[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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