[Federal Register Volume 59, Number 194 (Friday, October 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24828]
[[Page Unknown]]
[Federal Register: October 7, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8567]
RIN 1545-AR50
Recapture of LIFO Benefits
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations that describe the
events that trigger the recapture of LIFO benefits under section
1363(d) when a C corporation elects to become an S corporation or
transfers LIFO inventory to an S corporation in a tax-free
reorganization. The final regulations reflect changes made to the law
by the Revenue Act of 1987 and affect corporations that use the last-
in, first-out (LIFO) method of accounting.
DATES: These regulations are effective October 7, 1994.
The provisions of Sec. 1.1363-2(a)(1) apply to S elections made
after December 17, 1987, except as provided in section 10227(b)(2) of
the Revenue Act of 1987. The provisions of Sec. 1.1363-2(a)(2) apply to
transfers made after August 18, 1993.
FOR FURTHER INFORMATION CONTACT: Jeffrey A. Erickson, 202-622-3040 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On August 18, 1993, a notice of proposed rulemaking (PS-16-93) was
published in the Federal Register (58 FR 43827) proposing amendments to
the Income Tax Regulations (26 CFR part 1) under section 1363(d).
Written comments responding to the notice were received. No public
hearing was requested or held. After consideration of all the comments,
the regulations proposed by PS-16-93 are adopted as revised by this
Treasury decision.
Explanation of Provisions
Under the proposed regulations, a C corporation that transfers LIFO
inventory to an S Corporation in a tax-free reorganization is subject
to the LIFO recapture rules of section 1363(d) and must include the
LIFO recapture amount in its gross income in its last taxable year of
existence.
One commentator asserted that the IRS appeared to have exceeded its
authority by extending the application of section 1363(d) to situations
in which an S corporation succeeds to LIFO inventory in a tax-free
reorganization. The IRS and the Treasury Department believe that the
regulations are a valid exercise of authority to prevent the
circumvention of section 1363(d). Therefore, the final regulations
retain the rule of the proposed regulations.
Another commentator noted that the proposed regulations would apply
to a transfer of LIFO inventory by a transferor C corporation that goes
out of existence in a tax-free reorganization but would not apply to a
transfer in connection with a tax-free reorganization under section
368(a)(1)(D) in which the transferor corporation remains in existence.
The commentator suggested revising the regulations to require inclusion
of the LIFO recapture amount in the year of the transfer of the LIFO
inventory instead of the transferor corporation's last year of
existence. The final regulations adopt this suggestion.
The final regulations also clarify which corporation has the
responsibility to pay the three succeeding installments of tax
described in section 1363(d)(2).
Commentators suggested expanding the scope of the regulations to
deal with various related issues that arise from application of the
LIFO recapture rules. The IRS and the Treasury Department believe that
those issues are more appropriately dealt with in other forms of
administrative guidance. Accordingly, these comments have not been
adopted.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Small Business Administration for comment on its
impact on small business.
Drafting Information
The principal author of these regulations is Jeffrey A. Erickson,
Office of the Assistant Chief Counsel (Passthroughs and Special
Industries), IRS. However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1363-2 is added to read as follows:
Sec. 1.1363-2 Recapture of LIFO benefits.
(a) In general. A C corporation must include the LIFO recapture
amount (as defined in section 1363(d)(3)) in its gross income--
(1) In its last taxable year as a C corporation if the corporation
inventoried assets under the LIFO method for its last taxable year
before its S corporation election becomes effective; or
(2) In the year of transfer by the C corporation to an S
corporation of the LIFO inventory assets if paragraph (a)(1) of this
section does not apply and the C corporation--
(i) Inventoried assets under the LIFO method during the taxable
year of the transfer of those LIFO inventory assets; and
(ii) Transferred the LIFO inventory assets to the S corporation in
a nonrecognition transaction (within the meaning of section
7701(a)(45)) in which the transferred assets constitute transferred
basis property (within the meaning of section 7701(a)(43)).
(b) Payment of tax. Any increase in tax caused by including the
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) of this section
applies, or for the taxable year of the transfer if paragraph (a)(2) of
this section applies. The three succeeding installments must be paid--
(1) For a transaction described in paragraph (a)(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) 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.
(c) Basis adjustments. Appropriate adjustments to the basis of
inventory are to be made to reflect any amount included in income under
this section.
(d) Effective dates. (1) The provisions of paragraph (a)(1) of this
section apply to S elections made after December 17, 1987. For an
exception, see section 10227(b)(2) of the Revenue Act of 1987.
(2) The provisions of paragraph (a)(2) of this section apply to
transfers made after August 18, 1993.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: September 9, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-24828 Filed 10-6-94; 8:45 am]
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