that taxpayers
using the first-in, first-out (FIFO) inven-
tory method should be permitted to use
the 3-year average method even though
those taxpayers may have sufficient infor-
mation to revalue their inventory under
the facts and circumstances method.
The final regulations do not adopt these
suggestions. The House and Senate Re-
ports to the Tax Reform Act of 1986 indi-
cate Congress intended that taxpayers
generally revalue their inventory in the
year of change using the facts and circum-
stances method. Because Congress real-
ized that dollar-value LIFO taxpayers
may not have the data needed to use the
facts and circumstances method, it sug-
gested two other revaluation methods that
could be used in conjunction with, or in
lieu of, the facts and circumstances
method. The 3-year average method was
one of those other methods. H.R. Rep.
No. 426, 99th Cong., 1st Sess. 633–637
(1985), 1986–3 (Vol. 2) C.B. 633–637
and S. Rep. No. 313, 99th Cong., 2nd
Sess. 147–152 (1986), 1986–3 (Vol. 3)
C.B. 147–152. The IRS and the Treasury
Department believe that limiting the 3-
year average method to dollar-value LIFO
taxpayers is more consistent with legisla-
tive history which expresses Congress’
concern that dollar-value LIFO taxpayers
may have particular problems in revalu-
ing inventory. H.R. Rep. No. 426, 633,
1986–3 (Vol. 2) C.B. 633 and S. Rep. No.
313, 147, 1986–3 (Vol.3) C.B. 147.
B. Altering the mechanics of the method
One commentator suggested that tax-
payers be permitted to revalue items or
costs included in beginning inventory in
the year of change by using data from the
year of change instead of data from the
prior three years, and calculate a section
481(a) adjustment accordingly. This
commentator further suggested that three
years after the year of change, the tax-
payer would recompute the section 481(a)
adjustment using data from the three new
years to test its original adjustment under
section 481(a). If the new adjustment
were larger than the original adjustment
by a substantial amount, the taxpayer
would be required to amend its federal in-
come tax returns. The final regulations
do not adopt this suggestion. Requiring
taxpayers to compute two adjustments
under section 481(a) would unnecessarily
complicate application of the 3-year aver-
age method.
Another commentator suggested that
some taxpayers be permitted to revalue
items or costs included in beginning in-
ventory in the year of change by using
data from the immediately preceding year
rather than the prior three years. This
proposal to use only the prior year’s data
would be limited to taxpayers that can
show they have not had a significant
change in costs over the preceding three
years. This suggested modification to the
3-year average method was not adopted.
The suggested modification would not
substantially simplify the process of
revaluing beginning inventory because
taxpayers would be required to determine
whether their costs significantly changed
during the preceding three-year period.
C. Limiting costs subject to revaluation
One commentator suggested that LIFO
layers should be revalued only if the items
of inventory comprising those layers are
still in existence in the year of change.
This suggestion was not adopted. How-
ever, the final regulations continue the
rule in the temporary regulations that tax-
payers may adjust the revaluation factor
(under either the 3-year average method
or the weighted average method) to the
extent they can show that additional sec-
tion 263Acosts included in the calcula-
tion of the revaluation factor were not in-
curred in the prior years in which the
LIFO layers were accumulated.
D. New base year
Under the 3-year average method, taxpay-
ers generally are required to establish a
new base year. Several commentators
commented that requiring link-chain
LIFO taxpayers to establish a new base
year is costly and pointless and suggested
that these taxpayers be excluded from the
general requirement that all dollar-value
LIFO taxpayers establish a new base year.
The IRS and the Treasury Department did
not adopt this suggestion. If a new base
year is not established, the current-year
index, determined under the taxpayer’s
new method of accounting, would be
multiplied by the prior-year cumulative
index, determined under the taxpayer’s
former method of accounting, and could
distort the taxpayer’s LIFO inventory val-
uation. This distortion is eliminated when
the taxpayer establishes a new base year
1997–37 I.R.B.5September 15, 1997

and establishes a new index. Accord-
ingly, the final regulations provide that all
dollar-value LIFO taxpayers (whether
using double extension or link-chain)
should generally establish a new base
year when they use the 3-year average
method to revalue their inventories under
section 263A.
Commentators also suggested that tax-
payers using the 3-year average method
and either the simplified production
method or the simplified resale method be
allowed, but not required, to establish a
new base year. Section IV(B) of Notice
88-86 permits these taxpayers to choose
whether to establish a new base year.
This rule is incorporated into the final
regulations.
One commentator noted that the exam-
ple in the 1987 temporary regulations il-
lustrating the 3-year average method did
not use the current year revaluation factor
in computing the updated base year cost
of inventory. The example has been re-
vised to use the current year revaluation
factor.
REVALUING BEGINNING
INVENTORY—FACTS AND
CIRCUMSTANCES METHOD
One commentator suggested that spe-
cific rules or guidelines be adopted to
clarify what is a reasonable estimate or
procedure for revaluing beginning inven-
tory in connection with a change in
method of accounting. This suggestion
was not adopted. What is a reasonable es-
timate or procedure must be decided on a
case-by-case basis in light of all applica-
ble facts and circumstances. The final
regulations continue the provision in the
temporary regulations that permissible es-
timates and procedures include using in-
formation from a more recent period to
estimate the amount and nature of inven-
tory costs applicable to earlier periods,
and using information with respect to
comparable items of inventory to estimate
the costs associated with other items of
inventory.
NEW BASE YEAR WHEN THE 3-YEAR
AVERAGE METHOD IS NOTUSED
Several commentators suggested that
dollar-value LIFO taxpayers not using the
3-year average method to revalue begin-
ning inventory be permitted to update
their base year if they so choose. Section
IV(B) of Notice 88–86 permits these tax-
payers to establish a new base year. The
final regulations adopt this rule.
SCOPE OF ACCOUNTING METHOD
CHANGE
Several commentators suggested that
the regulations should allow taxpayers to
change from the specific goods LIFO in-
ventory method to the dollar-value LIFO
inventory method in connection with
changing their method of accounting for
costs under section 263Awithout obtain-
ing the Commissioner’s consent. Gener-
ally, taxpayers must secure the Commis-
sioner’s consent before effecting a change
in method of accounting under section
446(e) unless this requirement is specifi-
cally waived. The IRS and the Treasury
Department do not believe an exception
from this general rule is warranted for
changes from the specific goods LIFO in-
ventory method to the dollar-value LIFO
inventory method except to the extent
permitted by §1.472–8(f)(1).
Several commentators also suggested
that taxpayers that change their method of
accounting for costs subject to section
263Abe permitted to make additional
changes in their methods of accounting in
future tax years under section 263Awith-
out obtaining additional consents from the
Commissioner. The IRS and the Treasury
Department have issued various revenue
procedures that provide automatic con-
sent procedures for taxpayers to change
their method of accounting for costs
under section 263A.
One commentator suggested that the
regulations provide that when making the
change from the full absorption rules of
§1.471–11 to the uniform capitalization
rules of section 263A, taxpayers may
cease taking into account any costs not
treated as inventoriable under section
263Athat may have been erroneously in-
ventoried under prior law. The temporary
regulations issued in August 1987 and the
final regulations permit this result. In
revaluing beginning inventory to include
additional section 263Acosts, taxpayers
may cease capitalizing costs that had been
capitalized but are not required to be capi-
talized under section 263A.
AUDITPROTECTION
Several commentators noted that tax-
payers should be guaranteed audit protec-
tion for costs or items that are part of a
change in method of accounting under
section 263A. The IRS’long-standing ad-
ministrative position is that if a taxpayer
files an application to change its method
of accounting in accordance with the ap-
plicable administrative guidance, for ex-
ample, Rev. Proc. 97–27, an examining
agent may not later propose that the tax-
payer change its method of accounting for
the same item for a taxable year prior to
the year of change.
ORDERING RULES
One commentator suggested that over-
all accounting method changes (for exam-
ple, the cash receipts and disbursements
method to an accrual method) should be
implemented prior to any change in
method of accounting for costs under sec-
tion 263A. The temporary regulations
generally provide that a change in method
of accounting for costs under section
263Ais deemed to occur prior to any
other change in method of accounting ef-
fected during the year of change. The
final regulations continue that general
rule with four modifications. Taxpayers
that are discontinuing the LIFO inventory
method may make that change prior to a
change in method of accounting under
section 263A. Additionally, taxpayers
that are changing from the specific goods
LIFO inventory method to the dollar-
value LIFO inventory method may make
that change prior to a change in method of
accounting under section 263A. Also,
taxpayers that are changing their overall
method of accounting from the cash
method to an accrual method must make
the change to an accrual method prior to a
change in method of accounting under
section 263A. Finally, taxpayers that are
changing their method of accounting for
depreciation when any portion of the de-
preciation is subject to section 263Amust
make the method change for depreciation
prior to a change in method of accounting
under section 263A.
COSTALLOCATION METHOD
Several commentators suggested that
the regulations be clarified to provide that
a taxpayer must use the same cost alloca-
tion method to restate its beginning inven-
tory and to value its ongoing inventory.
The final regulations clarify this point.
Inventory on hand at the beginning of the
September 15, 199761997–37 I.R.B.

year of change is revalued as if the tax-
payer’s new method had applied to all
prior periods. The same cost allocation
method must be used both retroactively
(for purposes of restating beginning in-
ventory) and prospectively (for purposes
of the current year and all subsequent
years, unless the taxpayer seeks specific
consent from the Commissioner to change
this method of accounting).
INTERCOMPANY ITEMS
One commentator suggested that tax-
payers be given automatic consent to dis-
continue filing consolidated federal in-
come tax returns so that they could avoid
the need to revalue the amount of inter-
company items resulting from the sale or
exchange of inventory property in inter-
company transactions. The regulations do
not adopt this suggestion. Generally, tax-
payers must secure the Commissioner’s
consent before discontinuing the filing of
consolidated tax returns. The IRS and the
Treasury Department do not think an ex-
ception from this general rule is war-
ranted in this situation.
Effective Date
These regulations are effective for tax-
able years beginning on or after August 5,
1997.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
the notice of proposed rulemaking pre-
ceding the regulations was issued prior to
March 29, 1996, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the
Internal Revenue Code, these regulations
were submitted to the Small Business Ad-
ministration for comment on their impact
on small business.
Drafting Information
The principal author of these regula-
tions is Cheryl Lynn Oseekey, Office of
Assistant Chief Counsel (Income Tax and
Accounting). However, other personnel
from the IRS and the Treasury Depart-
ment participated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.263A–0 is amended
by revising the introductory text and
adding entries for §1.263A–7 to read as
follows:
§1.263A–0 Outline of regulations under
section 263A.
This section lists the paragraphs in
§§1.263A–1 through 1.263A–3 and
§1.263A–7 through 1.263A-15.
* * * * *
§1.263A–7 Changing a method of ac-
counting under section 263A.
(a)Introduction.
(1)Purpose.
(2)Taxpayers that adopt a method of
accounting under section 263A.
(3)Taxpayers that change a method
of accounting under section 263A.
(4)Effective date.
(5)Definition of change in method of
accounting.
(b)Rules applicable to a change in
method of accounting.
(1)General rules.
(2)Special rules.
(i)Ordering rules when multiple
changes in method of accounting occur in
the year of change.
(A)In general.
(B)Exceptions to the general ordering
rule.
(
1)Change from the LIFO inventory
method.
(2)Change from the specific goods
LIFO inventory method.
(3)Change in overall method of ac-
counting.
(4)Change in method of accounting
for depreciation.
(ii)Adjustment required by section
481(a).
(iii)Base year.
(A)Need for a new base year.
(1)Facts and circumstances revalua-
tion method used.
(2)3-year average method used.
(i)Simplified method not used.
(ii)Simplified method used.
(B)Computing a new base year.
(c)Inventory
(1)Need for adjustments.
(2)Revaluing beginning inventory.
(i)In general.
(ii)Methods to revalue inventory.
(iii)Facts and circumstances revalua-
tion method.
(A)In general.
(B)Exception.
(C)Estimates and procedures al-
lowed.
(D)Use by dollar-value LIFO taxpay-
ers.
(E)Examples.
(iv)Weighted average method.
(A)In general.
(B)Weighted average method for
FIFO taxpayers.
(1)In general.
(2)Example.
(C) Weighted average method for spe-
cific goods LIFO taxpayers.
(1)In general.
(2)Example.
(D)Adjustments to inventory costs
from prior years.
(v)3-year average method.
(A)In general.
(B)Consecutive year requirement.
(C)Example.
(D)Short taxable years.
(E)Adjustments to inventory costs
from prior years.
(1)General rule.
(2)Examples of costs eligible for re-
statement adjustment procedure.
(F)Restatement adjustment proce-
dure.
(1)In general.
(2)Examples of restatement adjust-
ment procedure.
(3)Intercompany items.
(i)Revaluing intercompany transac-
tions.
(ii)Example.
(iii)Availability of revaluation meth-
ods.
(4)Anti-abuse rule.
(i)In general.
1997–37 I.R.B.7September 15, 1997

(ii)Deemed avoidance of this section.
(A)Scope.
(B) General rule.
(iii)Election to use transferor’s LIFO
layers.
(iv)Tax avoidance intent not required.
(v)Related corporation.
(d)Non-inventory property.
(1)Need for adjustments.
(2)Revaluing property.
§1.263A–1 [Amended]
Par. 3. Section 1.263A–1 is amended
by removing “1.263A–7T(e) generally”
from the last sentence in paragraph
(a)(2)(i) and replacing it with
“1.263A–7”.
Par. 4. Section 1.263A–7 is added to
read as follows:
§1.263A–7 Changing a method of
accounting under section 263A.
(a) Introduction—(1) Purpose.These
regulations provide guidance to taxpayers
changing their methods of accounting for
costs subject to section 263A. The princi-
pal purpose of these regulations is to pro-
vide guidance regarding how taxpayers
are to revalue property on hand at the be-
ginning of the taxable year in which they
change their method of accounting for
costs subject to section 263A. Paragraph
(c) of this section provides guidance re-
garding how items or costs included in
beginning inventory in the year of change
must be revalued. Paragraph (d) of this
section provides guidance regarding how
non-inventory property should be reval-
ued in the year of change.
(2) Taxpayers that adopt a method of
accounting under section 263A.Taxpay-
ers may adopt a method of accounting for
costs subject to section 263Ain the first
taxable year in which they engage in re-
sale or production activities. For pur-
poses of this section, the adoption of a
method of accounting has the same mean-
ing as provided in §1.446–1(e)(1). Tax-
payers are not subject to the provisions of
these regulations to the extent they adopt,
as opposed to change, a method of ac-
counting.
(3) Taxpayers that change a method of
accounting under section 263A. Taxpay-
ers changing their method of accounting
for costs subject to section 263Aare sub-
ject to the revaluation and other provi-
sions of this section. Taxpayers subject to
these regulations include, but are not lim-
ited to—
(i) Resellers of personal property
whose average annual gross receipts for
the immediately preceding 3-year period
(or lesser period if the taxpayer was not in
existence for the three preceding taxable
years) exceed $10,000,000 where the tax-
payer was not subject to section 263Ain
the prior taxable year;
(ii) Resellers of real or personal prop-
erty that are using a method that fails to
comply with section 263Aand desire to
change to a method of accounting that
complies with section 263A;
(iii) Producers of real or tangible per-
sonal property that are using a method
that fails to comply with section 263Aand
desire to change to a method of account-
ing that complies with section 263A; and
(iv) Resellers and producers that desire
to change from one permissible method of
accounting for costs subject to section
263Ato another permissible method.
(4) Effective date.The provisions of
this section are effective for taxable years
beginning on or after August 5, 1997. For
taxable years beginning before August 5,
1997, the rules of §1.263A–7Tcontained
in the 26 CFR part 1 edition revised as of
April 1, 1997, as modified by other ad-
ministrative guidance, will apply.
(5) Definition of change in method of
accounting.For purposes of this section,
a change in method of accounting has the
same meaning as provided in §1.446–
1(e)(2)(ii). Changes in method of ac-
counting for costs subject to section 263A
include changes to methods required or
permitted by section 263Aand the regula-
tions thereunder. Changes in method of
accounting may be described in the pre-
ceding sentence irrespective of whether
the taxpayer’s previous method of ac-
counting resulted in the capitalization of
more (or fewer) costs than the costs re-
quired to be capitalized under section
263Aand the regulations thereunder, and
irrespective of whether the taxpayer’s
previous method of accounting was a per-
missible method under the law in effect
when the method was being used. How-
ever, changes in method of accounting for
costs subject to section 263Ado not in-
clude changes relating to factors other
than those described therein. For exam-
ple, a change in method of accounting for
costs subject to section 263Adoes not in-
clude a change from one inventory identi-
fication method to another inventory
identification method, such as a change
from the last-in, first-out (LIFO) method
to the first-in, first-out (FIFO) method, or
vice versa, or a change from one inven-
tory valuation method to another inven-
tory valuation method under section 471,
such as a change from valuing inventory
at cost to valuing the inventory at cost or
market, whichever is lower, or vice versa.
In addition, a change in method of ac-
counting for costs subject to section 263A
does not include a change within the
LIFO inventory method, such as a change
from the double extension method to the
link-chain method, or a change in the
method used for determining the number
of pools. Further, a change from the mod-
ified resale method set forth in Notice 89-
67 (1989–1 C.B. 723), see §601.601(d)(2)
of this chapter, to the simplified resale
method set forth in §1.263A–3(d) is not a
change in method of accounting within the
meaning of §1.446–1(e)(2)(ii) and is
therefore not subject to the provisions of
this section. However, a change from the
simplified resale method set forth in for-
mer §1.263A–1T(d)(4) to the simplified
resale method set forth in §1.263A–3(d) is
a change in method of accounting within
the meaning of §1.446–1(e)(2)(ii) and is
subject to the provisions of this section.
(b) Rules applicable to a change in
method of accounting—(1) General
rules.All changes in method of account-
ing for costs subject to section 263Aare
subject to the rules and procedures pro-
vided by the Code, regulations, and ad-
ministrative procedures applicable to such
changes. The Internal Revenue Service
has issued specific revenue procedures
that govern certain accounting method
changes for costs subject to section 263A.
Where a specific revenue procedure is not
applicable, changes in method of account-
ing for costs subject to section 263Aare
subject to the same rules and procedures
that govern other accounting method
changes. See Rev. Proc. 97–27 (1997–21
I.R.B. 10) and §601.601(d)(2) of this
chapter.
(2) Special rules—(i) Ordering rules
when multiple changes in method of ac-
counting occur in the year of change.
(A) In general. Achange in method of
accounting for costs subject to section
263Ais generally deemed to occur (in-
September 15, 199781997–37 I.R.B.

cluding the computation of the adjustment
under section 481(a)) before any other
change in method of accounting is
deemed to occur for that same taxable
year.
(B) Exceptions to the general ordering
rule—(
1) Change from the LIFO inven-
tory method.In the case of a taxpayer
that is discontinuing its use of the LIFO
inventory method in the same taxable
year it is changing its method of account-
ing for costs subject to section 263A, the
change from the LIFO method may be
made before the change in method of ac-
counting (and the computation of the cor-
responding adjustment under section 481
(a)) under section 263Ais made.
(2) Change from the specific goods
LIFO inventory method. In the case of a
taxpayer that is changing from the spe-
cific goods LIFO inventory method to the
dollar-value LIFO inventory method in
the same taxable year it is changing its
method of accounting for costs subject to
section 263A, the change from the spe-
cific goods LIFO inventory method may
be made before the change in method of
accounting under section 263Ais made.
(3) Change in overall method of ac-
counting.In the case of a taxpayer that is
changing its overall method of accounting
from the cash receipts and disbursements
method to an accrual method in the same
taxable year it is changing its method of
accounting for costs subject to section
263A, the taxpayer must change to an ac-
crual method for capitalizable costs (see
§1.263A–1(c)(2)(ii)) before the change in
method of accounting (and the computa-
tion of the corresponding adjustment
under section 481(a)) under section 263A
is made.
(4) Change in method of accounting
for depreciation.In the case of a taxpayer
that is changing its method of accounting
for depreciation in the same taxable year
it is changing its method of accounting for
costs subject to section 263Aand any por-
tion of the depreciation is subject to sec-
tion 263A, the change in method of ac-
counting for depreciation must be made
before the change in method of account-
ing (and the computation of the corre-
sponding adjustment under section
481(a)) under section 263Ais made.
(ii) Adjustment required by section
481(a).In the case of any taxpayer re-
quired or permitted to change its method
of accounting for any taxable year under
section 263Aand the regulations thereun-
der, the change will be treated as initiated
by the taxpayer for purposes of the adjust-
ment required by section 481(a). The ad-
justment required by section 481(a) is to
be taken into account in computing tax-
able income over a period not to exceed 4
taxable years.
(iii) Base year—(A) Need for a new
base year.Certain dollar-value LIFO tax-
payers (whether using double extension
or link-chain) must establish a new base
year when they revalue their inventories
under section 263A.
(1) Facts and circumstances revalua-
tion method used.Adollar-value LIFO
taxpayer that uses the facts and circum-
stances revaluation method is permitted,
but not required, to establish a new base
year.
(2) 3-year average method used—(i)
Simplified method not used.Adollar-
value LIFO taxpayer using the 3-year av-
erage method but not the simplified pro-
duction method or the simplified resale
method to revalue its inventory is re-
quired to establish a new base year.
(ii) Simplified method used.Adollar-
value LIFO taxpayer using the 3-year av-
erage method and either the simplified
production method or the simplified re-
sale method to revalue its inventory is
permitted, but not required, to establish a
new base year.
(B) Computing a new base year. For
purposes of determining future indexes,
the year of change becomes the new base
year (that is, the index at the beginning of
the year of change generally must be
1.00) and all costs are restated in new
base year costs for purposes of extending
such costs in future years. However,
when a new base year is established, costs
associated with old layers retain their sep-
arate identity within the base year, with
such layers being restated in terms of the
new base year index. For example, for
purposes of determining whether a partic-
ular layer has been invaded, each layer
must retain its separate identity. Thus, if a
decrement in an inventory pool occurs,
layers accumulated in more recent years
must be viewed as invaded first, in order
of priority.
(c) Inventory—(1) Need for adjust-
ments. When a taxpayer changes its
method of accounting for costs subject to
section 263A, the taxpayer generally
must, in computing its taxable income for
the year of change, take into account the
adjustments required by section 481(a).
The adjustments required by section
481(a) relate to revaluations of inventory
property, whether the taxpayer produces
the inventory or acquires it for resale. See
paragraph (d) of this section in regard to
the adjustments required by section 481(a)
that relate to non-inventory property.
(2) Revaluing beginning inventory—
(i) In general.If a taxpayer changes its
method of accounting for costs subject to
section 263A, the taxpayer must revalue
the items or costs included in its begin-
ning inventory in the year of change as if
the new method (that is, the method to
which the taxpayer is changing) had been
in effect during all prior years. In revalu-
ing inventory costs under this procedure,
all of the capitalization provisions of sec-
tion 263Aand the regulations thereunder
apply to all inventory costs accumulated
in prior years. The necessity to revalue
beginning inventory as if these capitaliza-
tion rules had been in effect for all prior
years includes, for example, the revalua-
tion of costs or layers incurred in taxable
years preceding the transition period to
the full absorption method of inventory
costing as described in §1.471–11(e), re-
gardless of whether a taxpayer employed
a cut-off method under those regulations.
The difference between the inventory as
originally valued using the former method
(that is, the method from which the tax-
payer is changing) and the inventory as
revalued using the new method is equal to
the amount of the adjustment required
under section 481(a).
(ii) Methods to revalue inventory.
There are three methods available to
revalue inventory. The first method, the
facts and circumstances revaluation
method, may be used by all taxpayers.
Under this method, a taxpayer determines
the direct and indirect costs that must be
assigned to each item of inventory based
on all the facts and circumstances. This
method is described in paragraph
(c)(2)(iii) of this section. The second
method, the weighted average method, is
available only in certain situations to tax-
payers using the FIFO inventory method
or the specific goods LIFO inventory
method. This method is described in
paragraph (c)(2)(iv) of this section. The
1997–37 I.R.B.9September 15, 1997

third method, the 3-year average method,
is available to all taxpayers using the dol-
lar-value LIFO inventory method of ac-
counting. This method is described in
paragraph (c)(2)(v) of this section. The
weighted average method and the 3-year
average method revalue inventory
through processes of estimation and ex-
trapolation, rather than based on the facts
and circumstances of a particular year’s
data. All three methods are available re-
gardless of whether the taxpayer elects to
use a simplified method to capitalize costs
under section 263A.
(iii) Facts and circumstances revalua-
tion method—(A) In general.Under the
facts and circumstances revaluation
method, a taxpayer generally is required
to revalue inventories by applying the
capitalization rules of section 263Aand
the regulations thereunder to the produc-
tion and resale activities of the taxpayer,
with the same degree of specificity as re-
quired of inventory manufacturers under
the law immediately prior to the effective
date of the Tax Reform Act of 1986 (Pub-
lic Law 99–514, 100 Stat. 2085, 1986–3
C.B. (Vol. 1)). Thus, for example, with
respect to any prior year that is relevant in
determining the total amount of the reval-
ued balance as of the beginning of the
year of change, the taxpayer must analyze
the production and resale data for that
particular year and apply the rules and
principles of section 263Aand the regula-
tions thereunder to determine the appro-
priate revalued inventory costs. However,
under the facts and circumstances revalu-
ation method, a taxpayer may utilize rea-
sonable estimates and procedures in valu-
ing inventory costs if—
(1) The taxpayer lacks, and is not able
to reconstruct from its books and records,
actual financial and accounting data
which is required to apply the capitaliza-
tion rules of section 263Aand the regula-
tions thereunder to the relevant facts and
circumstances surrounding a particular
item of inventory or cost; and
(2) The total amounts of costs for
which reasonable estimates and proce-
dures are employed are not significant in
comparison to the total restated value (in-
cluding costs previously capitalized under
the taxpayer’s former method) of the
items or costs for the period in question.
(B) Exception.Ataxpayer that is not
able to comply with the requirement of
paragraph (c)(2)(iii)(A)(2) of this section
because of the existence of a significant
amount of costs that would require the use
of estimates and procedures must revalue
its inventories under the procedures pro-
vided in paragraph (c)(2)(iv) or (v) of this
section.
(C) Estimates and procedures allowed.
The estimates and procedures of this para-
graph (c)(2)(iii) include—
(1) The use of available information
from more recent years to estimate the
amount and nature of inventory costs ap-
plicable to earlier years; and
(2) The use of available information
with respect to comparable items of in-
ventory produced or acquired during the
same year in order to estimate the costs
associated with other items of inventory.
(D) Use by dollar-value LIFO taxpay-
ers. Generally, a dollar-value LIFO tax-
payer must recompute its LIFO inventory
for each taxable year that the LIFO inven-
tory method was used.
(E) Examples.The provisions of this
paragraph (c)(2)(iii) are illustrated by the
following three examples. The principles
set forth in these examples are applicable
both to production and resale activities and
the year of change in all three examples is
1997. The examples read as follows:
Example 1. Taxpayer X lacks information for the
years 1993 and earlier, regarding the amount of
costs incurred in transporting finished goods from
X’s factory to X’s warehouse and in storing those
goods at the warehouse until their sale to customers.
X determines that, for 1994 and subsequent years,
these transportation and storage costs constitute 4
percent of the total costs of comparable goods under
X’s method of accounting for such years. Under this
paragraph (c)(2)(iii), X may assume that transporta-
tion and storage costs for the years 1993 and earlier
constitute 4 percent of the total costs of such goods.
Example 2.Assume the same facts as in Example
1,except that for the year 1993 and earlier, X used a
different method of accounting for inventory costs
whereunder significantly fewer costs were capital-
ized than amounts capitalized in later years. Thus,
the application of transportation and storage based
on a percentage of costs for 1994 and later years
would not constitute a reasonable estimate for use in
earlier years. X may use the information from 1994
and later years, if appropriate adjustments are made
to reflect the differences in inventory costs for the
applicable years, including, for example—
(i) Increasing the percentage of costs that are in-
tended to represent transportation and storage costs
to reflect the aggregate differences in capitalized
amounts under the two methods of accounting; or
(ii) Taking the absolute dollar amount of trans-
portation and storage costs for comparable goods in
inventory and applying that amount (adjusted for
changes in general price levels, where appropriate)
to goods associated with 1993 and prior periods.
Example 3.Taxpayer Z lacks information for
certain years with respect to factory administrative
costs, subject to capitalization under section 263A
and the regulations thereunder, incurred in the pro-
duction of inventory in factory A. Z does have suffi-
cient information to determine factory administra-
tive costs with respect to production of inventory in
factory B, wherein inventory items were produced
during the same years as factory A. Z may use the
information from factory B to determine the appro-
priate amount of factory administrative costs to cap-
italize as inventory costs for comparable items pro-
duced in factory Aduring the same years.
(iv) Weighted average method—(A)
In general.Ataxpayer using the FIFO
method or the specific goods LIFO
method of accounting for inventories may
use the weighted average method as pro-
vided in this paragraph (c)(2)(iv) to esti-
mate the change in the amount of costs
that must be allocated to inventories for
prior years. The weighted average
method under this paragraph (c)(2)(iv) is
only available to a taxpayer that lacks suf-
ficient data to revalue its inventory costs
under the facts and circumstances revalu-
ation method provided for in paragraph
(c)(2)(iii) of this section. Moreover, a
taxpayer that qualifies for the use of the
weighted average method under this para-
graph (c)(2)(iv) must utilize such method
only with respect to items or costs for
which it lacks sufficient information to
revalue under the facts and circumstances
revaluation method. Particular items or
costs must be revalued under the facts and
circumstances revaluation method if suf-
ficient information exists to make such a
revaluation. If a taxpayer lacks sufficient
information to otherwise apply the
weighted average method under this para-
graph (c)(2)(iv) (for example, the tax-
payer is unable to revalue the costs of any
of its items in inventory due to a lack of
information), then the taxpayer must use
reasonable estimates and procedures, as
described in the facts and circumstances
revaluation method, to whatever extent is
necessary to allow the taxpayer to apply
the weighted average method.
(B) Weighted average method for
FIFO taxpayers—(1) In general.This
paragraph (c)(2)(iv)(B) sets forth the me-
chanics of the weighted average method
as applicable to FIFO taxpayers. Under
the weighted average method, an item in
ending inventory for which sufficient data
is not available for revaluation under sec-
tion 263Aand the regulations thereunder
must be revalued by using the weighted
average percentage increase or decrease
with respect to such item for the earliest
subsequent taxable year for which suffi-
September 15, 1997101997–37 I.R.B.

cient data is available. With respect to an
item for which no subsequent data exists,
such item must be revalued by using the
weighted average percentage increase or
decrease with respect to all reasonably
comparable items in the taxpayer’s inven-
tory for the same year or the earliest sub-
sequent taxable year for which sufficient
data is available.
(2) Example. The provisions of this
paragraph (c)(2)(iv)(B) are illustrated by
the following example. The principles set
forth in this example are applicable both
to production and resale activities and the
year of change in the example is 1997.
The example reads as follows:
Example.Taxpayer Amanufactures bolts and
uses the FIFO method to identify inventories. Under
A’s former method, Adid not capitalize all of the
costs required to be capitalized under section 263A.
Amaintains inventories of bolts, two types of which
it no longer produces. Bolt Awas last produced in
1994. The revaluation of the costs of Bolt Aunder
this section for bolts produced in 1994 results in a 20
percent increase of the costs of Bolt A. Aportion of
the inventory of Bolt A, however, is attributable to
1993. Adoes not have sufficient data for revaluation
of the 1993 cost for Bolt A. With respect to Bolt A,
Amay apply the 20 percent increase determined for
1994 to the 1993 production as an acceptable esti-
mate. Bolt B was last produced in 1992 and no data
exists that would allow revaluation of the inventory
cost of Bolt B. The inventories of all other bolts for
which information is available are attributable to
1994 and 1995. Revaluation of the costs of these
other bolts using available data results in an average
increase in inventory costs of 15 percent for 1994
production. With respect to Bolt B, the overall 15
percent increase for A’s inventory for 1994 may be
used in revaluing the cost of Bolt B.
(C) Weighted average method for spe-
cific goods LIFO taxpayers—(1) In gen-
eral.This paragraph (c)(2)(iv)(C) sets
forth the mechanics of the weighted aver-
age method as applicable to LIFO taxpay-
ers using the specific goods method of
valuing inventories. Under the weighted
average method, the inventory layers with
respect to an item for which data is avail-
able are revalued under this section and
the increase or decrease in amount for
each layer is expressed as a percentage of
change from the cost in the layer as origi-
nally valued. Aweighted average of the
percentage of change for all layers for
each type of good is computed and ap-
plied to all earlier layers for each type of
good that lack sufficient data to allow for
revaluation. In the case of earlier layers
for which sufficient data exists, such lay-
ers are to be revalued using actual data.
In cases where sufficient data is not avail-
able to make a weighted average estimate
with respect to a particular item of inven-
tory, a weighted average increase or de-
crease is to be determined using all other
inventory items revalued by the taxpayer
in the same specific goods grouping. This
percentage increase or decrease is then
used to revalue the cost of the item for
which data is lacking. If the taxpayer
lacks sufficient data to revalue any of the
inventory items contained in a specific
goods grouping, then the weighted aver-
age increase or decrease of substantially
similar items (as determined by principles
similar to the rules applicable to dollar-
value LIFO taxpayers in §1.472–8(b)(3))
must be applied in the revaluation of the
items in such grouping. If insufficient
data exists with respect to all the items in
a specific goods grouping and to all items
that are substantially similar (or such
items do not exist), then the weighted av-
erage for all revalued items in the tax-
payer’s inventory must be applied in
revaluing items for which data is lacking.
(2) Example.The provisions of this
paragraph (c)(2)(iv)(C) are illustrated by
the following example. The principles set
forth in this example are applicable both
to production and resale activities and the
year of change in the example is 1997.
The example reads as follows:
Example.(i) Taxpayer M is a manufacturer that
produces two different parts. Under M’s former
method, M did not capitalize all of the costs required
to be capitalized under section 263A. Work-in-
process inventory is recorded in terms of equivalent
units of finished goods. M’s records show the fol-
lowing at the end of 1996 under the specific goods
LIFO inventory method:
LIFOCarrying
Product and layerNumberCostvalues
Product #1:
1993 . . . . . . . . . . . . .150$5.00$750
1994 . . . . . . . . . . . . .1006.00600
1995 . . . . . . . . . . . . .1006.50650
1996 . . . . . . . . . . . . .507.00 350
$2,350
Product #2:
1993 . . . . . . . . . . . . .200$4.00 $800
1994 . . . . . . . . . . . . .2004.50900
1995 . . . . . . . . . . . . .100 5.00500
1996 . . . . . . . . . . . . .1006.00600
$2,800
Total carrying value of
Products #1 and #2 under
M’s former method . . . . . . . . . . . . . . . . . .$5,150
(ii) M has sufficient data to revalue the unit costs
of Product #1 using its new method for 1994, 1995
and 1996. These costs are: $7.00 in 1994, $7.75 in
1995, and $9.00 in 1996. This data for Product #1
results in a weighted average percentage change of
20.31 percent [(100 x ($7.00 – $6.00)) + (100 x
($7.75 – $6.50)) + (50 x ($9.00 – $7.00)) divided by
(100 x $6.00) + (100 x $6.50) + (50 3$7.00)]. M
has sufficient data to revalue the unit costs of Prod-
uct #2 only in 1995 and 1996. These costs are:
$6.00 in 1995 and $7.00 in 1996. This data for
Product #2 results in a weighted average percentage
change of 18.18 percent [(100 3($6.00 – $5.00)) +
(100 3($7.00 – $6.00)) divided by (100 3$5.00) +
(100 3$6.00)].
(iii) M can estimate its revalued costs for Product
#1 for 1993 by applying the weighted average in-
crease computed for Product #1 (20.31 percent) to
the unit costs originally carried on M’s records for
1993 under M’s former method. The estimated
revalued unit cost of Product #1 would be $6.02
($5.00 31.2031). M estimates its revalued costs for
Product #2 for 1993 and 1994 in a similar fashion.
M applies the weighted average increase determined
for Product #2 (18.18 percent) to the unit costs of
$4.00 and $4.50 for 1993 and 1994 respectively.
The revalued unit costs of Product #2 are $4.73 for
1993 ($4.00 31.1818) and $5.32 for 1994 ($4.50 3
1.1818).
(iv) M’s inventory would be revalued as follows:
LIFOCarrying
Product and layerNumberCostvalues
Product #1:
1993. . . . . . . . . . . . 150$6.02$903
1994. . . . . . . . . . . . 1007.00700
1995. . . . . . . . . . . . 1007.75775
1996.. . . . . . . . . . . . 509.00450
$2,828
Product #2:
1993. . . . . . . . . . . . 200$4.73$946
1994. . . . . . . . . . . . 2005.321,064
1995. . . . . . . . . . . . 1006.00600
1996. . . . . . . . . . . . 1007.00700
$3,310
Total value of Products #1 and #2
as revalued under M’s new method . . . . .$6,138
Total amount of adjustment required under
section 481(a) [$6,138 – $5,150] . . . . . . . . .$988
(D) Adjustments to inventory costs
from prior years. For special rules applic-
able when a revaluation using the
weighted average method includes costs
not incurred in prior years, see paragraph
(c)(2)(v)(E) of this section.
(v) 3-year average method—(A) In
general. Ataxpayer using the dollar-
value LIFO method of accounting for in-
ventories may revalue all existing LIFO
layers of a trade or business based on the
3-year average method as provided in this
paragraph (c)(2)(v). The 3-year average
method is based on the average percent-
age change (the 3-year revaluation factor)
in the current costs of inventory for each
LIFO pool based on the three most recent
taxable years for which the taxpayer has
sufficient information (typically, the three
most recent taxable years of such trade or
business). The 3-year revaluation factor
is applied to all layers for each pool in be-
ginning inventory in the year of change.
The 3-year average method is available to
1997–37 I.R.B.11September 15, 1997

any dollar-value taxpayer that complies
with the requirements of this paragraph
(c)(2)(v) regardless of whether such tax-
payer lacks sufficient data to revalue its
inventory costs under the facts and cir-
cumstances revaluation method prescribed
in paragraph (c)(2)(iii) of this section. The
3-year average method must be applied
with respect to all inventory in a tax-
payer’s trade or business. Ataxpayer is
not permitted to apply the method for the
revaluation of some, but not all, inventory
costs on the basis of pools, business units,
or other measures of inventory amounts
that do not constitute a separate trade or
business. Generally, a taxpayer revaluing
its inventory using the 3-year average
method must establish a new base year.
See, paragraph (b)(2)(iii)(A)(2)(i) of this
section. However, a dollar-value LIFO
taxpayer using the 3-year average method
and either the simplified production
method or the simplified resale method to
revalue its inventory is permitted, but not
required, to establish a new base year.
See, paragraph (b)(2)(iii)(A)(2)(ii) of this
section. If a taxpayer lacks sufficient in-
formation to otherwise apply the 3-year
average method under this paragraph
(c)(2)(v) (for example, the taxpayer is un-
able to revalue the costs of any of its LIFO
pools for three years due to a lack of infor-
mation), then the taxpayer must use rea-
sonable estimates and procedures, as de-
scribed in the facts and circumstances
revaluation method under paragraph
(c)(2)(iii) of this section, to whatever ex-
tent is necessary to allow the taxpayer to
apply the 3-year average method.
(B) Consecutive year requirement.
Under the 3-year average method, if suffi-
cient data is available to calculate the
revaluation factor for more than three
years, the taxpayer may use data from
such additional years in determining the
average percentage increase or decrease
only if the additional years are consecu-
tive to and prior to the year of change.
The requirement under the preceding sen-
tence to use consecutive years is applica-
ble under this method regardless of
whether any inventory costs in beginning
inventory as of the year of change are
viewed as incurred in, or attributable to,
those consecutive years under the LIFO
inventory method. Thus, the requirement
to use data from consecutive years may
result in using information from a year in
which no LIFO increment occurred. For
example, if a taxpayer is changing its
method of accounting in 1997 and has suf-
ficient data to revalue its inventory for the
years 1991 through 1996, the taxpayer
may calculate the revaluation factor using
all six years. If, however, the taxpayer has
sufficient data to revalue its inventory for
the years 1990 through 1992, and 1994
through 1996, only the three years consec-
utive to the year of change, that is, 1994
through 1996, may be used in determining
the revaluation factor. Similarly, for ex-
ample, a taxpayer with LIFO increments
in 1995, 1993, and 1992 may not calculate
the revaluation factor based on the data
from those years alone, but instead must
use the data from consecutive years for
which the taxpayer has information.
(C) Example.The provisions of this
paragraph (c)(2)(v) are illustrated by the
following example. The principles set
forth in this example are applicable both
to production and resale activities and the
year of change in the example is 1997.
The example reads as follows:
Example. (i) Taxpayer G, a calendar year tax-
payer, is a reseller that is required to change its
method of accounting under section 263A. G will
not use either the simplified production method or
the simplified resale method. G adopted the dollar-
value LIFO inventory method in 1991, using a sin-
gle pool and the double extension method. G’s be-
ginning LIFO inventory as of January 1, 1997,
computed using its former method, for the year of
change is as follows:
Base yearLIFO
costsIndex carrying value
Base layer. . . $14,0001.00$14,000
1991 layer. . . . . 4,000 1.204,800
1992 layer. . . . . 5,0001.306,500
1993 layer. . . . . 2,0001.352,700
1994 layer. . . . . . . . . 01.400
1995 layer. . . . . 4,0001.506,000
1996 layer. . . . . 5,0001.608,000
Total. . . . . . . . $34,000. . . . $42,000
(ii) G is able to recompute total inventoriable
costs incurred under its new method for the three
preceding taxable years as follows:
CurrentCurrent
cost ascost as
recordedadjusted
(former(newPercentage
method)method)change
1994 . . . . . . .$35,000$45,150.29
1995 . . . . . . . .43,50054,375.25
1996 . . . . . . . .54,40070,720.30
Total . . . . . .$132,900$170,245.28
(iii) Applying the average revaluation factor of
.28 to each layer, G’s inventory is restated as fol-
lows:
RestatedRestated
base yearLIFO carrying
costsIndexvalue
Base layer . . .$17,9201.00$17,920
1991 layer . . . . .5,1201.206,144
1992 layer . . . . .6,4001.308,320
1993 layer . . . .2,5601.353,456
1994 layer . . . . . . . .01.400
1995 layer . . . . .5,1201.507,680
1996 layer . . . .6,4001.6010,240
Total . . . . . . .$43,520. . . . $53,760
(iv) The adjustment required by section 481(a) is
$11,760. This amount may be computed by multi-
plying the average percentage of .28 by the LIFO
carrying value of G’s inventory valued using its for-
mer method ($42,000). Alternatively, the adjust-
ment required by section 481(a) may be computed
by the difference between—
(A) The revalued costs of the taxpayer’s inven-
tory under its new method ($53,760), and
(B) The costs of the taxpayer’s inventory using its
former method ($42,000).
(v) In addition, the inventory as of the first day of
the year of change (January 1, 1997) becomes the
new base year cost for purposes of determining the
LIFO index in future years. See, paragraphs
(b)(2)(iii)(A)(2)(i) and (b)(2)(iii)(B) of this section.
This requires that layers in years prior to the base
year be restated in terms of the new base year index.
The current year cost of G’s inventory, as adjusted,
is $70,720. Such cost must be apportioned to each
layer in proportion to the restated base year cost of
that layer to total restated base year costs ($43,520),
as follows:
RestatedRestated
base yearRestatedLIFO carrying
costsindexvalue
Old base layer$29,120.615$17,920
1991 layer . . . . .8,320.7386,144
1992 layer . . . .10,400.808,320
1993 layer . . . . .4,160.8313,456
1994 layer . . . . . . . .0—0
1995 layer . . . . .8,320.9237,680
1996 layer . . . .10,400.98510,240
Total . . . . . . . .$70,720. . . . $53,760
(D) Short taxable years.Ashort tax-
able year is treated as a full 12 months.
(E) Adjustments to inventory costs
from prior years—(1) General rule—(i)
The use of the revaluation factor, based
on current costs, to estimate the revalua-
tion of prior inventory layers under the 3-
year average method, as described in
paragraph (c)(2)(v) of this section, may
result in an allocation of costs that include
amounts attributable to costs not incurred
during the year in which the layer arose.
To the extent a taxpayer can demonstrate
that costs that contributed to the determi-
nation of the revaluation factor could not
have affected a prior year, the revaluation
factor as applied to that year may be ad-
justed under the restatement adjustment
procedure, as described in paragraph
(c)(2)(v)(F) of this section. The determi-
nation that a cost could not have affected
September 15, 1997121997–37 I.R.B.

a prior year must be made by a taxpayer
only upon showing that the type of cost
incurred during the years used to calculate
the revaluation factor (revaluation years)
was not present during such prior year.
An item of cost will not be eligible for the
restatement adjustment procedure simply
because the cost varies in amount from
year to year or the same type of cost is de-
scribed or referred to by a different name
from year to year. Thus, the restatement
adjustment procedure allowed under para-
graph (c)(2)(v)(F) of this section is not
available in a prior year with respect to a
particular cost if the same type of cost
was incurred both in the revaluation years
and in such prior year, although the
amount of such cost and the name or de-
scription thereof may vary.
(ii) The provisions of this paragraph
(c)(2)(v)(E) are also applicable to taxpay-
ers using the weighted average method in
revaluing inventories under paragraph
(c)(2)(iv) of this section. Thus, to the ex-
tent a taxpayer can demonstrate that costs
that contributed to the determination of
the restatement of a particular year or
item could not have affected a prior year
or item, the taxpayer may adjust the reval-
uation of that prior year or item accord-
ingly under the weighted average method.
All the requirements and definitions,
however, applicable to the restatement ad-
justment procedure under this paragraph
(c)(2)(v)(E) fully apply to a taxpayer
using the weighted average method to
revalue inventories.
(2) Examples of costs eligible for re-
statement adjustment procedure. The
provisions of this paragraph (c)(2)(v)(E)
are illustrated by the following four ex-
amples. The principles set forth in these
examples are applicable both to produc-
tion and resale activities and the year of
change in the four examples is 1997. The
examples read as follows:
Example 1. Taxpayer Ais a reseller that intro-
duced a defined benefit pension plan in 1994, and
made the plan available to personnel whose labor
costs were (directly or indirectly) properly allocable
to resale activities. Adetermines the revaluation
factor based on data available for the years 1994
through 1996, for which the pension plan was in ex-
istence. Based on these facts, the costs of the pen-
sion plan in the revaluation years are eligible for the
restatement adjustment procedure for years prior to
1994.
Example 2. Assume the same facts as in Example
1, except that a defined contribution plan was avail-
able, during prior years, to personnel whose labor
costs were properly allocable to resale activities.
The defined contribution plan was terminated before
the introduction of the defined benefit plan in 1994.
Based on these facts, the costs of the defined benefit
pension plan in the revaluation years are not eligible
for the restatement adjustment procedure with re-
spect to years for which the defined contribution
plan existed.
Example 3.Taxpayer C is a manufacturer that es-
tablished a security department in 1995 to patrol and
safeguard its production and warehouse areas used
in C’s trade or business. Prior to 1995, C had not
been required to utilize security personnel in its
trade or business; C established the security depart-
ment in 1995 in response to increasing vandalism
and theft at its plant locations. Based on these facts,
the costs of the security department are eligible for
the restatement adjustment procedure for years prior
to 1995.
Example 4.Taxpayer D is a reseller that estab-
lished a payroll department in 1995 to process the
company’s weekly payroll. In the years 1991
through 1994, D engaged the services of an outside
vendor to process the company’s payroll. Prior to
1991, D’s payroll processing was done by D’s ac-
counting department, which was responsible for
payroll processing as well as for other accounting
functions. Based on these facts, the costs of the pay-
roll department are not eligible for the restatement
adjustment procedure. D was incurring the same
type of costs in earlier years as D was incurring in
the payroll department in 1995 and subsequent
years, although these costs were designated by a dif-
ferent name or description.
(F) Restatement adjustment pro-
cedure—(1) In general—(i) This para-
graph (c)(2)(v)(F) provides a restatement
adjustment procedure whereunder a tax-
payer may adjust the restatement of in-
ventory costs in prior taxable years in
order to produce a different restated value
than the value that would otherwise occur
through application of the revaluation fac-
tor to such prior taxable years.
(ii) Under the restatement adjustment
procedure as applied to a particular prior
year, a taxpayer must determine the par-
ticular items of cost that are eligible for
the restatement adjustment with respect to
such prior year. The taxpayer must then
recompute, using reasonable estimates
and procedures, the total inventoriable
costs that would have been incurred for
each revaluation year under the tax-
payer’s former method and the taxpayer’s
new method by making appropriate ad-
justments in the data for such revaluation
year to reflect the particular costs eligible
for adjustment.
(iii) The taxpayer must then compute
the total percentage change with respect
to each revaluation year, using the revised
estimates of total inventoriable costs for
such year as described in paragraph
(c)(2)(v)(F)(1)(ii) of this section. The
percentage change must be determined by
calculating the ratio of the revised total of
the inventoriable costs for such revalua-
tion year under the taxpayer’s new
method to the revised total of the invento-
riable costs for such revaluation year
under the taxpayer’s former method.
(iv) An average of the resulting per-
centage change for all revaluation years is
then calculated, and the resulting average
is applied to the prior year in issue.
(2) Examples of restatement adjust-
ment procedure.The provisions of this
paragraph (c)(2)(v)(F) are illustrated by
the following two examples. The princi-
ples set forth in these examples are ap-
plicable both to production and resale ac-
tivities and the year of change in the two
examples is 1997. The examples read as
follows:
Example 1.Taxpayer Ais a reseller that is eligible
to make a restatement adjustment by reason of the
costs of a defined benefit pension plan that was intro-
duced in 1994, during the revaluation period. The
revaluation factor, before adjustment of data to reflect
the pension costs, is as provided in the example in
paragraph (c)(2)(v)(C) of this section. Thus, for ex-
ample, with respect to the year 1994, the total inven-
toriable costs under A’s former method is $35,000, the
total inventoriable costs under A’s new method is
$45,150, and the percentage change is .29. Under the
method of accounting used by Aduring 1994 (the for-
mer method), none of the pension costs were included
as inventoriable costs. Thus, under the restatement
adjustment procedure, the total inventoriable cost
under A’s former method would remain at $35,000 if
the pension plan had not been in existence. Similarly,
Adetermines that the total inventoriable costs for
1994 under A’s new method, if the pension plan had
not been in existence, would have been $42,000. The
restatement adjustment for 1994 determined under
this paragraph (c)(2)(v)(F) would then be equal to .20
([$42,000 – $35,000]/$35,000). Awould make simi-
lar calculations with respect to 1995 and 1996. The
average of such amounts for each of the three years in
the revaluation period would then be determined as in
the example in paragraph (c)(2)(v)(C) of this section.
Such average would be used to revalue cost layers for
years for which the pension plan was not in existence.
Such revalued layers would then be viewed as re-
stated in compliance with the requirements of this
paragraph. With respect to cost layers incurred during
years for which the pension plan was in existence, no
adjustment of the revaluation factor would occur.
Example 2.Assume the same facts as in Example
1,except that a portion of the pension costs were in-
cluded as inventoriable costs under the method used
by Aduring 1994 (the former method). Under the
restatement adjustment procedure, Adetermines that
the total inventoriable costs for 1994 under the for-
mer method, if the pension plan had not been in ex-
istence, would have been $34,000. Similarly, Ade-
termines that the total inventoriable costs for 1994
under A’s new method, if the pension plan had not
been in existence, would have been $42,000. The
restatement adjustment for 1994 determined under
this paragraph (c)(2)(v)(F) would then be equal to
.24 ([$42,000 – $34,000]/$34,000). Awould make
similar calculations with respect to 1995 and 1996.
The average of such amounts for each of the three
years in the revaluation period would then be deter-
mined as in the example in paragraph (c)(2)(v)(C) of
this section. Such average would be used to revalue
1997–37 I.R.B.13September 15, 1997

cost layers for years for which the pension plan was
not in existence.
(3) Intercompany items—(i) Revaluing
intercompany transactions.Pursuant to
any change in method of accounting for
costs subject to section 263A, taxpayers
are required to revalue the amount of any
intercompany item resulting from the sale
or exchange of inventory property in an
intercompany transaction to an amount
equal to the intercompany item that would
have resulted had the cost of goods sold
for that inventory property been deter-
mined under the taxpayer’s new method.
The requirement of the preceding sen-
tence applies with respect to both inven-
tory produced by a taxpayer and inven-
tory acquired by the taxpayer for resale.
In addition, the requirements of this para-
graph (c)(3) apply only to any intercom-
pany item of the taxpayer as of the begin-
ning of the year of change in method of
accounting. See §1.1502–13(b)(2)(ii). A
taxpayer must revalue the amount of any
intercompany item only if the inventory
property sold in the intercompany trans-
action is held as inventory by a buying
member as of the date the taxpayer
changes its method of accounting under
section 263A. Corresponding changes to
the adjustment required under section
481(a) must be made with respect to any
adjustment of the intercompany item re-
quired under this paragraph (c)(3). More-
over, the requirements of this paragraph
(c)(3) apply regardless of whether the tax-
payer has any items in beginning inven-
tory as of the year of change in method of
accounting. See §1.1502–13 for the defi-
nition of intercompany transaction.
(ii) Example.The provisions of this
paragraph (c)(3) are illustrated by the fol-
lowing example. The principles set forth
in this example are applicable both to pro-
duction and resale activities and the year
of change in the example is 1997. The
example reads as follows:
Example. (i) Assume that S, a member of a con-
solidated group filing its federal income tax return
on a calendar year, manufactures and sells inventory
property to B, a member of the same consolidated
group, in 1996. The sale between S and B is an in-
tercompany transaction as defined under §1.1502–
13(b)(1). The gain from the intercompany transac-
tion is an intercompany item to S under §1.1502–
13(b)(2). As of the beginning of the year of change
in method of accounting (January 1, 1997), the in-
ventory property is still held by B based on the par-
ticular inventory method of accounting used by B
for federal income tax purposes (for example, the
LIFO or FIFO inventory method). The property was
sold by S to B in 1996 for $150; the cost of goods
sold with respect to the property under the method in
effect at the time the inventory was produced was
$100, resulting in an intercompany item of $50 to S
under §1.1502–13. As of January 1, 1997, S still has
an intercompany item of $50.
(ii) S is required to revalue the amount of its in-
tercompany item to an amount equal to what the in-
tercompany item would have been had the cost of
goods sold for that inventory property been deter-
mined under S’s new method. Assume that the cost
of the inventory under this method would have been
$110, had the method applied to S’s manufacture of
the property in 1996. Thus, S is required to revalue
the amount of its intercompany item to $40 (that is,
$150 less $110), necessitating a negative adjustment
to the intercompany item of $10. Moreover, S is re-
quired to increase its adjustment under section
481(a) by $10 in order to prevent the omission of
such amount by virtue of the decrease in the inter-
company item.
(iii) Availability of revaluation meth-
ods.In revaluing the amount of any in-
tercompany item resulting from the sale
or exchange of inventory property in an
intercompany transaction to an amount
equal to the intercompany item that would
have resulted had the cost of goods sold
for that inventory property been deter-
mined under the taxpayer’s new method,
a taxpayer may use the other methods and
procedures otherwise properly available
to that particular taxpayer in revaluing in-
ventory under section 263Aand the regu-
lations thereunder, including, if appropri-
ate, the various simplified methods
provided in section 263Aand the regula-
tions thereunder and the various proce-
dures described in this paragraph (c).
(4) Anti-abuse rule—(i) In general.
Section 263A(i)(1) provides that the Sec-
retary shall prescribe such regulations as
may be necessary or appropriate to carry
out the purposes of section 263A, includ-
ing regulations to prevent the use of re-
lated parties, pass-thru entities, or inter-
mediaries to avoid the application of
section 263Aand the regulations thereun-
der. One way in which the application of
section 263Aand the regulations thereun-
der would be otherwise avoided is
through the use of entities described in the
preceding sentence in such a manner as to
effectively avoid the necessity to restate
beginning inventory balances under the
change in method of accounting required
or permitted under section 263Aand the
regulations thereunder.
(ii) Deemed avoidance of this
section—(A) Scope.For purposes of this
paragraph (c), the avoidance of the appli-
cation of section 263Aand the regulations
thereunder will be deemed to occur if a
taxpayer using the LIFO method of ac-
counting for inventories, transfers inven-
tory property to a related corporation in a
transaction described in section 351, and
such transfer occurs:
(1) On or before the beginning of the
transferor’s taxable year beginning in
1987; and
(2) After September 18, 1986.
(B) General rule.Any transaction de-
scribed in paragraph (c)(4)(ii)(A) of this
section will be treated in the following
manner:
(1) Notwithstanding any provision to
the contrary (for example, section 381),
the transferee corporation is required to
revalue the inventories acquired from the
transferor under the provisions of this
paragraph (c) relating to the change in
method of accounting and the adjustment
required by section 481(a), as if the inven-
tories had never been transferred and were
still in the hands of the transferor; and
(
2) Absent an election as described in
paragraph (c)(4)(iii) of this section, the
transferee must account for the invento-
ries acquired from the transferor by treat-
ing such inventories as if they were con-
tained in the transferee’s LIFO layer(s).
(iii) Election to use transferor’s LIFO
layers.If a transferee described in para-
graph (c)(4)(ii) of this section so elects,
the transferee may account for the inven-
tories acquired from the transferor by al-
locating such inventories to LIFO layers
corresponding to the layers to which such
properties were properly allocated by the
transferor, prior to their transfer. The
transferee must account for such invento-
ries for all subsequent periods with refer-
ence to such layers to which the LIFO
costs were allocated. Any such election is
to be made on a statement attached to the
timely filed federal income tax return of
the transferee for the first taxable year for
which section 263Aand the regulations
thereunder applies to the transferee.
(iv) Tax avoidance intent not required.
The provisions of paragraph (c)(4)(ii) of
this section will apply to any transaction
described therein, without regard to
whether such transaction was consum-
mated with an intention to avoid federal
income taxes.
(v) Related corporation.For purposes
of this paragraph (c)(4), a taxpayer is re-
lated to a corporation if—
(A) the relationship between such per-
September 15, 1997141997–37 I.R.B.

sons is described in section 267(b)(1), or
(B) such persons are engaged in trades
or businesses under common control
(within the meaning of paragraphs (a) and
(b) of section 52).
(d) Non-inventory property—(1) Need
for adjustments.Ataxpayer that changes
its method of accounting for costs subject
to section 263Awith respect to non-in-
ventory property must revalue the non-in-
ventory property on hand at the beginning
of the year of change as set forth in para-
graph (d)(2) of this section, and compute
an adjustment under section 481(a). The
adjustment under section 481(a) will
equal the difference between the adjusted
basis of the property as revalued using the
taxpayer’s new method and the adjusted
basis of the property as originally valued
using the taxpayer’s former method.
(2) Revaluing property.Ataxpayer
must revalue its non-inventory property
as of the beginning of the year of change
in method of accounting. The facts and
circumstances revaluation method of
paragraph (c)(2)(iii) of this section must
be used to revalue this property. In
revaluing non-inventory property, how-
ever, the only additional section 263A
costs that must be taken into account are
those additional section 263Acosts in-
curred after the later of December 31,
1986, or the date the taxpayer first be-
comes subject to section 263A, in taxable
years ending after that date. See
§1.263A–1(d)(3) for the definition of ad-
ditional section 263Acosts.
§ 1.263A–7T[Removed]
Par. 5. Section 1.263A–7Tis removed.
§ 1.263A-15 [Amended]
Par. 6. Section 1.263A–15 is amended
by removing “1.263A–7T(e) generally”
from the last sentence in paragraph (a)(1)
and replacing it with “1.263A–7”.
Michael P. Dolan,
Acting Commissioner of
Internal Revenue.
Approved July 28, 1997.
Donald C. Lubick,
Acting Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on Au-
gust 4, 1997, 8:45 a.m., and published in the issue of
the Federal Register for August 5, 1997, 62 F.R.
42051)
Section 472.—Last-in, First-out
Inventories
26 CFR 1.472-1: Last-in, first-out inventories.
LIFO; price indexes; department
stores. The July 1997 Bureau of Labor
Statistics price indexes are accepted for
use by department stores employing the
retail inventory and last-in, first-out in-
ventory methods for valuing inventories
for tax years ended on, or with reference
to, July 31, 1997.
Rev. Rul. 97–37
The following Department Store Inven-
tory Price Indexes for July 1997 were is-
sued by the Bureau of Labor Statistics on
August 14, 1997. The indexes are ac-
cepted by the Internal Revenue Service,
under § 1.472–1(k) of the Income Tax
Regulations and Rev. Proc. 86–46, 1986–2
C.B. 739, for appropriate application to in-
ventories of department stores employing
the retail inventory and last-in, first-out in-
ventory methods for tax years ended on, or
with reference to, July 31, 1997.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of de-
partments, (b) three special combinations
of the major groups - soft goods, durable
goods, and miscellaneous goods, and (c)
a store total, which covers all depart-
ments, including some not listed sepa-
rately, except for the following: candy,
foods, liquor, tobacco, and contract de-
partments.
1997–37 I.R.B.15September 15, 1997
BUREAU OF LABOR STATISTICS, DEPARTMENTSTORE
INVENTORYPRICE INDEXES BYDEPARTMENTGROUPS
(January 1941 = 100, unless otherwise noted)
Percent Change
GroupsJulyJulyfrom July 1996
19961997to July 1997
1
1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .539.2539.80.1
2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .635.6656.13.2
3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . .643.9641.6–0.4
4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .888.2902.61.6
5. Infants’Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .609.3637.94.7
6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .536.9543.51.2
7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .289.3297.82.9
8. Women’s and Girls’Accessories . . . . . . . . . . . . . . . . . . . . . . . .544.7544.50.0
9. Women’s Outerwear and Girls’Wear . . . . . . . . . . . . . . . . . . . . .380.6395.03.8
10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .610.3621.61.9
11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .573.0585.92.3
12. Boys’Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . .475.9495.94.2
13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1016.01003.9–1.2
14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .779.4797.52.3
15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .880.9905.72.8
16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .671.6662.8–1.3
17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .577.5598.23.6

BUREAU OF LABOR STATISTICS, DEPARTMENTSTORE
INVENTORYPRICE INDEXES BYDEPARTMENTGROUPS
(January 1941 = 100, unless otherwise noted)
Percent Change
GroupsJulyJulyfrom July 1996
19961997to July 1997
1
18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .811.9807.2–0.6
19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .245.8243.1–1.1
20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79.275.9–4.2
21. Recreation and Education
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .112.7109.8–2.6
22. Home Improvements
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .126.8132.74.7
23. Auto Accessories
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107.0108.61.5
Groups 1 – 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .582.4594.92.1
Groups 16 – 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . .470.3464.2–1.3
Groups 21 – 23: Misc. Goods
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .113.5112.5–0.9
Store Total
3
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .544.2549.81.0
1
Absence of a minus sign before percentage change in this column signifies price increase.
2
Indexes on a January 1986=100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, foods, liquor, tobacco, and contract departments.
September 15, 1997161997–37 I.R.B.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Stan Michaels of the Office of
Assistant Chief Counsel (Income Tax and
Accounting). For further information re-
garding this revenue ruling, contact Mr.
Michaels on (202) 622-4970 (not a toll-
free call).
Section 6334.—Property
Exempt From Levy
26 CFR 301.6334–1: Property exempt from levy.
T.D. 8725
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
Miscellaneous Sections Affected
by the Taxpayer Bill of Rights 2
and the Personal Responsibility
and Work Opportunity
Reconciliation Act of 1996
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to joint returns,
property exempt from levy, interest,
penalties, offers in compromise, and the
awarding of costs and certain fees. The
regulations reflect changes to the law
made by the Taxpayer Bill of Rights 2 and
a conforming amendment made by the
Personal Responsibility and Work Oppor-
tunity Reconciliation Act of 1996. The
regulations affect taxpayers with respect
to filing of returns, interest, penalties,
court costs, and payment, deposit, and
collection of taxes.
DATES: These regulations are effective
July 22, 1997.
For dates of applicability of these regu-
lations, see §§301.6334–1(e) and (f),
301.6601–1(f)(3) and (4), 301.6651–
1(a)(3) and (g)(2), 301.6656–3(c),
301.7122–1(e)(2), 301.7430–2(c)(3)-
(i)(B), 301.7430–4(b)(3)(ii), 301.7430–
5(a) and (c)(3), and 301.7430–6.
FOR FURTHER INFORMATION CON-
TACT: Beverly A. Baughman, (202) 622-
4940 regarding joint returns and penal-
ties; Robert A. Miller, (202) 622-3640
regarding levy; Donna J. Welch, (202)
622-4910 regarding interest; Thomas D.
Moffitt, (202) 622-7900 regarding court
costs; and Kevin B. Connelly, (202) 622-
3640 regarding compromises (not toll-
free numbers).
SUPPLEMENTARYINFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1356. Responses to this collection
of information are required to obtain an
award of reasonable administrative costs.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
control number.
The estimated annual burden per re-
spondent varies from 10 minutes to 30
minutes, depending on individual circum-
stances, with an estimated average of 15
minutes.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service,Attn: IRS
Reports Clearance Officer, PC:FP, Wash-
ington, DC 20224, and to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503.
Books or records relating to a collec-

tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103
Background
This document contains amendments to
the Income Tax Regulations and the Reg-
ulations on Procedure and Administration
(26 CFR parts 1 and 301, respectively) re-
lating to joint returns under section 6013,
levy under section 6334, interest under
section 6601, the failure to file penalty
under section 6651, the failure to deposit
penalty under section 6656, compromise
under section 7122, and awards of costs
and certain fees under section 7430.
These sections were amended by the Tax-
payer Bill of Rights 2 (TBOR2) (Public
Law 104–168, 110 Stat. 1452 (1996)) and
section 110(l)(6) of the Personal Respon-
sibility and Work Opportunity Reconcilia-
tion Act of 1996 (Public Law 104–193,
110 Stat. 2105, 2173 (1996)). The
changes made by TBOR2 and the Per-
sonal Responsibility and Work Opportu-
nity Reconciliation Act of 1996 are re-
flected in the final regulations.
Anotice of proposed rulemaking was
published in the Federal Registerfor Jan-
uary 2, 1997 (62 FR 77). One written
comment was received in response to the
notice of proposed rulemaking. No public
hearing was requested or held. The pro-
posed regulations under sections 6013,
6334, 6601, 6651, 6656, 7122, and 7430
are adopted by this Treasury decision with
minor revisions, which are discussed
below.
Explanation of Revisions and Summary
of Comments
The IRS received one comment regard-
ing the proposed regulations. The com-
mentator remarked that §301.6601– 1(f)(3)
of the proposed regulations is unclear be-
cause, as drafted, the regulation implies
that interest on all additions to tax, includ-
ing those covered by section 6601(e)-
(2)(B), runs from the date of the notice and
demand. Therefore, the final regulations
clarify that interest on any addition to tax,
except additions to tax described in section
6601(e)(2)(B), begins to run from the date
of the notice and demand.
The commentator also requested clari-
fication for purposes of computing the
$100,000 threshold in §§301.6601–
1(f)(3) and (4) and 301.6651–1(a)(3).
Sections 303(a) and (b) of TBOR2 extend
the interest-free period to 21 calendar
days or 10 business days if the amount for
which the notice and demand is made
equals or exceeds $100,000. The com-
mentator suggested that the $100,000
threshold should include tax, interest, and
penalties. The language in the statute
supports this interpretation. Under sec-
tion 303(b)(1) of TBOR2, the 10 day pe-
riod specifically applies to a notice and
demand for interest and penalties. There-
fore, the final regulations clarify that 10
business days is the applicable interest-
free period if the total amount assessed,
including tax, penalties, and interest, and
shown on the notice and demand equals
or exceeds $100,000.
In addition, §301.6651–1(a)(3), regard-
ing the failure to pay penalty, has been
clarified by cross-referencing the defini-
tions of calendar day and business day in
§301.6601–1(f)(5).
Effective Dates
These regulations are applicable on
July 31, 1996, except that §301.7122–1(e)
is applicable on July 30, 1996, and
§301.6334–1(a)(2), (a)(3), (a)(11)(i), and
(e), §301.6601–1(f)(3), (f)(4), and (f)(5),
§301.6651–1(a)(3), and §301.7430–
4(b)(3)(ii) are applicable on January 1,
1997.
Special Analyses
It has been determined that this Treasury
decision is not a significant regulatory ac-
tion as defined in EO 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to
these regulations. Moreover, it is hereby
certified that the regulations in this docu-
ment will not have a significant economic
impact on a substantial number of small
entities. This certification is based on a de-
termination that in the past only an average
of 38 taxpayers per year, the majority of
whom were individuals, have filed a re-
quest to recover administrative costs. Ac-
cordingly, a Regulatory Flexibility Analy-
sis under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Inter-
nal Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on the impact of the
proposed regulations on small business.
Drafting Information
The principal authors of these regula-
tions are Beverly A. Baughman and
Donna J. Welch, Office of Assistant Chief
Counsel (Income Tax and Accounting),
Robert A. Miller and Kevin B. Connelly,
Office of Assistant Chief Counsel (Gen-
eral Litigation), and Thomas D. Moffitt,
Office of Assistant Chief Counsel (Field
Service). However, other personnel from
the IRS and Treasury Department partici-
pated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are amended as follows:
PART1—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 1.6013–2(b)(1) is
amended by removing the language “Un-
less” and adding “Beginning on or before
July 30, 1996, unless” in its place.
PART301—PROCEDURE AND
ADMINISTRATION
Par. 3. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 4. Section 301.6334–1 is amended
by:
1. Revising paragraph (a)(2).
2. Removing the language “$1,100
($1,050 for levies issued prior to January
1, 1990)” from paragraph (a)(3) and
adding “$1,250” in its place.
3. Removing the language “(relating to
aid to families with dependent children)”
from paragraph (a)(11)(i).
4. Revising paragraph (e).
5. Adding paragraph (f).
The additions and revisions read as fol-
lows:
§301.6334–1 Property exempt from levy.
(a) * * *
1997–37 I.R.B.17September 15, 1997

(2) Fuel, provisions, furniture, and per-
sonal effects. So much of the fuel, provi-
sions, furniture, and personal effects in
the taxpayer’s household, and of the arms
for personal use, livestock, and poultry of
the taxpayer, that does not exceed $2,500
in value.
* * * * *
(e) Inflation adjustment.For any calen-
dar year beginning after December 31,
1997, each dollar amount referred to in
paragraphs (a)(2) and (3) of this section
will be increased by an amount equal to the
dollar amount multiplied by the cost-of-
living adjustment determined under sec-
tion 1(f)(3) for the calendar year (substitut-
ing “calendar year 1996” for “calendar
year 1992” in section 1(f)(3)(B)). If any
dollar amount as adjusted is not a multiple
of $10, the dollar amount will be rounded
to the nearest multiple of $10 (rounding up
if the amount is a multiple of $5).
(f) Effective date.Generally, these pro-
visions are applicable with respect to levies
made on or after July 1, 1989. However,
any reasonable attempt by a taxpayer to
comply with the statutory amendments ad-
dressed by the regulations in this section
prior to February 21, 1995, will be consid-
ered as meeting the requirements of the
regulations in this section. In addition,
paragraphs (a)(2), (3), (11)(i) and (e) of
this section are applicable with respect to
levies issued after December 31, 1996.
Par. 5. Section 301.6601–1 is amended
by:
1. Revising paragraphs (f)(3) and
(f)(4).
2. Redesignating paragraph (f)(5) as
paragraph (f)(6) and adding new para-
graph (f)(5).
The additions and revisions read as fol-
lows:
§301.6601–1 Interest on underpayments.
* * * * *
(f) * * *
(3) Interest will not be imposed on any
assessable penalty, addition to the tax
(other than an addition to tax described in
section 6601(e)(2)(B)), or additional
amount if the amount is paid within 21
calendar days (10 business days if the
amount assessed and shown on the notice
and demand equals or exceeds $100,000)
from the date of the notice and demand. If
interest is imposed, it will be imposed
only for the period from the date of the no-
tice and demand to the date on which pay-
ment is received. This paragraph (f)(3) is
applicable with respect to any notice and
demand made after December 31, 1996.
(4) If notice and demand is made after
December 31, 1996, for any amount and
the amount is paid within 21 calendar
days (10 business days if the amount as-
sessed and shown on the notice and de-
mand equals or exceeds $100,000) from
the date of the notice and demand, interest
will not be imposed for the period after
the date of the notice and demand.
(5) For purposes of paragraphs (f)(3)
and (4) of this section—
(i) The term business daymeans any
day other than a Saturday, Sunday, legal
holiday in the District of Columbia, or a
statewide legal holiday in the state where
the taxpayer resides or where the tax-
payer’s principal place of business is lo-
cated. With respect to the tenth business
day (after taking into account the first
sentence of this paragraph (f)(5)(i)), see
section 7503 relating to time for perfor-
mance of acts where the last day falls on a
statewide legal holiday in the state where
the act is required to be performed.
(ii) The term calendar daymeans any
day. With respect to the twenty-first cal-
endar day, see section 7503 relating to
time for performance of acts where the
last day falls on a Saturday, Sunday, or
legal holiday.
* * * * *
Par. 6. Section 301.6651–1 is amended
by:
1. Revising paragraph (a)(3).
2. Adding paragraph (g).
The addition and revision read as fol-
lows:
§301.6651–1 Failure to file tax return or
to pay tax.
(a) * * *
(3) Failure to pay tax not shown on re-
turn.In the case of failure to pay any
amount of any tax required to be shown
on a return specified in paragraph (a)(1)
of this section that is not so shown (in-
cluding an assessment made pursuant to
section 6213(b)) within 21 calendar days
from the date of the notice and demand
(10 business days if the amount assessed
and shown on the notice and demand
equals or exceeds $100,000) with respect
to any notice and demand made after De-
cember 31, 1996, there will be added to
the amount stated in the notice and de-
mand the amount specified below unless
the failure to pay the tax within the pre-
scribed time is shown to the satisfaction
of the district director or the director of
the service center to be due to reasonable
cause and not to willful neglect. The
amount added to the tax is 0.5 percent of
the amount stated in the notice and de-
mand if the failure is for not more than 1
month, with an additional 0.5 percent for
each additional month or fraction thereof
during which the failure continues, but
not to exceed 25 percent in the aggregate.
For purposes of this paragraph (a)(3), see
§301.6601–1(f)(5) for the definition of
calendar dayand business day.
* * * * *
(g) Treatment of returns prepared by
the Secretary—(1) In general.Areturn
prepared by the Secretary under section
6020(b) will be disregarded for purposes
of determining the amount of the addition
to tax for failure to file any return pur-
suant to paragraph (a)(1) of this section.
However, the return prepared by the Sec-
retary will be treated as a return filed by
the taxpayer for purposes of determining
the amount of the addition to tax for fail-
ure to pay the tax shown on any return
and for failure to pay the tax required to
be shown on a return that is not so shown
pursuant to paragraphs (a)(2) and (3) of
this section, respectively.
(2) Effective date.This paragraph (g)
applies to returns the due date for which
(determined without regard to extensions)
is after July 30, 1996.
Par. 7. Section 301.6656–3 is added to
read as follows:
§301.6656–3 Abatement of penalty.
(a) Exception for first time depositors
of employment taxes—(1) Waiver.The
Secretary will generally waive the penalty
imposed by section 6656(a) on a person’s
failure to deposit any employment tax
under subtitle C of the Internal Revenue
Code if—
(i) The failure is inadvertent;
(ii) The person meets the requirements
referred to in section 7430(c)(4)(A)(ii)
(relating to the net worth requirements ap-
plicable for awards of attorney’s fees);
(iii) The failure occurs during the first
September 15, 1997181997–37 I.R.B.

quarter that the person is required to de-
posit any employment tax; and
(iv) The return of the tax is filed on or
before the due date.
(2) Inadvertent failure. For purposes
of paragraph (a)(1)(i) of this section, the
Secretary will determine if a failure to de-
posit is inadvertent based on all the facts
and circumstances.
(b) Deposit sent to Secretary.The
Secretary may abate the penalty imposed
by section 6656(a) if the first time a de-
positor is required to make a deposit, the
amount required to be deposited is inad-
vertently sent to the Secretary instead of
to the appropriate government deposi-
tory.
(c) Effective date. This section applies
to deposits required to be made after July
30, 1996.
Par. 8. n §301.7122–1, paragraph (e) is
revised to read as follows:
§301.7122–1 Compromises.
* * * * *
(e) Record—(1) In general.If an
offer in compromise is accepted, there
will be placed on file the opinion of the
Chief Counsel of the IRS with respect to
the compromise, with the reasons for the
opinion, and including a statement of—
(i) The amount of tax assessed;
(ii) The amount of interest, additional
amount, addition to the tax, or assessable
penalty, imposed by law on the person
against whom the tax is assessed; and
(iii) The amount actually paid in accor-
dance with the terms of the compromise.
(2) Exception.For compromises ac-
cepted on or after July 30, 1996, no opin-
ion will be required with respect to the
compromise of any civil case in which the
unpaid amount of tax assessed (including
any interest, additional amount, addition
to the tax, or assessable penalty) is less
than $50,000. However, the compromise
will be subject to continuing quality re-
view by the Secretary.
* * * * *
Par 9. Section 301.7430–0 is amended
by adding entries for §§301.7430–1(b)(4)
and 301.7430–5(c)(3) to read as follows:
§301.7430–0 Table of contents.
* * * * *
§301.7430–1 Exhaustion of administra-
tive remedies.
* * * * *
(b) * * *
(4) Failure to agree to extension of
time for assessments.”.
* * * * *
§301.7430–5 Prevailing party.
* * * * *
(c) * * *
(3) Presumption.
* * * * *
Par. 10. Section 301.7430–1 is
amended by adding paragraph (b)(4) to
read as follows:
§301.7430–1 Exhaustion of
administrative remedies.
* * * * *
(b) * * *
(4) Failure to agree to extension of
time for assessments. Any failure by the
prevailing party to agree to an extension
of the time for the assessment of any tax
will not be taken into account for pur-
poses of determining whether the prevail-
ing party has exhausted the administrative
remedies available to the party within the
Internal Rrevenue Service.
* * * * *
Par. 11. Section 301.7430–2 is
amended by:
1. Removing the language “7430(c)-
(4)(B)(ii)” from the third sentence of
paragraph (b)(2) and adding “7430(c)(4)-
(C)(ii)” in its place.
2. The introductory text of paragraph
(c)(3) is amended by removing the colon
and adding a dash in its place.
3. Revising paragraph (c)(3)(i)(B).
4. Removing the language “If more
than $75” from paragraph (c)(3)(ii)(C)
and adding “In the case of administrative
proceedings commenced after July 30,
1996, if more than $110” in its place.
The revision reads as follows:
§301.7430–2 Requirements and
procedures for recovery of reasonable
administrative costs.
* * * * *
(c) * * *
(3) * * *
(i) * * *
(B) Aclear and concise statement of
the reasons why the taxpayer alleges that
the position of the Internal Revenue Ser-
vice in the administrative proceeding was
not substantially justified. For adminis-
trative proceedings commenced after July
30, 1996, if the taxpayer alleges that the
Internal Revenue Service did not follow
any applicable published guidance, the
statement must identify all applicable
published guidance that the taxpayer al-
leges that the Internal Revenue Service
did not follow. For purposes of this para-
graph (c)(3)(i)(B), the term applicable
published guidance means final or tempo-
rary regulations, revenue rulings, revenue
procedures, information releases, notices,
announcements, and, if issued to the tax-
payer, private letter rulings, technical ad-
vice memoranda, and determination let-
ters. Also, for purposes of this paragraph
(c)(3)(i)(B), the term administrative pro-
ceeding includes only those administra-
tive proceedings or portions of adminis-
trative proceedings occurring on or after
the administrative proceeding date as de-
fined in §301.7430–3(c);
* * * * *
Par. 12. Section 301.7430–4 is
amended by:
1. Removing the language “$75” from
paragraph (b)(3)(i) and adding “, in the
case of proceedings commenced after
July 30, 1996, $110” in its place.
2. Revising paragraph (b)(3)(ii).
3. Removing the language “$75” from
the first, second, and third sentences of
paragraph (b)(3)(iii)(B) and adding
“$110” in its place.
4. Removing the language “$75” from
the first sentence of paragraph (b)(3)-
(iii)(C) and adding “$110” in its place.
5. Removing the language “$75” from
the third sentence of the example in para-
graph (b)(3)(iii)(D) and adding “$110” in
its place.
6. Removing the language “$75” from
the second and third sentences of para-
graph (c)(2)(ii) and adding “$110” in its
place.
The revision reads as follows:
§301.7430–4 Reasonable administrative
costs.
1997–37 I.R.B.19September 15, 1997

* * * * *
(b) * * *
(3) * * *
(ii) Cost of living adjustment. The In-
ternal Revenue Service will make a cost of
living adjustment to the $110 per hour lim-
itation for fees incurred in any calendar
year beginning after December 31, 1996.
The cost of living adjustment will be an
amount equal to $110 multiplied by the
cost of living adjustment determined under
section 1(f)(3) for the calendar year (sub-
stituting “calendar year 1995” for “calen-
dar year 1992” in section 1(f)(3)(B)). If
the dollar limitation as adjusted by this cost
of living increase is not a multiple of $10,
the dollar amount will be rounded to the
nearest multiple of $10 (rounding up if the
amount is a multiple of $5).
* * * * *
Par. 13. Section 301.7430–5 is
amended by:
1. Revising paragraph (a).
2. Adding paragraph (c)(3).
The addition and revision read as fol-
lows:
§301.7430–5 Prevailing party.
(a) In general. For purposes of an
award of reasonable administrative costs
under section 7430 in the case of adminis-
trative proceedings commenced after July
30, 1996, a taxpayer is a prevailing party
only if—
(1) The position of the Internal Revenue
Service was not substantially justified;
(2) The taxpayer substantially prevails
as to the amount in controversy or with
respect to the most significant issue or set
of issues presented; and
(3) The taxpayer satisfies the net worth
and size limitations referenced in para-
graph (f) of this section.
* * * * *
(c) * * *
(3) Presumption.If the Internal Rev-
enue Service did not follow any applica-
ble published guidance in an administra-
tive proceeding commenced after July 30,
1996, the position of the IRS, on those is-
sues to which the guidance applies and for
all periods during which the guidance was
not followed, will be presumed not to be
substantially justified. This presumption
may be rebutted. For purposes of this
paragraph (c)(3), the term applicable pub-
lished guidance means final or temporary
regulations, revenue rulings, revenue pro-
cedures, information releases, notices, an-
nouncements, and, if issued to the tax-
payer, private letter rulings, technical
advice memoranda, and determination
letters (see §601.601(d)(2) of this chap-
ter). Also, for purposes of this paragraph
(c)(3), the term administrative proceeding
includes only those administrative pro-
ceedings or portions of administrative
proceedings occurring on or after the ad-
ministrative proceeding date as defined in
§301.7430–3(c).
* * * * *
Par. 14. Section 301.7430–6 is revised
to read as follows:
§301.7430–6 Effective dates.
Sections 301.7430–2 through
301.7430– 6, other than §§301.7430–
2(b)(2), (c)(3)(i)(B), (c)(3)(ii)(C), and
(c)(5); §§301.7430–4(b)(3)(i), (b)(3)(ii),
(b)(3)(iii)(B), (b)(3)(iii)(C), (b)(3)(iii)(D),
and (c)(2)(ii); and §§301.7430–5(a) and
(c)(3), apply to claims for reasonable ad-
ministrative costs filed with the Internal
Revenue Service after December 23,
1992, with respect to costs incurred in ad-
ministrative proceedings commenced
after November 10, 1988. Section
301.7430–2(c)(5) is applicable March 23,
1993. Section 301.7430–2(b)(2),
(c)(3)(i)(B), and (c)(3)(ii)(C); 301.7430–
4(b)(3)(i), (b)(3)(ii), (b)(3)(iii)(B),
(b)(3)(iii)(C), (b)(3)(iii)(D), and (c)(2)(ii);
and 301.7430–5(a) and (c)(3) are applica-
ble for administrative proceedings com-
menced after July 30, 1996.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved June 27, 1997.
Donald C. Lubick,
Acting Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on July
21, 1997, 8:45 a.m., and published in the issue of the
Federal Register for July 22, 1997, 62 F.R. 39115)
September 15, 1997201997–37 I.R.B.

1997–37 I.R.B.21September 15, 1997
Designated Private Delivery
Services
Notice 97–50
This notice provides that the list of pri-
vate delivery services (“PDSs”) desig-
nated under Notice 97–26, 1997–17
I.R.B. 6, (“designated PDSs”) for pur-
poses of the “timely mailing as timely fil-
ing/paying” rule of § 7502 of the Internal
Revenue Code will remain in effect until
further notice. This notice also modifies
Rev. Proc. 97–19, 1997–10 I.R.B. 55, and
Notice 97–26 by changing the periods
during which PDSs can apply for designa-
tion and the dates that the Service will an-
nounce the new list of designated PDSs.
Section 7502(f) authorizes the Secre-
tary to designate certain PDSs for the
“timely mailing as timely filing/paying”
rule of § 7502. Rev. Proc. 97–19 provides
the criteria currently applicable for desig-
nation of a PDS. Rev. Proc. 97–19 (sec-
tion 7.01(2)) provides for semiannual ap-
plication periods ending on June 30th and
December 31st. Rev. Proc. 97–19 (sec-
tion 8.02) and Notice 97–26 provide that
the Service will issue a revised list of des-
ignated PDSs on or before September 1st
and March 1st of each year for which
Rev. Proc. 97–19 is in effect.
Notice 97–26 designates the following
PDSs with respect to the following spe-
cific services they provide:
1. Airborne Express (Airborne):
Overnight Air Express Service, Next Af-
ternoon Service, and Second Day Service
2. DHLWorldwide Express (DHL):
DHL“Same Day” Service and DHLUSA
Overnight
3. Federal Express (FedEx): FedEx
Priority Overnight, FedEx Standard
Overnight, and FedEx 2Day
4. United Parcel Service (UPS): UPS
Next Day Air, UPS Next Day Air Saver,
UPS 2nd Day Air, and UPS 2nd Day Air
A.M.
Airborne, DHL, FedEx, and UPS are
not designated with respect to any type of
delivery service not identified above. No-
tice 97-26 also provides special rules used
to determine the date that will be treated as
the postmark date for purposes of § 7502.
The Service received no applications
for designation during the most recent ap-
plication period, which ended June 30,
1997. Accordingly, until further notice,
the list of designated PDSs in Notice 97–
26 will remain in effect.
Section 7.01(2) of Rev. Proc. 97–19 is
modified to provide that each year there
will be only one application period, which
will end on June 30th. Also, section 8.02
of Rev. Proc. 97–19 and Notice 97–26 are
modified to provide that the Service will
issue a notice providing a new list of des-
ignated PDSs on or before September 1st
of each year for which Rev. Proc. 97–19
is in effect.
EFFECTON OTHER DOCUMENTS
Notice 97–26 and Rev. Proc. 97–19 are
modified.
EFFECTIVE DATE
This notice is effective on September 1,
1997.
FOR FURTHER INFORMATION
The principal author of this notice is
Robert J. Basso of the Office of Assistant
Chief Counsel (Income Tax and Account-
ing). For further information regarding
this notice, contact Mr. Basso at (202)
622-4940 (not a toll-free call).
Part III. Administrative, Procedural, and Miscellaneous

September 15, 1997221997–37 I.R.B.
Notice of Proposed Rulemaking
and Notice of Public Hearing
Qualified Nonrecourse
Financing Under Section
465(b)(6)
REG–105160–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations under section
465(b)(6) regarding qualified nonrecourse
financing. The proposed regulations ad-
dress whether the personal liability of an
entity prevents financing from being
treated as qualified nonrecourse financing
and whether qualified nonrecourse fi-
nancing may be secured by property that
is incidental to the activity of holding real
property. The proposed regulations
would affect partnerships and their part-
ners. This document also gives notice of
a public hearing scheduled for December
10, 1997.
DATES: Written comments and requests
to speak (with outlines of oral comments)
at the public hearing scheduled for De-
cember 10, 1997, must be received by
November 19, 1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–105160–97),
room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative, sub-
missions may be hand delivered between
the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–105160–97),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue NW,
Washington, DC. Alternatively, taxpayers
may submit comments electronically via
the Internet by selecting the “Tax Regs”
option of the IRS Home Page, or by sub-
mitting comments directly to the IRS In-
ternet site at: http://www.irs.ustreas.
gov/prod/tax_regs/comments.html. The
public hearing will be held in room 2615,
Internal Revenue Building, 1111 Consti-
tution Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Jef-
frey A. Erickson, (202) 622-3070; con-
cerning submissions and the hearing,
Michael Slaughter, (202) 622-7190 (not
toll-free numbers).
SUPPLEMENTARYINFORMATION:
Introduction
This document contains proposed regu-
lations under section 465(b)(6) of the In-
ternal Revenue Code (Code). Section
465, which applies to individuals and cer-
tain corporations, limits a taxpayer’s loss
deduction for an activity to the amount of
the taxpayer’s amount at risk in the activ-
ity at the close of the taxable year. Atax-
payer’s amount at risk generally includes
the amount of any cash and the adjusted
tax basis of any property contributed by
the taxpayer to the activity plus any
amounts borrowed for use in the activity
to the extent the taxpayer is personally li-
able for repayment.
For the activity of holding real prop-
erty, a taxpayer may also include as an
amount at risk the taxpayer’s share of any
“qualified nonrecourse financing” that is
secured by real property used in the activ-
ity of holding real property, even though
the taxpayer is not personally liable for
repayment of the financing. Section
465(b)(6) defines qualified nonrecourse
financing as any financing that (i) is bor-
rowed by the taxpayer for the activity of
holding real property; (ii) is borrowed by
the taxpayer from a qualified person or
represents a loan from any federal, state,
or local government or instrumentality
thereof, or is guaranteed by any federal,
state, or local government; (iii) except to
the extent provided in regulations, no per-
son is personally liable for repayment;
and (iv) is not convertible debt.
Explanation of Provisions
I. Secured by Real Property
Section 465(b)(6)(A) provides that qual-
ified nonrecourse financing must be se-
cured by real property used in the activity
of holding real property. The legislative
history of section 465(b)(6) suggests that
qualified nonrecourse financing can be se-
cured only by real property. H.R. Rep. No.
426, 99th Cong., 1st Sess. 293 (1985),
1986–3 (Vol. 2) C.B. 293; S. Rep. No. 313,
99th Cong., 2d Sess. 748 (1986), 1986–3
(Vol. 3) C.B. 748. Section 465(b)(6)(E),
however, provides that the activity of hold-
ing real property includes the holding of
personal property that is incidental to mak-
ing real property available as living ac-
commodations. Section 465(b)(6) does
not specifically provide that such inciden-
tal property may be used to secure quali-
fied nonrecourse financing. The proposed
regulations provide that financing can
qualify as qualified nonrecourse financing
if, in addition to the real property used in
the activity of holding real property, the fi-
nancing is secured by both real property
and other property that is incidental to the
activity of holding real property.
II. Personal Liability
Section 465(b)(6)(B)(iii) provides that,
except to the extent provided in regula-
tions, no person may be personally liable
for repayment of qualified nonrecourse fi-
nancing. The legislative history of sec-
tion 465 states that regulations may pro-
vide rules under which the guaranty,
indemnity, or personal liability of a per-
son other than the taxpayer does not cause
the financing to be treated as other than
qualified nonrecourse financing. H.R.
Rep. No. 426, 99th Cong., 1st Sess. 294
(1985), 1986–3 (Vol. 2) C.B. 294; S. Rep.
No. 313, 99th Cong., 2d Sess. 749 (1986),
1986–3 (Vol. 3) C.B. 749.
Apartnership is treated as a person
under the Code. Thus, any financing for
which a partnership is personally liable is
not qualified nonrecourse financing under
section 465(b)(6)(B)(iii), even if no part-
ner is personally liable for the financing.
This result is inappropriate if the only ac-
tivity of the partnership is the real prop-
erty activity; the personal liability of the
partnership in that situation is not mean-
ingful and the financing is the equivalent
of nonrecourse financing. Situations in
which a partnership is liable for repay-
ment, but no partner is personally liable,
may be unusual for general and limited
partnerships; however, such situations
may become increasingly common with
the use of limited liability companies
(LLCs) in which the LLC is personally li-
able for its debts and the members of the
Part IV. Items of General Interest

1997–37 I.R.B.23September 15, 1997
LLC are not liable. In response, the pro-
posed regulations provide that the per-
sonal liability of a partnership (including
an LLC that is treated as a partnership) is
disregarded in determining whether a fi-
nancing is qualified nonrecourse financ-
ing if the entity’s only assets are real
property used in the activity of holding
real property or both real property and
other property that is incidental to the ac-
tivity of holding real property, and no
other person is liable for the financing.
In addition, section 465(b)(6) does not
specifically provide that financing may
qualify as qualified nonrecourse financing
if a person is personally liable for a por-
tion of the financing. Treating the portion
of the financing for which no person is
personally liable as qualified nonrecourse
financing would not be inconsistent with
the underlying policy of section 465.
Therefore, the proposed regulations pro-
vide that the portion for which no person
is personally liable can qualify as quali-
fied nonrecourse financing.
Proposed Effective Date
These regulations are proposed to be
effective for financing incurred on or after
the date final regulations are published in
the Federal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because these regulations do
not impose on small entities a collection
of information requirement, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Therefore, a Regulatory
Flexibility Analysis is not required. Pur-
suant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (preferably a signed original and
eight (8) copies) that are submitted timely
to the IRS. All comments will be avail-
able for public inspection and copying.
Apublic hearing has been scheduled
for December 10, 1997, at 10 a.m., in
room 2615, Internal Revenue Building,
1111 Constitution Avenue NW., Washing-
ton, DC. Because of access restrictions,
visitors will not be admitted beyond the
Internal Revenue Building lobby more
than 15 minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral com-
ments at the hearing must submit timely
written comments (preferably a signed
original and eight (8) copies) and an out-
line of the topics to be discussed and the
time to be devoted to each topic by No-
vember 19, 1997.
Aperiod of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Jeffrey A. Erickson, Office of
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the IRS and Treasury Department
participated in their development.
* * * * *
Proposed Amendments to the Regulations
Accordingly, 26 CFR Part 1 is pro-
posed to be amended as follows:
PART1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
§1.465–27(b)(3) also issued under 26
U.S.C. 465(b)(6)(B)(iii). * * *
Par. 2. Section 1.465–27 is added to
read as follows:
§1.465–27 Qualified nonrecourse
financing
(a) In general.Notwithstanding any
provision of section 465(b) or the regula-
tions under section 465, in the case of an
activity of holding real property, a tax-
payer is considered at risk with respect to
the taxpayer’s share of any qualified non-
recourse financing that is secured by real
property used in such activity.
(b) Qualified nonrecourse financing—
(1) In general.For section 465(b)(6) and
this section, the term qualified nonre-
course financing means any financing—
(i) Which is borrowed by the taxpayer
with respect to the activity of holding real
property;
(ii) Which is borrowed by the taxpayer
from a qualified person or represents a
loan from any federal, state, or local gov-
ernment or instrumentality thereof, or is
guaranteed by any federal, state, or local
government;
(iii) Except as otherwise provided in
paragraph (b)(3)(ii) of this section, for
which no person is personally liable for
repayment; and
(iv) Which is not convertible debt.
(2) Secured by incidental property.A
taxpayer will be considered at risk with re-
spect to the taxpayer’s share of any quali-
fied nonrecourse financing secured by real
property used in the activity of holding
real property, where such financing is also
secured by property that is incidental to
the activity of holding such real property.
(3) Personal liability—(i) Partial lia-
bility.If a person is personally liable for
repayment of a portion of a financing, the
portion of the financing for which no per-
son is personally liable can qualify as
qualified nonrecourse financing.
(ii) Partnership liability.The personal
liability of an entity classified as a part-
nership for repayment of a financing shall
be disregarded in determining whether the
financing is qualified nonrecourse financ-
ing, if the only assets of the partnership
are either real property used in the activity
of holding real property or both such real
property and other property that is inci-
dental to the activity of holding such real
property, and no other person is liable for
repayment of the financing.
(4) Examples. The following examples
illustrate the rules of paragraph (b) of this
section:
Example 1.Personal liability of partnership; In-
cidental property.X is a limited liability company
that is classified as a partnership for federal tax pur-
poses. X is engaged only in the activity of holding
real property. In addition to real property used in the
activity of holding real property, X owns office
equipment, a truck, and maintenance equipment that
it uses to support the activity of holding real prop-

September 15, 1997241997–37 I.R.B.
erty. X borrows $500 to use in the activity. X is per-
sonally liable on the financing, but no member of X
and no other person is liable for repayment of the fi-
nancing. Under paragraph (b)(3)(ii) of this section,
the personal liability of X for repayment of the fi-
nancing is disregarded when determining whether the
financing is qualified nonrecourse financing. Under
paragraph (b)(2) of this section, the personal property
is treated as incidental personal property used in the
activity of holding real property. Therefore, assuming
the financing satisfies the other requirements for qual-
ified nonrecourse financing, the financing will be
treated as qualified nonrecourse financing.
Example 2.Bifurcation of financing. The facts
are the same as in Example 1, except that A, a mem-
ber of X, is personally liable for repayment of $100
of the financing. Under paragraph (b)(3)(i) of this
section, the portion of the financing for which Ais
not personally liable for repayment ($400) can qual-
ify as qualified nonrecourse financing.
(c) Effective date.This section is effec-
tive for financing incurred on or after the
date the final regulations are published in
the Federal Register.
Michael P. Dolan,
Acting Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on Au-
gust 12, 1997, 8:45 a.m., and published in the issue
of the Federal Register for August 13, 1997, 62 F.R.
43295)
Notice of Proposed Rulemaking
Remedial Amendment Period
REG–106043–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing by cross-reference to temporary regu-
lations.
SUMMARY: T.D. 8727, 1997–34 I.R.B.
5, the IRS is issuing temporary regula-
tions relating to the remedial amendment
period during which a sponsor of a quali-
fied retirement plan or an employer that
maintains a qualified retirement plan can
make retroactive amendments to the plan
to eliminate certain qualification defects
for the entire period. The text of those
temporary regulations also serves as the
text of these proposed regulations. These
proposed regulations will affect sponsors
of qualified retirement plans, and employ-
ers that maintain qualified retirement
plans.
DATES: Written comments and requests
for a public hearing must be received by
October 30, 1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG-106043-97),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–106043–97),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue NW,
Washington, DC. Alternatively, taxpayers
may submit comments electronically via
the internet by selecting the “Tax Regs”
option on the IRS Home Page, or by sub-
mitting comments directly to the IRS in-
ternet site at http://www.irs.ustreas.gov/
prod/tax_regs/comments.html.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Linda S. F. Marshall, (202) 622-
6030; concerning submissions,
Evangelista Lee, (202) 622-7190 (not
toll-free numbers).
SUPPLEMENTARYINFORMATION:
Background
Final and temporary regulations in T.D.
8727 amend the Income Tax Regulations
(26 CFR part 1) relating to section 401(b).
The regulations provide guidance to clarify
the scope of the Commissioner’s authority
to provide relief from plan disqualification
under section 401(b) and the regulations.
The text of T.D. 8727 the temporary
regulations also serves as the text of these
proposed regulations. The preamble to
the final and temporary regulations ex-
plains the temporary regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions and, because the regulation does not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small 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, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying. Apublic
hearing may be scheduled if requested in
writing by any person that timely submits
written comments. If a public hearing is
scheduled, notice of the date, time, and
place for the hearing will be published in
the Federal Register.
Drafting Information
The principal author of these regula-
tions is Linda S. F. Marshall, Office of the
Associate Chief Counsel (Employee Ben-
efits and Exempt Organizations). How-
ever, other personnel from the IRS and
Treasury Department participated in their
development.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.401(b)-1 is amended
by:
1. Revising paragraphs (b)(3), (c) and
(d)(1)(iv).
2. Adding paragraph (d)(1)(v).
The addition and revisions read as fol-
lows:
§1.401(b)-1 Certain retroactive changes
in plan.
[The text of proposed paragraphs
(b)(3), (c), (d)(1)(iv) and (v) is the same
as the text of §1.401(b)–1T(b)(3), (c),
(d)(1)(iv) and (v) published in T.D. 8727.]
Michael P. Dolan,
Acting Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on July
31, 1997, 8:45 a.m., and published in the issue of the
Federal Register for August 1, 1997, 62 F.R. 41322)

Changes to Excise Taxes
Announcement 97–91
PurposeTo announce additional excise tax changes made by the Taxpayer Relief Act of 1997 (P.L. 105–34).
These changes affect taxes on:
• Fuels
• Communications
• Air transportation
• Heavy highway vehicles
• Luxury automobiles
• Arrow components
Note:Announcement 97–78, 1997–34 I.R.B. 11, released on August 14, 1997, covered certain changes
made by the Act that took effect during August of 1997. Those changes affect the tax on the use of inter-
national air travel facilities, the date for deposits of air transportation taxes, and the tax on vaccines.
Fuel tax ratesThe changes listed below apply after September 30, 1997.
• The table below shows the new rates for fuels (other than those included under IRS No. 79) due to the
reinstatement of the Leaking Underground Storage Tank Trust Fund tax (generally $.001 per gallon).
• The rate on liquefied petroleum gas has decreased; this fuel will be identified separately as IRS No.
61.
• Other special fuels and alcohol fuels (other than gasohol) will be identified under IRS No. 79.(See the
Instructions for Form 720 for this list.)
Communications taxIn the case of communications services acquired by means of a prepaid telephone card, the 3% excise tax
is imposed on the face amount of the card when the card is transferred by a telecommunications carrier to
any person who is not a carrier. The provision will be effective after October 31, 1997.
Transportation of For amounts paid after September 30, 1997, for transportation beginning after September 30, 1997, the
persons by airfollowing changes apply:
• The tax is 9% (7.5% for segments to or from rural airports), plus $1.00 for each domestic segment (ex-
cluding segments to or from rural airports).
• Amounts paid to an air carrier for the right to provide mileage awards or other reductions in the cost of
any transportation of persons are treated as amounts paid for taxable transportation.
Retail tax on heavy The following changes apply after December 31, 1997, except as noted:
highway vehicles• The repair or modification of a vehicle will not be treated as manufacture for excise tax purposes unless
1997–37 I.R.B.25September 15, 1997
IRS No.Type of fuel Tax rate per gallon
62Gasoline$.184
59Gasohol containing at least 10% alcohol$.130
75Gasohol containing at least 7.7% alcohol$.14242
76Gasohol containing at least 5.7% alcohol$.15322
58Gasoline removed or entered for gasohol production, at least 10% alcohol$.14444
73Gasoline removed or entered for gasohol production, at least 7.7% alcohol$.1543
74Gasoline removed or entered for gasohol production, at least 5.7% alcohol$.16248
60Diesel fuel$.244
71Dyed diesel fuel used in trains$.0565
78Dyed diesel fuel used in certain buses$.074
61Liquefied petroleum gas ( LPG)$.136
14Aviation gasoline$.194
69Aviation fuel (other than gasoline)$.219
77Aviation fuel (commercial)$.044
64Inland waterways fuel use$.244

the repair or modification costs exceed 75% of the retail price of a comparable new vehicle. This rule
does not apply if the vehicle as repaired or modified would, if new, be taxable, and the vehicle when
new was not taxable.
• The registration requirement applicable to certain sales of trucks, tractors, and trailers will be replaced
with a certification requirement.
• Parts or accessories added to a heavy truck within six months of the initial purchase will be taxable
only if the aggregate price of the additions is more than $1,000. (This change is effective for vehicles
sold after August 5, 1997.)
• Acredit against the retail tax on heavy highway vehicles will be allowed for excise tax imposed on
tires sold on or in connection with the vehicle. This replaces the exclusion from the amount subject to
the heavy vehicle tax allowed for tire value.
Luxury taxEffective after August 5, 1997, the luxury tax threshold is raised for electric and clean-fuel motor vehicles.
• The electric vehicle threshold is 150 percent of the luxury tax threshold.
• The clean-fuel motor vehicle threshold is the luxury tax threshold plus an amount equal to the increase
in the price of the vehicle attributable to the retrofit parts and components installed that permit the ve-
hicle to be clean burning.
Also effective for vehicles sold after August 5, 1997, parts or accessories added to a luxury automobile within
six months of the initial purchase are only taxable if the aggregate price of the additions is more than $1,000.
Arrow components Effective after September 30, 1997, a 12.4% tax will be imposed on the price for which the manufacturer
sells any point, nock, vane, or shaft of the type used in the manufacture of any arrow. This replaces the
tax on arrows. The tax will be reported under new IRS No. 102.
September 15, 1997261997–37 I.R.B.
Foundations Status of Certain
Organizations
Announcement 97–92
The following organizations have
failed to establish or have been unable to
maintain their status as public charities or
as operating foundations. Accordingly,
grantors and contributors may not, after
this date, rely on previous rulings or des-
ignations in the Cumulative List of Orga-
nizations (Publication 78), or on the pre-
sumption arising from the filing of notices
under section 508(b) of the Code. This
listing does notindicate that the organiza-
tions have lost their status as organiza-
tions described in section 501(c)(3), eligi-
ble to receive deductible contributions.
Former Public Charities.The following
organizations (which have been treated as
organizations that are not private founda-
tions described in section 509(a) of the
Code) are now classified as private founda-
tions:
Across the Bridge Eastside Children’s
Museum, Bellevue, WA
African Christian Fellowship of
California Inc., Fullerton, CA
Ark Ministries, Inc., Lewisville, TX
Burlington-Edison School District
Foundation, Burlington, WA
Celestial Flight Nonprofit Housing
Corporation, Detroit, MI
Cerebral Palsy SOS, Inc., New York, NY
Challenges, Inc., Atlanta, GA
Chippechaug Christian Camp Inc.,
Meriden, CT
Church of Gospel Ministry, Lenoxdale,
MA
Classic Foundation, Inc., Fitchburg, MA
Families ALa Carte, Vallejo, CA
The Family School, Bronx, NY
Florida Home Incorporated, Richmond,
CA
Foundation for Genetics Research,
Houston, TX
The Foundation for Living, Tacoma, WA
Foundation for the Special Commission
on the Administration of Justice in
Illinois, Chicago, IL
Friends of Evergreen, Portland, ME
Haverhill Junior Football League,
Haverhill, MA
Home Care for Christian Scientists, Inc.,
Boston, MA
Illinois Town Hall Meetings, Rolling
Meadows, IL
Imperial Valley Affordable Housing,
Brawley, CA
Interculture, Inc., New York, NY
International Friends of Migdal Ohr
Institutions, New York, NY
In the Best Interests of the Children, Inc.,
Boston, MA
James Phillip Family Foundation of
Cleveland, Willoughby Hills, OH
Japanese-American International Art
Corporation, New York, NY
Japanese Community Association, Inc.,
Scarsdale, NY
Jeff’s Companion Animal Shelter, Inc.,
Westport, MA
La Casa Housing Corporation, Inc.,
Waterbury, CT
Learning Ladder Day Care, Inc.,
Cortland, NY
Lincoln and Friends, Fairfax, CA
Maryland Volunteer Water Quality
Monitoring Association Inc., Crofton,
MD
Maxie Wright’s Boys Center, San
Bernardino, CA
MGS Charity, Inc., Huntington, NY
The Nashville Foundation for Women
Business Owners Inc., Nashville, TN
National Association of Minorities in
Cable Foundation, Cerritos, CA
National Council for the Handicapped,
Inc., Brooklyn, NY
The National Museum of Artificial Limb
Technology, San Francisco, CA
Nevada Historical Automobile Society
Inc., Elcajon, CA
New Beginnings Outreach Ministries,
Inc., Bronx, NY
New Hampshire Association for the

Education of Young Children, Weare,
NH
New Hampshire Soccer Association,
Nashua, NH
New Village Productions, Inc., New
York, NY
New World Dancers and Singers, Inc.,
New York, NY
New York City Society for Parenteral and
Enteral Nutrition, Riverdale, NY
North Okaloosa Arc Inc., Crestview, FL
Onake II, Rooseveltown, NY
Out of the Blue Theater Company,
Somerville, MA
Pacific Basin Research Institute,
Rockville, MD
Paradise Pet Shelter, Inc., Millis, MA
Patricia Marschner Memorial for the
Children of Londonderry,
Londonderry, NH
Peaceful Settlements Foundation, Boise,
ID
Peninsula Sexual Minority Youth League,
Newport News, VA
Picnic-in-the-Park, Incorporated,
Concord, MA
Pima Optimum Learning Center,
Scottsdale, AZ
Pipco Corporation, Rochester, NY
Pittsburgh Allergy Society, Latrobe, PA
Plainfield First Response, Plainfield, VT
Playground in the Park, Inc., Cheshire,
CT
Point O Woods Historical Society,
Summit, NJ
Preserve Earths Threatened Ecosystems
Foundation, Berkeley, CA
PTANew York State Congress, Inc.,
Brentwood, NY
Public Productions, Inc., Waltham, MA
Rainforest Rescue, Inc., West Action,
MA
Rakka Thamm Theater Company, Inc.,
New York, NY
RCLC Foundation, Inc., Riverside, CT
Reach Out Ethiopia, Inc., Cambridge,
MA
Renaissance Intl, Inc., New York, NY
Rochester Charity Partners, Inc.,
Rochester, NY
San Diego Museum of Modern Sculpture,
San Diego, CA
Senior Citizen Association of Taiwanese
Christians of Greater New York, Inc.,
Flushing, NY
Shelter Homeless America, Inc.,
Lawrence, MA
Sluggers Forever Inc., New Ulm, MN
Southeast Texas Legal Clinic, Houston,
TX
St. Boniface Development Corporation,
Brooklyn, NY
Survivors United Network, Inc.,
Bridgehampton, NY
Transglobal Communications
Foundation, New York, NY
Traumatic Brain Injury Resource
Network, Inc., Framingham, MA
Trenton Education Dance Institute, Inc.,
W. Trenton, NJ
Trillium Performing Arts Center, Inc.,
Watertown, NY
Tzu Charn Foundation, Sunnyvale, CA
Walden-Bell Foundation, Portland, OR
Waterville Performing Arts Centre, Inc.,
Waterville, ME
West Greenwich Community Rescue
Company, West Greenwich, RI
Wilson County Education Foundation,
Inc., Floresville, TX
Worcester Institute for Students of
Europe, Worcester, MA
You Make Our Future, Inc., Danbury, CT
If an organization listed above submits
information that warrants the renewal of its
classification as a public charity or as a pri-
vate operating foundation, the Internal
Revenue Service will issue a ruling or de-
termination letter with the revised classifi-
cation as to foundation status. Grantors and
contributors may thereafter rely upon such
ruling or determination letter as provided
in section 1.509(a)–7 of the Income Tax
Regulations. It is not the practice of the
Service to announce such revised classifi-
cation of foundation status in the Internal
Revenue Bulletin.
1997–37 I.R.B.27September 15, 1997

September 15, 1997281997–37 I.R.B.
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to Abut not
to B, and the new ruling holds that it ap-
plies to both Aand B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. Aruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

1997–37 I.R.B.29September 15, 1997
Numerical Finding List
1
Bulletins 1997–27 through 1997–36
Announcements:
97–61, 1997–29 I.R.B. 13
97–67, 1997–27 I.R.B. 37
97–68, 1997–28 I.R.B. 13
97–69, 1997–28 I.R.B. 13
97–70, 1997–29 I.R.B. 14
97–71, 1997–29 I.R.B. 15
97–72, 1997–29 I.R.B. 15
97–73, 1997–30 I.R.B. 86
97–74, 1997–31 I.R.B.16
97–75, 1997–32 I.R.B. 28
97–76, 1997–32 I.R.B. 28
97–77, 1997–33 I.R.B. 58
97–78, 1997–34 I.R.B. 11
97–79, 1997–35 I.R.B. 8
97–80, 1997–34 I.R.B. 12
97–81, 1997–34 I.R.B. 12
97–82, 1997–34 I.R.B. 12
97–83, 1997–34 I.R.B. 13
97–84, 1997–34 I.R.B. 13
97–85, 1997–35 I.R.B. 8
97–86, 1997–35 I.R.B. 9
97–87, 1997–35 I.R.B. 9
97–88, 1997–35 I.R.B. 9
97–89, 1997–36 I.R.B. 10
97–90, 1997–36 I.R.B. 10
97–93, 1997–36 I.R.B. 11
97–94, 1997–36 I.R.B. 12
97–95, 1997–36 I.R.B. 12
Court Decisions:
2061, 1997–31 I.R.B. 5
2062, 1997–32 I.R.B. 8
Delegation Orders:
172 (Rev. 5), 1997–28 I.R.B. 6
Notices:
97–37, 1997–27 I.R.B. 4
97–38, 1997–27 I.R.B. 8
97–39, 1997–27 I.R.B. 8
97–40, 1997–28 I.R.B. 6
97–41, 1997–28 I.R.B. 6
97–42, 1997–29 I.R.B. 12
97–43, 1997–30 I.R.B. 9
97–44, 1997–31 I.R.B. 15
97–45, 1997–33 I.R.B. 7
97–46, 1997–34 I.R.B. 10
97–47, 1997–35 I.R.B. 5
97–48, 1997–35 I.R.B. 5
97–49, 1997–36 I.R.B. 8
Railroad Retirement Quarterly Rate:
1997–28 I.R.B. 5
Proposed Regulations:
REG–104893–97, 1997–29 I.R.B. 13
REG–107644–97, 1997–32 I.R.B. 24
Revenue Procedures:
97–32, 1997–27 I.R.B. 9
97–32A, 1997–34 I.R.B. 10
97–33, 1997–30 I.R.B. 10
Revenue Procedures-Continued
97–34, 1997–30 I.R.B.14
97–35, 1997–33 I.R.B. 11
97–36, 1997–33 I.R.B. 14
97–37, 1997–33 I.R.B. 18
97–38, 1997–33 I.R.B. 43
97–39, 1997–33 I.R.B. 48
97–40, 1997–33 I.R.B. 50
97–41, 1997–33 I.R.B. 5
97–42, 1997–33 I.R.B. 57
Revenue Rulings:
97–27, 1997–27 I.R.B. 4
97–28, 1997–28 I.R.B. 4
97–29, 1997–28 I.R.B. 4
97–30, 1997–31 I.R.B.12
97–31, 1997–32 I.R.B.4
97–32, 1997–33 I.R.B. 4
97–33, 1997–34 I.R.B. 4
97–34, 1997–34 I.R.B. 14
97–35, 1997–35 I.R.B. 4
97–36, 1997–36 I.R.B. 5
Treasury Decisions:
8722, 1997–29 I.R.B. 4
8723, 1997–30 I.R.B. 4
8724, 1997–36 I.R.B. 4
8726, 1997–34 I.R.B. 7
8727, 1997–34 I.R.B. 5
...
1
Acumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1997–1 through 1997–26
will be found in Internal Revenue Bulletin 1997–27,
dated July 7, 1997.

September 15, 1997301997–37 I.R.B.
Finding List of Current Action on
Previously Published Items
1
Bulletins 1997–27 through 1997–36
*Denotes entry since last publication
Revenue Procedures:
96–36
Superseded by
97–34, 1997–30 I.R.B. 14
96–42
Superseded by
97–27, 1997–27 I.R.B. 9
97–32
Modified and amplified by
97–32A, 1997–34 I.R.B. 10
Revenue Rulings:
89–42
Supplemented by
97–31, 1997–32 I.R.B. 4
1
Acumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1997–1 through 1997–26 will be found in Internal
Revenue Bulletin 1997–27, dated July 7, 1997.

INTERNAL REVENUE BULLETIN
The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold
on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent of
Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the week-
ly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
Superintendent of Documents.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Please
allow two to six weeks, plus mailing time, for delivery.
WE WELCOME COMMENTS ABOUT THE
INTERNAL REVENUE BULLETIN
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page
(www.irs.ustreas.gov) or write to the IRS Bulletin Unit, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW, Washington, DC
20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.
Superintendent of Documents
U.S. Government Printing Office
Washington, DC 20402
Official Business
Penalty for Private Use, $300
First Class Mail
Postage and Fees Paid
GPO
Permit No. G–26

INTERNAL REVENUE BULLETIN
The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold
on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent of
Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the week-
ly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
Superintendent of Documents.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Please
allow two to six weeks, plus mailing time, for delivery.
WE WELCOME COMMENTS ABOUT THE
INTERNAL REVENUE BULLETIN
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page
(www.irs.ustreas.gov) or write to the IRS Bulletin Unit, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW, Washington, DC
20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.
Internal Revenue Service
Washington, DC 20224
Official Business
Penalty for Private Use, $300
First Class Mail
Postage and Fees Paid
IRS
Permit No. G–48