[Federal Register Volume 70, Number 35 (Wednesday, February 23, 2005)]
[Rules and Regulations]
[Pages 8729-8730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-3463]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9179]
RIN 1545-BB62


Uniform Capitalization of Interest Expense in Safe Harbor Sale 
and Leaseback Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains amendments to regulations relating to 
the capitalization of interest expense incurred in sale and leaseback 
transactions under the Economic Recovery Tax Act of 1981 (ERTA) safe 
harbor leasing provisions. The regulations affect taxpayers that 
provide purchase money obligations in connection with these 
transactions.

DATES: Effective Date: These regulations are effective February 23, 
2005.
    Applicability Dates: For dates of applicability, see Sec.  1.263A-
15(a)(3).

FOR FURTHER INFORMATION CONTACT: Christian Wood, 202-622-4930 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1. On May 20, 
2004, the IRS and Treasury Department published in the Federal Register 
a notice of proposed rulemaking (REG-148399-02; 69 FR 29113) by cross 
reference to temporary regulations (TD 9129; 69 FR 29066) under section 
263A(f) of the Internal Revenue Code (Code). These amendments pertain 
to the treatment of certain interest expense incurred by the lessor in 
a sale and leaseback transaction under the ERTA safe harbor leasing 
provisions (former section 168(f)(8), as enacted by section 201(a) of 
ERTA, Public Law 97-34, 95 Stat. 214). No comments in response to the 
proposed regulations or requests to speak at a public hearing were 
received, and no hearing was held. The proposed regulations under 
section 263A(f) are adopted by this Treasury decision.

Effective Date

    These final regulations generally apply to interest incurred in 
taxable years beginning on or after May 20, 2004. In the case of 
property that is inventory in the hands of the taxpayer, these 
regulations apply to taxable years beginning on or after May 20, 2004. 
Taxpayers may elect to apply these regulations to interest incurred in 
taxable years beginning on or after January 1, 1995, or, in the case of 
property that is inventory in the hands of the taxpayer, to taxable 
years beginning on or after January 1, 1995 (the general effective date 
of the interest capitalization regulations).
    In addition, for purposes of Sec.  1.263A-15(a)(2), the exclusion 
of purchase money obligations given by the lessor to the lessee (or a 
party related to the lessee) in a sale and leaseback transaction under 
former section 168(f)(8) as enacted by ERTA will be considered to be a 
reasonable position for the application of section 263A(f) in taxable 
years beginning before January 1, 1995. Consequently, a taxpayer 
changing a method of accounting for property that is not inventory in 
the hands of the taxpayer to conform to these regulations may elect to 
include interest incurred after December 31, 1986, in taxable years 
beginning on or after December 31, 1986 (the general effective date of 
section 263A), and before January 1, 1995, in the determination of its 
adjustment under section 481(a). A taxpayer changing a method of 
accounting for property that

[[Page 8730]]

is inventory in the hands of the taxpayer to conform to these 
regulations must compute a section 481(a) adjustment and revalue its 
beginning inventory in the year of change as if the new method of 
accounting had been in effect during all prior years.

Special Analyses

    It has been determined that these final regulations are not a 
significant regulatory action as defined in Executive Order 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) does not apply to these regulations, and, because the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking that preceded these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

    The principal authors of these regulations are Christian Wood and 
Grant Anderson of the Office of Associate Chief Counsel (Income Tax & 
Accounting). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. In Sec.  1.263A-9, paragraph (a)(4)(ix) is added to read as 
follows:


Sec.  1.263A-9  The avoided cost method.

    (a) * * *
    (4) * * *
    (ix) A purchase money obligation given by the lessor to the lessee 
(or a party that is related to the lessee) in a sale and leaseback 
transaction involving an agreement qualifying as a lease under Sec.  
5c.168(f)(8)-1 through Sec.  5c.168(f)(8)-11 of this chapter. See Sec.  
5c.168(f)(8)-1(e) Example (2) of this chapter.
* * * * *


Sec.  1.263A-9T  [Removed]

0
Par. 3. Section 1.263A-9T is removed.

0
Par. 4. In Sec.  1.263A-15, paragraph (a)(3) is added to read as 
follows:


Sec.  1.263A-15  Effective dates, transitional rules, and anti-abuse 
rule.

    (a) * * *
    (3) Section 1.263A-9(a)(4)(ix) generally applies to interest 
incurred in taxable years beginning on or after May 20, 2004. In the 
case of property that is inventory in the hands of the taxpayer, Sec.  
1.263A-9(a)(4)(ix) applies to taxable years beginning on or after May 
20, 2004. Taxpayers may elect to apply Sec.  1.263A-9(a)(4)(ix) to 
interest incurred in taxable years beginning on or after January 1, 
1995, or, in the case of property that is inventory in the hands of the 
taxpayer, to taxable years beginning on or after January 1, 1995. A 
change in a taxpayer's treatment of interest to a method consistent 
with Sec.  1.263A-9(a)(4)(ix) is a change in method of accounting to 
which sections 446 and 481 apply.
* * * * *


Sec.  1.263A-15T  [Removed]

0
Par. 5. Section 1.263A-15T is removed.

Mark E. Mathews,
Deputy Commissioner for Services and Enforcement.
    Approved: February 15, 2005.
Eric Solomon,
Acting, Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 05-3463 Filed 2-22-05; 8:45 am]
BILLING CODE 4830-01-P