NPRM and Notice of Public Hearing

Federal Register / Vol. 69, No. 156 / Friday, August 13, 2004 / Proposed Rules
3531)’’ in Example 3(ii)(C) and Example
5(i) of paragraph (d) and adding the
language ‘‘(NAICS code 333120)’’ in its
place.
Linda M. Kroening,
Acting Deputy Commissioner for Services and
Enforcement.
[FR Doc. 04–18480 Filed 8–12–04; 8:45 am]
BILLING CODE 4830–01–P

at: http://www.irs.gov/regs or via the
Federal eRulemaking Portal at
www.regulations.gov (IRS and REG–
149524–03).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Pietro Canestrelli, (202) 622–3060, or
Martin Scha¨ ffer, (202) 622–3070;
concerning submissions, Robin Jones,
(202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:

DEPARTMENT OF THE TREASURY

Paperwork Reduction Act

Internal Revenue Service

The collection of information
contained in this notice of proposed
rulemaking has been submitted to the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)). Comments on the collection of
information should be sent to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of
information should be received by
October 12, 2004. Comments are
specifically requested concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Internal Revenue Service, including
whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information (see below);
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collection of information
can be minimized, including through
the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance,
and purchase of services to provide
information.
The collection of information in this
proposed regulation is in § 1.1363–
2(e)(3). This information is required to
inform the IRS of partnerships electing
to increase the basis of inventory to
reflect any amount included in a
partner’s income under section 1363(d).
Thus, the collection of information is
required to obtain a benefit. The likely
respondents are businesses or other forprofit institutions.
The burden for the collection of
information in § 1.1363–2(e)(3) is

26 CFR Part 1
[REG–149524–03]
RIN 1545–BC66

LIFO Recapture Under Section 1363(d)
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
AGENCY:

SUMMARY: This document contains
proposed regulations regarding LIFO
recapture by corporations converting
from C corporations to S corporations.
The purpose of the proposed regulations
is to provide guidance on the LIFO
recapture requirement when the
corporation holds inventory accounted
for under the last-in, first-out (‘‘LIFO’’)
method (LIFO inventory) indirectly
through a partnership. The proposed
regulations affect C corporations that
own interests in partnerships holding
LIFO inventory and that elect to be
taxed as S corporations or that transfer
such partnership interests to S
corporations in nonrecognition
transactions. The proposed regulations
also affect S corporations receiving such
partnership interests from C
corporations in nonrecognition
transactions.

Written or electronic comments
must be received by Novembre 12, 2004.
Requests to speak and outlines of topics
to be discussed at the public hearing
scheduled for Wednesday, December 8,
2004, must be received by Wednesday,
November 17, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–149524–03), Room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be handdelivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to: CC:PA:LPD:PR (REG–149524–03),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC, or submitted
electronically via the IRS Internet site
DATES:

VerDate jul<14>2003

13:16 Aug 12, 2004

Jkt 203001

PO 00000

Frm 00024

Fmt 4702

Sfmt 4702

50109

reflected on Form 1065, ‘‘Partnership
Return of Income’’.
The estimated burden for the
collection of information in § 1.1363–
2(e)(3) is as follows:
Estimated total annual reporting
burden: 200 hours.
The estimated annual burden per
respondent varies from 1 to 3 hours,
depending on individual circumstances,
with an estimated average of 2 hours.
Estimated number of respondents:
100.
Estimated annual frequency of
responses: On occasion.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid OMB control number
assigned by the Office of Management
and Budget.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
This document contains proposed
amendments to 26 CFR part 1 under
section 1363(d) of the Internal Revenue
Code (Code). Section 1363(d)(1)
provides that a C corporation that owns
LIFO inventory and that elects under
section 1362(a) to be taxed as an S
corporation must include in its gross
income for its final tax year as a C
corporation the LIFO recapture amount.
Under section 1363(d)(3), the LIFO
recapture amount is the excess of the
inventory amount of the inventory using
the first-in, first-out (FIFO) method (the
FIFO value) over the inventory amount
of the inventory using the LIFO method
(the LIFO value) at the close of the
corporation’s final tax year as a C
corporation (essentially, the amount of
income the corporation has deferred by
using the LIFO method rather than the
FIFO method).
Final regulations (TD 8567) under
section 1363(d) were published in the
Federal Register on October 7, 1994 (59
FR 51105) to describe the recapture of
LIFO benefits when a C corporation that
owns LIFO inventory elects to become
an S corporation or transfers LIFO
inventory to an S corporation in a
nonrecognition transaction. The final
regulations do not explicitly address the
indirect ownership of inventory through
a partnership. These proposed
regulations provide guidance for
situations in which a C corporation that
owns LIFO inventory through a

E:\FR\FM\13AUP1.SGM

13AUP1

50110

Federal Register / Vol. 69, No. 156 / Friday, August 13, 2004 / Proposed Rules

partnership (or through tiered
partnerships) converts to an S
corporation or transfers its partnership
interest to an S corporation in a
nonrecognition transaction.
Section 1374, modified as part of the
repeal of the General Utilities doctrine,
see General Utilities & Operating Co. v.
Helvering, 296 U.S. 200 (1935), imposes
a corporate level tax on certain income
or gain recognized by an S corporation
to the extent the income or gain is
attributable to appreciation that
occurred while the assets were held by
a C corporation. Specifically, section
1374 imposes a corporate level tax on an
S corporation’s net recognized built-in
gain attributable to assets that it held on
the date it converted from a C
corporation to an S corporation. The tax
is imposed only during the 10-year
period beginning on the first day the
corporation is an S corporation. In
addition, section 1374 imposes a
corporate level tax on an S corporation’s
net recognized built-in gain attributable
to assets that the S corporation acquires
if the S corporation’s bases in such
assets are determined (in whole or in
part) by reference to the bases of such
assets (or any other property) in the
hands of a C corporation. This tax is
imposed only during the 10-year period
beginning on the date that the S
corporation acquires the assets.
In Announcement 86–128 (1986–51
I.R.B. 22), the IRS stated that, for
purposes of section 1374(d)(2)(A), the
inventory method used by a taxpayer for
tax purposes (FIFO, LIFO, etc.) shall be
used in determining whether goods
disposed of following a conversion from
C corporation to S corporation status
were held by the corporation at the time
of conversion. After the issuance of this
announcement, Congress became
concerned that taxpayers owning LIFO
inventory might avoid the built-in gain
rules of section 1374. Congress believed
that taxpayers owning LIFO inventory,
who have enjoyed the deferral benefits
of the LIFO method during their status
as a C corporation, should not be treated
more favorably than their FIFO
counterparts. To eliminate this potential
disparity in treatment, Congress enacted
section 1363(d) in 1987, requiring a
taxpayer owning LIFO inventory to
recapture the benefits of using the LIFO
method. H.R. Rep. No. 100–391 (Parts 1
and 2), 1098 (1987).
In Coggin Automotive Corp. v.
Commissioner, 292 F.3d 1326 (11th Cir.
2002), rev’g 115 T.C. 349 (2000), a
holding company owned majority
interests in several subsidiaries that
operated automobile dealerships
owning LIFO inventory. As part of a
restructuring, each subsidiary

VerDate jul<14>2003

13:16 Aug 12, 2004

Jkt 203001

contributed its assets (including its
LIFO inventory) to a different
partnership. The subsidiaries were then
merged into the holding company,
which elected to be taxed as an S
corporation. The court of appeals held
that the holding company’s S
corporation election did not trigger
LIFO recapture under section 1363(d)
because it was the partnerships in
which the holding company held
interests, and not the holding company
itself, that used the LIFO method.
Section 337(d)(1) authorizes the
Secretary to prescribe regulations to
prevent the circumvention of the
purposes of the repeal of the General
Utilities doctrine through the use of any
provision of law or regulations. The
Treasury Department and the IRS
believe that these proposed regulations
are necessary to implement General
Utilities repeal. Congress enacted
section 1363(d) because the use of the
LIFO method by a C corporation that
converts to S corporation status creates
the potential for the permanent
avoidance of corporate level tax on the
built-in gain reflected in the LIFO
reserve. This avoidance possibility is
present regardless of whether the
converting corporation owns inventory
directly or indirectly through a
partnership or tiered partnerships.
Accordingly, the Treasury Department
and the IRS believe it is appropriate to
require the recapture of a converting
corporation’s share of the LIFO reserves
of partnerships in which it participates.
Such an approach is consistent with the
regulations under section 1374, which
generally adopt a lookthrough approach
to partnerships.
Explanation of Provisions
The proposed regulations provide that
a C corporation that holds an interest in
a partnership owning LIFO inventory
must include the lookthrough LIFO
recapture amount in its gross income
where the corporation either elects to be
an S corporation or transfers its interest
in the partnership to an S corporation in
a nonrecognition transaction. The
proposed regulations define the
lookthrough LIFO recapture amount as
the amount of income that would be
allocated to the corporation, taking into
account section 704(c) and § 1.704–3, if
the partnership sold all of its LIFO
inventory for the FIFO value. A
corporate partner’s lookthrough LIFO
recapture amount must be determined,
in general, as of the day before the
effective date of the S corporation
election or, if the recapture event is a
transfer of a partnership interest to an S
corporation, the date of the transfer (the
recapture date). The proposed

PO 00000

Frm 00025

Fmt 4702

Sfmt 4702

regulations provide that, if a partnership
is not otherwise required to determine
inventory values on the recapture date,
the lookthrough LIFO recapture amount
may be determined based on inventory
values of the partnership’s opening
inventory for the year that includes the
recapture date.
The proposed regulations provide that
a corporation owning LIFO inventory
through a partnership must increase its
basis in its partnership interest by the
lookthrough LIFO recapture amount.
The proposed regulations also allow the
partnership through which the LIFO
inventory is owned to adjust the basis
of partnership inventory (or lookthrough
partnership interests held by that
partnership) to account for LIFO
recapture. This adjustment to basis is to
be patterned in manner and effect after
the adjustment in section 743(b). Thus,
the basis adjustment constitutes an
adjustment to the basis of the LIFO
inventory (or lookthrough partnership
interests held by that partnership) with
respect to the corporate partner only; no
adjustment is made to the partnership’s
common basis. The IRS and the
Treasury Department request comments
on whether the partnership should be
required, in some or all circumstances,
to increase the basis of partnership
assets by the lookthrough LIFO
recapture amount attributable to those
assets.
Under § 1.1374–4(i)(1), an S
corporation’s distributive share of
partnership items is not taken into
account in determining the S
corporation’s share of net recognized
built-in gain or loss if the S
corporation’s partnership interest
represents less than 10 percent of the
partnership capital and profits and has
a fair market value of less than
$100,000. This exception reduces the
burden on the S corporation and the
partnership of tracking built-in gain
assets that are relatively small in
amount.
The burden of looking through a
partnership interest under section 1374
is greater than the burden of looking
through a partnership interest under
section 1363(d). Under section 1374,
partnership assets must be tracked for a
10-year period. No such tracking
problem exists under section 1363
because recapture generally occurs on
the date of the S election. Accordingly,
the proposed regulations do not contain
an exception for partnership interests
that are smaller than a specified
threshold.
Proposed Effective Date
These regulations are proposed to
apply to S elections and transfers made

E:\FR\FM\13AUP1.SGM

13AUP1

Federal Register / Vol. 69, No. 156 / Friday, August 13, 2004 / Proposed Rules
on or after August 13, 2004. No
inference is intended as to the tax
consequences of S elections and
transfers made before the effective date
of these regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in EO 12866; therefore, a regulatory
assessment is not required. It is hereby
certified that these regulations will not
have a significant economic impact on
a substantial number of small entities.
This certification is based upon the fact
that few corporations engage in the type
of transactions that are subject to these
regulations (the conversion from C
corporation to S corporation status
while holding an interest in a
partnership that owns LIFO inventory or
the transfer of an interest in such a
partnership by a C corporation to an S
corporation in a nonrecognition
transaction). Therefore, a Regulatory
Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Code, this notice
of proposed rulemaking will be
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.

The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish
to present oral comments at the hearing
must submit electronic or written
comments and an outline of the topics
to be discussed and the time to be
devoted to each topic (signed original
and eight (8) copies) by Wednesday,
November 17, 2004. A period of 10
minutes will be allotted to each person
for making comments. An agenda
showing the scheduling of the speakers
will be prepared after the deadline for
receiving outlines has passed. Copies of
the agenda will be available free of
charge at the hearing.
Drafting Information
The principal authors of these
regulations are Martin Scha¨ ffer and
Pietro Canestrelli, Office of Associate
Chief Counsel (Passthroughs and
Special Industries). However, other
personnel from the IRS and the Treasury
Department participated in their
development.
List of Subjects 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:

Comments and Public Hearing

PART 1—INCOME TAXES

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 timely to the IRS. The
IRS and Treasury Department request
comments on the clarity of the proposed
rules and how they can be made easier
to understand. All comments will be
available for public inspection and
copying.
A public hearing has been scheduled
for Wednesday, December 8, 2004
beginning at 10 a.m. in the auditorium
of the Internal Revenue Building, 1111
Constitution Avenue, NW., Washington,
DC. Due to building security
procedures, visitors must enter at the
Constitution Avenue entrance. In
addition, all visitors must present photo
identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the
immediate entrance area more than 30
minutes before the hearing starts. For
information about having your name
placed on the building access list to
attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this
preamble.

Paragraph 1. The authority citation
for part 1 is amended by adding an entry
in numerical order to read as follows:

VerDate jul<14>2003

13:16 Aug 12, 2004

Jkt 203001

Authority: 26 U.S.C. 7805. * * * Section
1.1363–2 is issued also under 26 U.S.C.
337(d). * * *

Par. 2. Section 1.1363–2 is amended
by:
1. Redesignating paragraphs (b), (c),
and (d) as paragraphs (d), (e), and (g),
respectively.
2. Adding paragraphs (b), (c), (f), and
(g)(3).
3. Revising newly designated
paragraphs (d) and (e).
The revisions and additions read as
follows:
§1.1363–2

Recapture of LIFO benefits.

*

*
*
*
*
(b) LIFO inventory held indirectly
through partnership. A C corporation
must include the lookthrough LIFO
recapture amount (as defined in
paragraph (c)(2) of this section) in its
gross income—
(1) In its last taxable year as a C
corporation if, on the last day of the
corporation’s last taxable year before its
S corporation election becomes
effective, the corporation held a

PO 00000

Frm 00026

Fmt 4702

Sfmt 4702

50111

lookthrough partnership interest (as
defined in paragraph (c)(1) of this
section); or
(2) In the year of transfer by the C
corporation to an S corporation of a
lookthrough partnership interest if the
corporation transferred its lookthrough
partnership interest to the S corporation
in a nonrecognition transaction (within
the meaning of section 7701(a)(45)) in
which the transferred interest
constitutes transferred basis property
(within the meaning of section
7701(a)(43)).
(c) Definitions—(1) Lookthrough
partnership interest. A partnership
interest is a lookthrough partnership
interest if the partnership owns (directly
or indirectly through one or more
partnerships) assets accounted for under
the last-in, first-out (LIFO) method
(LIFO inventory).
(2) Lookthrough LIFO recapture
amount. For purposes of this section, a
corporation’s lookthrough LIFO
recapture amount is the amount of
income that would be allocated to the
corporation, taking into account section
704(c) and § 1.704–3, if the partnership
sold all of its LIFO inventory for the
inventory’s FIFO value. For this
purpose, the FIFO value of inventory is
the inventory amount of the inventory
assets under the first-in, first-out
method of accounting authorized by
section 471. The lookthrough LIFO
recapture amount generally shall be
determined as of the end of the
recapture date. However, if the
partnership is not otherwise required to
determine the inventory amount of the
inventory using the LIFO method (the
LIFO value) on the recapture date, the
partnership may determine the
lookthrough LIFO recapture amount as
though the FIFO and LIFO values of the
inventory on the recapture date equaled
the FIFO and LIFO values of the
opening inventory for the partnership’s
taxable year that includes the recapture
date. For this purpose, the opening
inventory includes inventory
contributed by a partner to the
partnership on or before the recapture
date and excludes inventory distributed
by the partnership to a partner on or
before the recapture date.
(3) Recapture date. In the case of a
transaction described in paragraph (b)(1)
of this section, the recapture date is the
day before the effective date of the S
corporation election. In the case of a
transaction described in paragraph (b)(2)
of this section, the recapture date is the
date of the transfer of the partnership
interest to the S corporation (but only
the portion of that date that precedes the
transfer).

E:\FR\FM\13AUP1.SGM

13AUP1

50112

Federal Register / Vol. 69, No. 156 / Friday, August 13, 2004 / Proposed Rules

(d) Payment of tax. Any increase in
tax caused by including the LIFO
recapture amount or the lookthrough
LIFO recapture amount in the gross
income of the C corporation is payable
in four equal installments. The C
corporation must pay the first
installment of this payment by the due
date of its return, determined without
regard to extensions, for the last taxable
year it operated as a C corporation if
paragraph (a)(1) or (b)(1) of this section
applies, or for the taxable year of the
transfer if paragraph (a)(2) or (b)(2) of
this section applies. The three
succeeding installments must be paid—
(1) For a transaction described in
paragraph (a)(1) or (b)(1) of this section,
by the corporation that made the
election under section 1362(a) to be an
S corporation, on or before the due date
for the corporation’s returns
(determined without regard to
extensions) for the succeeding three
taxable years; and
(2) For a transaction described in
paragraph (a)(2) or (b)(2) of this section,
by the transferee S corporation on or
before the due date for the transferee
corporation’s returns (determined
without regard to extensions) for the
succeeding three taxable years.
(e) Basis adjustments—(1) General
rule. Appropriate adjustments to the
basis of inventory are to be made to
reflect any amount included in income
under paragraph (a) of this section.
(2) LIFO inventory owned through a
partnership—(i) Basis of corporation’s
partnership interest. Appropriate
adjustments to the basis of the
corporation’s lookthrough partnership
interest are to be made to reflect any
amount included in income under
paragraph (b) of this section.
(ii) Basis of partnership assets. A
partnership directly holding LIFO
inventory that is taken into account
under paragraph (b) may elect to adjust
the basis of that LIFO inventory. In
addition, a partnership that holds,
through another partnership, LIFO
inventory that is taken into account
under paragraph (b) may elect to adjust
the basis of that partnership interest.
Any adjustment under this paragraph
(e)(2) to the basis of inventory held by
the partnership is equal to the amount
of LIFO recapture attributable to the
inventory. Likewise, any adjustment
under this paragraph (e)(2) to the basis
of a lookthrough partnership interest
held by the partnership is equal to the
amount of LIFO recapture attributable to
the interest. A basis adjustment under
this paragraph (e)(2) is treated in the
same manner and has the same effect as
an adjustment to the basis of

VerDate jul<14>2003

15:09 Aug 12, 2004

Jkt 203001

partnership property under section
743(b). See § 1.743–1(j).
(3) Election. A partnership elects to
adjust the basis of its inventory and any
lookthrough partnership interest that it
owns by attaching a statement to its
original or amended income tax return
for the first taxable year ending on or
after the date of the S corporation
election or transfer described in
paragraph (b) of this section. This
statement shall state that the
partnership is electing under § 1.1363–
2(e)(3) and must include the names,
addresses, and taxpayer identification
numbers of any corporate partner liable
for tax under paragraph (d) of this
section and of the partnership, as well
as the amount of the adjustment and the
portion of the adjustment that is
attributable to each pool of inventory or
lookthrough partnership interest that is
held by the partnership.
(f) Examples. The following examples
illustrate the rules of this section.
Example 1. (i) G is a C corporation with a
taxable year ending on June 30. GH is a
partnership with a calendar year taxable year.
G has a 20 percent interest in GH. The
remaining 80 percent interest is owned by an
individual. On April 25, 2005, G contributed
inventory that is LIFO inventory to GH,
increasing G’s interest in the partnership to
50 percent. GH holds no other LIFO
inventory. G elects to be an S corporation
effective July 1, 2005. The recapture date is
June 30, 2005 under paragraph (c)(3) of this
section. GH determines that the FIFO and
LIFO values of the opening inventory for
GH’s 2005 taxable year, including the
inventory contributed by G, are $200 and
$120, respectively.
(ii) Under paragraph (c)(1) of this section,
GH is not required to determine the FIFO and
LIFO values of the inventory on the recapture
date. Instead, GH may determine the
lookthrough LIFO recapture amount as
though the FIFO and LIFO values of the
inventory on the recapture date equaled the
FIFO and LIFO values of the opening
inventory for the partnership’s taxable year
(2005) that includes the recapture date. For
this purpose, under paragraph (c)(2) of this
section, the opening inventory includes the
inventory contributed by G. The amount by
which the FIFO value ($200) exceeds the
LIFO value ($120) in GH’s opening inventory
is $80. Thus, if GH sold all of its LIFO
inventory for $200, it would recognize $80 of
income. G’s lookthrough LIFO recapture
amount is $80, the amount of income that
would be allocated to G, taking into account
section 704(c) and § 1.704–3, if GH sold all
of its LIFO inventory for the FIFO value.
Under paragraph (b)(1) of this section, G
must include $80 in income in its taxable
year ending on June 30, 2005. Under
paragraph (e)(2) of this section, G must
increase its basis in its interest in GH by $80.
Under paragraphs (e)(2) and (3) of this
section, and in accordance with section
743(b) principles, GH may elect to increase
the basis (with respect to G only) of its LIFO
inventory by $80.

PO 00000

Frm 00027

Fmt 4702

Sfmt 4702

Example 2. (i) J is a C corporation with a
calendar year taxable year. JK is a partnership
with a calendar year taxable year. J has a 30
percent interest in the partnership. JK owns
LIFO inventory that is not section 704(c)
property. J elects to be an S corporation
effective January 1, 2005. The recapture date
is December 31, 2004 under paragraph (c)(3)
of this section. JK determines that the FIFO
and LIFO values of the inventory on
December 31, 2004 are $240 and $140,
respectively.
(ii) The amount by which the FIFO value
($240) exceeds the LIFO value ($140) on the
recapture date is $100. Thus, if JK sold all of
its LIFO inventory for $240, it would
recognize $100 of income. J’s lookthrough
LIFO recapture amount is $30, the amount of
income that would be allocated to J if JK sold
all of its LIFO inventory for the FIFO value
(30 percent of $100). Under paragraph (b)(1)
of this section, J must include $30 in income
in its taxable year ending on December 31,
2004. Under paragraph (e)(2) of this section,
J must increase its basis in its interest in JK
by $30. Under paragraphs (e)(2) and (3) of
this section, and in accordance with section
743(b) principles, JK may elect to increase
the basis (with respect to J only) of its
inventory by $30.

(g) Effective dates. * * *
(3) The provisions of paragraphs (b),
(c), (e)(2), (e)(3), and (f) of this section
apply to S elections and transfers made
on or after August 13, 2004.
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 04–18559 Filed 8–12–04; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–131264–04]
RIN 1545–BD55

Consolidated Returns; Intercompany
Transactions
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:

SUMMARY: This document contains
proposed regulations that provide
guidance regarding the treatment of
manufacturer incentive payments
between members of a consolidated
group. The proposed regulations are
necessary to provide additional
guidance for a variety of transactions
involving manufacturer incentive
payments. The regulations will affect
corporations filing consolidated returns.
DATES: Written or electronic comments
and requests for a public hearing must
be received by November 12, 2004.

E:\FR\FM\13AUP1.SGM

13AUP1