Final Regulation_149524-03

FR Doc 05-13383

[Federal R e g i s ~ e r :J u l y 12, 2 0 0 5 (Volxme 7 0 , Nilmber 132)]
[ R u l e s and H e g u l a t l o n s ]
[Page 39920-389231
From t h e Federal Register Online via GPO Access (wais.access.gpo.gov]

LDOCID:frl2jyO5-11)

DEPARTMENT OF THE TREASURY

Internal Revenue Service
2 6 CER P a r t s 1 a n d 602
[TD 92131
R I N 1545-BE75

LIFO Recapture Under Section L363(d)
AGENCY:

I n t e r n a l R e v e n u ~Selvlce ( I R S ) , Treasury.

ACTION: Final regulation

document: contains f i n a l r e y u l . a t i o n s regarding L I F O
converting from C corporations to S
corporations. T h e p u r p o s e of t h e s e r e g u l a t i o n s is to p r o v i d e g u i d a n c e
u n t h e L I F O r e c a p t u r e r - e q u i r e r n e n t when t h e corpor-ati o n holds in- ent tory
a c c o u n t e d f o r under the 1 - a s t - i n , first-out (LIFO) method (LIFO
inventory\ i r i d i r e c t l y t h r o u g h a p a r t n e r s h i p . T h e s e r - e g u l a y i o n s a f f e c t C
c o r p o r a t i o n s t h a t own i n t e r e s t s i n p a r t n e r s h i p s h i l l d i n g LIFO i n v e n t o r y
and t h c t elect tis be t a x e d a s 5 c o r p o r a t i o n s o r t h a t t r a n s f e r s u c h
p a r t n e r s h i p interests t o S c o r p o r a t i o n s i n n o n r e c o g r ~ i t i o nt r a n s a c t i o n s .
SUMMAK'i: This

recapture by

corporations

r e g u l a t i o n s a l s o a f f e c t S carporatinns rece131ing such p a r t n e r s h i p
i n t e r e s t s from C corporations in n o n r e c o g n i t i o ~ it r a n s a c t ~ o n s .

T!lese

Effeztive D a t e : These regu?ations are e f f e s t ~ v eJuly 12, 2005.
Appllcabi lity D a t e : T h e s e regulat i v n s a p p l y Co S e l e c t i o n s and

DATES:

t r a n s f e r s made on o r after A u g u s t 13, 7 0 0 4 .

FOR F!JRTI-IER INFGRMATION CONTACT: P i e t r o C a n e s t r e l l i , at ( 2 0 2 ) 6 2 2 - 3 0 6 0
a n d M a r t i n Sch[aurnl] ffer, a t (202) 622-3070 ( n o t toll free numbers)
SUPPLEMEldTAHY

INFORMATION :

Paperwork R e d u c t i f i n Act
The collection o f information contained i17 these f ~ n a lr e g u l a t i o n s
has been r e 3 r i e w e d a n d approved by t h e O f f i c e of Management a n d Budget
i n accnrdancc w i t h the Paperwor-k Reductifin A c t of 1 9 9 5 144 U . S . C .
3507(dj) under contrcll number i 5 4 5 - 1 9 0 6 .
The cl2l lect.ion of i n f o r n ~ a t i o ni n t h e s e f i n a l r e g l ~ l a t i o n si s i n
Sec.
1 . 1 3 6 3 - 2 (el ( 3 ) . This i n f o r m a t . i o n is required to i n f c ) r m t h e I R S of
partnerships e l e c t i n g to incre.3se t h e b a s i s of invent~ryto r e f l e c t any
amr3uilt included i n a p a r t n e r ' s income u n d e r sectlcln l 3 6 3 ( d ) .
An a g e n c y may n o t conduct or s p o n s o r , and a person 1s n o t r e q u i r e d
to respond to, a c o l l e c t i o n n f irlrormat-ion u n l ~ s sthe r c ' l l l e c t i a n of

FR Doc 05-13383

information dlsplays a valld c o n t r u l number asslgned by the Office o f
Management and Budget.
Estimated total annual ~ e p o r t l n g burden: 200 h o u r s .
The e s t i m a t e d a n n u a l b u r d e n per r e s p c n d e n t varies f r o m 1 to 3
h o u r s , d e p e n d i n g on ~ n i i v i d u a lell-cumstances, w i t h an estlniated average
of 2 hours.
Estirfiated number of r e s p o n d e n t s : 100.
E s c i r n a t e d a n n u a l f r e q u e n c y of responses: On oc'casion.
Cdmments concerning the accuracy of [his b u r d e n estimate and
suggestions f o r r e d u c l n g this b u r d e n s h o u l d be s e n t to t h e Internal
Revenue Service, A t t n : I R S R e p o r t s Clearance Officer,
SE:W:CAR:MP:T:T:SP Wash~ngton,DC 2 0 2 2 4 , and t o t h e Office of
Management and B u d g e t , A t t n : D e s k O f f i c e r f o r r h e Department of the
Treasury, Office o f Inforrnatlon an? K e g u l a t o r - y A f f a l r s , Washington, DC
20503.

Books or records relating to a collection of inforrnat.lon must be
retained as long as their c o n t e n t s may become rnaterlal i n the
administration of any internal revenue law. Generally, t a x r e t u r n s and
tax r e t u r n i n f o r m a t i o n a r e confidential, as requlred by 2 6 U . S . C . 6 1 0 3 .
Background

This document c o n r a i n s amendments t o 2 6 C F R p a r t 1 under s e c t i o n
1363(d) of the Internal Revenue Code ( C o d e ) . S e c t i o n ? 3 5 3 ( d ) (1.1
provides t h a t a C c o r p o l - a t i o n that owns LIFO inventory and that elects
under s e c t i ( > n i362Ia) t o be t a x e d as an S corporation must i n c l u d e i n
its g r o s s incqme f o r i t s f i n a l tax y e a r a s a C corporation t h e LIFO
recapture amount. Under section 1363(d) ( 3 ) , the LIFG recapture amount
i s the excess of the I n v e n t o r y amount of :he invectory u s i n g the f i r s t in, first-out (FIFO) method ( t h e FIFO value) over t h e i n v e n t o r y amount
of the inventory using the LIFO m e t h o d (the L I F O v a l u e ) a t t h e c l o s e of
t h e corporatimnls f l n a l tax year a s a C c c i - p o r a t i o n ( e s s e n t i a l l y , t.he
amount O E income the ccrporation has deferred b.1 using the L I F O rnetk~od
ra t h ~ rthan the F I F O method) .
F i n a l regulations (TD 8 5 6 7 1 under secticn 1 3 6 3 1 d ) were published I n
the Federal Register on October 7 , 1994 ( 5 9 FR 511051 t o d e s c r i b e the
r e c a p t u r e of LIFO b e n e f i t s when a C c o r p o r a t i o n that owns LIFO
inventory elects to become a n S c o r p o r a t i o i l or- t r a n s f e r s LIP0 inventql-y
to a n S c o r p o r a t i o n i n a n o n r e c o g n l t l o n t ~ a n s a c t i o n . The regulations
d i d n o t explicitly address t h e lndirect o w n e r s h i p cbf inventory through
a partnership.
A n u t z c e of p r o p o s e d r ~ l l e m a k i n g (REG-149524-03,20(14-39 I . R . B . 5 2 8 1
w a s published I n the Federal ~ e g i s t e ron August 1 3 , 2 0 0 4 ( 6 9 F R 5 0 1 0 9 1 .
The ~ r o p o s e c lr e g u l a t i c b n s p r o v l d ~ d g u i d a ! ~ c e for situations in w h l c ! ~ a C
c o r p o r a t i o n chat 07*?;sLZFC! i n v e n t o r y t h r o u g h a p a r t n e r s h i p ( o r t h r o u g h
t i e r e d p a r t n e r s h i p s ) c o n v e r t s t o a n S corporation or transfers i t s
p a r t n e ~ ~ h i ipn t e r e s t to an S corgoration ~n a nonrecognition
transaction. One persan submitted c o ~ i u n e n t s i n response tc, the norice ~f
prdposed rulemaking. A p u b l i c hearing w a s held on December 8 , 2 C 0 4 .
After consideration of the comments, t h ~
proposed requlations a r e
a d o p t e d a s f i ~ a rl e g u l a t i o n s w i t h the m o i l . i f i c ; l t l o n s disrussed below.
S u n n a r y c)f CommEnEs and Explanat ior; of Revis ions
T h e propr,sed r e y u l a t i o 1 2 s p r o v i d e d that a C corporation that h o l d s
an interest in a partnership owning LIFO i n v e n t o r y must include the
lookthrough LIFO r e c a p t u r e amuunL i n its g r o s s income where the
c o r p o i - a t i o n e i t h e r e l e c t s t o be an S c o r p o r a t i o n o r transfers i t s
i n t e r e s t in t h e p a r t n e r s h i p to a n S c o r p o r a t i o n i n a n o n r e c o g n i t i o n
transaction. The proposed 1 - e g u l a t i c n s defined the I c o k t h r o u y l ~LIFO

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FR Doc 05-13383

Page 3 of 9

r e c a p t u r e amount a s t h e amount of income that w o u l d be allocated to the
corporation, taking i n t o a c c o u n t s e c t i o n 704(c) a n d S e c .
1.704-3, l f
the partnership s o l d all of i t , s LIFO inventory for the FIFO value. A
corporate partner-'s lookthrough LIFO r e c a p t u r e amount must be
determined, in general, as o f the day h e f ~ r et h e effective date of t h e
S c o r p o r a t l a n e l e c t l r ~ no r , i f t h e recapture e v e n t is a t r a n s f e r of a
partnership i n t e r e s t to an S corporation, the date o f recapture event
is a transfer of a p a r t n e r s h i p i n t e r e s t to a n S corporation, the date
of t h e t r a n s f e r (the recapture d a t e ) . The proposed regulations provided
that, if a partnership is not otherwise required to determine inventory
values on the recapture date, the l o o k t h r o u g h L I F O recapture amount may
be determined based on inventory v a l u e s of t h e p a r t n e r s h i p ' s opening
I n v e n t o r y f o r t h e y e a r that i n c l u d e s t h e recapture d a t e .
The sole c o m n e n t a t o r sugg5sted t h a t t h e regulations p r o v i d e t h a t ,
if the lookthrough LIFO recapture amount is determined based or1
i n v e n t o r y v a l i l e s of t h e p a r t n e r s h i p ' s o p e n i n g i n v e n t o r y for t h e year
t h a t includes the r e c a p t u r e
[ [Page 3 9 9 2 1 1 1

d a t e , t h e n the lookthrough LIFO recapture amount must he a d j u s t e d t o
take i n t o a c c o i ~ n ta n y a d j u s t m e n t s t u the p a r t n e r s h i p ' s b a s i s in its
LIFO inventory t h a t result f r o m transactions occurring during the
p e r i o d from the s t a r t of t h e partnership's tax year to the end of t h e
recapture date. Thus, t h e lookthrough L I F O recapture arncurlt w o u l d have
to reflect any adjustments to the basis o f L I F O i r ~ v e r l t u r ydurit:g that.
period u n d e r sections 7 3 4 1 b 3 , 7 3 7 ( c ) , or 7F81(b).T1.e f i n a l regc~lathons
adopt this suggestion.
The proposed regulations p r o v i d e d t h a t a c g r p o r a t i ~ ncwning LTFO
inventory through a p a r t n e r s h i p m u s t i n c r e a s e its b a s l s in i t s
partnership i n t e r e s t b y t h e Lookthrough L I F O r e c a p t u r e a m o u r ~ t . The
proposed reguiations a l s o a l l o w e d the p a r - t n e r s h i ~ jt h r o u y h which t h e
LIFO i n \ - u n t o r y i s owned tr, elect to adjust +he basis of partnership
inventory (or laokthrough partnership interests held by that
p a r t n e r s h i p ) t o a c c o l m t f o r LIFO r e c a p t u r e . T h i s adjustment tn basls is
patterned in manner and effect after the adjuetment in s ? c t i o n 743ib).
Thus, t h e basis adjusrment c o n s t i t u t e s an a d j u s t m e n t t o the basis of
t h e L I F O i n v e n t o r y ( o r i o o k t h r o u g h p a r t n e r s h i p interests h e l d by that
pzrr'tnershipl with respect to the corporate partner only; r!o adjustment
is mode to t.he phrt,nership' s c o m m o n b a s is.
The Treasury D e p a r t m e n t and the IRS reql~estedc o r r m e n t s or) w h e t h e r
the partnership should be r e q u i r e d , in scme or a1 l circumstarlce~s, to
Increase the basis of p a r t n e r s h i p a s s e t s by t h e i o o k t h r o u g h LIFO
recapture amount a ~ t r i b u t c i b l eto those assets. N o comments w e r e
r e c e l ~ r e don this q u e s t i o n . Therefore, the flnal regulations fullow the
rule of the proposed regulations.
The s o l e cornrner!tator recommended t h a t the regulations should extend
the availability of a section 7 4 3 (h)-type basls a d j u s t m e n t t o t h e
purc'hase of a iookthrough p a r t r i e r s h i p interest by a C corpol-ation that
s u b s e q u e n t l y makes an S electian ( o r s u b s e q u e r i t l y d i s p o s e s o f the
partnership interest in a nontaxable carryover basis transaction). S t
has been determined that. :his recommendation i s beyond t h e scope of the
regulations and, s o , is not included in the final I-egulations.
The commentat ~r recommended that t-he r e g u l a t lons proviile f o r t h e
r e t r o a c t i v e revalltation of L I F O j-nventories u n d e r S e c . 1 . 7 0 4 1(b)( 2 ) ( i v )( f ) when a norl-C: corporation p a l - t n e r h a s been admitted t o a
p a r t n e r s h i p ( o r t h e n o n - C - c o r - p o r a t i o n p a r t - n e r ' s r e l a t i v e intel'est in
t h e partnership h a s i n c r e a s e d ) within a p e r i d of t,wo years e n d i n g on
t h e date when a C corporation partner I n t h e same partnership m a k s an
S e l e c t i o n l o r t r a n s f e r s ~ t psa r t n e r s h i p i n t e r e s t t o an S c o r p o r a t i o n

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Page 4 of Q

L n a nontaxable carryover basis transaction). It h a s b e e n d e t e r m i n e d
that thls recommer;dation i s beyond the scope of t h e r e g u l a t i o r ~ sa n d ,
s o , 1s n o t i n c l u d e d i n t h e final regulations.
Regarding t h e payment of t h e L I F O r e c a p t u r e t a x d u r i n g an S y e a r ,
the coinmentator made two s u g g e s r _ i o n s . First , not.wi t h s t a n d i n g s e c t i o n
1 3 7 1 ( c ) ( l ) ,t h e regulations should provide t h a t t h e S corporation's
e a r n i n g s and p r n f ~ t sbe reduced upon s u c h a payment. Second,
notwithstanding section 1 2 6 7 ( a ) ( 2 ) ( D ) , the r e g u l a t i o n s s h o u l d p r n v i d e
t h a t the s t c ~ c kb a s i s of the shareholders of the S c o r p o r a t i o n n o t be
reduced upon such a payment. T h e issues r a i s e d b2/t,he p a y m e n t by an S
corporation of taxes attributable t o a taxable year i n which the
corporation was a C c o r p o r a t i o n a r e not u n i q u e to a payment of t h e L I F O
r e c a p t u r e t a x and a r e beyond t h e scope of these regulations.
F i n a l l y , t h e commentator quesyioned whether i t is appropriate t o
issue t h e s e regulations u n d e r the a u t h o r i t y - of s e c t i o n 337(d). T h e
T r e a s u r y Department a n d t h e I R S contlnue to believe that issuing these
regulat~onsunder the authority of secticn 3 3 7 ( d ) 1 s appropriate,
because Congress's p u r p o s e i n e n a c t i n g s e c t i o n 1363(d) was t o prevent
t a x p a y e r s o w n i ~ gLIFO in- ent tory froni avoiding the built-in gain rules
of section 1 3 7 4 . H.R. Rep. No. 100-391 (ParYs 1 a n d 21, 1098 ( 1 9 8 7 ) .

Special A n a l y s e s

It has been determin+d that t h i s T r e a s u r y d e c i s i o r , i s n o t a
significant regulatory action as defined in EO 12866; therefor*, a
regulatory assessment i s n o t required. It i s h e r e b y c e r t i f i e d t h a t
these r e g u l a t i o n s w i l l not have a significant. economic impact on a
s u b s t a n t i a l n u n h e r o f s m a l l e n t i t i e s . T h i s c e r t i f i c a t i o n is based upon
rhe f a c t t h a t f e t ~c o r - p o r a t i o n s e n g a g e i n the type of transactions that
are subject to t h e s e r e g u l . a t i o n s ( t h e c o n v e r s i o n from C corporation ta
S corporation status while holding an interest l n a partnership t h a t
c l w r l s LIFO inventory or t h e transfer of a n i n ~ e r e s ti n such a
p a r t n e r s h i p by a C c o r p o r a t i o n t o a n S c a r - p o r a t i o n i n a nonrecognition
transaction). Therefore, a R?gc~lator:, Flexibility A n a l y s i s under t h e
Regulatory F l e s i b i l l t y A c t ( 5 U . S . C . c h a p t e r 61 is not- required. These
final r e g u l a t i o n s a r e n e c e s s a r y t o prevent a b u s i v e transactions
i n v o l v i n q partnerships a n d ;: corporations. A c c o r d i n g l y , gnod cause is
found for dispensing with a Belayed effective date p u r s u a n t to 5 U . S . C .
5 5 3 !d)( 3 ) . P u r s u a n t to s e c t i o n 7 8 0 5 i f ) of t h e Code, t h e n o t i c e of
p r o p o s e d rulemaking preceding this regulation was s u b r n l t t e d t o t h e
C h i e f Counsel f o r A d - ~ o c a c yof t.he Small sllsiness A A ~ i n ltsr a t i o n f o r
comment on ~ t irnpact
s
on small business.
D I - a f t i n g Information

The p r i n c ~ p a l authors cf these r e c j u l a t ~ o n sare Pietro C a t l c s t r e l l l
and Martin S c h a f f e r , O f f j c e of A s s o c i a t e Chlef Counsel ( P a s s t b r o u g h s
a n d S p e c i a l industrlesl. However, other p e r s o n n e l from t h e I R S a n d the
T r e a s u r y Department partlclpated ln thelr development.
L i s t oL S u b j e c t - s
26 CFR P a r t

1

i n c o r n e t h x c s , R e p o r t i n g and recordkeeping r e q u i r e m e n t s
2 6 CFR P a r r 6 0 2

Reportiny and recordkeeping requirements

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Page 5 of 9

0
Acrordingly, 26 U F R parts 1 a n d 6 0 2 a r e amended as f o l i . o w s :
PART 1 - - - I N C O M E TAXES

C
Paragraph 1. The authority citation f o r part 1 is amended by adding an
entry in numerical order- to read, in p a r t , a s follows:

Authority: 2 6 U.S.C. 7805 * * *
S e c t i o n 1 . 1 3 6 3 - 2 a l s o issued u n d e r 2 6 U . S . C .

337(d). * * *

0

par-. 2 . Sectiorl 1.1363-2 is amended by:
0

1. Redesignating p a r a g r a p h s (b), (c), and ( d l as paragrayhs ( d l , (el,
and ( g ) , respectively.
0
2 . Adding n e w paragraphs

(b), ( c ) , ( f ) , a n d { g ) ( 3 ) .

0

3 . R e v i - s i n g newly d e s i g n a t , e d paragraphs ( d ) and (el .
The revision and additions read as follows:

Sec.

1.1363-2

Recapture of LIFO benefits.

( b ) LIFO inventory held 1ndir-ectl.y through partner-ship. A r j
corporation must include t h e l o ~ k t h r o u g hL l F O recapture amount {as
defined in paragraph ( c ) ( 4 ) of t h i s section) in 1ts g r o s s income-(1) I n its l a s t taxable year a s a c' corporation i f , on t h e l a s t day
of the corporation's last taxable year be?fore its S corporation
election becomes effective, the c o r p o r a t i ~ j nheld i

1ookthrough partnership i n t e r e s t ( a s defined i n p a r a g r a p h l c ) ( 3 ) a €
thls section); or
( 2 ) I n t h e year of t r - a n s f e r by- t h e C corporation to

an S

corporation o f a lookthrough pa~~tnership
i n t e r e s t i f t h e corporation
transferred its lookthrough partnership interest to t h e S corporation
ir, a n o n r z r ; o g n i t i o n transaction (within the m e a r i i n g of sectinn
7 7 0 1 ( a ) (45)) in which the transferred interest c o r l s t i t u t ~ st r a n s f e r t - e d
hasis property ( w i t h i r i t h e meatllng of section ? 7 0 L ( a ) ( 4 3 ) ) .
( c ) Definitions and special rules--(I) F e c a p t u r e date. I n the c a s e
of a transactior! d e s c r i b e d in paragraph la) (1) c?r (b)(1) of this
section, the r e c a p t u r e d a t e 1s t h e d a y b e f o r e t h e effective date a t the
S corporation election. I n t h e case of a transactLon described i n
p a r a g r a p h (a)( 2 ) o r { b ) ( 2 ) of this s e c t i o n , t h e recapture d a t e is t h e
d a t e o f t,he transfer of the partnership interest to the S corporation.
( 2 ) D e t ermination o f LIFO recapt. u:-e
amount. The L l F O recapture
amount shall be determined as of the cnd of t h e r e c a p t u r e d a t e f o r
transactions d e s c r . ~ b e din paragraph ( 6 (11 of t h i s s e c t i u n , and as of
the moment before t h e transfer o c c u r s f o r t r a n s a c t i o n s d e s q r i b e d in
paragraph (a)( 2 ) of this section.
( 3 ) L o a k t h r c u q h p a r t n e r s h i p interest.
partnership interest is a
lookthrough partnership interest if the partnership owns (dirertly or

FR Doc 05-13383

indirectly t h r o u g h one or more partnerships) assets accnunted f o r u n d e r
the Last-in, f lrst-out (LIFO) method (LIFO i.nventor7) .
( 4 ) Lookrhrough L I F O r e c a p t u r e amount--(i) In general. For p u r p o s e s
of t h i s s e c t i o n , a corporation's lookthrough LIFO recapEure a m o u n t is
the amount of income t h a t would be a l l o c a r e d t o t h e c o r p o r a t i o n , taking
into a c c n u n t section ' ? 0 4 ( c ) and S e c . 1 . 7 0 4 - 3 , if t h e p a r t - n e ~ s h i psold
a l l of its LIFO inventory for the inventory's FIFO value. For this
p u r p o s e , the FIFO -1alue of i n v e n t o r y is the i n v e n t o r y amount of t h e
inventory a s s e t s u n d e r the first--in,f i r s t - o u t method of accvuntins
a u t h o r i z e d 5y sectiori 4 7 1 , deternllned irk a c c o r d a n c e w i t h sect i o n
1363 ( d )( 4 ) (C).
( i i ) Determination of l o o k t h r o u y h LIFO r - e c a p t u r e a m o u n t . Except as
provided in paragraph { c ) ( 4 ) ( i i i )of t h i s section, the Lookthrough LIFO
recapture amount s h a l l be d e t e r m i n e d a s o f the e n d of the recapture
date for transactions described in p a r a g r a p h ( b ) ( l ) o f t h i s section,
a n d as of the moment before the transfer occurs f o r transactions
described In paragraph ( b ) ( 2 ) n f this sectlon.
(iii} Alternat13,e r u l e . I f the partnership i s n o t o t h e r w i s e
r e q u l r e d t o determine t h e inventory amount of the inventory using t h e
L I F C method (the LIFn value) on the recapture date, the partnership may
determine t h e lookthrough LIFO recapture amount as t h o u g h the FIFO and
LIFO valucs of t h e i n v e n t o r y o n t h r~e c a p c u r e d a t e e q u a l e d t h e F I F O a n d
L I F O values of the opening inventory for the p a r t n e l - s h i p ' s t a x a b l e year
t h a t i n c l u d e s t h e recapture d a t e . F o r thls purpose, t h e opening
rnventoz-y includes inventory c o n t r i b u t e d by a partner to the
partnership on or b e f o r e the recapture date and excludes inventory
distributed by t.he partnership to a part,net, on o r b e f o r e the r e c a p t u r e
d a c e . A p a r - t n e r s h i p t h a t applies the alternative method of this
paragraph i c ) (4)( l i ~ )to calculate the Lookthrough L I F O recapture
amount must take into account any a d j u s t m e n t s to the partnership's
b e s l s in i t s L I F O i n v e n t o r y that r e s u l t f r ~ mi - . r a n s a c t i o n s occurring
after t h e start of the partnership's t a x a b l e year and before the end of
the recapture date. For example, the l q o k t h r r 7 u ~ hL I F O r e c a p t u r e arnount
m u s t Le adjusted t o t a k e l n t o a c r u u n t a n y a ~ i j u s t m e n t - st o t h basis
~
of
LIFO i r l v e r , t c l ~ ' y during that p e r i o d u n d e r r : e c t i o n s 7 3 4 ( b \ , 7 3 7 ( r) , or
7 5 1 (b).
( r l ) Payment of tax. Any increase in tay caused by i t l c l u d i n c j t h e
LIFO recapture amount 01' t h e l o c k t h r o u g h L I F O r e c a p Cure a r n ~ u n t l r i the
g r o s s income of t h e C c o r p ~ r a t i d ni s payable I n four equal
~nstallmsnts.The C corporation m u s t pay the f i r s t installment ~f t h i s
payment by the due date of i t s return, determined without regard to
extensions, f o r t-he l ~ s taxable
t
y e a r i t operated as a C corporation L €
paragraph ( a ) (1) or (b)(1) of this section applies, o r f ~ the
r
taxable
y e a r I?£ t h e transfer if p a r a g r a p h ( a ) (2) or ( G ) ( 2 ) of t h i s s e c t f o t ~
a p p l i e s . The three sl.acceeding installments must be pa ~ d - - ( 1 ) For a transaction described in paragraph ( a )( 1 ) or (b)( 1 ) of
t h i s sectlon, by t h e corporatlon that, made the election under section
1362 ( a ) to be a n S corpol-ation, on or before t h e d u e date f o r the
c o r p o r a t i o n ' s r e t u r n s {determined w i t h o u t rcgdrd ta extensiuns) for the
succeeding three t a x a b l e years; and
( 2 ) For a transaction described in paragraph (a)( % ! or ( b )( 2 ) of
t h i s s e c t i o n , by the t r a n s f e r e e S corporatlon on 01- b e f o r e the clue date
f o r t h e t r a ~ : s feree c o r p o r a t i o n ' s r e t u r n s (determined w i t h o u t regard to
extensions) for the s u c c e e d i n g t h r e e taxable Y E a r s .
( E ) Basis adjustments- - (1) General r ~ ~ l A
e p
. p r o p r i a t e adjustments t o
t h e b a s i s o f i n v e n t o r y a r e to be made t o r e f l e c t any amount i n c l u d e d in
income u n d e r p a r a g r a p h (a) of this section.
( 2 1 LIFO inv~ntoryowned t h r o u g h a partnership--(il B a s i s of
c o r p o r a t i o n ' s p a r t n e r s h i p i n t e r e s t . Appropriate a d j u s t m e n t s t o the
b a s l s of t h e corporation's lookthrough partnership lnterest are to he

Page 6 of 9

Page 7 of 9

made t o r e f l e c t a n y amount ~ n c l u d e d in incnrt~e under p a r a g r a p h Ib) of
this s e c t ion.
( F 1 ) Basis o f p a r ~ n e r s h i p assets. A p a r t n e r s h i p d i r e c t l y holding
L I F O inventory t h a t i s t a k e n lnto account u n d e r pal-agraph ( b ) of t h i s

section may elect to a d j u s t the basis of that LIFO inventory. In
a d d i t i o n , a partnershi y that h o l d s , through a r l r ~ t h e rpartnership, L I F O
i n v e n t o r y t h a t is t a k e n into accounr under paragraph (b) of t h i s
~ e c t l o nmay e l e c t t o a d j u s t t h e b a s i s of t h a t partners hi^ interest. Any
a d j u s t m e n t under this paragraph ( e ) ( 2 ) to t h e basls of inventory h e l d
by t h e partnership is equal to t h e amount of L I F O r e c a p t u r e
attributable to the i n v e n t o r y . L i k e w i s e , any a d j u s t n ~ c n tuncler this
parayraph te) (2; to the b a s i s of a lookthrough partnership interest
held by t h e p a r t n e r s h i p i s equal t o the amoulit of LIFO recaprure
aktributable to t h e interest, A b a s i s d d j u s t m e n t under t h i s p a r a g r a p h
( e }( 2 ) is t r e a t e d in the same manner and has t h e same effect as an
adjustment to the b a s i s of p a r t n e r s h i p p r o p e r t y under section 743(b).
S e e Sec.
1.743-1(:1.
( 3 ) E l e c t i o n . A p a r t n e r s h i p e l e c t s t o a d j u s t t h e basis of i t s
inventory and any lookthrough partnership interest that it OWES by
a t t a c : h i n g a statemefit t o its original or amended income t a x r e t u r n f o r
t h e f i r s t taxable year e n d i n g nn or a f t e r the date of the S corporation
election or transfer described in paragraph (b) of t h i s s e c t i o : ~ . This
s t a t e m e n t shall state t h a t t h e p a r t n e r s h i p is e l e c t i n g u n d e r this
paragraph Ie) ( 3 ) and m u s t lnclude the names, a d d r e s s e s , a n d t a x p a y e r
identification numbers of any c m 3 r p o r a t ep a r t n e r l i a b l e for t a x u n d e r
paracj~.aph (d) of this section and of t h e p a l - t n e r s h i p , as well a s t h e
amaunt o f the a d j u s t m e n t and the porticn of t h e adjustment, t h a t i s
attributable to e a c h pool of i n v e n t o r y G r l o o k t h r o u g h parrnershlp
i n t e r e s t that is h e l d by t h e partnership.
( f ) Examples. The following examples iliustrate the rules of this
section :

Example 1. ( i ) G I S a C corporaklon with a t a x a b l e year e n d i n g
June 3 0 . CH i s a p a r t n e r s h i p w i t h a cslendar year taxable year. G
h a s a 2 0 p e r c e n r i n t e r e s t in GK. The remaining 80 percent i n t e r e s t
i s owned by a n 3 . n d i v i d u a l . O n A p r l l 2 5 , 2 0 0 5 , G c o n t r i b u t e d
i n v e r l t o r y t h a t i s L I F O inventory L O GH, ~ r i r ; r e a s i n g G ' s i n t e r e s t i n
t h e p a l - t n e r s h i p to 50 p e r c e n t . GH holds no other LIFO inventory, and
t h e r e a r e no ilther a d j u s t m e n t s t o t h e p a r t r i e l - s h i p ' s l ~ a s i si n i r s
LIFO inventory between J a n u a r y 1, 2 0 0 5 a n d tllz end of the recapture
date. G e l e c t s to be = n 5 corporation effective J u l y 1 , 2 0 0 5 . The
on

r e c a p t u r e d a t e i s J u n e 3 0 , 2 0 0 5 u n d e r paragraph (c)(1) of this
s e c t i o n . GH e l e c t s t o u s e t h e L I F O method f o r t h e i n v e n t o r y and
determines t h a t t h e F I F O and LIFO values o f the opening Inventory
for GH's 2 0 0 5 t.axable )-ear, including r h e i n v e n t o r y contrtbuted by
G, a r e $ 2 0 0 a n 3 $ 1 2 0 , respect~vely.
( i i ) Uxder p a r a g r a p h (c)( 4 ) (iiil of t h i s section, GH is n o t
required to d e t ~ r r n i n et h e F I F O a n d LIFO v a l u e s o f t.he lrlventory on
the recapture date. Instead, GH may d e t - e r r n i r ~ ~the
? lockthrough LIFO
recapture arnounr a s though the F I F O and L I F O values of t h e i n v e n t o r y
on t h e r e c a p t u r e d a t e e q u a l e d the F I F O a n d L I F O - ~ a l u e sof the
openinq inventqry f ~ trh e p a r t t l e r s h i p ' s taxable year :2005) t!iat
i n c l u d e s the recapture date. F o r this p u r p c s c , under paragraph
l c ) ( 4 ) of r h i s s e c t i o n , the o p e n i n g i n v e n t o r y i n c l u d e s t h e inventory
c o n t r i b u t e d by G. T h e amount b y w h i r h t h e FIFD v a l u e ( $ 2 0 0 ) e x c e e d s
t.he LIFO v a l u e ( $ 1 2 0 ) in GH's opening inventory is $ 8 0 . Thus, if GH
sold a l l of i t s LIFO inveritory f o r $ 2 0 0 , it would recognize $ 8 0 of

htto:lla257, ~.ak;lmai
tech .net17125712422101ian2005 1&OO/edocket.access.
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Page S of 9

income. G ' s lookthrough LIFO r e c a p t u r e a m c u n t i s $ 9 0 , t h e a m o u n y of
i n c ~ m e:tiat would t o a l l o c a t e d t o G , t a k i n g i n t o a c c o u n t s e c t i o n
704(c) a n d S e r .
1 . 7 0 4 - 3 , if GE s o l d all of its LIFO i n v e n t o r y f o r
the FIFO value. U n d e r p a r a g r a p h (b)l l ) elf t h i s s e c t i o n , G m u s t
~nclude$ 8 0 i n income i n its t c x a b l e year ending on June 30, 2005,
Under paragraph ( e ) ( 2 ) of this section, G must increase i t s b a s i s in
i t s interest i n GH by $ 8 0 . Under pal-agraphs (e1 ( 2 and ( 3 1 o f L h i s
sectiirn, and In accordance w i t h section 743(b) principles, GH may
elect t 3 increase the basis (with r e s p e c t to G only) of i t s L I F O
i n v e n t o r y by $ 8 0 .
G x a m p L c 2 . (i) 3 is a C rnrporation w i t h a c a l e n d a r year t a x a b l e
y e a r . JK is a p a r t n e r s h i p w i t h a calendar year t a x a b l e year. ;h a s a
3 0 percent interest i n t h e p a r t n e r s h i p . JI.: owns L I F O i n v e n t o r y t h a t
is not s e c t i ~ n7 0 4 I c ) property. J e l e c z s to be a n S c c r p o r a t i n n
errective January 1, 2 0 0 5 . The r e c a p t l l r e c3at.e is Dererrher 3 1 , 2 0 0 4
under ~ a r a g r a p(~c ) ( 1 ) of this s e c t l o n . J K determines that the FIFO
and L I F O v a l u e s of t h e i n v e n t o r y on Dezernber 3 1 , 2 0 0 4 are $240 and
$140, respectively.
( i l ) T h e amount by which thc F I F O v a l u e ( $ 2 4 0 ) ~ x r e e d sthe L I F O
v a l u e ($140) qn t h e recapture date is $100. T h u s , i f JK s o l d a l l of
i t s LIFO inventory for $240, it would recognize $100 o f income. J ' s
lookthrough LIFO recapture amu-dot i s $ 3 0 , the amount o f i n c o m e t h a t
would be a l l o c d t e d tu J i f J K s o l d a l l of its L I F O inventnry 'or t-he
FIFO v a l u e ( 3 0 p e r c e n t of $100). Under p a r a g r z p h (h)( 1 ) of thls
section, J m u s t include $ 3 0 in income i n i t s t a x a b l e y e a r e n d l n y on
December 3 1 , 2 0 0 4 . Under p a r a y r a p h ( e ) ( 2 ) of this s e c t i o n , J must
increase i t s b a s i s in i C s i r l t e r e s l i l l JIc. by $ 3 0 . U n d e r pal-agr;lghs
( e )( 2 ) and ( 3 1 of t h i s section, a n d i n accor-d~..ncewith section
743(b) principles, JK nay e l e c t to i n c r e a s e t h e basss ( w i t h respect
t o J only) of its inventory by $30.
(g:

* *

=

(3 i The provisions of paragraphs (b), ( c ), (d), ( e )( 2 1 , (;.) l 3 ) , and
( € 1 o f t h i s seztiun a p p l y t o S e l e c r l o n s and transfers made on o r after
August 1 3 , 200%. T h e r u l e s that apply to S elections arid t r , a r i s r e r s made
b e f o r e A u g u s t 1 3 , 2 0 0 4 , a r e c c n t a i n e d i n S e c . 1 . 1 3 5 3 - 2 a s i n effect
prior LF A l l y U s t 1 3 , 2004 ( s e e 2 6 CFP. p a c t 1 r e v i s e d as of April 1,
2005).
P A R T 6 3 2 - -0MB CONTROL NLll+TBERS LJrTDER THE PAPERItORK REDICTION ACT
0

Par. 3 . 'Fhe a u t h c j r i c y c i t a t i o r . for p a r t 6 0 2 c L \ n t i n u e s t o read as
follows :

0
P.qr.

4 . In S e c .
6 0 2 . 1 0 1 , paragraph (b) is amended by a d d i n g a n entry
in n u ~ e r i c a l crder to the t a b l e to r e a d a s follows:

SBC.

602.101

DMA

r o n r r n l numbers.

C u r r e n t OMB

Page 9 of 9

CF? p a r t ur s e c t i o n where identified and described

Mark E . Matthews,
D e p u t y Commissioner f o r Services and Enforcement.
Approved: J u n e 2 3 , 2 0 3 5 .
Eric Sol ornon,
A c t i n g Deputy A s s i s t a n t S'cretary
[ F R L O C . 05-13383 Filed 7 - l l - U h ;

BILLING CODE 4 8 3 0 - 0 1 - P

of t k e Treasury.
8:45

am1

control No.