Internal Revenue Bulletin 2011-33 (PDF rendition): IRS Announcements

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

Bulletin No. 201
1-33
August 15, 2011
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
T.D. 9533, page 139.
REG–118809–11, page 162.
Final, temporary, and proposed regulations remove any refer-
ences to, or requirement of reliance on, credit ratings in regula-
tions under various sections of the Code and provide substitute
standards of credit-worthiness where appropriate, pursuant to
the Dodd-Frank Act.
T.D. 9534, page 144.
Final regulations under sections 381(c)(4) and 381(c)(5) of the
Code provide guidance regarding the accounting method or
combination of methods, including inventory methods, to use
following certain corporate reorganizations and tax-free liquida-
tions.
ESTATE TAX
Rev. Rul. 2011–17, page 160.
Special use value; farms; interest rates.The 2010 and
2011 interest rates to be used in computing the special use
value of farm real property for which an election is made under
section 2032A of the Code are listed for estates of decedents.
EXCISE TAX
T.D. 9533, page 139.
REG–118809–11, page 162.
Final, temporary, and proposed regulations remove any refer-
ences to, or requirement of reliance on, credit ratings in regula-
tions under various sections of the Code and provide substitute
standards of credit-worthiness where appropriate, pursuant to
the Dodd-Frank Act.
Announcements of Disbarments and Suspensions begin on page 164.
Finding Lists begin on page ii.

The IRS Mission
Provide Americ
a’s taxpayers top-quality service by helping
them understa
nd and meet their tax responsibilities and en-
force the law wi
th integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
August 15, 20112011–33 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 150.—
Definitions
and Special Ru
les
26 CFR 1.150–1
: Definitions.
T.D. 9533
DEPARTMENT O
FTHE
TREASURY
Internal Rev
enue Service
26 CFR Parts
1and48
Modificati
on of Treasury
Regulatio
ns Pursuant
to Section
939A of the
Dodd-Fran
kWallStreet
Reform an
dConsumer
Protecti
on Act
AGENCY: I
nternal Revenue Service
(IRS), T
reasury.
ACTION:
Final and temporary regula-
tions.
SUMMARY
: This document contains tem-
porary r
egulations that remove any ref-
erence t
o, or requirement of reliance on,
“credi
t ratings” in regulations under the
Intern
al Revenue Code (Code) and pro-
vides s
ubstitute standards of credit-worthi-
ness wh
ere appropriate. This action is re-
quired
by the Dodd-Frank Wall Street Re-
form a
nd Consumer Protection Act, which
requi
res Federal agencies to remove any
refer
ence to, or requirement of reliance on,
credi
t ratings from their regulations and to
subst
itute such standard of credit-worthi-
ness
as the agency deems appropriate for
such
regulations. These regulations affect
pers
ons subject to various provisions of the
Code
. The text of these temporary regula-
tion
salsoservesasthetextoftheproposed
regu
lations set forth in the notice of pro-
pos
ed rulemaking on this subject in this is-
sue
of the Bulletin.
DAT
ES:Effective Date:These regulations
are
effective on July 6, 2011.
App
licability Dates:For dates of
app
licability, see §§1.150–1T(a)(4),
1.1
71–1T(f),1.197–2T(b)(7),
1.249–1T(f)(
3),1.475(a)–4T(d)(4),
1.860G–2T(g)
(3), 1.1001–3T(d), (e), and
(g), and 48.41
01–1T(l)(5).
FOR FURTHER IN
FORMATION
CONTACT: Art
uro Estrada, (202)
622–3900 (no
t a toll-free number).
SUPPLEMENTA
RY INFORMATION:
Background
Section 939A
(a) of the Dodd-Frank
Wall Street R
eform and Consumer Protec-
tion Act, Pu
blic Law 111–203 (124 Stat.
1376 (2010)
), (the “Dodd-Frank Act”),
requires ea
ch Federal agency to review
its regulat
ions that require the use of an
assessmen
t of credit-worthiness of a secu-
rity or mon
ey market instrument, and to
review any
references or requirements in
those regu
lations regarding credit ratings.
Section 93
9A(b) directs each agency to
modify an
yregulationidentifiedinthe
review re
quired under section 939A(a) by
removing
any reference to, or requirement
of relian
ce on, credit ratings and substi-
tuting a s
tandard of credit-worthiness that
the agen
cy deems appropriate. Numerous
provisi
ons under the Code are affected.
These te
mporary regulations amend
the Inco
me Tax Regulations (26 CFR part
1) under
sections 150, 171, 197, 249,
475, 860
G, and 1001 of the Code. These
section
s were added to the Code during
differ
ent years to serve different purposes.
These t
emporary regulations also amend
the Man
ufacturers and Retailers Excise
Tax Reg
ulations (26 CFR part 48) under
sectio
n 4101 that provides registration
requi
rements related to Federal fuel taxes.
Expla
nation of Provisions
These
temporary regulations remove
refer
ences to “credit ratings” and “credit
agenc
ies” or functionally similar terms in
the ex
isting regulations. Some changes
invol
ve simple word deletions or substi-
tuti
ons. Others reflect the revision of a
sent
ence to remove the credit rating refer-
ence
s. In some cases, multiple sentences
have
been modified. Where appropriate,
subs
titute standards of credit-worthiness
replace the pr
ior references to credit rat-
ings, credit a
gencies or functionally simi-
lar terms. Lan
guage revisions serve solely
to remove the
references prohibited by
section 939A
of the Dodd-Frank Act and
no additiona
l changes are intended.
Section 1.15
0–1. Section 1.150–1
provides def
initions for purposes of sec-
tions 103 and
141 through 150. Section
1.150–1(b)
definesissuance coststo mean
costs to the
extent incurred in connection
with, and al
locable to, the issuance of an
issue withi
n the meaning of section 147(g).
Section 1.
150–1(b) lists as non-exclusive
examples o
f issuance costs: underwriters’
spread; co
unsel fees; financial advisory
fees; rati
ng agency fees; trustee fees;
paying age
nt fees; bond registrar, certifi-
cation, a
nd authentication fees; accounting
fees; pri
nting costs for bonds and offering
document
s; public approval process costs;
engineer
ing and feasibility study costs;
guarante
e fees, other than for qualified
guarant
ees (as defined in §1.148–4(f));
and simi
lar costs. These temporary regu-
lations
replace the §1.150–1(b) reference
to ratin
g agency fees with “fees paid to an
organi
zation to evaluate the credit quality
of the i
ssue.” No substantive change is
intend
ed.
Sectio
n 1.171–1. The temporary regu-
lation
schangecredit ratingin §1.171–1(f)
Exampl
e2(i) tocredit quality. The change
does no
t affect the analysis in the exam-
ple. I
n addition, the temporary regulations
make o
ther nonsubstantive changes to the
examp
le (for example, the dates in the ex-
ample
are updated).
Secti
on 1.197–2(b)(7).Thetemporary
regul
ations remove “the existence of a fa-
vorab
le credit rating” from the examples
of su
pplier-based intangibles in the third
sent
ence of §1.197–2(b)(7). No substan-
tive
change in the treatment of a favorable
cred
it rating as a supplier-based intangible
unde
r section 197 is intended.
Sect
ion 1.249–1. The temporary regu-
lati
ons changecredit ratingandratings of
cred
it rating servicesin §1.249–1(e)(2)(ii)
toc
redit qualityandwidely published fi-
nan
cial information. In the existing reg-
ula
tions, a change in the credit rating of
an i
ssuer or obligation is one of the facts
and
circumstances used to determine how
2011–33 I.R.B.139August 15, 2011

much of a repurchase premium is attribut-
able to the cost of borrowing and not to the
conversion feature of a convertible bond.
Credit rating servicesis used as a means
to determine the credit rating of an issuer
or obligation. None of these changes affect
the substantive rules in the existing regula-
tions.
Section 1.475(a)–4(d)(4).Exam-
ple 1,Example 2,andExample 3in
§1.475(a)–4(d)(4) are revised to remove
references to credit ratings or credit rat-
ing agencies. In these three examples in
the existing regulations,credit ratingor
specific references to certain ratings by
certain credit ratings agencies (such as
AA/aa or AAA/aaa) were used to set up the
factual scenario that illustrates the factors
that go into the determination of whether
it is appropriate for a dealer to take a credit
risk adjustment. These terms were also
used to describe the credit risk adjustment
implicit in the yield curve used to discount
the present value of the cash flows. This
adjustment affects whether any additional
credit risk adjustments are warranted.
These examples also usedcredit rating
agencyto set up the factual scenario that
a counterparty’s credit-worthiness was
based upon an industry standard of a
certain credit quality and illustrates the
factors that go into the determination of
whether it is appropriate for a dealer to
take a credit risk adjustment. The changes
that have been made to the language of the
examples do not alter the purpose of the
illustrations and present the factual issues
in a more generalized way.
Section 1.860G–2.Section
1.860G–2(g)(2) definesqualified reserve
fundas an amount that is reasonably
required to fund expenses of the REMIC
or amounts due on regular or residual
interests in the event of defaults on
the underlying pool of mortgages. In
defining the amount reasonably required,
§1.860G–2(g)(3)(ii) refers to the amount
required by a nationally recognized
independent rating agency as a condition
of providing the rating for the REMIC
interest desired by the sponsor. Because
an alternative and fully adequate standard
of reference is already set forth in these
regulations, these temporary regulations
remove the rating agency alternative
standard.
Section 1.1001–3. Section 1.1001–3
provides rules for determining whether
a modification of a debt instrument re-
sults in an exchange for purposes of
§1.1001–1(a). These temporary regula-
tions remove the termsratingandcredit
ratingfrom §1.1001–3 and generally re-
place those terms withcredit quality.
Section 1.1001–3(d)Example 9is revised
so that the event that triggers an option to
increase a note’s rate of interest is a breach
of certain covenants in the note, rather
than a specific decline in the corporation’s
credit rating. The temporary regulations
also revise §1.1001–3(g)Example 5so that
the debt instrument described in the exam-
ple allows a party to be substituted for the
instrument’s original obligor on the basis
of the party’s credit-worthiness, rather
than the party’s credit rating. The tempo-
rary regulations also revise §1.1001–3(g)
Example 8to explain that a bank’s letter of
credit supporting a debt instrument is sub-
stituted for another bank’s letter of credit
when the first bank encounters financial
difficulty, thus removing references to
rating agenciesand either bank’scredit
rating.
Section 48.4101–1(f)(4). Section 4101
requires certain persons to be regis-
tered by the IRS for purposes of several
fuel tax provisions of the Code. Under
§48.4101–1, the IRS will register an appli-
cant for registration only if, among other
conditions, the applicant has adequate fi-
nancial resources to pay its expected fuel
tax liability. To make this determination,
§48.4101–1(f)(4)(ii)(B) instructs the IRS
to look to the applicant’s financial in-
formation. These temporary regulations
remove the examples of the types of docu-
ments the IRS should review and instructs
the IRS to look at all information relevant
to the applicant’s financial status.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13563. 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. chap-
ter 5) does not apply to these regulations.
For applicability of the Regulatory Flexi-
bility Act (5 U.S.C. chapter 6), please re-
fer to the Special Analysis section in the
preamble to the cross-referenced notice of
proposed rulemaking in this issue of the
Bulletin. Pursuant to section 7805(f) of
the Code, these regulations have been sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on their impact on small busi-
ness.
Drafting Information
These regulations were drafted by per-
sonnel in the Office of Associate Chief
Counsel (Financial Institutions and Prod-
ucts), the Office of Associate Chief Coun-
sel (Income Tax and Accounting), the
Office of the Associate Chief Counsel (In-
ternational) and the Office of the Associate
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the IRS and the Treasury Department
participated in their development.
*****
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 48 are
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.150–1 is amended as
follows:
1. Paragraph (a)(4) is added.
2. In paragraph (b), the definition of
Issuance costsis revised.
The additions and revisions read as fol-
lows:
§1.150–1 Definitions.
(a) * * *
(4) [Reserved]. For further guidance,
see §1.150–1T(a)(4).
(b) * * *
Issuance costs[Reserved]. For fur-
ther guidance, see §1.150–1T(b),Issuance
costs.
*****
Par. 3. Section 1.150–1T is added to
read as follows:
§1.150–1T Definitions (temporary).
(a) through (a)(3) [Reserved]. For fur-
ther guidance, see §1.150–1(a) through
(a)(3).
August 15, 20111402011–33 I.R.B.

(4)Additional exception to the general
applicability date. Section 1.150–1T(b),
Issuance costs, applies on and after July 6,
2011.
(5)Expiration date. The applicability
of §1.150–1T(b),Issuance costs,expires
on or before July 3, 2014.
(b)Bondthrough the definition ofGov-
ernmental bond[Reserved]. For further
guidance, see §1.150–1(b)Bondthrough
the definition ofGovernmental bond.
Issuance costsmeans costs to the ex-
tent incurred in connection with, and allo-
cable to, the issuance of an issue within the
meaning of section 147(g). For example,
issuance costs include the following costs
but only to the extent incurred in connec-
tion with, and allocable to, the borrowing:
underwriters’ spread; counsel fees; finan-
cial advisory fees; fees paid to an organ-
ization to evaluate the credit quality of an
issue; trustee fees; paying agent fees; bond
registrar, certification, and authentication
fees; accounting fees; printing costs for
bonds and offering documents; public ap-
proval process costs; engineering and fea-
sibility study costs; guarantee fees, other
than for qualified guarantees (as defined in
§1.148–4(f)); and similar costs.
(c)Issue datethrough paragraph (e)
[Reserved]. For further guidance, see
§1.150–1(b)Issue datethrough paragraph
(e).
Par. 4. Section 1.171–1(f)Example 2is
revised to read as follows:
§1.171–1 Bond premium.
*****
(f) * * *
Example 2. [Reserved]. For further
guidance, see §1.171–1T(f)Example 2.
*****
Par. 5. Section 1.171–1T is added to
read as follows:
§1.171–1T Bond premium (temporary).
(a) through (f)Example 1[Reserved].
For further guidance, see §1.171–1(a)
through (f)Example 1.
Example 2.Convertible bond—(i)Facts.On
January 1, 2012, A purchases for $1,100 B corpo-
ration’s bond maturing on January 1, 2015, with a
stated principal amount of $1,000, payable at matu-
rity. The bond provides for unconditional payments
ofinterestof$30onJanuary1andJuly1ofeachyear.
In addition, the bond is convertible into 15 shares
of B corporation stock at the option of the holder.
On January 1, 2012, B corporation’s nonconvertible,
publicly-traded, three-yeardebt of comparable credit
quality trades at a price that reflects a yield of 6.75
percent, compounded semiannually.
(ii)Determination of basis. A’s basis for de-
termining loss on the sale or exchange of the bond
is $1,100. As of January 1, 2012, discounting the
remaining payments on the bond at the yield at which
B’s similar nonconvertible bonds trade (6.75 percent,
compounded semiannually) results in a present value
of $980. Thus, the value of the conversion option
is $120. Under §1.171–1(e)(1)(iii)(A), A’s basis is
$980 ($1,100 - $120) for purposes of §§1.171–1
through 1.171–5. The sum of all amounts payable
on the bond other than qualified stated interest is
$1,000. Because A’s basis (as determined under
§1.171–1(e)(1)(iii)(A)) does not exceed $1,000, A
does not acquire the bond at a premium.
(iii)Effective/applicability date.This
Example 2applies to bonds acquired on or
after July 6, 2011.
(g)Expiration date. The applicability
of this section expires on July 3, 2014.
Par. 6. Section 1.197–2 is amended
by revising paragraph (b)(7) to read as fol-
lows:
§1.197–2 Amortization of goodwill and
certain other intangibles.
*****
(b) * * *
(7) [Reserved]. For further guidance,
see §1.197–2T(b)(7).
*****
Par. 7. Section 1.197–2T is added to
read as follows:
§1.197–2T Amortization of goodwill and
certain other intangibles (temporary).
(a) through (b)(6) [Reserved]. For fur-
ther guidance, see §1.197–2(a) through
(b)(6).
(7)Supplier-based intangibles—(i)In
general. Section 197 intangibles include
any supplier-based intangible. Asup-
plier-based intangibleis the value result-
ing from the future acquisition, pursuant
to contractual or other relationships with
suppliers in the ordinary course of busi-
ness, of goods or services that will be sold
or used by the taxpayer. Thus, the amount
paid or incurred for supplier-based intan-
gibles includes, forexample, any portion
of the purchase price of an acquired trade
or business attributable to the existence
of a favorable relationship with persons
providing distribution services (such as
favorable shelf or display space at a retail
outlet), or the existence of favorable sup-
ply contracts. The amount paid or incurred
for supplier-based intangibles does not
include any amount required to be paid for
the goods or services themselves pursuant
to the terms of the agreement or other re-
lationship. In addition, see the exceptions
in §1.197–2(c), including the exception in
§1.197–2(c)(6) for certain rights to receive
tangible property or services from another
person.
(ii)Effective/applicability date.This
section applies to supplier-based intangi-
bles acquired after July 6, 2011.
(iii)Expiration date. The applicability
of this section expires on July 3, 2014.
(b)(8) through (l) [Reserved]. For fur-
ther guidance, see §1.197–2(b)(8) through
(l).
Par. 8. Section 1.249–1 is amended as
follows:
1. Paragraph (e)(2)(ii) is revised.
2. The paragraph heading for paragraph
(f) is revised.
3. Paragraph (f)(3) is added.
The revisions and addition read as fol-
lows:
§1.249–1 Limitation on deduction of bond
premium on repurchase.
*****
(e) * * *
(2) * * *
(ii) [Reserved]. For further guidance,
see §1.249–1T(e)(2)(ii).
*****
(f)Effective/applicability dates.***
(3) [Reserved]. For further guidance,
see §1.249–1T(f)(3).
*****
Par. 9. Section 1.249–1T is added to
read as follows:
§1.249–1T Limitation on deduction of
bond premium on repurchase (temporary).
(a) through (e)(2)(i) [Reserved]. For
further guidance, see §1.249–1(a) through
(e)(2)(i).
(ii) In determining the amount under
§1.249–1(e)(2)(i), appropriate considera-
tion shall be given to all factors affect-
ing the selling price or yields of compara-
ble nonconvertible obligations. Such fac-
tors include general changes in prevailing
yields of comparable obligations between
2011–33 I.R.B.141August 15, 2011

the dates the convertible obligation was is-
sued and repurchased and the amount (if
any) by which the selling price of the non-
convertible obligation was affected by rea-
son of any change in the issuing corpora-
tion’s credit quality or the credit quality of
the obligation during such period (deter-
mined on the basis of widely published fi-
nancial information or on the basis of other
relevant facts and circumstances which re-
flect the relative credit quality of the cor-
poration or the comparable obligation).
(e)(2)(iii) through (f)(2) [Re-
served]. For further guidance, see
§1.249–1(e)(2)(iii) through (f)(2).
(3)Portion of repurchase premium at-
tributable to cost of borrowing. Paragraph
(e)(2)(ii) of this section applies to any re-
purchase of a convertible obligation occur-
ring on or after July 6, 2011.
(g) [Reserved]. For further guidance,
see §1.249–1(g).
(h)Expiration date. The applicability
of this section expires on July 3, 2014.
Par. 10. Section 1.475(a)–4 is amended
by revising paragraph (d)(4)Example 1,
Example 2,andExample 3to read as fol-
lows:
§1.475(a)–4 Valuation safe harbor.
*****
(d) * * *
(4) * * *
Example 1. [Reserved]. For further
guidance, see §1.475(a)–4T(d)(4)Exam-
ple 1.
Example 2. [Reserved]. For further
guidance, see §1.475(a)–4T(d)(4)Exam-
ple 2.
Example 3. [Reserved]. For further
guidance, see §1.475(a)–4T(d)(4)Exam-
ple 3.
*****
Par. 11. Section 1.475(a)–4T is added
to read as follows:
§1.475(a)–4T Valuation safe harbor
(temporary).
(a) through (d)(4) introductory text
[Reserved]. For further guidance, see
§1.475(a)–4(a) through (d)(4) introduc-
tory text.
Example 1. (i) X, a calendar year taxpayer, is
a dealer in securities within the meaning of section
475(c)(1). X generally maintains a balanced portfo-
lio of interest rate swaps and other interest rate deriva-
tives, capturing bid-ask spreads and keeping its mar-
ket exposure within desired limits (using, if neces-
sary, additional derivatives for this purpose). X uses
a mark-to-market method on a statement that it is re-
quired to file with the United States Securities and
Exchange Commission and that satisfies §1.475(a)–4
(d)(2) with respect to both the contracts with cus-
tomers and the additional derivatives. When deter-
mining the amount of any gain or loss realized on a
sale, exchange, or termination of a position, X makes
a proper adjustment for amounts taken into account
respecting payments or receipts. X and all of its coun-
terparties on the derivatives have the same general
credit quality as each other.
(ii) Under X’s valuation method, as of each val-
uation date, X determines a mid-market probability
distribution of future cash flows under the derivatives
and computes the present values of these cash flows.
In computing these present values, X uses an indus-
try standard yield curve that is appropriate for obliga-
tions by persons with this same general credit qual-
ity. In addition, based on information that includes
its own knowledge about the counterparties, X ad-
justs some of these present values either upward or
downward to reflect X’s reasonable judgment about
the extent to which the true credit status of each coun-
terparty’s obligation, taking credit enhancements into
account, differs from the general credit quality used
in the yield curve to present value the derivatives.
(iii) X’s methodology does not violate the require-
ment in §1.475(a)–4(d)(3)(iii) that the same cost or
risk not be taken into account, directly or indirectly,
more than once.
(iv) ThisExample 1applies to valuations of secu-
rities on or after July 6, 2011.
Example 2. (i) The facts are the same as inExam-
ple 1, except that X uses a better credit quality in de-
termining the yield curve to discount the payments to
be received under the derivatives. Based on informa-
tion that includes its own knowledge about the coun-
terparties, X adjusts these present values to reflect
X’s reasonable judgment about the extent to which
the true credit status of each counterparty’s obliga-
tion, taking credit enhancements into account, differs
from this better credit quality obligation.
(ii) X’s methodology does not violate the require-
ment in §1.475(a)–4(d)(3)(iii) that the same cost or
risk not be taken into account, directly or indirectly,
more than once.
(iii) ThisExample 2applies to valuations of secu-
rities on or after July 6, 2011.
Example 3. (i)ThefactsarethesameasinEx-
ample 1, except that, after computing present values
using the discount rates that are appropriate for oblig-
ors with the same general credit quality, and based on
information that includes X’s own knowledge about
the counterparties, X adjusts some of these present
values either upward or downward to reflect X’s rea-
sonable judgment about the extent to which the true
credit status of each counterparty’s obligation, taking
credit enhancements into account, differs from a bet-
ter credit quality.
(ii) X’s methodology violates the requirement in
§1.475(a)–4(d)(3)(iii) that the same cost or risk not be
taken into account, directly or indirectly, more than
once. By using the same general credit quality dis-
count rate, X’s method takes into account the dif-
ference between risk-free obligations and obligations
with that lower credit quality. By adjusting values
for the difference between a higher credit quality and
that lower credit quality, X takes into account risks
that it had already accounted for through the discount
rates that it used. The same result would occur if X
judged some of its counterparties’ obligations to be of
a higher credit quality but X failed to adjust the values
of those obligations to reflect the difference between
a higher credit quality and the lower credit quality.
(iii) ThisExample 3applies to valuations of secu-
rities on or after July 6, 2011.
Example 4andExample 5and para-
graphs (e) through (m). [Reserved]. For
further guidance, see §1.475(a)–4(d)(4)
Example 4andExample 5and paragraphs
(e) through (m).
(n)Expiration date. The applicability
of this section expires on July 3, 2014.
Par. 12. Section 1.860G–2 is amended
by revising paragraphs (g)(3)(ii)(B) and
(C) and adding paragraph (D) to read as
follows:
§1.860G–2 Other rules.
*****
(g) * * *
(3) * * *
(ii) * * *
(B) [Reserved]. For further guidance,
see §1.860G–2T(g)(3)(ii)(B).
(C) [Reserved]. For further guidance,
see §1.860G–2T(g)(3)(ii)(C).
(D) [Reserved]. For further guidance,
see §1.860G–2T(g)(3)(ii)(D).
*****
Par. 13. Section 1.860G–2T is added to
read as follows:
§1.860G–2T Other rules (temporary).
(a) through (g)(3)(ii)(A) [Reserved].
For further guidance, see §1.860G–2(a)
through (g)(3)(ii)(A).
(B)Presumption that a reserve is rea-
sonably required. The amount of a reserve
fund is presumed to be reasonable (and
an excessive reserve is presumed to have
been promptly and appropriately reduced)
if it does not exceed the amount required
by a third party insurer or guarantor, who
does not own directly or indirectly (within
the meaning of section 267(c)) an inter-
est in the REMIC (as defined in section
1.860D–1(b)(1)), as a condition of provid-
ing credit enhancement.
(C)Presumption may be rebutted.The
presumption in §1.860G–2(g)(3)(ii)(B)
may be rebutted if the amounts required
by the third party insurer are not commer-
cially reasonable considering the factors
described in §1.860G–2(g)(3)(ii)(A).
August 15, 20111422011–33 I.R.B.

(D)Effective/applicability date. Para-
graphs (g)(3)(ii)(B) and (C) of this section
apply on and after July 6, 2011.
(E)Expiration date. The applicability
of paragraphs (g)(3)(ii)(B) and (C) of this
section expire on July 3, 2014.
(h) through (k) [Reserved]. For further
guidance, see §1.860G–2(h) through (k).
Par. 14. Section 1.1001–3 is amended
as follows:
1. Paragraph (d)Example 9is revised.
2. Paragraph (e)(4)(iv)(B) is revised.
3. Paragraph (e)(5)(ii)(B)(2) is revised.
4. Paragraph (g)Examples 1,5and8
are revised.
The revisions read as follows:
§1.1001–3 Modifications of debt
instruments.
*****
(d) * * *
Example 9. [Reserved]. For further
guidance, see §1.1001–3T(d)Example 9.
*****
(e) * * *
(4) * * *
(iv) * * *
(B) [Reserved]. For further guidance,
see §1.1001–3T(e)(4)(iv)(B).
*****
(5) * * *
(ii) * * *
(B)***
(2) [Reserved]. For further guidance,
see §1.1001–3T(e)(5)(ii)(B)(2).
*****
(g) * * *
Example 1. [Reserved]. For further
guidance, see §1.1001–3T(g)Example 1.
*****
Example 5. [Reserved]. For further
guidance, see §1.1001–3T(g)Example 5.
*****
Example 8. [Reserved]. For further
guidance, see §1.1001–3T(g)Example 8.
*****
Par. 15. Section 1.1001–3T is added to
read as follows:
§1.1001–3T Modifications of debt
instruments (temporary).
(a) through (d)Example 8[Reserved].
For further guidance, see §1.1001–3(a)
through (d)Example 8.
Example 9.Holder’s option to increase interest
rate. (i) A corporation issues an 8-year note to a bank
in exchange for cash. Under the terms of the note,
the bank has the option to increase the rate of in-
terest by a specified amount if certain covenants in
the note are breached. The bank’s right to increase
the interest rate is a unilateral option as described in
§1.1001–3(c)(3).
(ii) A covenant in the note is breached. The bank
exercises its option to increase the rate of interest.
The increase in the rate of interest occurs by opera-
tion of the terms of the note and does not result in
a deferral or a reduction in the scheduled payments
or any other alteration described in §1.1001–3(c)(2).
Thus, the change in interest rate is not a modification.
(iii)Effective/applicability date.ThisExample 9
applies to modifications occurring on or after July 6,
2011.
(d)Example 10through (e)(4)(iv)(A)
[Reserved].For further guidance,
see §1.1001–3(d)Example 10through
(e)(4)(iv)(A).
(B)Nonrecourse debt instruments.(1)
A modification that releases, substitutes,
adds or otherwise alters a substantial
amount of the collateral for, a guarantee
on, or other form of credit enhancement
for a nonrecourse debt instrument is a
significant modification. A substitution of
collateral is not a significant modification,
however, if the collateral is fungible or
otherwise of a type where the particular
units pledged are unimportant (for exam-
ple, government securities or financial
instruments of a particular type and credit
quality). In addition, the substitution of
a similar commercially available credit
enhancement contract is not a significant
modification, and an improvement to the
property securing a nonrecourse debt in-
strument does not result in a significant
modification.
(2)Effective/applicability date.This
paragraph (e)(4)(iv)(B) applies to modifi-
cations occurring on or after July 6, 2011.
(e)(4)(v) through (e)(5)(ii)(B)(1)
[Reserved].For further guidance,
see§1.1001–3(e)(4)(v)through
(e)(5)(ii)(B)(1).
(2)Original collateral.(i) A modi-
fication that changes a recourse debt in-
strument to a nonrecourse debt instrument
is not a significant modification if the in-
strument continues to be secured only by
the original collateral and the modification
does not result in a change in payment ex-
pectations. For this purpose, if the origi-
nal collateral is fungible or otherwise of a
type where the particular units pledged are
unimportant (for example, government se-
curities or financial instruments of a partic-
ular type and creditquality), replacement
of some or all units of the original collat-
eral with other units of the same or similar
type and aggregate value is not considered
a change in the original collateral.
(ii)Effective/applicability date.This
paragraph (e)(5)(ii)(B)(2)appliestomodi-
fications occurring on or after July 6, 2011.
(e)(6) through (g) introductory text
[Reserved]. For further guidance, see
§1.1001–3(e)(6) through (g) introductory
text.
Example 1.Modification of call right.(i)Un-
der the terms of a 30-year, fixed-rate bond, the issuer
can call the bond for 102 percent of par at the end of
ten years or for 101 percent of par at the end of 20
years. At the end of the eighth year, the holder of
the bond pays the issuer to waive the issuer’s right to
call the bond at the end of the tenth year. On the date
of the modification, the issuer’s credit quality is ap-
proximately the same as when the bond was issued,
but market rates of interest have declined from that
date.
(ii) The holder’s payment to the issuer changes
the yield on the bond. Whether the change in yield
is a significant modification depends on whether the
yield on the modified bond varies from the yield on
the original bond by more than the change in yield as
described in §1.1001–3(e)(2)(ii).
(iii) If the change in yield is not a significant mod-
ification, the elimination of the issuer’s call right must
also be tested for significance. Because the specific
rules of §1.1001–3(e)(2) through (e)(6) do not ad-
dress this modification, the significance of the modi-
fication must be determined under the general rule of
§1.1001–3(e)(1).
(iv)Effective/applicability date.ThisExample 1
applies to modifications occurring on or after July 6,
2011.
Example 2throughExample 4[Re-
served]. For further guidance, see
§1.1001–3(g)Example 2throughExample
4.
Example 5.Assumption of mortgage with in-
crease in interest rate. (i) A recourse debt instrument
with a 9 percent annual yield is secured by an office
building. Under the terms of the instrument, a pur-
chaser of the building may assume the debt and be
substituted for the original obligor if the purchaser
is equally or more creditworthy than the original
obligor and if the interest rate on the instrument is
increased by one-half percent (50 basis points). The
building is sold, the purchaser assumes the debt, and
the interest rate increases by 50 basis points.
(ii) If the purchaser’s acquisition of the
building does not satisfy the requirements of
§1.1001–3(e)(4)(i)(B) or (C), the substitution of the
purchaser as the obligor is a significant modification
under §1.1001–3(e)(4)(i)(A).
(iii) If the purchaser acquires substantially all of
the assets of the original obligor, the assumption of
the debt instrument will not result in a significant
modification if there is not a change in payment ex-
pectations and the assumption does not result in a sig-
nificant alteration.
2011–33 I.R.B.143August 15, 2011

(iv) The change in the interest rate, if tested under
the rules of §1.1001–3(e)(2), would result in a signif-
icant modification. The change in interest rate that
results from the transaction is a significant alteration.
Thus, the transaction does not meet the requirements
of §1.1001–3(e)(4)(i)(C) and is a significant modifi-
cation under §1.1001–3 (e)(4)(i)(A).
(v)Effective/applicability date. Notwithstanding
§1.1001–3(h), thisExample 5applies to modifica-
tions occurring on or after July 6, 2011.
Example 6throughExample 7[Re-
served]. For further guidance, see
§1.1001–3(g)Example 6throughExample
7.
Example 8.Substitution of credit enhancement
contract. (i) Under the terms of a recourse debt instru-
ment, the issuer’s obligations are secured by a letter
of credit from a specified bank. The debt instrument
does not contain any provision allowing a substitu-
tion of a letter of credit from a different bank. The
specified bank, however, encounters financial diffi-
culty. The issuer and holder agree that the issuer will
substitute a letter of credit from another bank.
(ii) Under §1.1001–3(e)(4)(iv)(A), the substitu-
tion of a different credit enhancement contract is not a
significant modification of a recourse debt instrument
unless the substitution results in a change in payment
expectations. While the substitution of a new letter
of credit by a different bank does not itself result in a
change in payment expectations, such a substitution
may result in a change in payment expectations under
certain circumstances (forexample, if the obligor’s
capacity to meet payment obligations is dependent on
the letter of credit and the substitution substantially
enhances that capacity fromprimarily speculative to
adequate).
(iii)Effective/applicability date.ThisExample 8
applies to modifications occurring on or after July 6,
2011.
Example 9through (h) [Reserved]. For
further guidance, see §1.1001–3(g)Exam-
ple 9through (h).
(i)Expiration date. The applicability of
this section expires on July 3, 2014.
PART 48—MANUFACTURERS AND
RETAILERS EXCISE TAXES
Par. 16. The authority citation for part
48 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 17. Section 48.4101–1 is amended
as follows:
1. Paragraph (f)(4)(ii)(B) is removed
and reserved.
2. Paragraph (l)(5) is added and re-
served.
The additions read as follows:
§48.4101–1 Taxable fuel; registration.
*****
(f) * * *
(4) * * *
(ii) * * *
(B) [Reserved]. For further guidance,
see §48.4101–1T(f)(4)(ii)(B).
*****
(l) * * *
(5) [Reserved]. For further guidance,
see §48.4101–1T(l)(5).
Par. 18. Section 48.4101–1T is
amended as follows:
1. Paragraphs (a) through (f)(4)(ii)(A)
are reserved.
2. Paragraph (f)(4)(ii)(B) is revised.
3. Paragraphs (f)(4)(iii) through
(h)(3)(iii) are reserved.
4. Paragraphs (h)(3)(v) through (l)(4)
are reserved.
5. Paragraphs (l)(5) and (l)(6) are
added.
The additions and revisions read as fol-
lows:
§48.4101–1T Taxable fuel; registration
(temporary).
(a) through (f)(4)(ii)(A) [Reserved].
For further guidance see §48.4104–1(a)
through (f)(4)(ii)(A).
(B)Basis for determination. The deter-
mination under §48.4101–1(f)(4)(ii) must
be based on all information relevant to the
applicant’s financial status.
(f)(4)(iii) through (h)(3)(iii) [Re-
served]. For further guidance, see
§48.4101–1(f)(4)(iii) through (h)(3)(iii).
*****
(h)(3)(v) through (l)(4) [Reserved]. For
further guidance, see §48.4101–1(h)(3)(v)
through (l)(4).
(l)(5)Effective/applicability date. Para-
graph (f)(4)(ii)(B) of this section applies
on July 6, 2011.
(l)(6)Expiration date. The applicabil-
ity of paragraph (f)(4)(ii)(B) of this section
expires on July 3, 2014.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved June 29, 2011.
Emily S. McMahon,
Acting Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on July 1, 2011,
11:15 a.m., and published in the issue of the Federal Register
for July 6, 2011, 76 F.R. 39278)
Section 381.—Carryovers
in Certain Corp
orate
Acquisitions
26 CFR 1.381(a)–1: General rule relating to carry-
overs in certain corporate acquisitions.
T.D. 9534
DEPARTMENT OF T
HE
TREASURY
Internal Reve
nue Service
26 CFR Part 1
Methods of Accounting
Used by Corporations That
Acquire the Assets of Other
Corporations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations relating to the methods of
accounting, including the inventory meth-
ods, to be used by corporations that acquire
the assets of other corporations in certain
corporate reorganizations and tax-free liq-
uidations. These regulations clarify and
simplify the rules regarding the accounting
methods to be used following these reorga-
nizations and liquidations.
DATES:Effective Date:These regulations
are effective on August 31, 2011.
Applicability Date:For dates of
applicability,see §§1.381(a)–1(e),
1.381(c)(4)–1(f), 1.381(c)(5)–1(f), and
1.446–1(e)(4)(iii).
FOR FURTHER INFORMATION
CONTACT: Cheryl Oseekey at (202)
622–4970 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to 26 CFR part 1. On November 16, 2007,
the IRS and the Treasury Department pub-
lished a notice of proposed rulemaking
(REG–151884–03, 2007–2 C.B. 1200)
in theFederal Register(72 FR 64545).
This notice of proposed rulemaking, while
continuing most of the provisions of the
August 15, 20111442011–33 I.R.B.

regulations originally issued under sec-
tions 381(c)(4) and 381(c)(5) of the In-
ternal Revenue Code (Code) regarding
the methods of accounting to be used by
a corporation that acquires the assets of
another corporation in a section 381(a)
transaction, proposed to clarify and sim-
plify those existing regulations. The IRS
received no comments in response to the
notice of proposed rulemaking. No pub-
lic hearing was requested or held. The
proposed regulations, as revised by this
Treasury decision, are adopted as final
regulations.
Explanation of Provisions
The final regulations differ somewhat
in organization and format from the notice
of proposed rulemaking. These changes
are intended to be editorial in nature and
are not intended to alter the substance
andprinciplesoftherulessetforthinthe
notice of proposed rulemaking. The IRS
and the Treasury Department made these
changes to further advance the objective,
as expressed in the preamble to the no-
tice of proposed rulemaking, of reducing
uncertainty and controversy by provid-
ing regulations undersections 381(c)(4)
and 381(c)(5) that are clear, consistent,
and administrable. For example, the fi-
nal regulations under sections 381(c)(4)
and 381(c)(5) have been drafted so that
the regulations mirror each other to the
greatest extent possible, thus highlight-
ing the consistencies of the regulations’
provisions. Similarly, many of the exam-
ples in the notice of proposed rulemaking
have been revised in the final regulations
to specify the substantive tax rule in the
regulations that the examples illustrate.
Additionally, new examples were added
to the final regulations to provide further
illustrations of the substantive tax rules in
these regulations.
The keystone of the final regulations
for sections 381(c)(4) and 381(c)(5) con-
tinues to be whether the acquiring corpora-
tion operates the trades or businesses of the
parties to a section 381(a) transaction as
separate and distinct trades or businesses
following the date of distribution or trans-
fer. The final regulations continue to pro-
vide that when the acquiring corporation
operates the trades or businesses of the
parties as separate and distinct trades or
businesses after the date of distribution or
transfer, the acquiringcorporation will use
a carryover method. In contrast, when the
acquiring corporation does not operate the
trades or businesses of the parties as sep-
arate and distinct trades or businesses af-
ter the date of distribution or transfer, the
acquiring corporationwilluseaprincipal
method. These rules do not apply when
a carryover method or principal method,
as applicable, is not a permissible method,
or when the acquiringcorporation chooses
not to use a carryover method or principal
method. In those cases, the general rules
under section 446(e) that govern methods
of accounting apply.
The final regulations modify the test
for determining a principal method when
the acquiring corporation does not oper-
ate the trades or businesses of the parties
to the section 381(a) transaction as sepa-
rate and distinct trades or businesses after
the date of distribution or transfer. Under
the final regulations, the determination of
whether the distributor or transferor cor-
poration is larger than the acquiring cor-
poration is made by comparing certain at-
tributes (that is, under section 381(c)(4) the
adjusted bases of the assets and gross re-
ceipts, and under section 381(c)(5) the fair
market value of the inventory) of only the
trades or businesses that will be integrated
after the date of distribution or transfer
rather than comparing the attributes for the
entire entity. The IRS and the Treasury
Department believe that the attributes of
a trade or business that will continue to
operate as a separate and distinct trade or
business after the date of distribution or
transfer should not influence the determi-
nation of a principal method that will be
used by trades or businesses that will be
integrated after the date of distribution or
transfer. The IRS and the Treasury De-
partment also believe that applying the test
at the trade or business level is consistent
with §1.446–1(d) because methods of ac-
counting are generally determined at the
trade or business level.
The final regulations also provide rules
on how an acquiring corporation identifies
a principal method when an acquiring cor-
poration or a distributor or transferor cor-
poration operates more than one separate
and distinct trade or business on the date of
distribution or transfer, has more than one
method of accounting used in the trades or
businesses, and the acquiring corporation
combines the trades or businesses after the
date of distribution or transfer. While the
IRS and the Treasury Department do not
think these situations occur frequently, the
final regulations are revised to provide cer-
tainty for an acquiring corporation and to
obviate the need to obtain a ruling in these
situations.
The final regulations under sections
381(c)(4) and 381(c)(5) clarify the defini-
tion of “cut-off basis.” The final regula-
tions provide thatcut-off basisgenerally
means a manner in which a change in
method of accounting is made without a
section 481(a) adjustment and under which
only the items arising after the beginning
of the year of change (or, in the case of a
change made to a principal method, only
the items arising after the date of distribu-
tion or transfer) are accounted for under
the new method of accounting. The def-
inition of cut-off basis is expanded in the
final regulations under section 381(c)(5)
to clarify that a taxpayer that makes a
change within the last-in, first-out (LIFO)
inventory method from one LIFO method
or sub-method to another LIFO method or
sub-method does not recompute the cost
of its beginning inventories for the year
of change under the new LIFO inventory
method when it implements the change on
a cut-off basis.
The final regulations under section
381(c)(5) also make certain organizational
changes to §1.381(c)(5)–1(e)(6) of the no-
tice of proposed rulemaking with respect
to the integration of inventories after a
section 381(a) transaction. These changes
do not change the substantive rules in the
notice of proposed rulemaking but are
intended to clarify that the rules apply
whether the inventory method of either the
acquiring corporation or the transferor or
distributor corporation must be changed to
a principal method. The IRS and the Trea-
sury Department are considering issuing
additional guidance that would clarify or
modify the manner in which inventories
must be combined and integrated in a sec-
tion 381(a) transaction.
Finally, the final regulations correct
the discussion of section 472(d) that was
in §1.381(c)(5)–1(e)(6)(ii)(B) of the no-
tice of proposed rulemaking. Section
1.381(c)(5)–1(e)(6)(ii)(B) of the notice
of proposed rulemaking provided that
the restoration to cost of any previous
write-downs to market value shall be taken
into account fully in the year that included
2011–33 I.R.B.145August 15, 2011

the date of distribution or transfer. Con-
sistent with the amendments to section
472(d), the final regulations provide that
these restorations shall be taken into ac-
count by the acquiringcorporation ratably
in each of the three taxable years begin-
ning with the taxable year that includes
the date of the distribution or transfer.
The IRS and the Treasury Department
are aware that some practitioners were
concerned that the notice of proposed
rulemaking did not provide audit pro-
tection when an acquiring corporation
uses a principal method after the date of
distribution or transfer. For the reasons
expressed in the preamble to the notice of
proposed rulemaking, the final regulations
continue to deny audit protection in these
circumstances. Unlike changes in method
of accounting under section 446(e) for
which a taxpayer must disclose its use
of a method of accounting, proper or im-
proper, as part of the process for obtaining
consent to make the change, changes to
a principal method pursuant to these fi-
nal regulations are made on the acquiring
corporation’s tax return with no disclosure
on a Form 3115,“Application for Change
in Accounting Method,”that a change in
method of accounting occurred.
The IRS and the Treasury Department
are aware that some taxpayers desire to ob-
tain audit protection for a required change
to a principal method by filing a Form
3115. However, the IRS and the Trea-
sury Department believe that, given the
need for efficient tax administration, filing
a Form 3115 merely to obtain audit protec-
tion should not be allowed. Although audit
protection is not provided for a change to a
principal method required under these reg-
ulations, audit protection ordinarily is pro-
vided for any voluntary change in method
of accounting for which a party to a sec-
tion 381(a) transaction obtains consent un-
der section 446(e) and the generally appli-
cable administrative procedures.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. It is hereby certi-
fied that these regulations will not have
a significant economic impact on a sub-
stantial number of small entities. There-
fore, a regulatory flexibility analysis under
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. This certifica-
tion is based on the belief of the IRS and
the Treasury Department that the corporate
reorganizations and tax-free liquidations
described in section 381(a) generally in-
volve large entities. In addition, these final
regulations reduce the burden on taxpay-
ers by clarifying and simplifying the exist-
ing rules and make the procedures for re-
questing changes in methods of accounting
relating to corporate reorganizations and
tax-free liquidations described in section
381(a) consistent with the general rules for
requesting changes in methods of account-
ing. Pursuant to section 7805(f), the no-
tice of proposed rulemaking that preceded
these final regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business. Consistent
with 5 U.S.C. section 553(d), the regula-
tions are effective 30 days after publication
of this document in theFederal Register.
Drafting Information
The principal author of these final regu-
lations is Cheryl Oseekey, Office of Asso-
ciate Chief Counsel (Income Tax and Ac-
counting). However, other personnel from
the IRS and the Treasury Department par-
ticipated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.381(c)(4)–1 also issued under
26 U.S.C. 381(c)(4). * * *
Section 1.381(c)(5)–1 also issued under
26 U.S.C. 381(c)(5). * * *
Par. 2. In §1.381(a)–1, paragraph
(b)(1)(i) is revised and paragraph (e) is
added to read as follows:
§1.381(a)–1 General rule relating
to carryovers in certain corporate
acquisitions.
*****
(b) * * *
(1) * * * (i) The complete liquidation
of a subsidiary corporation upon which no
gain or loss is recognized in accordance
with the provisions of section 332;
*****
(e)Effective/applicability date.The
rules of paragraph (b)(1)(i) of this section
apply to corporate reorganizations and
tax-free liquidations described in section
381(a) that occur on or after August 31,
2011.
Par. 3. Section 1.381(c)(4)–1 is revised
to read as follows:
§1.381(c)(4)–1 Method of accounting.
(a)Introduction—(1)Purpose.This
section provides guidance regarding the
method of accounting or combination of
methods (other than inventory and depre-
ciation methods) an acquiring corporation
must use following a distribution or trans-
fer to which sections 381(a) and 381(c)(4)
apply and how to implement any associ-
ated change in method of accounting. See
§1.381(c)(5)–1 for guidance regarding the
inventory method an acquiring corporation
must use following a distribution or trans-
fer to which sections 381(a) and 381(c)(5)
apply. See §1.381(c)(6)–1 for guidance
regarding the depreciation method an ac-
quiring corporation must use following a
distribution or transfer to which sections
381(a) and 381(c)(6) apply.
(2)Carryover method requirement for
separate and distinct trades or businesses.
In a transaction to which section 381(a)
applies, if an acquiring corporation con-
tinues to operate a trade or business of the
partiestothesection381(a)transactionas
a separate and distinct trade or business
after the date of distribution or transfer,
the acquiring corporation must use a car-
ryover method as defined in paragraph
(b)(5) of this section for each continuing
trade or business, unless either the carry-
over method is impermissible and must be
changed under paragraph (a)(4) of this sec-
tion or the acquiring corporation changes
the carryover method in accordance with
paragraph (a)(5) of this section. The car-
ryover method requirement applies to the
August 15, 20111462011–33 I.R.B.

overall method of accounting (for exam-
ple, an accrual method of accounting) and
any special methodof accounting (for
example, the percentage of completion
method of accounting described in section
460) as defined in paragraph (b)(2) of this
section used by each trade or business
after the date of distribution or transfer.
The acquiring corporation need not secure
the Commissioner’s consent to continue a
carryover method.
(3)Principal method requirement for
trades or businesses not operated as sep-
arate and distinct trades or businesses.
In a transaction to which section 381(a)
applies, if an acquiring corporation does
not operate the trades or businesses of the
parties to the section 381(a) transaction as
separate and distinct trades or businesses
after the date of distribution or transfer,
the acquiring corporation must use a prin-
cipal method determined under paragraph
(c) of this section, unless either the princi-
pal method is impermissible and must be
changed under paragraph (a)(4) of this sec-
tion or the acquiring corporation changes
the principal method in accordance with
paragraph (a)(5) of this section. The prin-
cipal method requirement applies to the
overall method of accounting (for exam-
ple, the cash receipts and disbursements
method of accounting) and any special
method of accounting (for example, the
installment method under section 453) as
defined in paragraph (b)(2) of this section
used by each integrated trade or business
after the date of distribution or transfer.
The acquiring corporation must change
to a principal method in accordance with
paragraph (d)(1) of this section for each
integrated trade or business and need not
secure the Commissioner’s consent to use
a principal method.
(4)Carryover method or principal
method not a permissible method.Ifa
carryover method or principal method is
not a permissible method of accounting,
the acquiring corporation must secure the
Commissioner’s consent to change to a
permissible method of accounting as pro-
vided in paragraph (d)(2) of this section. If
the acquiring corporation must use a single
method of accounting for a particular item
after the date of distribution or transfer
regardless of the number of separate and
distinct trades or businesses operated on
that date, the acquiring corporation must
use the principal method for that item as
determined under paragraph (c) of this
section, unless either the principal method
is impermissible and must be changed un-
der this paragraph (a)(4) or the acquiring
corporation changes the principal method
in accordance with paragraph (a)(5) of this
section.
(5)Voluntary change.Anypartytoa
section 381(a) transaction may request per-
mission under section 446(e) to change a
method of accounting for the taxable year
in which the transaction occurs or is ex-
pected to occur. For trades or businesses
that will not operate as separate and dis-
tinct trades or businesses after the date of
distribution or transfer, a change in method
of accounting for the taxable year that in-
cludes that date will be granted only if the
requested method is the method that the ac-
quiring corporation must use after the date
of distribution or transfer. The time and
manner of obtaining the Commissioner’s
consent to change to a different method of
accounting is describedin paragraph (d)(2)
of this section.
(6)Examples. The following exam-
ples illustrate the rules of this paragraph
(a). Unless otherwise noted, the carry-
over method is a permissible method of ac-
counting.
Example(1).Carryover method for separate and
distinct trades or businesses after the date of distri-
bution or transfer—(i)Facts. X Corporation oper-
ates an employment agency that uses the overall cash
receipts and disbursements method of accounting. T
Corporation operates an educational institution that
uses an overall accrual method of accounting. X Cor-
poration acquires the assets of T Corporation in a
transaction to which section 381(a) applies. After the
date of distribution or transfer, X Corporation oper-
ates the employment agency as a trade or business
that is separate and distinct from the educational in-
stitution.
(ii)Conclusion. Because after the date of distri-
bution or transfer X Corporation operates the employ-
ment agency as a separate and distinct trade or busi-
ness, under paragraph (a)(2) of this section X Corpo-
ration must use the carryover method for each con-
tinuing trade or business, unless either the carryover
method is impermissible and must be changed un-
der paragraph (a)(4) of this section or X Corpora-
tion changes the carryover method in accordance with
paragraph (a)(5) of this section. As defined in para-
graph (b)(5) of this section, the carryover method for
the employment agency is the cash receipts and dis-
bursements method of accounting and the carryover
method for the educational institution is the accrual
method of accounting used by T Corporation immedi-
ately prior to the date of distribution or transfer. There
is no change in method of accounting, and X Corpo-
ration need not secure the Commissioner’s consent to
use either carryover method.
Example(2).Carryover method for a special
method of accounting—(i)Facts. X Corporation
provides personal grooming consulting and T Cor-
poration provides weight management consulting.
Both X Corporation and T Corporation use the same
overall accrual method of accounting. X Corporation
has elected to use the recurring item exception under
§1.461–5. T Corporation does not use the recurring
item exception. X Corporation acquires the assets
of T Corporation in a transaction to which section
381(a) applies. After the date of distribution or trans-
fer, X Corporation operates the personal grooming
consulting business as a trade or business that is
separate and distinct from the weight management
consulting business.
(ii)Conclusion. Because after the date of dis-
tribution or transfer, X Corporation operates the
personal grooming consulting business as a separate
and distinct trade or business, under paragraph (a)(2)
of this section X Corporation must use a carryover
method for each continuing trade or business, unless
either the carryover method is impermissible and
must be changed under paragraph (a)(4) of this sec-
tion or X Corporation changes the carryover method
in accordance with paragraph (a)(5) of this section.
As defined in paragraph (b)(5) of this section, the
carryover method for the overall method of account-
ing for each trade or business is the accrual method
used immediately prior to the date of distribution
or transfer. The carryovermethod for the special
method of accounting for the personal grooming
consulting business is the recurring item exception
under §1.461–5 while the carryover method for the
weight management consulting business is not to
use the recurring item exception under §1.461–5.
There is no change in method of accounting, and
X Corporation need not secure the Commissioner’s
consent to use the carryover methods of accounting.
Example(3).Carryover method for a special
method of accounting not permissible—(i)Facts.X
Corporation is an engineering firm that uses the over-
all cash receipts and disbursements method of ac-
counting and has elected under section 171 to amor-
tize bond premium with respect to its taxable bonds
acquired at a premium. T Corporation is a manufac-
turer that uses an overall accrual method of account-
ing and has not made a section 171 election to amor-
tize bond premium with respect to its taxable bonds
acquired at a premium. X Corporation acquires the
assets of T Corporation in a transaction to which sec-
tion 381(a) applies. After the date of distribution or
transfer, X Corporation operates the engineering firm
as a trade or business that is separate and distinct from
the manufacturing business.
(ii)Conclusion. Because after the date of distri-
bution or transfer X Corporation operates the engi-
neering firm as a separate and distinct trade or busi-
ness, under paragraph (a)(2) of this section X Cor-
poration must use a carryover method for each con-
tinuing trade or business, unless either the carryover
method is impermissible and must be changed un-
der paragraph (a)(4) of this section or X Corpora-
tion changes the carryover method in accordance with
paragraph (a)(5) of this section. As defined in para-
graph (b)(5) of this section, the carryover method for
the overall method of accounting for the engineering
firm is the cash receipts and disbursements method
used by X Corporation immediately prior to the date
of distribution or transfer, and the carryover method
2011–33 I.R.B.147August 15, 2011

for the overall method of accounting for the manufac-
turing business is the accrual method used by T Cor-
poration immediately prior to the date of distribution
or transfer. There is no change in method of account-
ing, and X Corporation need not secure the Com-
missioner’s consent to use either carryover method.
Notwithstanding that after the date of distribution or
transfer X Corporation hastwo separate and distinct
trades or businesses, X Corporation is permitted only
one method of accounting for amortizable bond pre-
mium under section 171. Because after the date of
distribution or transfer X Corporation must use a sin-
gle method of accounting for bond premium for all
trades or businesses, X Corporation must use the prin-
cipal method for that item as determined under para-
graph (c) of this section, unless either the principal
method is impermissible and must be changed un-
der paragraph (a)(4) of this section or X Corporation
changes that method in accordance with paragraph
(a)(5) of this section. X Corporation must change
to the principal method inaccordance with paragraph
(d)(1) of this section. If amortizing bond premium is
not the principal method, X Corporation may make an
election to amortize bond premium to the extent per-
mitted by section 171. See paragraph (e)(2) of this
section for rules on making elections.
(b)Definitions. For purposes of this
section—
(1)Method of accounting. A method of
accounting has the same meaning as pro-
vided in section 446 and any applicable In-
come Tax Regulations.
(2)Special method of accounting.A
special method of accounting is a method
expressly permitted or required by the
Internal Revenue Code, Income Tax Reg-
ulations, or administrative guidance pub-
lished in the Internal Revenue Bulletin
that deviates from the normal application
of the cash receipts and disbursements
method or an accrual method of account-
ing. The installment method under section
453, the mark-to-market method under
section 475, the amortization of bond pre-
mium under section 171, the percentage
of completion method under section 460,
the recurring item exception of §1.461–5,
and the income deferral methods under
section 455 and §1.451–5 are examples
of special methods of accounting. See
§1.446–1(c)(1)(iii).
(3)Adoption of a method of account-
ing. Adoption of a method of account-
ing has the same meaning as provided in
§1.446–1(e)(1).
(4)Change in method of account-
ing. A change in method of accounting
has the same meaning as provided in
§1.446–1(e)(2).
(5)Carryover method. A carryover
method for the overall method of account-
ing is the overall method of accounting that
each party to a section 381(a) transaction
uses for each separate and distinct trade
or business immediately prior to the date
of distribution or transfer. The carryover
method for a specialmethod of account-
ing for an item is the special method of
accounting for that item that each party to
a section 381(a) transaction uses for each
separate and distinct trade or business im-
mediately prior to the date of distribution
or transfer.
(6)Principal method.Aprincipal
method is an overall or special method
of accounting that is determined under
paragraph (c) of this section.
(7)Permissible method of accounting.
A permissible method of accounting is a
method of accounting that is proper or per-
mitted under the Internal Revenue Code or
any applicable IncomeTax Regulations.
(8)Acquiring corporation. An acquir-
ing corporation has the same meaning as
provided in §1.381(a)–1(b)(2).
(9)Distributor corporation.Adistribu-
tor corporation means the corporation, for-
eign or domestic, that distributes its assets
to another corporation described in sec-
tion 332(b) in a distribution to which sec-
tion 332 (relating to liquidations of sub-
sidiaries) applies.
(10)Transferor corporation.Atrans-
feror corporation means the corporation,
foreign or domestic, that transfers its as-
sets to another corporation in a transfer to
which section 361 (relating to nonrecogni-
tion of gain or loss to corporations) applies,
but only if—
(i) The transfer is in connection with
a reorganization described in section
368(a)(1)(A), (a)(1)(C), or (a)(1)(F), or
(ii) The transfer is in connection with
a reorganization described in section
368(a)(1)(D) or (a)(1)(G), provided the
requirements of section 354(b) are met.
(11)Parties to the section 381(a) trans-
action. Parties to the section 381(a) trans-
action means the acquiring corporation
and the distributor or transferor corpo-
ration that participate in a transaction to
which section 381(a) applies.
(12)Date of distribution or transfer.
The date of distribution or transfer has
the same meaning as provided in section
381(b)(2) and §1.381(b)–1(b).
(13)Separate and distinct trades or
businesses. Separate and distinct trades
or businesses has the same meaning as
provided in §1.446–1(d).
(14)Gross receipts. Gross receipts
means all the receipts, including amounts
that are excludible from gross income,
that must be taken into account under the
method of accounting used in a represen-
tative period (determined without regard
to this section) for federal income tax
purposes. For example, gross receipts in-
cludes income from investments, amounts
received for services, rents, total sales
(net of returns and allowances), and both
taxable and tax-exempt interest. See para-
graph (e)(5) of this section for rules on
determining the representative period.
(15)Audit protection. Audit protection
means, for purposes of paragraph (d)(1) of
this section, that the IRS will not require
an acquiring corporation that is required
to change a method of accounting under
paragraph (a)(3) of this section to change
that method for a taxable year ending prior
to the taxable year that includes the date of
distribution or transfer.
(16)Section 481(a) adjustment.The
section 481(a) adjustment means an ad-
justment that must be taken into account
as required under section 481(a) to prevent
amounts from being duplicated or omitted
when the taxable income of an acquiring
corporation is computed under a method of
accounting different from the method used
to compute taxable income for the preced-
ing taxable year.
(17)Cut-off basis. A cut-off basis
means a manner in which a change in
method of accounting is made without a
section 481(a) adjustment and under which
only the items arising after the beginning
of the year of change (or, in the case of
a change made under paragraph (d)(1) of
this section, after the date of distribution
or transfer) are accounted for under the
new method of accounting.
(18)Adjustment period.Theadjust-
ment period means the number of taxable
years for taking into account the section
481(a) adjustment required as a result of a
change in method of accounting.
(19)Component trade or business.A
component trade or business is a trade or
business of a party to the section 381(a)
transaction that will be combined and inte-
grated with a trade or business of the other
party to the section 381 transaction. See
paragraph (e)(4)(ii) of this section for the
determination of whether a trade or busi-
ness is operated as a separate and distinct
August 15, 20111482011–33 I.R.B.

trade or business after the date of distribu-
tion or transfer.
(c)Principal method—(1)In general.
For each integrated trade or business, the
principal method is generally the method
of accounting used by the component
trade or business of the acquiring corpo-
ration immediately prior to the date of
distribution or transfer. If, however, the
component trade or business of the dis-
tributor or transferor corporation is larger
than the component trade or business
of the acquiring corporation on the date
of distribution or transfer, the principal
methodisthemethodusedbythecompo-
nent trade or business of the distributor or
transferor corporation immediately prior
to that date. If the larger component trade
or business does not have a special method
of accounting for a particular item im-
mediately prior to the date of distribution
or transfer, the principal method for that
item is the method of accounting used
by the component trade or business that
does have a special method of account-
ing for that item. See paragraph (e)(9) of
this section for special rules concerning
methods of accounting that are elected on
a project-by-project, job-by-job, or other
similar basis. For each integrated trade or
business, the component trade or business
of the distributor or transferor corporation
is larger than the component trade or busi-
ness of the acquiring corporation on the
date of distribution or transfer if—
(i) The aggregate of the adjusted bases
of the assets held by each component trade
or business of the distributor or transferor
corporation (determined under section
1011 and any applicable Income Tax Reg-
ulations) exceeds the aggregate of the
adjusted bases of the assets of each com-
ponent trade or business of the acquiring
corporation immediately prior to the date
of distribution or transfer, and
(ii) The aggregate of the gross receipts
for a representative period of each compo-
nent trade or business of the distributor or
transferor corporation exceeds the aggre-
gate of the gross receipts for the same pe-
riod of each component trade or business
of the acquiring corporation. See para-
graph (e)(5) of this section for rules on de-
termining the representative period.
(2)Multiple component trades or busi-
nesses with different principal methods.If
a party to the section 381(a) transaction
has multiple component trades or busi-
nesses and more than one principal over-
all method of accounting or more than one
principal special method of accounting for
an item, then the acquiring corporation
may choose which of the principal meth-
ods of accounting used by such compo-
nent trades or businesses will be the prin-
cipal methods of the integrated trade or
business. The acquiring corporation must
choose a principal method that is a permis-
sible method of accounting. In general, a
change to a principal method in a transac-
tion to which section 381(a) and paragraph
(a)(3) of this section applies is made under
paragraph (d)(1) of this section.
(3)Examples. The following exam-
ples illustrate the rules of this paragraph
(c). Unless otherwise noted, the princi-
pal method is a permissible method of ac-
counting.
Example(1).Principal method is the method
used by the acquiring corporation—(i)Facts.XCor-
poration and T Corporation each operate an employ-
ment agency. X Corporation uses the overall cash re-
ceipts and disbursements method of accounting, and
T Corporation uses an overall accrual method of ac-
counting. X Corporation acquires the assets of T Cor-
poration in a transaction to which section 381(a) ap-
plies. The adjusted bases of the assets in X Corpora-
tion’s employment agency immediately prior to the
date of distribution or transfer exceed the adjusted
bases of the assets in T Corporation’s employment
agency, and the gross receipts in X Corporation’s em-
ployment agency for the representative period ex-
ceed the gross receipts of TCorporation’s employ-
ment agency for the period. After the date of distribu-
tion or transfer, X Corporation’s employment agency
will not be operated as a trade or business that is sep-
arate and distinct from T Corporation’s employment
agency.
(ii)Conclusion. Because after the date of distri-
bution or transfer X Corporation will not operate its
employment agency as a separate and distinct trade or
business, X Corporation must use a principal method
under paragraph (a)(3) of this section, unless either
the principal method is impermissible and must be
changed under paragraph (a)(4) of this section or X
Corporation changes the principal method in accor-
dance with paragraph (a)(5) of this section. Because
on the date of distribution or transfer T Corporation’s
employment agency is not larger than X Corpora-
tion’s employment agency, the principal method for
the overall method of accounting is the cash receipts
and disbursements method used by X Corporation’s
employment agency. X Corporation need not secure
the Commissioner’s consent to use this method of ac-
counting. However, in accordance with paragraph
(d)(1) of this section, X Corporation must change the
method of accounting for the employment agency ac-
quired from T Corporation to the cash receipts and
disbursements method.
Example (2).Principal method is the method
used by the acquiring corporation—(i)Facts.The
facts are the same as inExample(1), except that the
gross receipts of T Corporation’s employment agency
for the representative period exceed the gross receipts
of X Corporation’s employment agency for the pe-
riod.
(ii)Conclusion. The result is the same as inEx-
ample(1). Although the grossreceipts of T Corpora-
tion’s employment agency exceed the gross receipts
of X Corporation’s employment agency, T Corpora-
tion’s employment agency is not larger than X Cor-
poration’s employment agency because the adjusted
bases of the assets of T Corporation’s employment
agency do not exceed the adjusted bases of the assets
of X Corporation’s employment agency. Thus, the
principal method for the overall method of account-
ing is the cash receipts and disbursements method
of accounting used by X Corporation’s employment
agency immediately prior to the date of distribution
or transfer. X Corporation need not secure the Com-
missioner’s consent to use this method of accounting.
However, in accordance withparagraph (d)(1) of this
section, X Corporation must change the method of
accounting for the employment agency business ac-
quired from T Corporation to the cash receipts and
disbursements method.
Example(3).Principal method is the method
used by the distributor or transferor corporation—(i)
Facts. The facts are the same as inExample(2), ex-
cept that the adjusted bases of the assets held by T
Corporation’s employment agency immediately prior
to the date of distribution or transfer exceed the ad-
justed bases of the assets held by X Corporation’s em-
ployment agency.
(ii)Conclusion. The principal method for the
overall method of accounting is the accrual method
of accounting used by T Corporation’s employment
agency immediately prior to the date of distribution
or transfer because on the date of distribution or trans-
fer T Corporation’s employment agency is larger than
X Corporation’s employment agency. The adjusted
bases of the assets of T Corporation’s employment
agency exceed the adjusted bases of the assets of X
Corporation’s employment agency, and the gross re-
ceipts of T Corporation’s employment agency exceed
the gross receipts of X Corporation’s employment
agency. X Corporation need not secure the Com-
missioner’s consent to use this method of accounting.
However, in accordance withparagraph (d)(1) of this
section, X Corporation must change the method of ac-
counting for the employment agency business it op-
erated prior to the date of distribution or transfer to
the accrual method of accounting used by T Corpo-
ration’s employment agency immediately prior to the
date of distribution or transfer.
Example(4).Impermissible principal
method—(i)Facts. Thefactsarethesameasin
Example(1), except that X Corporation is prohibited
under section 448 from using the cash receipts and
disbursements method of accounting after the date
of distribution or transfer.
(ii)Conclusion. Because section 448 prohibits
X Corporation from using the cash receipts and dis-
bursements method of accounting, X Corporation is
not permitted to use the principal method for the over-
all method of accounting as determined inExample
(1). Because after the date of distribution or transfer
that method is not a permissible method, under para-
graph (a)(4) of this section X Corporation must secure
the Commissioner’s consent to change to a permis-
sible method in accordance with the procedures set
forth in paragraph (d)(2) of this section.
2011–33 I.R.B.149August 15, 2011

Example(5).Voluntary change not allow-
able—(i)Facts. The facts are the same as inExample
(4), except that T Corporation wants to discontinue
using the overall accrual method of accounting for its
employment agency and change to the cash receipts
and disbursements method for the taxable year in
which the section 381(a) transaction occurs or is
expected to occur.
(ii)Conclusion. Under paragraph (a)(5) of this
section, the Commissioner will grant a request to
change a method of accounting for the taxable year
that includes the date of distribution or transfer only
if the requested method is the method that the acquir-
ing corporation must use after the date of distribution
or transfer. The Commissioner will not consent to
a request by T Corporation to change to the cash
receipts and disbursements method for the taxable
year in which the section 381(a) transaction occurs
or is expected to occur because X Corporation cannot
use the cash receipts and disbursements method after
the date of distribution or transfer.
Example(6).Principal methods are the acquir-
ing corporation’s methods—(i)Facts.XCorpora-
tion and T Corporation each publishes magazines. X
Corporation acquires the assets of T Corporation in a
transaction to which section 381(a) applies. Both X
Corporation and T Corporation use an overall accrual
method of accounting. X Corporation has elected to
defer income from its subscription sales under section
455. T Corporation has not elected to defer income
from its subscription sales under section 455 and in-
stead has recognized the income from these sales in
accordance with section 451. The adjusted bases of
the assets in X Corporation’s publication business im-
mediately prior to the date of distribution or transfer
exceed the adjusted bases of the assets in T Corpo-
ration’s publication business, and the gross receipts
in X Corporation’s publication business for the rep-
resentative period exceed the gross receipts in T Cor-
poration’s publication business for the representative
period. After the date of distribution or transfer, X
Corporation will not operate its publication business
as a trade or business that is separate and distinct from
T Corporation’s publication business.
(ii)Conclusion. Because after the date of distri-
bution or transfer X Corporation will not operate its
publication business as a separate and distinct trade
or business, X Corporation must use the principal
method under paragraph (a)(3) of this section, un-
less either the principal method is impermissible and
must be changed under paragraph (a)(4) of this sec-
tion or X Corporation changes the principal method
in accordance with paragraph (a)(5) of this section.
The adjusted bases of the assets in T Corporation’s
publication business do not exceed the adjusted bases
of the assets in X Corporation’s publication business,
and the gross receipts in T Corporation’s publication
business do not exceed the gross receipts in X Cor-
poration’s publication business. Because on the date
of distribution or transfer T Corporation’s publica-
tion business is not larger than X Corporation’s pub-
lication business, the principal method for the over-
all method of accounting is the accrual method used
by X Corporation’s publication business immediately
prior to the date of distribution or transfer. The prin-
cipal method for subscription sales is the section 455
deferral method used by X Corporation immediately
prior to the date of distribution or transfer. X Corpo-
ration need not secure the Commissioner’s consent to
use the principal method for either the overall method
of accounting or the special method of accounting.
However, in accordance withparagraph (d)(1) of this
section, X Corporation must change both the overall
method of accounting and the special method of ac-
counting for the publication business acquired from
T Corporation to the accrual method and the section
455 deferral method used by X Corporation immedi-
ately prior to the date of distribution or transfer.
Example (7).Principal methods are the acquir-
ing corporation’s methods—(i)Facts. The facts are
thesameasinExample(6), except that the adjusted
bases of the assets in T Corporation’s publication
business immediately prior to the date of distribution
or transfer exceed the adjusted bases of the assets in
X Corporation’s business.
(ii)Conclusion. The result is the same as inEx-
ample(6). Because on the date of distribution or
transfer T Corporation’s publication business is not
larger than X Corporation’s publication business, the
principal method for the overall method of account-
ing is the accrual method used by X Corporation’s
publication business immediately prior to the date of
distribution or transfer. The principal method for sub-
scription sales is the section 455 deferral method used
by X Corporation immediately prior to the date of
distribution or transfer. X Corporation need not se-
cure the Commissioner’s consent to use the princi-
pal method for either the overall method of account-
ing or the special method of accounting. However,
in accordance with paragraph (d)(1) of this section,
X Corporation must change both the overall method
of accounting and the special method of accounting
for the publication business acquired from T Corpo-
ration to the accrual method and the section 455 defer-
ral method used by X Corporation immediately prior
to the date of distribution or transfer.
Example(8).Principal method determination
when larger component trade or business does not
have a special method of accounting—(i)Facts.X
Corporation and T Corporation both install ice skat-
ing rinks. Both X Corporation and T Corporation
use an overall accrual method of accounting for their
respective businesses. X Corporation completes its
installation contracts within the contracting year and
uses an accrual method of accounting to recognize
the revenue from its installation contracts. T Corpo-
ration’s installation contracts are subject to section
460, and T Corporation recognizes the revenue from
such contracts under the percentage-of-completion
method. X Corporation acquires the assets of T
Corporation in a transaction to which section 381(a)
applies. The adjusted bases of the assets in X Corpo-
ration’s installation business immediately prior to the
date of distribution or transfer exceed the adjusted
bases of the assets in T Corporation’s installation
business, and the gross receipts in X Corporation’s
installation business for the representative period ex-
ceed the gross receipts in T Corporation’s installation
business for the representative period. After the date
of distribution or transfer, X Corporation will not
operate its installation business as a trade or business
that is separate and distinct from T Corporation’s
installation business.
(ii)Conclusion. Because after the date of distri-
bution or transfer X Corporation will not operate its
installation business as a separate and distinct trade or
business, X Corporation must use a principal method
under paragraph (a)(3) of this section, unless either
the principal method is impermissible and must be
changed under paragraph (a)(4) of this section or X
Corporation changes the principal method in accor-
dance with paragraph (a)(5) of this section. The ad-
justed bases of the assets in T Corporation’s instal-
lation business do not exceed the adjusted bases of
the assets in X Corporation’s installation business,
and the gross receipts in T Corporation’s installation
business do not exceed the gross receipts in X Cor-
poration’s installation business. Because on the date
of distribution or transfer T Corporation’s installa-
tion business is not larger than X Corporation’s in-
stallation business, the principal method for the over-
all method of accounting is the accrual method used
by X Corporation’s installation business immediately
prior to the date of distribution or transfer. X Corpo-
ration need not secure the Commissioner’s consent
to use the principal method for the overall method of
accounting. However, in accordance with paragraph
(d)(1) of this section, X Corporation must change
the overall method of accounting for the installation
business acquired from T Corporation to the accrual
method used by X Corporation. Under paragraph (c)
of this section, the principal method for T Corpora-
tion’s long-term contracts is the percentage-of-com-
pletionmethodusedbyTCorporationimmediately
prior to the date of distribution or transfer because
X Corporation’s installation business does not have a
method of accounting for long-term contracts. There
is no change in method of accounting, and X Cor-
poration need not secure the Commissioner’s con-
sent to use T Corporation’s percentage-of-completion
method.
Example(9).Principal method determination
with a combined trade or business and a separate
and distinct trade or business—(i)Facts.XCorpora-
tion operates a tennis academy as a trade or business
that is separate and distinct from its trade or business
of operating a golf academy. X Corporation uses
the overall cash receipts and disbursements method
of accounting for the tennis academy and an overall
accrual method of accounting for the golf academy.
T Corporation operates a tennis academy and uses
an accrual method of accounting for the overall
method. X Corporation acquires the assets of T
Corporation in a transaction to which section 381(a)
applies. After the date of distribution or transfer, X
Corporation will not operate its tennis academy as a
trade or business that is separate and distinct from T
Corporation’s tennis academy. X Corporation will
continue to operate its golf academy as a trade or
business that is separate and distinct from the opera-
tion of the tennis academy. The adjusted bases of the
assets in T Corporation’s tennis academy exceed the
adjusted bases of the assets in X Corporation’s tennis
academy immediately prior to the date of distribution
or transfer. The gross receipts of T Corporation’s
tennis academy for the representative period exceed
the gross receipts of X Corporation’s tennis academy
for that period.
(ii)Conclusion. Because after the date of dis-
tribution or transfer X Corporation will not operate
its tennis academy as a separate and distinct trade or
business, X Corporation must use a principal method
under paragraph (a)(3) of this section, unless either
the principal method is impermissible and must be
changed under paragraph (a)(4) of this section or X
Corporation changes the principal method in accor-
dance with paragraph (a)(5) of this section. Because
August 15, 20111502011–33 I.R.B.

on the date of distribution or transfer the tennis acad-
emy operated by T Corporation is larger than the ten-
nis academy operated by X Corporation, the princi-
pal method for the overall method of accounting for
the combined tennis academy business is the accrual
method used by T Corporation’s tennis academy im-
mediately prior to the date of distribution or transfer.
X Corporation need not secure the Commissioner’s
consent to use the principal method for the overall
method of accounting. However, in accordance with
paragraph (d)(1) of this section, X Corporation must
change the method of accounting for its tennis acad-
emy to the accrual method. Because X Corporation
will operate the golf academy as a separate trade or
business, under paragraph (a)(2) of this section X
Corporation must continue to use the accrual method
that it used immediately prior to the date of distribu-
tion or transfer as the carryover method for the golf
academy. There is no change in method of account-
ing, and X Corporation need not secure the Commis-
sioner’s consent to use the carryover method.
Example(10).Principal method determination
with multiple component trades or businesses—(i)
Facts. The facts are the same as inExample(9), ex-
cept that after the date of distribution or transfer X
Corporation will not operate its golf academy as a
trade or business that is separate and distinct from the
tennis academy. In addition,X Corporation’s compo-
nent trades or businesses are larger than T Corpora-
tion’s component trade or business: (1) the adjusted
bases of the assets of X Corporation’s tennis acad-
emy and golf academy businesses, in the aggregate,
exceed the adjusted bases of the assets held by T Cor-
poration’s tennis academy;and (2) the gross receipts
for the representative period of X Corporation’s ten-
nis academy and golf academy businesses, in the ag-
gregate, exceed the gross receipts in T Corporation’s
tennis academy.
(ii)Conclusion. Because on the date of distribu-
tion or transfer T Corporation’s tennis academy is not
larger than X Corporation’s combined tennis acad-
emy and golf academy, the principal method for the
overall method of accounting is the method of ac-
counting used by the component trades or businesses
of X Corporation that will be combined with T Cor-
poration’s component trade or business on that date.
Because on the date of distribution or transfer X Cor-
poration operates two component trades or businesses
with different overall methods of accounting that will
be integrated after the date of distribution or transfer,
X Corporation may choose under paragraph (c)(2) of
this section which overall method (and any special
method of accounting) used by its component trades
or businesses will be the principal method. X Corpo-
ration may choose to use either the accrual method
used by the golf academy or the cash receipts and
disbursements method used by its tennis academy as
the principal method after the date of distribution or
transfer, if either method is a permissible method.
In accordance with paragraph(d)(1)ofthissection,
X Corporation must change T Corporation’s overall
method of accounting to the principal method. Under
paragraph (a)(3) of this section, X Corporation also
must change either its golf academy business or its
tennis academy business, depending on which prin-
cipal method X Corporation selects, to the principal
method.
(d)Procedures for changing a method
of accounting—(1)Changemadetoprin-
cipal method under paragraph (a)(3)
of this section—(i)Section 481(a) ad-
justment—(A)In general. An acquiring
corporation that changes its method of
accounting or the distributor or transferor
corporation’s method of accounting under
paragraph (a)(3) of this section does not
need to secure the Commissioner’s con-
sent to use the principal method. To the
extent the use of a principal method con-
stitutes a change in method of accounting,
the change in method is treated as a change
initiated by the acquiring corporation for
purposes of section 481(a)(2). Any change
to a principal method, whether the change
relates to a trade or business of the ac-
quiring corporation or a trade or business
of the distributor or transferor corpora-
tion, must be reflected on the acquiring
corporation’s federal income tax return
for the taxable year that includes the date
of distribution or transfer. The amount
of the section 481(a) adjustment and the
adjustment period, if any, necessary to im-
plement a change to the principal method
are determined under §1.446–1(e) and the
applicable administrative procedures that
govern voluntary changes in methods of
accounting under section 446(e). If the
Internal Revenue Code, the Income Tax
Regulations, or administrative procedures
require that a method of accounting be im-
plemented on a cut-off basis, the acquiring
corporation must implement the change
on a cut-off basis as of the date of distri-
bution or transfer on its federal income tax
return for the taxable year that includes
the date of distribution or transfer. If the
Internal Revenue Code, the Income Tax
Regulations, or administrative procedures
require a section 481(a) adjustment, the
acquiring corporation must determine the
section 481(a) adjustment and include the
appropriate amount of the section 481(a)
adjustment on its federal income tax re-
turn for the taxable year that includes the
date of distribution or transfer and subse-
quent taxable year(s), as necessary. This
adjustment is determined by the acquiring
corporation as of the beginning of the day
that is immediately after the date of distri-
bution or transfer.
(B)Example. The following exam-
ple illustrates the rules of this paragraph
(d)(1)(i):
Example. X Corporation uses the overall cash re-
ceipts and disbursements method of accounting, and
T Corporation uses an overall accrual method of ac-
counting. X Corporation acquires the assets of T
Corporation in a transaction to which section 381(a)
applies. X Corporation determines that under the
rules of paragraph (c)(1) of this section X Corpora-
tion must change the method of accounting for the
business acquired from T Corporation to the cash re-
ceipts and disbursements method. X Corporation will
determine the section 481(a) adjustment pertaining
to the change to the cash receipts and disbursements
method by consolidating the adjustments (whether
the amounts thereof represent increases or decreases
in items of income or deductions) arising with re-
spect to balances in the various accounts, such as ac-
counts receivable, as of the beginning of the day that
immediately follows the day on which X Corpora-
tion acquires the assets of T Corporation. X Corpo-
ration will reflect this adjustment, or an appropriate
part thereof, on its federal income tax return for the
taxable year that includes the date of distribution or
transfer.
(ii)Audit protection. Notwithstanding
any other provision in any other Income
Tax Regulation or administrative proce-
dure, no audit protection is provided for
any change in method of accounting under
paragraph (d)(1) of this section.
(iii)Other terms and conditions.Ex-
cept as otherwise provided in this section,
other terms and conditions provided in
§1.446–1(e) and the applicable adminis-
trative procedures for voluntary changes
in method of accounting under section
446(e) apply to a change in method of
accounting under this section. Thus, for
example, if the administrative procedures
for a particular change in method of ac-
counting have a term and condition that
provides for the acceleration of the section
481(a) adjustment period, this term and
condition applies to a change made under
this paragraph (d)(1). However, any scope
limitation in the applicable administrative
procedures will not apply for purposes
of making a change under this paragraph
(d)(1). For example, if the administrative
procedures provide as a limitation that an
identical change in method of accounting
is barred for a period of years, this limita-
tion will not bar a change to the principal
method made under this section.
(2)Change made to a method of ac-
counting under paragraph (a)(4) or (a)(5)
of this section—(i)In general.Apartyto
a section 381(a) transaction that changes
a method of accounting under either para-
graph (a)(4) or paragraph (a)(5) of this
section must follow the provisions of
§1.446–(1)(e) and theapplicable adminis-
trative procedures, including scope limita-
tions, for voluntary changes in method of
accounting under section 446(e), except
2011–33 I.R.B.151August 15, 2011

as provided in paragraphs (d)(2)(ii) and
(d)(2)(iii) of this section. An application
on Form 3115,“Application for Change in
Accounting Method,”filed with the IRS to
change a method of accounting under this
paragraph (d)(2) should be labeled “Filed
under section 381(c)(4)” at the top.
(ii)Final year limitation. Any scope
limitation relating to the final year of a
trade or business will not apply to a tax-
payer that changes its method of account-
ing in the final year of a trade or business
that is terminated as the result of a section
381(a) transaction.
(iii)Time to file. Under the authority of
§1.446–1(e)(3)(ii), for a change in method
of accounting requiring advance consent,
the application for a change in method of
accounting (for example, Form 3115) must
be filed with the IRS on or before the later
of—
(A) The due date for filing a Form 3115
as specified in §1.446–1(e), for example,
the last day of the taxable year in which
the distribution or transfer occurred, or
(B) The earlier of—
(1) The day that is 180 days after the
date of distribution or transfer, or
(2) The day on which the acquiring cor-
poration files its federal income tax return
for the taxable year in which the distribu-
tion or transfer occurred.
(e)Rules and procedures—(1)No
method of accounting. Ifapartytoa
section 381(a) transaction is not using a
method of accounting, does not have a
method of accounting for a particular item,
or came into existence as a result of the
transaction, the party will not be treated as
having a method of accounting different
from that used by another party to the
section 381(a) transaction.
(2)Elections and adoptions allowed.If
an election does not require the Commis-
sioner’s consent, an acquiring corporation
or a distributor or transferor corporation is
not precluded from making any election
that is otherwise permissible for the tax-
able year that includes the date of distri-
bution or transfer. For purposes of this
section, a corporation shall be deemed as
having made any election as of the first
day of the taxable year that includes the
date of distribution or transfer. Similarly,
where adoption is permissible, an acquir-
ing corporation or a distributor or trans-
feror corporation may adopt any permissi-
ble method of accounting for the taxable
year that includes the date of distribution
or transfer.
(3)Elections continue after section
381(a) transaction—(i)General rule.An
acquiring corporation is not required to
renew any election not otherwise requiring
renewal and previously made by it or by a
distributor or transferor corporation for a
carryover method or a principal method if
the acquiring corporation uses the method
after the section 381(a) transaction. If the
acquiring corporation uses a method after
the date of distribution or transfer, an elec-
tion made by the acquiring corporation or
by a distributor or transferor corporation
for that method that was in effect on the
date of distribution or transfer continues
after the section 381(a) transaction as
though the distribution or transfer had not
occurred.
(ii)Example. The following example il-
lustratestherulesofthisparagraph(e)(3):
Example. The acquiring corporation, X Corpo-
ration, previously elected to amortize bond premium
under section 171. X Corporation acquires the as-
sets of T Corporation in a transaction to which section
381(a) applies. X Corporation determines under the
rules of paragraph (c)(1) of this section that X Corpo-
ration’s method of amortizing bond premium is the
principal method. After the date of distribution or
transfer, X Corporation is not required to renew its
bond premium amortization election and is bound by
it. Additionally, X Corporation would not be required
to renew its election to amortize bond premium if the
method were the carryover method under paragraph
(a)(2) of this section.
(4)Appropriate times for certain de-
terminations—(i)Determining the method
of accounting. The method of accounting
used by a party to a section 381(a) transac-
tion on the date of distribution or transfer
isthemethodofaccountingusedbythat
party as of the end of the day that is imme-
diately prior to the date of distribution or
transfer.
(ii)Determining whether there are sep-
arate and distinct trades or businesses
after the date of distribution or transfer.
Whether an acquiringcorporation will
operate the trades or businesses of the
parties to a section 381(a) transaction as
separate and distinct trades or businesses
after the date of distribution or transfer
will be determined as of the date of distri-
bution or transfer based upon the facts and
circumstances. Intent to combine books
and records of the trades or businesses
may be demonstrated by contemporaneous
records and documents or by other objec-
tive evidence that reflects the acquiring
corporation’s ultimate plan of operation,
even though the actual combination of the
books and records may extend beyond the
end of the taxable year that includes the
date of distribution or transfer.
(5)Representative period for aggregat-
ing gross receipts. The representative pe-
riod for measuring gross receipts is gen-
erally the 12 consecutive months preced-
ing the date of distribution or transfer. If a
component trade or business was not in ex-
istence for the 12 consecutive months pre-
ceding the date of distribution or transfer,
then all component trades or businesses
of each integrated trade or business will
compare their gross receipts for the period
that such trade or business was in exis-
tence. For example, if the acquiring corpo-
ration’s component trade or business was
formed in August and the date of distri-
bution or transfer occurred in December
of the same year, the gross receipts for
those five months will be compared with
the gross receipts of the other component
trades or businesses for the same period.
(6)Establishing a method of account-
ing. A method of accounting used by the
distributor or transferor corporation im-
mediately prior to the date of distribution
or transfer that continues to be used by
the acquiring corporation after the date of
distribution or transfer is an established
method of accounting for purposes of sec-
tion 446(e), whether or not such method is
proper or is permitted under the Internal
Revenue Code or any applicable Income
Tax Regulations.
(7)Other applicable provisions.This
section does not preempt any other pro-
vision of the Internal Revenue Code or
the Income Tax Regulations that is appli-
cable to the acquiring corporation’s cir-
cumstances. For example, income, deduc-
tions, credits, allowances, and exclusions
may be allocated among the parties to a
section 381(a) transaction and other tax-
payers under sections 269 and 482, if ap-
propriate. Similarly, transfers of contracts
accounted for using a long-term contract
method of accounting are governed by the
rules provided in §1.460–4(k). Further,
if other paragraphs of section 381(c) ap-
ply for purposes of determining the meth-
ods of accounting to be used following
the date of distribution or transfer, section
381(c)(4) and this §1.381(c)(4)–1 will not
applytothetaxtreatmentoftheitems.
For example, this section does not apply to
August 15, 20111522011–33 I.R.B.

inventories that an acquiring corporation
obtains in a transaction to which section
381(a) applies. Instead, the rules of section
381(c)(5) govern the inventory method to
be used by the acquiring corporation after
the distribution or transfer. Similarly, if the
acquiring corporationassumesanobliga-
tion of the distributor or transferor corpo-
ration that gives rise to a liability after the
date of distribution or transfer and to which
§1.381(c)(16)–1 applies, the deductibility
of the item is determined under this section
only after the rules of section 381(c)(16)
are applied.
(8)Character of items of income and
deduction. After the date of distribution
or transfer, items of income and deduction
have the same character in the hands of
the acquiring corporation as they would
have had in the hands of the distributor or
transferor corporationifnodistributionor
transfer had occurred.
(9)Method of accounting selected by
project or job. If other sections of the In-
ternal Revenue Code, Income Tax Regu-
lations, or other administrative guidance
permit an acquiring corporation to elect
a method of accounting on a project-by-
project, job-by-job, or other similar ba-
sis, then for purposes of this section the
method elected with respect to each project
or job is the established method only for
that project or job. For example, the elec-
tion under section 460 to classify a con-
tract to perform both manufacturing and
construction activities as a long-term con-
struction contract if at least 95 percent of
the estimated total allocable contract costs
are reasonably allocated to the construc-
tion activities is made on a contract-by-
contract basis. Accordingly, the method of
accounting previously elected for a project
or job generally continues after the date of
distribution or transfer. However, if the
trades or businesses of the parties to a sec-
tion 381(a) transaction are not operated as
separate and distinct trades or businesses
after the date of distribution or transfer,
and two or more of the parties to the sec-
tion 381(a) transaction previously worked
on the same project or job and used differ-
ent methods of accounting for the project
or job immediately before the distribution
or transfer, then the acquiring corporation
must determine the principal method for
that project or job under paragraph (c) of
this section and make changes, if neces-
sary, to the principal method in accordance
with paragraph (d)(1) of this section.
(10)Impermissible method of account-
ing. This section does not limit the Com-
missioner’s ability under section 446(b) to
determine whether a taxpayer’s method of
accounting is an impermissible method or
otherwise fails to clearly reflect income.
For example, an acquiring corporation
may not use the method of accounting
determined under paragraph (a)(2) of this
section if the method fails to clearly reflect
the acquiring corporation’s income within
the meaning of section 446(b).
(f)Effective/applicability date.This
section applies to corporate reorganiza-
tions and tax-free liquidations described
in section 381(a) that occur on or after
August 31, 2011.
Par. 4. Section 1.381(c)(5)–1 is revised
to read as follows:
§1.381(c)(5)–1 Inventory method.
(a)Introduction—(1)Purpose.This
section provides guidance regarding the
inventory method an acquiring corporation
must use following a distribution or trans-
fer to which sections 381(a) and 381(c)(5)
apply and how to implement any associ-
ated change in method of accounting. See
§1.381(c)(4)–1 for guidance regarding the
method of accounting or combination of
methods (other than inventory and depre-
ciation methods) an acquiring corporation
must use following a distribution or trans-
fer to which sections 381(a) and 381(c)(4)
apply. See §1.381(c)(6)–1 for guidance
regarding the depreciation method an ac-
quiring corporation must use following a
distribution or transfer to which sections
381(a) and 381(c)(6) apply.
(2)Carryover method requirement for
separate and distinct trades or businesses.
In a transaction to which section 381(a)
applies, if an acquiring corporation con-
tinues to operate a trade or business of
the parties to the section 381(a) transac-
tion as a separate and distinct trade or busi-
ness after the date of distribution or trans-
fer, the acquiring corporation must use a
carryover method as defined in paragraph
(b)(4) of this section for each continuing
trade or business, unless either the carry-
over method is impermissible and must be
changed under paragraph (a)(4) of this sec-
tion or the acquiring corporation changes
the carryover method in accordance with
paragraph (a)(5) of this section. The ac-
quiring corporation need not secure the
Commissioner’s consent to continue a car-
ryover method.
(3)Principal method requirement for
trades or businesses not operated as sep-
arate and distinct trades or businesses.In
a transaction to which section 381(a) ap-
plies, if an acquiring corporation does not
operate the trades or businesses of the par-
ties to the section 381(a) transaction as
separate and distinct trades or businesses
after the date of distribution or transfer,
the acquiring corporation must use a prin-
cipal method determined under paragraph
(c) of this section, unless either the prin-
cipal method is impermissible and must be
changed under paragraph (a)(4) of this sec-
tion or the acquiring corporation changes
the principal method in accordance with
paragraph (a)(5) of this section. The ac-
quiring corporation must change to a prin-
cipal method in accordance with paragraph
(d)(1) of this section for each integrated
trade or business and need not secure the
Commissioner’s consent to use a principal
method.
(4)Carryover method or principal
method not a permissible method.Ifa
carryover method or principal method is
not a permissible inventory method, the
acquiring corporation must secure the
Commissioner’s consent to change to a
permissible inventory method as provided
in paragraph (d)(2) of this section. If the
acquiring corporation must use a single
inventory method for a particular type
of goods after the date of distribution
or transfer regardless of the number of
separate and distinct trades or businesses
operated on that date, the acquiring cor-
poration must use the principal method
for that type of goods as determined under
paragraph (c) of this section, unless either
the principal method is impermissible and
must be changed under this paragraph
(a)(4) or the acquiring corporation changes
the principal method in accordance with
paragraph (a)(5) of this section.
(5)Voluntary change. Anypartytoa
section 381(a) transaction may request per-
mission under section 446(e) to change an
inventory method for the taxable year in
which the transaction occurs or is expected
to occur. For trades or businesses that will
not operate as separate and distinct trades
or businesses after the date of distribution
or transfer, a change in method of account-
2011–33 I.R.B.153August 15, 2011

ing for the taxable year that includes that
date will be granted only if the requested
inventory method is the method that the ac-
quiring corporation must use after the date
of distribution or transfer. The time and
manner of obtaining the Commissioner’s
consent to change to a different inventory
method is described in paragraph (d)(2) of
this section.
(6)Examples. The following exam-
ples illustrate the rules of this paragraph
(a). Unless otherwise noted, the carryover
method is a permissible inventory method.
Example(1).Carryover method for separate and
distinct trades or businesses after the date of distri-
bution or transfer—(i)Facts. X Corporation man-
ufactures radios and television sets. X Corporation
uses the first-in, first-out (FIFO) method of inven-
tory identification, the cost method of valuing its in-
ventories, and capitalizes inventory costs in accor-
dance with section 263A. T Corporation manufac-
tures washing machines and dryers. T Corporation
uses the last-in, first-out (LIFO) method of inventory
identification, the cost method of valuing its inven-
tories, and capitalizes inventory costs under section
263A using methods other than those used by X Cor-
poration. X Corporation acquires the inventory of T
Corporation in a transaction to which section 381(a)
applies. After the date of distribution or transfer, X
Corporation operates its radio and television manu-
facturing business as a trade or business that is sepa-
rate and distinct from its washing machines and dry-
ers manufacturing business.
(ii)Conclusion. Because after the date of distri-
bution or transfer X Corporation operates its manu-
facturing businesses as separate and distinct trades or
businesses, under paragraph (a)(2) of this section X
Corporation must use the carryover methods for each
continuing trade or business, unless either the carry-
over methods are impermissible and must be changed
under paragraph (a)(4) of this section or X Corpo-
ration changes the carryover methods in accordance
with paragraph (a)(5) of this section. As defined in
paragraph (b)(4) of this section, the carryover meth-
ods for the radios and television sets manufacturing
business are the FIFO method, the cost basis of val-
uation, and X Corporation’s methods of accounting
for section 263A costs immediately prior to the date
of distribution or transfer. The carryover methods
for the washing machines and dryers manufacturing
business are the LIFO method, the cost basis of val-
uation, and T Corporation’s methods of accounting
for section 263A costs immediately prior to the date
of distribution or transfer. There is no change in
method of accounting, and X Corporation need not
secure the Commissioner’s consent to use any carry-
over method.
Example(2).Carryover method not permissi-
ble—(i)Facts. X Corporation manufactures food and
beverages and uses the FIFO method of inventory
identification, the cost method of valuing its inven-
tories, and capitalizes costs in accordance with sec-
tion 263A. T Corporation sells sporting equipment.
T Corporation uses the FIFO method of inventory
identification and the cost method of valuing its in-
ventories. T Corporation does not capitalize costs
under section 263A because it meets the small re-
seller exception under section 263A. X Corporation
acquires the inventory of T Corporation in a trans-
action to which section 381(a) applies. After the date
of distribution or transfer, X Corporation operates the
food and beverages business as a trade or business
that is separate and distinct from the sporting equip-
ment business, and X Corporation does not qualify
for the small reseller exception under section 263A
for its sporting equipment business.
(ii)Conclusion. Because after the date of distri-
bution or transfer X Corporation operates the food
and beverages business as a separate and distinct
trade or business, under paragraph (a)(2) of this sec-
tion X Corporation must use the carryover methods
for each continuing trade or business, unless either
the carryover methods are impermissible and must
be changed under paragraph (a)(4) of this section
or X Corporation changes the carryover methods in
accordance with paragraph(a)(5)ofthissection.As
defined in paragraph (b)(4) of this section, the car-
ryover methods for the food and beverages business
are the FIFO method, the cost basis of valuation,
and X Corporation’s methods of capitalizing costs
under section 263A immediately prior to the date of
distribution or transfer. The carryover methods for
the sporting equipment business are the FIFO method
and the cost basis of valuation. There is no change in
method of accounting, and X Corporation need not
secure the Commissioner’s consent to use any carry-
over method. However, because X Corporation does
not qualify for the small reseller exception under
section 263A for its sporting equipment business, X
Corporation’s method of not capitalizing additional
section 263A costs is an impermissible carryover
method under paragraph (a)(4) of this section. X
Corporation must secure the Commissioner’s consent
to change to a permissible method of capitalizing
costs under section 263A for the sporting equipment
business as provided in paragraph (d)(2) of this sec-
tion.
(b)Definitions. For purposes of this
section—
(1)Inventory method. An inventory
method is a method of accounting used
to account for merchandise on hand (in-
cluding finished goods, work in process,
and raw materials) at the beginning of a
year for purposes of computing taxable in-
come for that year. The term includes not
only the method for identifying inventory,
for example, the FIFO inventory method
or the LIFO inventory method, but also
all other methods necessary to account for
merchandise.
(2)Adoption of a method of account-
ing. Adoption of a method of account-
ing has the same meaning as provided in
§1.446–1(e)(1).
(3)Change in method of account-
ing. A change in method of accounting
has the same meaning as provided in
§1.446–1(e)(2).
(4)Carryover method. A carryover
method is an inventory method that each
party to a section 381(a) transaction uses
for each separate and distinct trade or busi-
ness immediately prior to the date of distri-
bution or transfer.
(5)Principal method. A principal
method is an inventory method that is
determined under paragraph (c) of this
section.
(6)Permissible method of accounting.
A permissible method of accounting is a
method of accounting that is proper or per-
mitted under the Internal Revenue Code or
any applicable Income Tax Regulations.
(7)Acquiring corporation. An acquir-
ing corporation has the same meaning as
provided in §1.381(a)–1(b)(2).
(8)Distributor corporation. A distribu-
tor corporation means the corporation, for-
eign or domestic, that distributes its assets
to another corporation described in sec-
tion 332(b) in a distribution to which sec-
tion 332 (relating to liquidations of sub-
sidiaries) applies.
(9)Transferor corporation.Atrans-
feror corporation means the corporation,
foreign or domestic, that transfers its as-
sets to another corporation in a transfer to
which section 361 (relating to nonrecogni-
tion of gain or loss to corporations) applies,
but only if—
(i) The transfer is in connection with
a reorganization described in section
368(a)(1)(A), (a)(1)(C), or (a)(1)(F), or
(ii) The transfer is in connection with
a reorganization described in section
368(a)(1)(D) or (a)(1)(G), provided the
requirements of section 354(b) are met.
(10)Parties to the section 381(a) trans-
action. Parties to the section 381(a) trans-
action means the acquiring corporation
and the distributor or transferor corpo-
ration that participate in a transaction to
which section 381(a) applies.
(11)Date of distribution or transfer.
Thedateofdistributionortransferhas
the same meaning as provided in section
381(b)(2) and §1.381(b)–1(b).
(12)Separate and distinct trades or
businesses. Separate and distinct trades
or businesses has the same meaning as
provided in §1.446–1(d).
(13)Audit protection. Audit protection
means, for purposes of paragraph (d)(1) of
this section, that the IRS will not require
an acquiring corporation that is required
to change a method of accounting under
paragraph (a)(3) of this section to change
that method for a taxable year ending prior
August 15, 20111542011–33 I.R.B.

to the taxable year that includes the date of
distribution or transfer.
(14)Section 481(a) adjustment.The
section 481(a) adjustment means an ad-
justment that must be taken into account
as required under section 481(a) to prevent
amounts from being duplicated or omitted
when the taxable income of an acquiring
corporation is computed under a method of
accounting different from the method used
to compute taxable income for the preced-
ing taxable year.
(15)Cut-off basis. A cut-off basis
means a manner in which a change in
method of accounting is made without a
section 481(a) adjustment and under which
only the items arising after the beginning
of the year of change (or, in the case of
a change made under paragraph (d)(1) of
this section, after the date of distribution
or transfer) are accounted for under the
new method of accounting. When it im-
plements the change on a cut-off basis, a
taxpayer using the LIFO inventory method
to identify its inventory goods that makes
a change in method of accounting within
the LIFO inventory method from one
LIFO method or sub-method to another
LIFO method or sub-method uses the new
LIFO inventory method to determine its
current-year cost and base-year cost of
ending inventories for the year of change,
but does not recompute the cost of begin-
ning inventories for the year of change
using the new LIFO inventory method.
(16)Adjustment period.Theadjust-
ment period means the number of taxable
years for taking into account the section
481(a) adjustment required as a result of a
change in method of accounting.
(17)Component trade or business.A
component trade or business is a trade or
business of a party to the section 381(a)
transaction that will be combined and inte-
grated with a trade or business of the other
party to the section 381 transaction. See
paragraph (e)(7)(ii) of this section for the
determination of whether a trade or busi-
ness is operated as a separate and distinct
trade or business after the date of distribu-
tion or transfer.
(c)Principal method—(1)In general.
For each integrated trade or business, the
principal method for a particular type of
goods is generally the inventory method
used by the component trade or business
of the acquiring corporation immediately
prior to the date of distribution or trans-
fer for that type of goods. If, however,
on the date of distribution or transfer the
component trade or business of the distrib-
utor or transferor corporation holds more
inventory of a type of goods than the com-
ponent trade or business of the acquiring
corporation, the principal method for such
goods is the inventory method used by the
component trade or business of the distrib-
utor or transferor corporation immediately
prior to that date. For each integrated trade
or business, the component trade or busi-
ness of the distributor or transferor corpo-
ration holds more inventory if, for a par-
ticular type of goods, the aggregate of the
fair market value of the goods held by each
component trade or business of the distrib-
utor or transferor corporation exceeds the
aggregate of the fair market value of the
goods held by each component trade or
business of the acquiring corporation im-
mediately prior to the date of distribution
or transfer. Alternatively, as a simplifying
convention, the acquiring corporation may
elect to apply the preceding sentence to the
aggregate fair market value of the entire in-
ventories, held by each component trade or
business of the acquiring corporation and
each component trade or business of the
distributor or transferor corporation, that
will be integrated after the date of distri-
bution or transfer. If the component trade
or business with the larger aggregate fair
market value of the entire inventories does
not have an inventory method for a partic-
ular type of goods immediately prior to the
date of distribution or transfer, the princi-
pal method for that type of goods is the
inventory method used by the component
trade or business that does have an inven-
tory method for that type of goods.
(2)Multiple component trades or busi-
nesses with different principal methods.If
a party to the section 381(a) transaction
has multiple component trades or busi-
nesses and more than one principal inven-
tory method for a particular type of goods,
then the acquiring corporation may choose
which of the inventory methods used by
such component trades or businesses will
be the principal method of the integrated
trade or business. The acquiring corpora-
tion must choose a principal method that
is a permissible method of accounting. In
general, a change to a principal method in
a transaction to which section 381(a) and
paragraph (a)(3) of this section apply is
made under paragraph (d)(1) of this sec-
tion.
(3)Examples. The following exam-
ples illustrate the rules of this paragraph
(c). Unless otherwise noted, the principal
method is a permissible inventory method.
Example(1).Principal methods are the methods
used by the acquiring corporation—(i)Facts.XCor-
poration and T Corporation each manufacture tennis
equipment. X Corporation’s manufacturing business
uses the FIFO method of inventory identification, the
cost method of valuing inventories, and allocates in-
direct costs to the property produced using the bur-
den rate method provided in §1.263A–1(f)(3)(i). T
Corporation’s manufacturing business uses the LIFO
method of inventory identification, the cost method
of valuing its inventories, and allocates indirect costs
to the property it produces using the standard cost
method provided in §1.263A–1(f)(3)(ii). X Corpo-
ration acquires the inventory of T Corporation in a
transaction to which section 381(a) applies. The fair
market value of each particular type of goods held
by X Corporation’s manufacturing business immedi-
ately prior to the date of distribution or transfer ex-
ceeds the fair market value of each particular type of
goods held by T Corporation’s manufacturing busi-
ness on that date. After the date of distribution or
transfer, X Corporation will not operate its manufac-
turing business as a trade or business that is sepa-
rate and distinct from T Corporation’s manufacturing
business.
(ii)Conclusion. Because after the date of dis-
tribution or transfer X Corporation will not operate
its manufacturing business as a separate and dis-
tinct trade or business, X Corporation must use the
principal methods under paragraph (a)(3) of this
section, unless either the principal methods are im-
permissible and must be changed under paragraph
(a)(4) of this section or X Corporation changes the
principal methods in accordance with paragraph
(a)(5) of this section. The fair market value of each
particular type of goods held by T Corporation’s
manufacturing business immediately prior to the
date of distribution or transfer does not exceed the
fair market value of each particular type of goods
held by X Corporation’s manufacturing business
on that date. Because on the date of distribution
or transfer T Corporation’s manufacturing business
does not hold more inventory than X Corporation’s
manufacturing business, the principal methods are
the FIFO method of inventory identification, the cost
method of valuation, and X Corporation’s method of
allocating indirect costs under section 263A using the
burden rate method. X Corporation need not secure
the Commissioner’s consent to use these methods.
However, in accordance withparagraph (d)(1) of this
section, X Corporation must change the inventory
methods for the manufacturing business acquired
from T Corporation to the principal methods.
Example(2).Principal methods are the methods
used by the acquiring corporation—(i)Facts.The
facts are the same as inExample(1), except that the
fair market value of each particular type of goods held
by X Corporation’s manufacturing business immedi-
ately prior to the date of distribution or transfer is
identical to the fair market value of each particular
type of goods held by T Corporation’s manufacturing
business on that date.
2011–33 I.R.B.155August 15, 2011

(ii)Conclusion. The result is the same as in
Example(1). The principal methods are the FIFO
method of inventory identification, the cost method
of valuation, and X Corporation’s method of allo-
cating indirect costs under section 263A using the
burden rate method. X Corporation need not secure
the Commissioner’s consent to use the principal
methods. However, in accordance with paragraph
(d)(1) of this section, X Corporation must change the
inventory methods for the manufacturing business
acquired from T Corporation to the principal meth-
ods.
Example(3).Principal methods are the methods
used by the distributor or transferor corporation—(i)
Facts. The facts are the same as inExample(1), ex-
cept that the fair market value of each particular type
of goods held by T Corporation’s manufacturing busi-
ness immediately prior to the date of distribution or
transfer exceeds the fair market value of each partic-
ular type of goods held by X Corporation’s manufac-
turing business on that date.
(ii)Conclusion. Because after the date of dis-
tribution or transfer X Corporation will not operate
its manufacturing business as a separate and distinct
trade or business, X Corporation must use the prin-
cipal methods under paragraph (a)(3) of this section,
unless either the principal methods are impermissi-
ble and must be changed under paragraph (a)(4) of
this section or X Corporation changes the principal
methods in accordance with paragraph (a)(5) of this
section. The fair market value of each particular type
of goods held by T Corporation’s manufacturing
business immediately prior to the date of distribution
or transfer exceeds the fair market value of each
particular type of goods held by X Corporation’s
manufacturing business on that date. Because on
the date of distribution or transfer T Corporation’s
manufacturing business holds more inventory than
X Corporation’s manufacturing business, the prin-
cipal methods are the LIFO method of inventory
identification, the cost method of valuation, and T
Corporation’s method of allocating indirect costs
under section 263A using the standard cost method.
X Corporation need not secure the Commissioner’s
consent to use the principal methods. However, in
accordance with paragraph (d)(1) of this section, X
Corporation must change the inventory methods for
the manufacturing businessoperatedbyXCorpora-
tion prior to the date of distribution or transfer to the
principal methods.
Example(4).Voluntary change allowable—(i)
Facts. The facts are the same as inExample(1), ex-
cept that T Corporation wants to discontinue using
the LIFO method for its manufacturing business and
change to the FIFO method for the taxable year in
which the section 381(a) transaction occurs or is ex-
pected to occur.
(ii)Conclusion. Under paragraph (a)(5) of this
section, the Commissioner will grant a request to
change a method of accounting for the taxable year
that includes the date of distribution or transfer only
if the requested method is the method that the acquir-
ing corporation must use after the date of distribution
or transfer. The Commissioner will consent to a
request by T Corporation to change to the FIFO
method for the taxable year in which the section
381(a) transaction occurs or is expected to occur
because X Corporation will use this method after the
date of distribution or transfer.
Example (5).Principal method determination
when larger component trade or business does not
have a method of accounting for a particular type of
goods—(i)Facts.ThefactsarethesameasinExam-
ple(1), except that T Corporation’s manufacturing
business has a particular type of goods that is not
held by X Corporation’s manufacturing business.
(ii)Conclusion. The result is similar toExample
(1). In general, the principal methods are the FIFO
method of inventory identification, the cost method
of valuation, and X Corporation’s method of allo-
cating indirect costs to the property produced using
the burden rate method. X Corporation need not se-
cure the Commissioner’s consent to use the princi-
pal methods. However, in accordance with paragraph
(d)(1) of this section, X Corporation must change
the inventory methods for the manufacturing business
acquired from T Corporation to the principal meth-
ods. Under paragraph (c) of this section, the prin-
cipal methods for the particular type of goods held
only by T Corporation’s manufacturing business are
the LIFO method of inventory identification, the cost
method of valuation, and T Corporation’s method of
allocating indirect costs to the property it produces
using the standard cost method. X Corporation must
determine whether the principal methods for the type
of goods previously held by T Corporation are per-
missible given that such methods are different than
the principal methods that must be used by X for all
other goods. If X Corporation’s use of the standard
cost method would be impermissible after the date of
distribution or transfer, X Corporation must change
to a permissible method under section 263A for those
goods in accordance with paragraph (a)(4) of this sec-
tion.
Example(6).Inventory convention elected—(i)
Facts. X Corporation manufactures planes and T Cor-
poration manufactures planes and communications
satellites. X Corporation’s manufacturing business
uses the FIFO method of inventory identification and
values its inventories at cost or market, whichever is
lower, while T Corporation’s manufacturing business
uses the LIFO method of inventory identification and
values its inventories at cost. X Corporation’s man-
ufacturing business and T Corporation’s manufactur-
ing business use the same methods to capitalize costs
under section 263A. X Corporation acquires the in-
ventory of T Corporation in a transaction to which
section 381(a) applies. In lieu of determining the fair
market value of each particular type of goods held
on the date of distribution or transfer, X Corporation
elects to value the entire inventories of its manufac-
turing business and the entire inventories of T Corpo-
ration’s manufacturing business in accordance with
paragraph (c)(1) of this section. The fair market value
of the inventory held by T Corporation’s manufactur-
ing business immediately prior to the date of distribu-
tion or transfer does not exceed the fair market value
of the inventory held by X Corporation’s manufac-
turing business on that date. After the date of distri-
bution or transfer, X Corporation will not operate its
manufacturing business as a trade or business that is
separate and distinct from T Corporation’s manufac-
turing business.
(ii)Conclusion. Because after the date of dis-
tribution or transfer X Corporation will not operate
its manufacturing business as a separate and distinct
trade or business, X Corporation must use the prin-
cipal methods under paragraph (a)(3) of this section,
unless either the principal methods are impermissi-
ble and must be changed under paragraph (a)(4) of
this section or X Corporation changes the principal
methods in accordance withparagraph (a)(5) of this
section. The fair market value of the entire inven-
tory held by T Corporation’s manufacturing business
immediately prior to the date of distribution or trans-
fer does not exceed the fair market value of the en-
tire inventory of X Corporation’s manufacturing busi-
ness on that date. Because on the date of distribu-
tion or transfer T Corporation’s manufacturing busi-
ness does not hold more inventory than X Corpora-
tion’s manufacturing business, the principal methods
are the FIFO method, the cost or market, whichever
is lower, method of valuation, and X Corporation’s
method of capitalizing costs under section 263A on
the date of distribution or transfer. X Corporation
need not secure the Commissioner’s consent to use
the principal methods. However, in accordance with
paragraph (d)(1) of this section, X Corporation must
change the inventory methods for the manufacturing
business acquired from T Corporation to the principal
methods.
Example(7).Principal method determination
with a combined trade or business and a separate
and distinct trade or business—(i)Facts.XCor-
poration manufactures tennis equipment in a trade
or business that is separate and distinct from its
trade or business of manufacturing golf equipment.
X Corporation uses the FIFO method of inven-
tory identification for its tennis equipment and the
LIFO method of inventory identification for its golf
equipment. X Corporation values the goods in both
inventories at cost and allocates indirect costs to
the property produced using the burden rate method
provided in §1.263A–1(f)(3)(i). T Corporation
manufactures tennis equipment. T Corporation’s
manufacturing business uses the FIFO method of
inventory identification, values inventories at cost,
and allocates indirect costs to the property it pro-
duces using the standard cost method provided in
§1.263A–1(f)(3)(ii). X Corporation acquires the
inventory of T Corporation in a transaction to which
section 381(a) applies. Immediately prior to the date
of distribution or transfer, the fair market value of
T Corporation’s inventories in the tennis equipment
manufacturing business exceeds the fair market value
of the inventories held by X Corporation’s tennis
equipment manufacturing business. After the date
of distribution or transfer, X Corporation will not
operate its tennis equipment manufacturing business
as a trade or business that is separate and distinct
from T Corporation’s tennis equipment manufac-
turing business, but X Corporation will operate its
golf equipment manufacturing business as a trade or
business that is separate and distinct from the tennis
equipment manufacturing business.
(ii)Conclusion. Because after the date of dis-
tribution or transfer X Corporation will not operate
its tennis equipment manufacturing business as a
separate and distinct trade or business, X Corpora-
tion must use the principal methods under paragraph
(a)(3) of this section, unless either the principal
methods are impermissible and must be changed un-
der paragraph (a)(4) of this section or X Corporation
changes the principal methods in accordance with
paragraph (a)(5) of this section. Under paragraph
(c)(1) of this section, X Corporation elects to com-
pare the fair market values of the entire inventories
August 15, 20111562011–33 I.R.B.

of the component trades or businesses on the date
of distribution or transfer to determine whether T
Corporation holds more inventory than X Corpo-
ration. The fair market value of the inventory held
by T Corporation’s tennis equipment manufactur-
ing business exceeds the fair market value of the
tennis equipment held by X Corporation’s tennis
equipment manufacturing business. Because on the
date of distribution or transfer T Corporation’s ten-
nis equipment manufacturing business holds more
inventory than X Corporation’s tennis equipment
manufacturing business, the principal methods for
the combined tennis equipment business are the FIFO
method of inventory identification, the cost basis of
valuation, and T Corporation’s methods of allocating
indirect costs under section 263A using the standard
cost method provided in §1.263A–1(f)(3)(ii). X
Corporation need not secure the Commissioner’s
consent to use the principal methods. However, in
accordance with paragraph (d)(1) of this section, X
Corporation must change the methods of accounting
for its tennis equipment manufacturing business to
the principal methods. Under paragraph (a)(2) of
this section, because X Corporation will operate the
golf equipment manufacturing business as a separate
trade or business, for the inventories held by the golf
equipment manufacturing business X Corporation
must continue to use the LIFO method of inventory
identification, use the cost basis of valuation, and
allocate indirect costs under section 263A using the
burden rate method provided in §1.263A–1(f)(3)(i).
There are no changes in method of accounting for
the golf manufacturing business, and X Corporation
need not secure the Commissioner’s consent to use
these carryover methods.
Example(8).Principal method determination
with multiple component trades or businesses—(i)
Facts. The facts are the same as inExample(7),
except that after the date of distribution or transfer
X Corporation will not operate the golf equipment
manufacturing business as a trade or business that
is separate and distinct from the tennis equipment
manufacturing business. In addition, the fair mar-
ket value of the inventories of X Corporation’s
tennis equipment manufacturing business and golf
equipment manufacturing business, in the aggregate,
exceed the fair market value of the inventories of
T Corporation’s tennis equipment manufacturing
business.
(ii)Conclusion. Because on the date of distri-
bution or transfer T Corporation’s tennis equipment
manufacturing business does not hold more inventory
than X Corporation’s tennis equipment manufactur-
ing business and golf equipment manufacturing busi-
ness, in the aggregate, the principal method for iden-
tifying inventory is the method used by X Corpora-
tion’s component trade or business on the date of dis-
tribution or transfer. However, because on the date of
distribution or transfer X Corporation operates two
separate and distinct trades or businesses with dif-
ferent inventory identification methods that will be
combined after the date of distribution or transfer,
X Corporation may choose under paragraph (c)(2)
of this section which method used by its component
trades or businesses will be the principal method. Af-
ter the date of distribution or transfer, X Corporation
may use either the FIFO method of inventory identi-
fication used by the tennis equipment manufacturing
business or the LIFO method of inventory identifica-
tion used by the golf equipment manufacturing busi-
ness as the principal method of identification, if either
method is a permissible method. For the integrated
trade or business, X Corporation will use the cost
method of valuation and allocate indirect costs under
section 263A using the burden rate method provided
in §1.263A–1(f)(3)(i). In accordance with paragraph
(d)(1) of this section, X Corporation must change the
inventory methods of T Corporation’s manufactur-
ing business to the principal methods. Under para-
graph (a)(3) of this section, X Corporation also must
change either its golf equipment manufacturing busi-
ness or its tennis equipment manufacturing business,
depending on which principal method X Corporation
selects, to the principal method.
(d)Procedures for changing a method
of accounting—(1)Change made to prin-
cipal method under paragraph (a)(3)
of this section—(i)Section 481(a) ad-
justment—(A)In general. An acquiring
corporation that changes its method of
accounting or the distributor or transferor
corporation’s method of accounting un-
der paragraph (a)(3) of this section does
not need to secure the Commissioner’s
consent to use a principal method. To the
extent the use of a principal method con-
stitutes a change in method of accounting,
the change in method is treated as a change
initiated by the acquiring corporation for
purposes of section 481(a)(2). Any change
to a principal method, whether the change
relates to a trade or business of the ac-
quiring corporation or a trade or business
of the distributor or transferor corpora-
tion, must be reflected on the acquiring
corporation’s federal income tax return
for the taxable year that includes the date
of distribution or transfer. The amount
of the section 481(a) adjustment and the
adjustment period, if any, necessary to im-
plement a change to the principal method
are determined under §1.446–1(e) and the
applicable administrative procedures that
govern voluntary changes in methods of
accounting under section 446(e). If the
Internal Revenue Code, the Income Tax
Regulations, or administrative procedures
require that a method of accounting be im-
plemented on a cut-off basis, the acquiring
corporation must implement the change,
on a cut-off basis as of the date of distribu-
tion or transfer, on its federal income tax
return for the taxable year that includes
the date of distribution or transfer. If the
Internal Revenue Code, the Income Tax
Regulations, or administrative procedures
require a section 481(a) adjustment, the
acquiring corporation must determine the
section 481(a) adjustment and include the
appropriate amount of the section 481(a)
adjustment on its federal income tax re-
turn for the taxable year that includes the
date of distribution or transfer and subse-
quent taxable year(s), as necessary. This
adjustment is determined by the acquiring
corporation as of the beginning of the day
that is immediately after the date of distri-
bution or transfer.
(B)Example. The following exam-
ple illustrates the rules of this paragraph
(d)(1)(i):
Example. X Corporation uses the FIFO method
of inventory identification, and T Corporation uses
the LIFO method of inventory identification. X Cor-
poration acquires the inventory of T Corporation in a
transaction to which section 381(a) applies. X Cor-
poration determines that under the rules of paragraph
(c)(1) of this section, X Corporation must change the
inventory method for the business acquired from T
Corporation to the FIFO method. X Corporation will
determine the section 481(a) adjustment pertaining to
the change to the FIFO method (whether the amounts
thereof represent increases or decreases in income)
as of the beginning of the day that immediately fol-
lows the day on which X Corporation acquires the in-
ventory of T Corporation. X Corporation will reflect
this adjustment, or an appropriate part thereof, on its
federal income tax return for the taxable year that in-
cludes the date of distribution or transfer.
(ii)Audit protection. Notwithstanding
any other provision in any other Income
Tax Regulation or administrative proce-
dure, no audit protection is provided for
any change in method of accounting under
paragraph (d)(1) of this section.
(iii)Other terms and conditions.Ex-
cept as otherwise provided in this section,
other terms and conditions provided in
§1.446–1(e) and the applicable adminis-
trative procedures for voluntary changes
in method of accounting under section
446(e) apply to a change in method of
accounting under this section. Thus, for
example, if the administrative procedures
for a particular change in method of ac-
counting have a term and condition that
provides for the acceleration of the section
481(a) adjustment period, this term and
condition applies to a change made under
this paragraph (d)(1). However, any scope
limitation in the applicable administrative
procedures will not apply for purposes
of making a change under this paragraph
(d)(1). For example, if the administrative
procedures provide as a limitation that an
identical change in method of accounting
is barred for a period of years, this limita-
tion will not bar a change to the principal
method made under this section.
2011–33 I.R.B.157August 15, 2011

(2)Change made to a method of ac-
counting under paragraph (a)(4) or (a)(5)
of this section—(i)In general.Apartyto
a section 381(a) transaction that changes
a method of accounting under either para-
graph (a)(4) or paragraph (a)(5) of this
section must follow the provisions of
§1.446–(1)(e) and the applicable adminis-
trative procedures, including scope limita-
tions, for voluntary changes in method of
accounting under section 446(e), except
as provided in paragraphs (d)(2)(ii) and
(d)(2)(iii) of this section. An application
on Form 3115,“Application for Change in
Accounting Method,”filed with the IRS to
change a method of accounting under this
paragraph (d)(2) should be labeled “Filed
under section 381(c)(5)” at the top.
(ii)Final year limitation. Any scope
limitation relating to the final year of a
trade or business will not apply to a tax-
payer that changes its method of account-
ing in the final year of a trade or business
that is terminated as the result of a section
381(a) transaction.
(iii)Time to file. Under the author-
ity of §1.446–1(e)(3)(ii), for a change in
method of accounting requiring advance
consent, the application for a change in
method of accounting (for example, Form
3115), must be filed with the IRS on or be-
fore the later of—
(A) The due date for filing a Form 3115
as specified in §1.446–1(e), for example,
the last day of the taxable year in which
the distribution or transfer occurred, or
(B) The earlier of—
(1) The day that is 180 days after the
date of distribution or transfer, or
(2) The day on which the acquiring cor-
poration files its federal income tax return
for the taxable year in which the distribu-
tion or transfer occurred.
(e)Rules and procedures—(1)Inven-
tory method selected for a particular type
of goods. If other sections of the Inter-
nal Revenue Code or Income Tax Regula-
tions allow a taxpayer to elect an inventory
method for a particular type of goods, the
method elected with respect to those goods
is the established inventory method only
for those goods. For example, an election
to use the LIFO inventory method to iden-
tify specified goods in inventory, such as
certain products in finished goods, is the
inventory method only for those products.
(2)No method of accounting.Ifaparty
to a section 381(a) transaction is not us-
ing an inventory method, does not have
an inventory method for a particular type
of goods, or came into existence as a re-
sult of the transaction, the party will not be
treated as having an inventory method dif-
ferent from that used by another party to
the section 381(a) transaction.
(3)Elections and adoptions allowed.If
an election does not require the Commis-
sioner’s consent, an acquiring corporation
or a distributor or transferor corporation is
not precluded from making any election
that is otherwise permissible for the tax-
able year that includes the date of distribu-
tion or transfer. For example, an acquiring
corporation may electto identify its inven-
tory using the LIFO inventory method in
the year of the distribution or transfer. For
purposes of this section, a corporation shall
be deemed as having made any election as
of the first day of the taxable year that in-
cludes the date of distribution or transfer.
Similarly, where adoption is permissible,
an acquiring corporationoradistributoror
transferor corporation may adopt any per-
missible method of accounting for the tax-
able year that includes the date of distribu-
tion or transfer.
(4)Elections continue after section
381(a) transaction—(i)General rule.An
acquiring corporation is not required to
renew any election not requiring renewal
and previously made by it or by a dis-
tributor or transferor corporation for a
carryover method or a principal method if
the acquiring corporation uses the method
after the section 381(a) transaction. If the
acquiring corporation uses a method after
the date of distribution or transfer, an elec-
tion made by the acquiring corporation or
by a distributor or transferor corporation
for that method that was in effect on the
date of distribution or transfer continues
after the section 381(a) transaction as
though the distribution or transfer had not
occurred.
(ii)Example. The following example
illustrates the rules of paragraph (e)(4):
Example. Since its incorporation in 1982, X Cor-
poration elected to use the LIFO inventory method
under section 472 to identify its inventory of tennis
balls. Since its incorporation in 2002, T Corporation
elected to use the FIFO inventory method to identify
its inventory of tennis balls. X Corporation acquires
the assets of T Corporation in a transaction to which
section 381(a) applies. Immediately prior to the date
of distribution or transfer, the fair market value of X
Corporation’s inventory in its tennis balls exceeds the
fair market value of the tennis balls inventory held by
T Corporation. After the date of distribution or trans-
fer, X Corporation will not operate its business as a
trade or business that is separate and distinct from T
Corporation’s business. Because on the date of distri-
bution or transfer T Corporation does not hold more
inventory than X Corporation, the principal method
for identifying inventory is the method used by X
Corporation on the date of distribution or transfer.
After the date of distribution or transfer, X Corpora-
tion need not renew its election to identify inventory
using the LIFO inventory method, and X Corporation
is bound by the election.
(5)Adopting the LIFO inventory
method. A party to a section 381(a) trans-
action will be deemed to be using the
LIFO inventory method for a particular
type of goods on the date of distribution or
transfer if that party elects under section
472 to adopt that inventory method with
respect to those goods for its taxable year
within which the date of distribution or
transfer occurs. See section 472 for the
requirements to adopt the LIFO inventory
method.
(6)Inventory layers treatment—(i)Ad-
justments required after a section 381(a)
transaction. An acquiring corporation that
determines the principal method of taking
an inventory after a section 381(a) trans-
action under paragraphs (a)(3) and (c) of
this section after the date of distribution
or transfer may need to integrate inven-
tories and make appropriate adjustments
as provided in paragraphs (e)(6)(ii) and
(e)(6)(iii) of this section.
(ii)LIFO inventory method used after
the section 381(a) transaction—(A)LIFO
inventory method used by the acquiring
corporation and the distributor or trans-
feror corporation—(1)Principal method
is the dollar-value LIFO method. If, un-
der paragraphs (a)(3) and (c) of this sec-
tion, the acquiring corporation changes its
inventory method or the inventory method
of the distributor or transferor corpora-
tion from the specific goods LIFO method
of pricing inventories to the dollar-value
LIFO method of pricing inventories (dol-
lar-value LIFO method) for a particular
type of goods, the inventory accounted for
under the specific goods method shall be
placed on the dollar-value method as pro-
vided in §1.472–8(f), and then the inven-
tory shall be integrated with the inventory
previously accounted for under the dol-
lar-value LIFO method. If pools of each
corporation are permitted or required to be
combined, the pools must be combined as
provided in §1.472–8(g)(2). For purposes
of combining pools, all base year inven-
August 15, 20111582011–33 I.R.B.

tories or layers of increment that occur in
taxable years including the same Decem-
ber 31 shall be combined. A base year
inventory or layer of increment occurring
in any short taxable year of a distributor
or transferor corporation shall be merged
with and considered a layer of increment
of its immediately preceding taxable year.
(2)Principal method is the specific
goods LIFO method. If, under paragraphs
(a)(3) and (c) of thissection, the acquir-
ing corporation changes its inventory
method or the inventory method of the
distributor or transferor corporation from
the dollar-value LIFO method of pricing
inventories to the specific goods LIFO
method of pricing inventories, the acquir-
ing corporation shall treat the inventory
being changed to the specific goods LIFO
method as having the same acquisition
datesandcostsassuchinventoryhadun-
der the dollar-value LIFO method.
(B)Change from the FIFO inventory
method to either the specific goods LIFO
method or the dollar-value LIFO method.
If, under paragraphs (a)(3) and (c) of this
section, the acquiringcorporation changes
its inventory method or the inventory
method of the distributor or transferor cor-
poration from the FIFO inventory method
to either the specific goods LIFO method
or the dollar-value method of pricing LIFO
inventories, the inventory accounted for
under the FIFO inventory method shall
be treated by the acquiring corporation as
having been acquired at their average unit
cost in a single transaction on the date of
the distribution or transfer. Thus, if an
inventory of a particular type of goods is
combined in an existing dollar-value pool,
the goods shall be treated as if they were
purchased by the acquiring corporation
at the average unit cost on the date of
the distribution or transfer with respect
to such pool. Alternatively, if the goods
are not combined inan existing pool, the
goods will be treated as if they were pur-
chased by the acquiring corporation at the
average unit cost on the date of the dis-
tribution or transfer with respect to a new
pool, with the base-year being the year
of the section 381(a) transaction. Adjust-
ments resulting from a restoration to cost
of any write-down to market value of the
inventories shall be taken into account by
the acquiring corporation ratably in each
of the three taxable years beginning with
the taxable year that includes the date of
the distribution or transfer. See section
472(d).
(iii)FIFO inventory method used after
the section 381(a) transaction—(A)FIFO
inventory method used by the acquiring
corporation and the distributor or trans-
feror corporation. If, under paragraphs
(a)(3) and (c) of thissection, the FIFO
inventory method is the principal method
and the component trades or businesses of
both the acquiring corporation and the dis-
tributor or transferor corporation use the
FIFO method immediately prior to the dis-
tribution or transfer, the acquiring corpo-
ration must treat the inventory that must
change to the principal method as having
the same acquisition dates and costs as
such inventory had immediately prior to
the date of distribution or transfer. How-
ever, if the principal method of valuing in-
ventories is the cost or market, whichever
is lower, method, the acquiring corpora-
tion must treat the inventories that must
change to the principal method as having
been acquired at cost or market, whichever
is lower.
(B)Change from either the specific
goods LIFO method or the dollar-value
LIFO method to the FIFO inventory
method. If, under paragraphs (a)(3) and (c)
of this section, the acquiring corporation
changes its inventory method or the inven-
tory method of the distributor or transferor
corporation from either the specific goods
LIFO method or the dollar-value LIFO
method to the FIFO inventory method,
the acquiring corporation must treat the
inventory accounted for under the LIFO
method as having the same acquisition
dates and costs that the inventory would
have had if the FIFO inventory method
had been used on the date of distribu-
tion or transfer. However, if the principal
method of valuing inventories is the cost
or market, whichever is lower, method,
the acquiring corporation must treat the
inventories accounted for under the LIFO
method as having been acquired at cost or
market, whichever is lower.
(7)Appropriate times for certain deter-
minations—(i)Determining the inventory
method. The inventory method used by
a party to a section 381(a) transaction on
the date of distribution or transfer is the
method used by that party as of the end of
the day that is immediately prior to the date
of distribution or transfer.
(ii)Determining whether there are sep-
arate and distinct trades or businesses
after the date of distribution or transfer.
Whether an acquiring corporation will
operate the trades or businesses of the
parties to a section 381(a) transaction as
separate and distinct trades or businesses
after the date of distribution or transfer
will be determined as of the date of distri-
bution or transfer based upon the facts and
circumstances. Intent to combine books
and records of the trades or businesses
may be demonstrated by contemporaneous
records and documents or by other objec-
tive evidence that reflects the acquiring
corporation’s ultimate plan of operation,
even though the actual combination of the
books and records may extend beyond the
end of the taxable year that includes the
date of distribution or transfer.
(8)Establishing an inventory method.
An inventory method used by the distrib-
utor or transferor corporation immediately
prior to the date of distribution or trans-
fer that continues to be used by the acquir-
ing corporation after the date of distribu-
tion or transfer is an established method of
accounting for purposesof section 446(e),
whether or not such method is proper or
is permitted under the Internal Revenue
Code or any applicable Income Tax Reg-
ulations.
(9)Other applicable provisions.This
section does not preempt any other pro-
vision of the Internal Revenue Code or
the Income Tax Regulations that is ap-
plicable to the acquiring corporation’s
circumstances. Section 381(c)(5) and this
§1.381(c)(5)–1 determine only the inven-
tory method to be used after a section
381(a) transaction. If other paragraphs
of section 381(c) apply for purposes of
determining the methods of accounting
to be used following the date of distri-
bution or transfer, section 381(c)(5) and
this §1.381(c)(5)–1 will not apply to the
tax treatment of the items. Specifically,
section 381(c)(5) and this §1.381(c)(5)–1
do not apply to assets other than inven-
tory that an acquiringcorporation obtains
in a transaction to which section 381(a)
applies.
(10)Use of the cash receipts and dis-
bursements method of accounting.If
immediately prior to the date of distribu-
tion or transfer, an acquiring corporation
or a distributor or transferor corporation
uses the cash receipts and disbursements
2011–33 I.R.B.159August 15, 2011

method of accounting within the meaning
of section 446(c)(1) and §1.446–1(c)(1)(i),
or is not required to use an inventory
method for its goods, section 381(c)(5)
and §1.381(c)(5)–1 do not apply. Instead,
section 381(c)(4) and §1.381(c)(4)–1 must
be applied to determine the methods of
accounting that continue after the transac-
tion.
(11)Character of items of income and
deduction. After the date of distribution
or transfer, items of income and deduction
have the same character in the hands of
the acquiring corporation as they would
have had in the hands of the distributor or
transferor corporationifnodistributionor
transfer had occurred.
(12)Impermissible inventory method.
This section does not limit the Commis-
sioner’s ability under section 446(b) to
determine whether a taxpayer’s inventory
method is an impermissible method or
otherwise fails to clearly reflect income.
For example, an acquiring corporation
may not use the method of accounting
determined under paragraph (a)(2) of this
section if the method fails to clearly reflect
the acquiring corporation’s income within
the meaning of section 446(b).
(f)Effective/applicability date.This
section applies to corporate reorganiza-
tions and tax-free liquidations described
in section 381(a) that occur on or after
August 31, 2011.
Par. 5. Section 1.446–1 is amended by:
1. Revising the first sentence and
adding a second new sentence in para-
graph (e)(3)(i).
2. Revising the first sentence in para-
graph (e)(4)(i).
3. Adding paragraph (e)(4)(iii).
The revisions and addition read as fol-
lows:
§1.446–1 General rule for methods of
accounting.
*****
(e) * * *
(3)(i) Except as otherwise provided
under the authority of paragraph (e)(3)(ii)
of this section, to secure the Commis-
sioner’s consent to a taxpayer’s change in
method of accounting the taxpayer gener-
ally must file an application on Form 3115,
“Application for Change in Accounting
Method,”with the Commissioner during
the taxable year in which the taxpayer
desires to make the change in method of
accounting. See §§1.381(c)(4)–1(d)(2)
and 1.381(c)(5)–1(d)(2) for rules allowing
additional time, in some circumstances,
for the filing of an application on Form
3115 with respect to a transaction to which
section 381(a) applies. * * *
*****
(4) * * *(i) * * *Except as pro-
vided in paragraphs (e)(3)(iii), (e)(4)(ii),
and (e)(4)(iii) of this section, paragraph
(e) of this section applies on or after
December 30, 2003. * * *
*****
(iii)Effective/applicability date for
paragraph (e)(3)(i). The rules of para-
graph (e)(3)(i) of this section apply to
corporate reorganizations and tax-free liq-
uidations described in section 381(a) that
occur on or after August 31, 2011.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved July 20, 2011.
Emily S. McMahon,
Acting Assistant Secretary
for the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on July 29, 2011,
8:45 a.m., and published in the issue of the Federal Register
for August 1, 2011, 76 F.R. 45673)
Section 2032A.—Valuation
of Certain Farm, Etc.,
Real Property
26 CFR 20.2032A–4: Method of valuing farm real
property.
Special use value; farms; interest
rates.The 2010 and 2011 interest rates to
be used in computing the special use value
of farm real property for which an election
is made under section 2032A of the Code
are listed for estates of decedents.
Rev. Rul. 2011–17
This revenue ruling contains a list of the
average annual effective interest rates on
new loans under the Farm Credit System.
This revenue ruling also contains a list of
the states within each Farm Credit System
Bank Chartered Territory.
Under § 2032A(e)(7)(A)(ii) of the In-
ternal Revenue Code, rates on new Farm
Credit System Bank loans are used in com-
puting the special use value of real prop-
erty used as a farm for which an election is
made under § 2032A. The rates in Table 1
of this revenue ruling may be used by es-
tates that value farmland under § 2032A as
of a date in 2010. The rates in Table 2 of
this revenue ruling may be used by estates
that value farmland under § 2032A as of a
date in 2011.
Average annual effective interest
rates, calculated in accordance with
§ 2032A(e)(7)(A) and § 20.2032A–4(e)
of the Estate Tax Regulations, to be used
under § 2032A(e)(7)(A)(ii), are set forth
in the accompanying Tables of Interest
Rates (Table 1 and 2). The states within
each Farm Credit System Bank Chartered
Territory are set forth in the accompany-
ing Table of Farm Credit System Bank
Chartered Territories (Table 3).
Rev. Rul. 81–170, 1981–1 C.B. 454,
contains an illustrative computation of an
average annual effective interest rate. The
rates applicable for valuation in 2009 are
in Rev. Rul. 2009–21, 2009–30 I.R.B.
162. For rate information for years prior
to 2009, see Rev. Rul. 2008–44, 2008–2
C.B. 292, and other revenue rulings that
are referenced therein.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Lane Damazo of the Office of the As-
sociate Chief Counsel (Passthroughs and
Special Industries). For further informa-
tion regarding this revenue ruling, contact
Lane Damazo at (202) 622–3090 (not a
toll-free call).
August 15, 20111602011–33 I.R.B.

REV. RUL. 2011–17 TABLE 1
TABLE OF INTEREST RATES
(Year of Valuation 2010)
Farm Credit System Bank Servicing State in
Which Property is LocatedRate
AgFirst,FCB ....................................................................... 7.48
AgriBank,FCB ..................................................................... 6.41
CoBank,ACB ...................................................................... 6.07
Texas,FCB ........................................................................
6.45
U.S.AgBank,FCB..................................................................
6.15
REV. RUL. 2011–17 TABLE 2
TABLE OF INTEREST RATES
(Year of Valuation 2011)
Farm Credit System Bank Servicing State in
Which Property is LocatedRate
AgFirst,FCB ....................................................................... 6.97
AgriBank,FCB ..................................................................... 6.12
CoBank,ACB ......................................................................
5.78
Texas,FCB ........................................................................ 6.04
U.S.AgBank,FCB..................................................................
5.88
REV. RUL. 2011–17 TABLE 3
TABLE OF FARM CR
EDIT SYSTEM BANK CHARTERED TERRITORIES
Farm Credit Sys
tem Bank
Location of Pro
perty
AgFirst,FCB ............................................ Delaware,DistrictofColumbia,Florida,Georgia,Maryland,
North Carolina, Pennsylvania, South Carolina, Virginia,
West Virginia.
AgriBank,FCB .......................................... Arkansas,Illinois,Indiana,Iowa,Kentucky,Michigan,
Minnesota, Missouri, Nebraska, North Dakota, Ohio,
South Dakota, Tennessee, Wisconsin, Wyoming.
CoBank,ACB ........................................... Alaska,Connecticut,Idaho,Maine,Massachusetts,Montana,
New Hampshire, New Jersey, New York, Oregon,
Rhode Island, Vermont, Washington.
Texas,FCB.............................................. Alabama,Louisiana,Mississippi,Texas.
U.S.Agbank,FCB........................................ Arizona,California,Colorado,Hawaii,Kansas,NewMexico,
Nevada, Oklahoma, Utah.
2011–33 I.R.B.161August 15, 2011

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking by
Cross-Refere
nce to
Temporary Re
gulations
Modificatio
nofTreasury
Regulations
Pursuant
to Section 9
39A of the
Dodd-Frank
Wall Street
Reform and
Consumer
Protectio
nAct
REG–118809–11
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Not
ice of proposed rulemaking
by cross-r
eference to temporary regula-
tions.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing final and temporary
regulations that remove any reference
to, or requirement of reliance on, credit
ratings in regulations under the Internal
Revenue Code (Code) and provide substi-
tute standards of credit-worthiness where
appropriate. The Dodd-Frank Wall Street
Reform and Consumer Protection Act re-
quires each Federal agency to take such
actions regarding its regulations. These
regulations affect persons subject to vari-
ous provisions of the Code. The text of the
temporary regulations published in this
issue of the Bulletin also serves as the text
of the proposed regulations.
DATES: Written and electronic comments
and requests for a public hearing must be
received by September 5, 2011.
ADDRESS
ES: Send submissions to:
CC:PA:L
PD:PR(REG–118809–11),
Room 52
03, Internal Revenue Service, PO
Box 760
4, Ben Franklin Station, Wash-
ington
, DC 20044. Submissions may be
hand-d
elivered to: CC:PA:LPD:PR Mon-
day thr
ough Friday between the hours of
8a.m.
and 4 p.m. to: CC:PA:LPD:PR
(REG–
118809–11), Courier’s Desk, Inter-
nal Re
venue Service, 1111 Constitution
Avenu
e, NW, Washington, DC, or sent
electronical
ly via the Federal eRulemak-
ing Portal ath
ttp://www.regulations.gov
(IRS REG–1188
09–11).
FOR FURTHER IN
FORMATION
CONTACT: Conc
erning the proposed reg-
ulations, Art
uro Estrada, (202) 622–3900;
concerning s
ubmissions of comments and
requests for
a public hearing, Oluwa-
funmilayo Ta
ylor, (202) 622–7180 (not
toll-free nu
mbers).
SUPPLEMENTA
RY INFORMATION:
Background
Section 939
A(a) of the Dodd-Frank
Wall Street
Reform and Consumer Protec-
tion Act, Pu
blic Law 111–203 (124 Stat.
1376 (2010)
), (the “Dodd-Frank Act”),
requires ea
ch Federal agency to review
its regula
tions that require the use of an
assessmen
t of credit-worthiness of a secu-
rity or mon
ey market instrument, and to
review any
references or requirements in
those regu
lations regarding credit ratings.
Section 9
39A(b) directs each agency to
modify an
yregulationidentifiedinthe
review re
quired under section 939A(a) by
removing
any reference to, or requirement
of relia
nce on, credit ratings and substi-
tuting a
standard of credit-worthiness that
the agen
cy deems appropriate. Numerous
provisi
ons under the Code are affected.
Tempora
ry regulations in this issue of
the Bull
etin amend the Income Tax Regu-
lations
(26 CFR part 1) under sections 150,
171, 19
7, 249, 475, 860G, and 1001 of
the Cod
e. The temporary regulations also
amend t
he Manufacturers and Retailers
Excise
Tax Regulations (26 CFR part 48)
under s
ection 4101 of the Code. The text
of the
temporary regulations also serves
as the
text of these proposed regulations.
The pr
eamble to the temporary regulations
expla
ins the temporary regulations and the
propo
sed regulations.
Speci
al Analyses
It has
been determined that this notice
of pro
posed rulemaking is not a significant
regu
latory action as defined in Execu-
tive
Order 12866, as supplemented by
Exec
utive Order 13563. Therefore, a
regu
latory assessment is not required. It
has been deter
mined that section 553(b)
of the Adminis
trative Procedure Act (5
U.S.C. chapte
r 5) does not apply to these
regulations,
and because these regulations
do not impose a
collection of information
on small enti
ties, the Regulatory Flexi-
bility Act (5
U.S.C. chapter 6) does not
apply. Pursu
ant to section 7805(f) of the
Code, this no
tice of proposed rulemaking
has been sub
mitted to the Chief Counsel
for Advocac
y of the Small Business
Administra
tion for comment on its impact
on small bus
iness.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timelytotheIRS.TheIRSandtheTrea-
sury Department specifically request com-
ments on the clarity of the proposed reg-
ulations and how they may be made eas-
ier to understand. All comments will be
available for public inspection and copy-
ing. A public hearing may be scheduled
ifrequestedinwritingbyanypersonthat
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the hearing will
be published in theFederal Register.
Drafti
ng Information
These regulations were drafted by per-
sonnel in the Office of Associate Chief
Counsel (Financial Institutions and Prod-
ucts), the Office of Associate Chief Coun-
sel (Income Tax and Accounting), the
Office of Associate Chief Counsel (Inter-
national) and the Office of the Associate
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the IRS and the Treasury Department
participated in their development.
*****
Proposed Amendments to the
Regulations
Acco
rdingly, 26 CFR parts 1 and 48 are
prop
osed to be amended as follows:
August 15, 20111622011–33 I.R.B.

PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.150–1 is amended as
follows:
1. Paragraph (a)(4) is added.
2. In paragraph (b), the definition of
Issuance costs, is revised.
The addition and revision read as fol-
lows:
§1.150–1 Definitions.
*****
(4) [The text of the proposed amend-
ments to §1.150–1(a)(4) is the same as
the text of §1.150–1T(a)(4) published else-
where in this issue of the Bulletin].
(b) * * *
Issuance costs. [The text of the pro-
posed amendments to §1.150–1(b),Is-
suance costs, is the same as the text of
§1.150–1T(b),Issuance costs,published
elsewhere in this issue of the Bulletin].
*****
Par. 3. Section 1.171–1 is amended by
revising paragraph (f)Example 2to read as
follows:
§1.171–1 Bond premium.
*****
(f) * * *
Example 2. [The text of the proposed amend-
ments to §1.171–1(f)Example 2is the same as the
text of §1.171–1T(f)Example 2published elsewhere
in this issue of the Bulletin].
Par. 4. Section 1.197–2 is amended
by revising paragraph (b)(7) to read as fol-
lows:
§1.197–2 Amortization of goodwill and
certain other intangibles.
*****
(b) * * *
(7) [The text of the proposed amend-
ments to §1.197–2(b)(7) is the same as
the text of §1.197–2T(b)(7) published else-
where in this issue of the Bulletin].
*****
Par. 5. Section 1.249–1 is amended by
revising paragraphs (e)(2)(ii) and adding
paragraph (f)(3) to read as follows:
§1.249–1 Limitation on deduction of bond
premium on repurchase.
*****
(e) * * *
(2) * * *
(ii) [The text of the proposed amend-
ments to §1.249–1(e)(2)(ii) is the same as
the text of §1.249–1T(e)(2)(ii) published
elsewhere in this issue of the Bulletin].
*****
(f)Effective/applicability dates.***
(3) [The text of the proposed amend-
ments to §1.249–1(f)(3) is the same as
the text of §1.249–1T(f)(3) published else-
where in this issue of the Bulletin].
*****
Par. 6. Section 1.475(a)–4 is amended
by revising paragraph (d)(4)Examples 1,
2,and3and paragraph (n) to read as fol-
lows:
§1.475(a)–4 Valuation safe harbor.
*****
(d) * * *
(4) * * *
Example 1. [The text of the proposed amend-
ments to §1.475(a)–(4)(d)(4)Example 1is the same
as the text of §1.475(a)–4T(d)(4)Example 1pub-
lished elsewhere in this issue of the Bulletin].
Example 2. [The text of the proposed amend-
ments to §1.475(a)–4(d)(4)Example 2is the same as
the text of §1.475(a)–4T(d)(4)Example 2published
elsewhere in this issue of the Bulletin].
Example 3. [The text of the proposed amend-
ments to §1.475(a)–4(d)(4)Example 3is the same as
the text of §1.475(a)–4T(d)(4)Example 3published
elsewhere in this issue of the Bulletin].
*****
Par. 7. Section 1.860G–2 is amended
by revising paragraphs(g)(3)(ii)(B), (C),
and (D) to read as follows:
§1.860G–2 Other rules.
*****
(g) * * *
(3) * * *
(ii) * * *
(B) [The text of the proposed
amendments to §1.860G–2(g)(3)(ii)(B)
is the same as the text of
§1.860G–2T(g)(3)(ii)(B) published else-
where in this issue of the Bulletin].
(C) [The text of the proposed
amendments to §1.860G–2(g)(3)(ii)(C)
is the same as the text of
§1.860G–2T(g)(3)(ii)(C) published else-
where in this issue of the Bulletin].
(D) [The text of the proposed
amendments to §1.860G–2(g)(3)(ii)(D)
is the same as the text of
§1.860G–2T(g)(3)(ii)(D) published else-
where in this issue of the Bulletin].
*****
Par. 8. Section 1.1001–3 is amended as
follows:
1. Paragraph (d)Example 9is revised.
2. Paragraph (e)(4)(iv)(B) is revised.
3. Paragraph (e)(5)(ii)(B)(2) is revised.
4. Paragraph (g)Examples 1,5,and8
are revised.
The revisions read as follows:
§1.1001–3 Modifications of debt
instruments.
*****
(d) * * *
Example 9. [The text of the proposed amend-
ments to §1.1001–3(d)Example 9is the same as the
text of §1.1001–3T(d)Example 9published else-
where in this issue of the Bulletin].
*****
(e) * * *
(4) * * *
(iv)***
(B) [The text of the proposed
amendments to §1.1001–3(e)(4)(iv)(B)
is the same as the text of
§1.1001–3T(e)(4)(iv)(B) published else-
where in this issue of the Bulletin].
*****
(5) * * *
(ii) * * *
(B) * * *
(2) [The text of the proposed amend-
ments to §1.1001–3(e)(5)(ii)(B)(2)
is the same as the text of
§1.1001–3T(e)(5)(ii)(B)(2)published
elsewhere in this issue of the Bulletin].
*****
(g) * * *
Example 1. [The text of the proposed amend-
ments to §1.1001–3(g)Example 1is the same as the
text of §1.1001–3T(g)Example 1published else-
where in this issue of the Bulletin].
*****
Example 5. [The text of the proposed amend-
ments to §1.1001–3(g)Example 5is the same as the
text of §1.1001–3T(g)Example 5published else-
where in this issue of the Bulletin].
*****
2011–33 I.R.B.163August 15, 2011

Example 8. [The text of the proposed amend-
ments to §1.1001–3(g)Example 8is the same as the
text of §1.1001–3T(g)Example 8published else-
where in this issue of the Bulletin].
PART 48—MANUFACTURERS AND
RETAILERS EXCISE TAXES
Par. 9. The authority citation for part
48 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 10. Section 48.4101–1 paragraphs
(f)(4)(ii)(B) and (l)(5) are revised to read
as follows:
§48.4101–1 Taxable fuel; registration.
*****
(f) * * *
(4) * * *
(ii) * * *
(B) [The text of the proposed
amendments to §48.4101–1(f)(4)(ii)(B)
is the same as the text of
§48.4101–1T(f)(4)(ii)(B) published else-
whereinthisissueoftheBulletin].
*****
(l) * * *
(5) [The text of the proposed amend-
ments to §48.4101–1(l)(5) is the same as
the text of §48.4101–1T(l)(5) published
elsewhere in this issue of the Bulletin].
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on July 1, 2011,
11:15 a.m., and published in the issue of the Federal Register
for July 6, 2011, 76 F.R. 39341)
Announcement of Disciplinary Sanctions From the Office
of Professional Responsibility
Announcement 2011-44
TheOfficeofProfessionalResponsi-
bility (OPR) announcesrecent disciplinary
sanctions involving attorneys, certified
public accountants, enrolled agents, en-
rolled actuaries, enrolled retirement plan
agents, and appraisers. These individuals
are subject to the regulations governing
practice before the Internal Revenue Ser-
vice (IRS), which are set out in Title 31,
Code of Federal Regulations, Part 10, and
which are published in pamphlet form as
Treasury Department Circular No. 230.
The regulations prescribe the duties and
restrictions relating to such practice and
prescribe the disciplinary sanctions for
violating the regulations.
The disciplinary sanctions to be im-
posed for violation of the regulations are:
Disbarred from practice before the
IRS—An individual who is disbarred is
not eligible to represent taxpayers before
the IRS.
Suspended from practice before the
IRS—An individual who is suspended is
not eligible to represent taxpayers before
the IRS during the term of the suspension.
Censured in practice before the
IRS—Censure is a public reprimand. Un-
like disbarment or suspension, censure
does not affect an individual’s eligibility
to represent taxpayers before the IRS, but
OPR may subject the individual’s future
representations to conditions designed to
promote high standards of conduct.
Monetary penalty—A monetary
penalty may be imposed on an individual
who engages in conduct subject to sanc-
tion or on an employer, firm, or entity
if the individual was acting on its behalf
and if it knew, or reasonably should have
known, of the individual’s conduct.
Disqualification of appraiser—An
appraiser who is disqualified is barred
from presenting evidence or testimony in
any administrative proceeding before the
Department of the Treasury or the IRS.
Under the regulations, attorneys, cer-
tified public accountants, enrolled agents,
enrolled actuaries, and enrolled retirement
plan agents may not assist, or accept assis-
tance from, individuals who are suspended
or disbarred with respect to matters consti-
tuting practice (i.e., representation) before
the IRS, and they may not aid or abet sus-
pended or disbarred individuals to practice
before the IRS.
Disciplinary sanctions are described in
these terms:
Disbarred by decision after hearing,
Suspended by decision after hearing,
Censured by decision after hearing,
Monetary penalty imposed after hear-
ing, and Disqualified after hearing—An
administrative law judge (ALJ) conducted
an evidentiary hearing upon OPR’s com-
plaint alleging violation of the regulations
and issued a decision imposing one of
these sanctions. After 30 days from the
issuance of the decision, in the absence of
an appeal, the ALJ’s decision became the
final agency decision.
Disbarred by default decision, Sus-
pended by default decision, Censured by
default decision, Monetary penalty im-
posed by default decision, and Disqual-
ified by default decision—An ALJ, after
finding that no answer to OPR’s complaint
had been filed, granted OPR’s motion for a
default judgment and issued a decision im-
posing one of these sanctions.
Disbarment by decision on appeal,
Suspended by decision on appeal, Cen-
sured by decision on appeal, Monetary
penalty imposed by decision on ap-
peal, and Disqualified by decision on
appeal—The decision of the ALJ was
appealed to the agency appeal authority,
acting as the delegate of the Secretary
of the Treasury, and the appeal authority
issued a decision imposing one of these
sanctions.
Disbarred by consent, Suspended by
consent, Censured by consent, Mone-
tary penalty imposed by consent, and
Disqualified by consent—Inlieuofa
disciplinary proceeding being instituted
or continued, an individual offered a con-
sent to one of these sanctions and OPR
accepted the offer. Typically, an offer
of consent will provide for: suspension
for an indefinite term; conditions that the
individual must observe during the sus-
pension; and the individual’s opportunity,
after a stated number of months, to file
with OPR a petition for reinstatement af-
firming compliance with the terms of the
consent and affirming current eligibility
to practice (i.e., an active professional
license or active enrollment status). An
enrolled agent or an enrolled retirement
August 15, 20111642011–33 I.R.B.

plan agent may also offer to resign in order
to avoid a disciplinary proceeding.
Suspended by decision in expedited
proceeding, Suspended by default de-
cision in expedited proceeding, Sus-
pended by consent in expedited pro-
ceeding—OPR instituted an expedited
proceeding for suspension (based on cer-
tain limited grounds, including loss of a
professional license and criminal convic-
tions).
OPR has authority to disclose the
grounds for disciplinary sanctions in these
situations: (1) an ALJ or the Secretary’s
delegate on appeal has issued a decision
on or after September 26, 2007, which was
theeffectivedateofamendmentstothe
regulations that permit making such deci-
sions publicly available; (2) the individual
has settled a disciplinary case by signing
OPR’s “consent to sanction” form, which
requires consenting individuals to admit to
one or more violations of the regulations
and to consent to the disclosure of the in-
dividual’s own return information related
to the admitted violations (for example,
failure to file Federal income tax returns);
or (3) OPR has issued a decision in an
expedited proceeding for suspension.
Announcements of disciplinary sanc-
tions appear in the Internal Revenue Bul-
letin at the earliest practicable date. The
sanctions announced below are alphabet-
ized first by the names of states and sec-
ond by the last names of individuals. Un-
less otherwise indicated, section numbers
(e.g., §10.51) refer to the regulations.
City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
Alabama
SpringvilleBowers, David A.CPASuspended by decision
in expedited proceeding
under §10.82 (revocation
of CPA license)
Indefinite from
April 26, 2011
Arizona
PhoenixCurtis Jr., David W.AttorneySuspended by default
decision in expedited
proceeding under §10.82
(attorney disbarment)
Indefinite from
May 27, 2011
PhoenixPlatt, Donna J.AttorneySuspended by default
decision in expedited
proceeding under §10.82
(attorney disbarment)
Indefinite from
May 11, 2011
California
San DiegoBujkovsky, Gustav G. AttorneySuspended by default
decision in expedited
proceeding under
§10.82 (conviction
under 18 U.S.C. §1505,
obstruction of justice and
26 U.S.C. §7201, income
tax evasion )
Indefinite from
June 21, 2011
IrvineCassidy, Carl R.CPASuspended by default
decision in expedited
proceeding under §10.82
(revocation of CPA
license)
Indefinite from
May 4, 2011
2011–33 I.R.B.165August 15, 2011

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
California (Continued)
Santa BarbaraFrausto, MarcoEnrolled AgentCensured by consent
for admitted violation
of §10.22 (failure to
exercise due diligence in
the preparation of client
tax returns)
April 8, 2011
Los AngelesHenschel, Bradford E. AttorneySuspended by decision
in expedited proceeding
under §10.82 (attorney
disbarment)
Indefinite from
May 4, 2011
Los AngelesJohnson, Eric D.AttorneySuspended by default
decision in expedited
proceeding under §10.82
(attorney disbarment)
Indefinite from
April 26, 2011
ClovisLima, Richard A.AttorneySuspended by default
decision in expedited
proceeding under §10.82
(suspension of attorney
license)
Indefinite from
April 22, 2011
NipomoPena Jr., HilarioCPASuspended by decision
in expedited proceeding
under §10.82 (revocation
of CPA license)
Indefinite from
June 7, 2011
RocklinShattuck, Alan D.CPASuspended by default
decision in expedited
proceeding under §10.82
(revocation of CPA
license)
Indefinite from
May 27, 2011
EscondidoSmith, Todd C.AttorneySuspended by default
decision in expedited
proceeding under §10.82
(conviction under
26 U.S.C. §7201, tax
evasion)
Indefinite from
June 17, 2011
AtwaterTomsha-Miguel,
Susan R.
Enrolled AgentDisbarred by ALJ in
default decision for
violations of §10.51
(failure to file timely
Federal income tax
returns for tax years
2002–2009, and failure
to timely pay Federal
tax liability for the years
2002–2004)
Indefinite from
March 10, 2011,
but at least 5 years
August 15, 20111662011–33 I.R.B.

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
Colorado
Colorado SpringsAnderson, Edwin G.Enrolled AgentSuspended by consent
for admitted violation
of §10.22 (failure to
exercise due diligence in
the determination of the
validity of credits and
deductions under §44
of the Internal Revenue
Code)
Indefinite from
May 10, 2011, but
at least 6 months
District of Columbia
Sangarie, Mohamed B. Enrolled AgentSuspended by decision
in expedited proceeding
under §10.82 (conviction
under 26 U.S.C. §7206,
aiding and abetting false
income tax returns)
Indefinite from
May 23, 2011
Florida
TallahasseeDavis, James E.CPASuspended by consent
for admitted violation of
§10.22 (failure to exercise
due diligence in preparing
his Federal individual
income tax returns for
tax years 2005–2007)
and violation of § 10.51
(failure to timely file
Federal individual income
tax returns for tax years
2003–2008)
Indefinite from
June 1, 2011, but
not less than 12
months
Georgia
AugustaCruse, Samuel W.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
April 26, 2011
ConyersRoberts, Vernon A.Enrolled AgentSuspended by default
decision in expedited
proceeding under
§ 10.82 (conviction
under 18 U.S.C. § 371,
conspiracy to commit
tax fraud and 26 U.S.C.
§7206and18U.S.C§2,
false claims to the IRS)
Indefinite from
April 26, 2011
2011–33 I.R.B.167August 15, 2011

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
Georgia (Continued)
JonesboroSwank, Lynn M.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(suspension of attorney
license)
Indefinite from
April 26, 2011
Indiana
GreenfieldWilson, Curtis D.CPASuspended by consent
for admitted violation of
§ 10.51 (failure to timely
file Federal individual
income tax returns for tax
years 1996–2002, 2005,
2006, 2009 and failed to
honor the terms of the
agreement he had with
OPR dated May 12, 2004)
Indefinite from
May 13, 2011, but
at least 12 months
Kentucky
LouisvilleReskin, James A.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
June 17, 2011
Maryland
Silver SpringBoykins, James R.AttorneySuspended by decision
in expedited proceeding
under § 10.82 (suspension
of attorney license)
Indefinite from
April 22, 2011
BethesdaFox, David E.AttorneySuspended by decision
in expedited proceeding
under § 10.82 (attorney
disbarment)
Indefinite from
June 7, 2011
Massachusetts
AndoverMcLaughlin, Peter C.AttorneySuspended by decision
in expedited proceeding
under § 10.82 (suspension
of attorney license)
Indefinite from
June 7, 2011
FlorenceZadworny, Kim E.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(suspension of attorney
license)
Indefinite from
June 17, 2011
August 15, 20111682011–33 I.R.B.

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
Minnesota
St. Louis ParkLetourneau, Dennis R. AttorneySuspended by decision
in expedited proceeding
under § 10.82 (suspension
of attorney license)
Indefinite from
April 22, 2011
MinneapolisRooney, Edward F.AttorneyReinstated to
practice before the
IRS, June 17, 2011
Missouri
LebanonBaldwin, James E.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
June 23, 2011
FergusonGrecco, Frances E.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(attorney disbarment)
Indefinite from
June 17, 2011
Nebraska
BellevueErwin-Loncke, Kim D.AttorneySuspended by decision
in expedited proceeding
under § 10.82 (attorney
disbarment)
Indefinite from
June 7, 2011
New Jersey
Hauke, Thomas P.,
See Pennsylvania
FreeholdPrzygoda, Deirdre A.AttorneySuspended by decision
in expedited proceeding
under § 10.82 (attorney
disbarment)
Indefinite from
April 22, 2011
New York
LevittownBarsch, Robert J.AttorneySuspended by decision
in expedited proceeding
under § 10.82 (attorney
disbarment)
Indefinite from
June 7, 2011
PleasantvilleBell, RosannaCPAReinstated to
practice before the
IRS, June 14, 2011
Hauke, Thomas P.,
See Pennsylvania
ScarsdalePirro, Anthony G.CPAReinstated to
practice before the
IRS, May 4, 2011
2011–33 I.R.B.169August 15, 2011

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
North Carolina
AshevilleBullock, Lester E.CPASuspended by decision
in expedited proceeding
under § 10.82 (revocation
of CPA license)
Indefinite from
May 27, 2011
RaleighFowler, Roy D.CPASuspended by decision
in expedited proceeding
under § 10.82 (revocation
of CPA license)
Indefinite from
June 27, 2011
Oregon
PrinewilleHolland, Michael W.CPASuspended by decision
in expedited proceeding
under § 10.82 (conviction
under 26 U.S.C. § 7206,
assisting in the filing
of a false tax return
and revocation of CPA
license)
Indefinite from
May 4, 2011
Pennsylvania
WexfordGraham, William J.CPASuspended by decision
in expedited proceeding
under § 10.82 (suspension
of CPA license)
Indefinite from
April 15, 2011
PlumsteadvilleHauke, Thomas P.CPAReinstated to
practice before the
IRS, May 23, 2011
South Carolina
EdgefieldMonahan, Daniel T.CPASuspended by decision
in expedited proceeding
under § 10.82 (conviction
under 18 U.S.C. § 1341,
mail fraud)
Indefinite from
June 15, 2011
Texas
BrownsvilleHernandez, Luis R.AttorneySuspended by decision
on appeal for violations
of § 10.51 (willful failure
to timely file Federal
income tax returns for
2004 and 2005, and
failure to file Federal
income tax returns for
2006 and 2007)
Indefinite from
May 26, 2011, but
at least 40 months
August 15, 20111702011–33 I.R.B.

City & StateNameProfessionalDisciplinary SanctionEffective Date(s)
Designation
Texas (Continued)
La FeriaLabunski, Gail S.CPASuspended by decision
in expedited proceeding
under § 10.82 (revocation
of CPA license)
Indefinite from
April 26, 2011
Virginia
GrundyCecil, David E.AttorneySuspended by default
decision in expedited
proceeding under
§ 10.82 (conviction under
18 U.S.C. § 1341, mail
fraud, conviction under
18 U.S.C. § 1956(a)(1),
money laundering, and
under 26 U.S.C. § 7201,
tax evasion)
Indefinite from
June 14, 2011
Washington
Gig HarborFloyd, Steven W.CPASuspended by default
decision in expedited
proceeding under § 10.82
(revocation of CPA
license)
Indefinite from
April 26, 2011
Wisconsin
MilwaukeeBaldwin, Timothy L.AttorneySuspended by decision
on appeal for violations
of § 10.51 (willful failure
to timely file Federal
income tax returns for
2002–2006, and failure to
file a Federal income tax
return for 2007)
Indefinite from
June 2, 2011, but
at least 24 months
BrookfieldBrady, Leonard V.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(revocation of attorney
license)
Indefinite from
April 26, 2011
GreenvilleFisher, Scott H.AttorneySuspended by default
decision in expedited
proceeding under § 10.82
(revocation of attorney
license)
Indefinite from
April 26, 2011
2011–33 I.R.B.171August 15, 2011

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
August 15, 2011i2011–33 I.R.B.

Numerical Finding List
1
Bulletins 2011–27 through 2011–33
Announcements:
2011-37, 2011-27 I.R.B.37
2011-38, 2011-28 I.R.B.45
2011-39, 2011-28 I.R.B.46
2011-40, 2011-29 I.R.B.56
2011-41, 2011-28 I.R.B.47
2011-42, 2011-32 I.R.B.138
2011-44, 2011-33 I.R.B.164
Notices:
2011-47, 2011-27 I.R.B.34
2011-50, 2011-27 I.R.B.35
2011-51, 2011-27 I.R.B.36
2011-52, 2011-30 I.R.B.60
2011-53, 2011-32 I.R.B.124
2011-54, 2011-29 I.R.B.53
2011-55, 2011-29 I.R.B.53
2011-56, 2011-29 I.R.B.54
2011-57, 2011-31 I.R.B.84
2011-58, 2011-31 I.R.B.85
2011-59, 2011-31 I.R.B.86
2011-60, 2011-31 I.R.B.90
2011-61, 2011-31 I.R.B.91
2011-62, 2011-32 I.R.B.126
2011-70, 2011-32 I.R.B.135
Proposed Regulations:
REG-137128-08, 2011-28 I.R.B.43
REG-125592-10, 2011-32 I.R.B.137
REG-101352-11, 2011-30 I.R.B.75
REG-118809-11, 2011-33 I.R.B.162
Revenue Procedures:
2011-38, 2011-30 I.R.B.66
2011-39, 2011-30 I.R.B.68
Revenue Rulings:
2011-14, 2011-27 I.R.B.31
2011-15, 2011-30 I.R.B.57
2011-16, 2011-32 I.R.B.93
2011-17, 2011-33 I.R.B.160
Treasury Decisions:
9527, 2011-27 I.R.B.1
9528, 2011-28 I.R.B.38
9529, 2011-30 I.R.B.57
9530, 2011-31 I.R.B.77
9531, 2011-31 I.R.B.79
9532, 2011-32 I.R.B.95
9533, 2011-33 I.R.B.139
9534, 2011-33 I.R.B.144
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2011–1 through 2011–26 is in Internal Revenue Bulletin
2011–26, dated June 27, 2011.
2011–33 I.R.B.iiAugust 15, 2011

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2011–27 through 2011–33
Notices:
2010-23
Modified and supplemented by
Notice 2011-54, 2011-29 I.R.B.53
2010-88
Modified by
Ann. 2011-40, 2011-29 I.R.B.56
Proposed Regulations:
REG-118761-09
Hearing scheduled by
Ann. 2011-38, 2011-28 I.R.B.45
Revenue Procedures:
2008-24
Modified and superseded by
Rev. Proc. 2011-38, 2011-30 I.R.B.66
2008-32
Superseded by
Rev. Proc. 2011-39, 2011-30 I.R.B.68
Revenue Rulings:
58-225
Obsoleted by
Rev. Rul. 2011-15, 2011-30 I.R.B.57
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2011–1 through 2011–26 is in Internal Revenue Bulletin 2011–26, dated June 27, 2011.
August 15, 2011iii2011–33 I.R.B.

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