INCOME TAX EXCISE TAX - Internal Revenue ServiceFeb 07, 2011 · of February 2011. See Rev. Rul. 2011-4, page 448. Section 471.—General Rule for Inventories 26 CFR 1.471-3: Inventories

Bulletin No. 2011-6February 7, 2011

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2011–4, page 448.Federal rates; adjusted federal rates; adjusted federallong-term rate and the long-term exempt rate. For pur-poses of sections 382, 642, 1274, 1288, and other sectionsof the Code, tables set forth the rates for February 2011.

T.D. 9509, page 450.Final regulations under section 1301 of the Code provide rulesunder the American Jobs Creation Act of 2004 relating to theaveraging of farm and fishing income.

T.D. 9510, page 453.Final regulations under section 6012 of the Code allow the IRSto require corporations to file a schedule disclosing uncertaintax positions related to the tax return as required by the IRS.

T.D. 9511, page 455.Final regulations under sections 6229(c)(2) and 6501(e) of theCode define an omission from gross income for purposes ofthe six-year minimum period for assessment of tax attributableto partnership items and the six-year period for assessing tax.

REG–149335–08, page 468.Proposed regulations under sections 263A and 471 of theCode provide rules relating to capitalizing and allocating sales-based royalties, and adjusting the cost of merchandise inven-tory for sales-based vendor allowances. The regulations mod-ify the simplified production method and the simplified resalemethod.

EXCISE TAX

Notice 2011–9, page 459.This notice modifies and supersedes Notice 2010–71,2010–50 I.R.B. 822, which provides guidance on the annualfee imposed by section 9008 of the Affordable Care Acton certain manufacturers and importers (covered entities)of branded prescription drugs sold to certain governmentprograms. The modifications affect information provided by acovered entity regarding controlled group members, orphandrugs, Medicare Part D rebates, and Medicaid rebates. Notice2010–71 modified and superseded.

Notice 2011–10, page 463.This notice provides rules under which taxpayers may make aone-time claim for payment of the credits and payments allow-able under sections 6426 and 6427 of the Code for biodiesel(including renewable diesel) mixtures, alternative fuels, and al-ternative fuel mixtures sold or used during calendar year 2010.

ADMINISTRATIVE

Rev. Proc. 2011–19, page 465.This procedure sets forth the maximum face amount of Qual-ified Zone Academy Bonds (“QZABs”) that may be issued foreach state for the calendar year 2011. For this purpose,“state” includes the District of Columbia and the possessionsof the United States.

Finding Lists begin on page ii.

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-

force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

February 7, 2011 2011–6 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof February 2011. See Rev. Rul. 2011-4, page 448.

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-term ratesare set forth for the month of February 2011. See Rev.Rul. 2011-4, page 448.

Section 382.—Limitationon Net Operating LossCarryforwards and CertainBuilt-In Losses FollowingOwnership Change

The adjusted applicable federal long-term rate isset forth for the month of February 2011. See Rev.Rul. 2011-4, page 448.

Section 412.—MinimumFunding Standards


Section 467.—CertainPayments for the Use ofProperty or Services


Section 468.—SpecialRules for Mining and SolidWaste Reclamation andClosing Costs


Section 471.—GeneralRule for Inventories26 CFR 1.471-3: Inventories at cost.

Proposed regulations provide that the amount ofa sales-based vendor allowance is a reduction in thecost of merchandise sold and does not reduce the in-ventory cost or value of goods on hand at the end ofthe taxable year. See REG-149335-08, page 468.

Section 482.—Allocationof Income and DeductionsAmong Taxpayers


Section 483.—Interest onCertain Deferred Payments


Section 642.—SpecialRules for Credits andDeductions


Section 807.—Rules forCertain Reserves


Section 846.—DiscountedUnpaid Losses Defined


Section 1274.—Determi-nation of Issue Price in theCase of Certain Debt Instru-ments Issued for Property(Also Sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate and thelong-term exempt rate. For purposes ofsections 382, 642, 1274, 1288, and othersections of the Code, tables set forth therates for February 2011.

Rev. Rul. 2011–4

This revenue ruling provides variousprescribed rates for federal income taxpurposes for February 2011 (the currentmonth). Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current monthfor purposes of section 1274(d) of theInternal Revenue Code. Table 2 containsthe short-term, mid-term, and long-termadjusted applicable federal rates (ad-justed AFR) for the current month forpurposes of section 1288(b). Table 3 setsforth the adjusted federal long-term rateand the long-term tax-exempt rate de-scribed in section 382(f). Table 4 containsthe appropriate percentages for deter-mining the low-income housing creditdescribed in section 42(b)(1) for build-ings placed in service during the currentmonth. However, under section 42(b)(2),the applicable percentage for non-feder-ally subsidized new buildings placed inservice after July 30, 2008, and beforeDecember 31, 2013, shall not be less than9%. Finally, Table 5 contains the federalrate for determining the present value ofan annuity, an interest for life or for a termof years, or a remainder or a reversionaryinterest for purposes of section 7520.

2011–6 I.R.B. 448 February 7, 2011

REV. RUL. 2011–4 TABLE 1

Applicable Federal Rates (AFR) for February 2011

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR .51% .51% .51% .51%110% AFR .56% .56% .56% .56%120% AFR .61% .61% .61% .61%130% AFR .66% .66% .66% .66%

Mid-term

AFR 2.33% 2.32% 2.31% 2.31%110% AFR 2.57% 2.55% 2.54% 2.54%120% AFR 2.80% 2.78% 2.77% 2.76%130% AFR 3.04% 3.02% 3.01% 3.00%150% AFR 3.51% 3.48% 3.46% 3.46%175% AFR 4.10% 4.06% 4.04% 4.03%

Long-term

AFR 4.15% 4.11% 4.09% 4.08%110% AFR 4.57% 4.52% 4.49% 4.48%120% AFR 4.99% 4.93% 4.90% 4.88%130% AFR 5.41% 5.34% 5.30% 5.28%


Adjusted AFR for February 2011

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjustedAFR

.74% .74% .74% .74%

Mid-term adjusted AFR 2.04% 2.03% 2.02% 2.02%

Long-term adjustedAFR

4.47% 4.42% 4.40% 4.38%


Rates Under Section 382 for February 2011

Adjusted federal long-term rate for the current month 4.47%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjustedfederal long-term rates for the current month and the prior two months.) 4.47%


Appropriate Percentages Under Section 42(b)(1) for February 2011

Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service afterJuly 30, 2008, and before December 31, 2013, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit 7.75%

Appropriate percentage for the 30% present value low-income housing credit 3.32%

February 7, 2011 449 2011–6 I.R.B.


Rate Under Section 7520 for February 2011

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,or a remainder or reversionary interest 2.8%

Section 1288.—Treatmentof Original Issue Discounton Tax-Exempt Obligations


Section 1301.—Averageof Farm Income26 CFR 1.1301–1: Averaging of farm and fishing in-come.

T.D. 9509

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Farmer and FishermanIncome Averaging

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains fi-nal regulations relating to the averaging offarm and fishing income in computing in-come tax liability. The regulations reflectchanges made by the American Jobs Cre-ation Act of 2004 and the Tax Extendersand Alternative Minimum Tax Relief Actof 2008. The regulations provide guidanceto individuals engaged in a farming or fish-ing business who elect to reduce their taxliability by treating all or a portion of thecurrent taxable year’s farm or fishing in-come as if one-third of it had been earnedin each of the prior three taxable years.

DATES: Effective Date: These regulationsare effective on December 15, 2010.

Applicability Date: For date of applica-bility, see §1.1301–1(g).

FOR FURTHER INFORMATIONCONTACT: Erika Reigle, (202) 622–4950(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation ofProvisions

This document contains amendmentsto 26 CFR part 1. On July 22, 2008, tem-porary regulations (T.D. 9417, 2008–2C.B. 693) were published in the FederalRegister (73 FR 42522) relating to theaveraging of farm and fishing incomein computing tax liability. A notice ofproposed rulemaking (REG–161695–04,2008–37 I.R.B. 699) cross-referencing thetemporary regulations also was publishedin the Federal Register (73 FR 42538) onJuly 22, 2008. No comments in responseto the notice of proposed rulemaking orrequests to hold a public hearing werereceived, and no hearing was held. ThisTreasury decision adopts the proposedregulations with minor changes and re-moves the temporary regulations.

Section 504 of the Tax Extenders andAlternative Minimum Tax Relief Act of2008, Div. C of Public Law 110–343 (122Stat. 3765), enacted on October 3, 2008,provides that a taxpayer may treat qual-ified settlement income received in con-nection with the civil action In re ExxonValdez, No. 8–095–CV (HRH) (Consoli-dated) (D. Alaska), as income from a fish-ing business eligible for income averaging.Therefore, these final regulations includethis qualified settlement income in the def-inition of income from a fishing business.Qualified settlement income is limited tointerest and punitive damages. The ex-tent to which compensatory damages aretreated as income from a fishing businessis determined under the generally applica-ble rules of section 1301.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order

12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) doesnot apply to these regulations, and becausethe regulations do not impose a collectionof information on small entities, the Regu-latory Flexibility Act (5 U.S.C. chapter 6)does not apply. Pursuant to section 7805(f)of the Code, the notice of proposed rule-making preceding these regulations weresubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on their impact on small busi-ness.

Drafting Information

The principal author of these regula-tions is Erika Reigle of the Office of As-sociate Chief Counsel (Income Tax & Ac-counting). However, other personnel fromthe IRS and Treasury Department partici-pated in their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.1301–1 is amended

by revising the section heading and para-graphs (a), (b)(1), (b)(3), (c)(1), (d)(3)(ii),(d)(4), (e), (f)(2), (f)(4), and (g) to read asfollows:

§1.1301–1 Averaging of farm and fishingincome.

(a) Overview. An individual engagedin a farming or fishing business may makea farm income averaging election to com-pute current year (election year) incometax liability under section 1 by averag-ing, over the prior three-year period (base

2011–6 I.R.B. 450 February 7, 2011

years), all or a portion of the individ-ual’s current year electible farm incomeas defined in paragraph (e) of this section.Electible farm income includes incomefrom both farming and fishing businesses.An individual who makes a farm incomeaveraging election—

(1) Designates all or a portion of theindividual’s electible farm income for theelection year as elected farm income; and

(2) Determines the election year section1 tax by calculating the sum of—

(i) The section 1 tax that would be im-posed for the election year if taxable in-come for the year were reduced by electedfarm income; plus

(ii) The amount by which the section 1tax would be increased if taxable incomefor each base year were increased by one-third of elected farm income.

(b) Individual engaged in a farmingor fishing business—(1) In general—(i)Farming or fishing business. “Farm-ing business” has the same meaning asprovided in section 263A(e)(4) and theregulations under that section. Fishingbusiness means the conduct of commer-cial fishing as defined in section 3 of theMagnuson-Stevens Fishery Conservationand Management Act (16 U.S.C. 1802(4)).Accordingly, a fishing business is fishingin which the fish harvested are intended toor do enter commerce through sale, barter,or trade. Fishing means the catching, tak-ing, or harvesting of fish; the attemptedcatching, taking, or harvesting of fish; anyactivities that reasonably can be expectedto result in the catching, taking, or har-vesting of fish; or any operations at sea insupport of or in preparation for the catch-ing, taking, or harvesting of fish. Fishingdoes not include any scientific researchactivity conducted by a scientific researchvessel. Fish means finfish, mollusks, crus-taceans, and all other forms of marineanimal and plant life, other than marinemammals and birds. Catching, taking, orharvesting includes activities that result inthe killing of fish or the bringing of livefish on board a vessel.

(ii) Exxon Valdez settlement payments.For purposes of this section, a qualifiedtaxpayer who receives qualified settle-ment income in any taxable year is treatedas engaged in a fishing business, and theincome is treated as income attributable toa fishing business, for that taxable year. Aqualified taxpayer is an individual plain-

tiff in the civil action In re Exxon Valdez,No. 89–095–CV (HRH) (Consolidated)(D. Alaska). Qualified taxpayer alsomeans any individual who is a beneficiaryof the estate of such a plaintiff, wasthe spouse or immediate relative of thatplaintiff, and acquired the right to receivethe settlement income from that plaintiff.Qualified settlement income means anyinterest and punitive damage awards thatare received in connection with the civilaction In re Exxon Valdez (whether aslump-sum or periodic payments, whetherpre- or post-judgment, and whether relatedto a settlement or to a judgment) and thatare otherwise includible in income.

(iii) Form of business. An individualengaged in a farming or fishing businessincludes a sole proprietor of a farming orfishing business, a partner in a partner-ship engaged in a farming or fishing busi-ness, and a shareholder of an S corporationengaged in a farming or fishing business.Except as provided in paragraph (e)(1)(i)of this section, services performed as anemployee are disregarded in determiningwhether an individual is engaged in a farm-ing or fishing business for purposes of sec-tion 1301 of the Internal Revenue Code.

(iv) Base years. An individual is notrequired to have been engaged in a farmingor fishing business in any of the base yearsin order to make a farm income averagingelection.

* * * * *(3) Lessors of vessels used in fishing. A

lessor of a vessel is engaged in a fishingbusiness for purposes of section 1301 withrespect to payments that are received un-der the lease and are based on a share ofthe catch from the lessee’s use of the ves-sel in a fishing business (or a share of theproceeds from the sale of the catch) if thismanner of payment is determined under awritten lease agreement entered into be-fore the lessee begins any significant fish-ing activities resulting in the catch. Alessor of a vessel is not engaged in a fishingbusiness for purposes of section 1301 withrespect to fixed lease payments or with re-spect to lease payments based on a shareof the lessee’s catch (or a share of the pro-ceeds from the sale of the catch) if theshare is determined under either an unwrit-ten agreement or a written agreement en-tered into after the lessee begins significantfishing activities resulting in the catch.

(c) Making, changing, or revokingan election—(1) In general. A farm in-come averaging election is made by filingSchedule J, “Income Averaging for Farm-ers and Fishermen,” with an individual’sFederal income tax return for the electionyear (including a late or amended return ifthe period of limitation on filing a claimfor credit or refund has not expired).

* * * * *(d) * * *(3) * * *(ii) Example. The rules of this para-

graph (d)(3) are illustrated by the follow-ing example:

Example. (i) T is a fisherman who uses the calen-dar taxable year. In each of the years 2007, 2008, and2009, T’s taxable income is $20,000, none of whichis electible farm income. In 2010, T has taxable in-come of $30,000 (prior to any farm income averagingelection), $10,000 of which is electible farm income.T makes a farm income averaging election with re-spect to $9,000 of the electible farm income for 2010.Under paragraph (a)(2)(ii) of this section, $3,000 ofelected farm income is allocated to each of the baseyears 2007, 2008, and 2009. Under paragraph (a)(2)of this section, T’s 2010 tax liability is the sum of thefollowing amounts:

(A) The section 1 tax on $21,000, which is T’s tax-able income of $30,000, minus elected farm incomeof $9,000.

(B) For each of the base years 2007, 2008, and2009, the amount by which the section 1 tax wouldbe increased if one-third of elected farm income wereallocated to each year. The amount for each year isthe section 1 tax on $23,000 (T’s taxable income of$20,000, plus $3,000, which is one-third of electedfarm income for the 2010 election year), minus thesection 1 tax on $20,000.

(ii) In 2011, T has taxable income of $50,000,$12,000 of which is electible farm income. T makesa farm income averaging election with respect to all$12,000 of the electible farm income for 2011. Underparagraph (a)(2)(ii) of this section, $4,000 of electedfarm income is allocated to each of the base years2008, 2009, and 2010. Under paragraph (a)(2) ofthis section, T’s 2011 tax liability is the sum of thefollowing amounts:

(A) The section 1 tax on $38,000, which is T’staxable income of $50,000, minus elected farm in-come of $12,000.

(B) For each of the base years 2008 and 2009, theamount by which section 1 tax would be increasedif, after adjustments for previous farm income av-eraging elections pursuant to paragraph (d)(3)(i) ofthis section, one-third of 2011 elected farm incomewere allocated to each year. The amount for eachyear is the section 1 tax on $27,000 (T’s taxable in-come of $20,000 increased by $3,000 for T’s 2010farm income averaging election and further increasedby $4,000, which is one-third of elected farm incomefor the 2011 election year), minus the section 1 tax on$23,000 (T’s taxable income of $20,000 increased by$3,000 for T’s 2010 farm income averaging election).

(C) For base year 2010, the amount by which sec-tion 1 tax would be increased if, after adjustments

February 7, 2011 451 2011–6 I.R.B.

for previous farm income averaging elections pur-suant to paragraph (d)(3)(i) of this section, one-thirdof elected farm income were allocated to that year.This amount is the section 1 tax on $25,000 (T’s 2010taxable income of $30,000 reduced by $9,000 for T’s2010 farm income averaging election and increasedby $4,000, which is one-third of elected farm incomefor the 2011 election year), minus the section 1 taxon $21,000 (T’s taxable income of $30,000 reducedby $9,000 for T’s 2010 farm income averaging elec-tion).

(4) Deposits into Merchant MarineCapital Construction Fund—(i) Reduc-tions to taxable income and electible farmincome. Under section 7518(c)(1)(A),certain deposits to a Merchant MarineCapital Construction Fund (CCF) reducetaxable income for purposes of the InternalRevenue Code (the CCF reduction). Theamount of the CCF reduction is limitedunder section 7518(a)(1)(A) to the tax-payer’s taxable income (determined with-out regard to the reduction) attributable tospecified maritime operations includingoperations in fisheries of the United States.The CCF reduction is taken into accountin determining the taxable income usedin computations under this section. Inaddition, except to the extent the amountdescribed in section 7518(a)(1)(A) is notattributable to the individual’s fishingbusiness, the CCF reduction is treated incomputing electible farm income as anitem of deduction attributable to the indi-vidual’s fishing business.

(ii) Example. The rules of this para-graph (d)(4) are illustrated by the follow-ing example:

Example. (i) T is a fisherman who uses thecalendar taxable year. In each of the years 2007,2008, and 2009, T’s taxable income (before takingany CCF reduction into account) is $20,000. Fortaxable year 2008, all of T’s income is describedin section 7518(a)(1)(A) and is attributable to T’sfishing business. T makes a $5,000 deposit into aCCF for taxable year 2008. In 2010, T has totaltaxable income of $30,000 (before taking any CCFreduction into account). T’s electible farm incomefor 2010 (before taking the CCF reduction intoaccount) is $10,000, all of which is described in sec-tion 7518(a)(1)(A) and is attributable to T’s fishingbusiness. For taxable year 2010, T makes a $4,000deposit into a CCF.

(ii) The amount of the 2010 CCF deposit reducestaxable income. Accordingly, T’s taxable income for2010 is $26,000 ($30,000 - $4,000). In addition, theentire amount of the CCF reduction is treated as anitem of deduction attributable to T’s fishing business.Accordingly, T’s electible farm income for 2010 is$6,000 ($10,000 - $4,000). Similarly, the amount ofthe 2008 CCF deposit reduces T’s taxable income for2008. Accordingly, T’s taxable income for 2008 is$15,000 ($20,000 - $5,000).

(iii) T makes an income averaging election withrespect to all $6,000 of the electible farm incomefor 2010. Under paragraph (a)(2)(ii) of this section,$2,000 of elected farm income is allocated to each ofthe base years 2007, 2008, and 2009. Under para-graph (a)(2) of this section, T’s 2010 tax liability isthe sum of the following amounts:

(A) The section 1 tax on $20,000, which is T’staxable income of $26,000 ($30,000 reduced by the$4,000 CCF deposit), minus elected farm income of$6,000.

(B) For each of the base years 2007, 2008, and2009, the amount by which section 1 tax would beincreased if one-third of elected farm income wereallocated to each year. The amount for base years2007 and 2009 is the section 1 tax on $22,000, (T’staxable income of $20,000, plus $2,000, which is one-third of elected farm income for the election year),minus the section 1 tax on $20,000. The amount forbase year 2008 is the section 1 tax on $17,000, whichis T’s taxable income of $15,000 ($20,000 reducedby the $5,000 CCF deposit), plus $2,000 (one-thirdof elected farm income for the election year), minusthe section 1 tax on $15,000.

(e) Electible farm income—(1) Identi-fication of items attributable to a farmingor fishing business—(i) In general. Farmand fishing income includes items of in-come, deduction, gain, and loss attribut-able to an individual’s farming or fish-ing business. Farm and fishing losses in-clude, to the extent attributable to a farm-ing or fishing business, any net operatingloss carryover or carryback or net capi-tal loss carryover to an election year. In-come, gain, or loss from the sale of de-velopment rights, grazing rights, and othersimilar rights is not treated as attributableto a farming business. In general, farm andfishing income does not include compen-sation received as an employee. However,a shareholder of an S corporation engagedin a farming or fishing business may treatcompensation received from the corpora-tion as farm or fishing income if the com-pensation is paid by the corporation in theconduct of the farming or fishing business.If a crewmember on a vessel engaged incommercial fishing (within the meaning ofsection 3 of the Magnuson-Stevens Fish-ery Conservation and Management Act,16 U.S.C. 1802(4)) is compensated by ashare of the boat’s catch of fish or a shareof the proceeds from the sale of the catch,the crewmember is treated for purposesof section 1301 as engaged in a fishingbusiness and the compensation is treatedfor such purposes as income from a fishingbusiness.

(ii) Gain or loss on sale or other dispo-sition of property—(A) In general. Gain

or loss from the sale or other disposition ofproperty that was regularly used in the in-dividual’s farming or fishing business fora substantial period of time is treated asattributable to a farming or fishing busi-ness. For this purpose, the term prop-erty does not include land, but does in-clude structures affixed to land. Propertythat has always been used solely in thefarming or fishing business by the individ-ual is deemed to meet both the regularlyused and substantial period tests. Whetherproperty not used solely in the farming orfishing business was regularly used in thefarming or fishing business for a substan-tial period of time depends on all of thefacts and circumstances.

(B) Cessation of a farming or fishingbusiness. If gain or loss described in para-graph (e)(1)(ii)(A) of this section is real-ized after cessation of a farming or fishingbusiness, the gain or loss is treated as at-tributable to a farming or fishing businessonly if the property is sold within a rea-sonable time after cessation of the farmingor fishing business. A sale or other dispo-sition within one year of cessation of thefarming or fishing business is presumed tobe within a reasonable time. Whether asale or other disposition that occurs morethan one year after cessation of the farm-ing or fishing business is within a reason-able time depends on all of the facts andcircumstances.

(2) Determination of amount that maybe elected farm income—(i) Electible farmincome. (A) The maximum amount of in-come that an individual may elect to av-erage (electible farm income) is the sumof any farm and fishing income and gains,minus any farm and fishing deductions orlosses (including loss carryovers and car-rybacks) that are allowed as a deductionin computing the individual’s taxable in-come.

(B) Individuals conducting both a farm-ing business and a fishing business mustcalculate electible farm income by com-bining income, gains, deductions, andlosses derived from the farming businessand the fishing business.

(C) Except as otherwise providedin paragraph (d)(4) of this section, theamount of any CCF reduction is treated asa deduction from income attributable toa fishing business in calculating electiblefarm income.

2011–6 I.R.B. 452 February 7, 2011

(D) Electible farm income may not ex-ceed taxable income, and electible farm in-come from net capital gain attributable toa farming or fishing business may not ex-ceed total net capital gain. Subject to theselimitations, an individual who has both or-dinary income and net capital gain from afarming or fishing business may elect toaverage any combination of the ordinaryincome and net capital gain.

(ii) Examples. The rules of this para-graph (e)(2) are illustrated by the follow-ing examples:

Example 1. A has ordinary income from a farm-ing business of $200,000 and deductible expensesfrom a farming business of $50,000. A’s taxable in-come is $150,000 ($200,000 - $50,000). Under para-graph (e)(2)(i) of this section, A’s electible farm in-come is $150,000, all of which is ordinary income.

Example 2. B has capital gain of $20,000 that isnot from a farming or fishing business, capital lossfrom a farming business of $30,000, and ordinary in-come from a farming business of $100,000. Undersection 1211(b), B’s allowable capital loss is limitedto $23,000. B’s taxable income is $97,000 (($20,000- $23,000) + $100,000). B has a capital loss carryoverfrom a farming business of $7,000 ($30,000 total loss- $23,000 allowable loss). Under paragraph (e)(2)(i)of this section, B’s electible farm income is $77,000($100,000 ordinary income from a farming business,minus $23,000 capital loss from a farming business),all of which is ordinary income.

Example 3. C has ordinary income from a fish-ing business of $200,000 and ordinary loss from afarming business of $60,000. C’s taxable income is$140,000 ($200,000 - $60,000). Under paragraph(e)(2)(i)(B) of this section, C must deduct the farmloss from the fishing income in determining C’selectible farm income. Therefore, C’s electible farmincome is $140,000 ($200,000 - $60,000), all ofwhich is ordinary income.

Example 4. D has ordinary income from a farm-ing business of $200,000 and ordinary loss of $50,000that is not from a farming or fishing business. D’s tax-able income is $150,000 ($200,000 - $50,000). Underparagraph (e)(2)(i)(D) of this section, electible farmincome may not exceed taxable income. Therefore,D’s electible farm income is $150,000, all of whichis ordinary income.

Example 5. E has capital gain from a farmingbusiness of $50,000, capital loss of $40,000 that is notfrom a farming or fishing business, and ordinary in-come from a farming business of $60,000. E’s taxableincome is $70,000 (($50,000 - $40,000) + $60,000).Under paragraph (e)(2)(i)(D) of this section, electiblefarm income may not exceed taxable income, andelectible farm income from net capital gain attribut-able to a farming or fishing business may not exceedtotal net capital gain. Therefore, E’s electible farmincome is $70,000 of which $10,000 is capital gainand $60,000 is ordinary income.

(f) * * *(2) Changes in filing status. An individ-

ual is not prohibited from making a farmincome averaging election solely because

the individual’s filing status is not the samein an election year and the base years. Forexample, an individual who is married andfiles a joint return in the election year, whofiled as single in one or more of the baseyears, may elect to average farm or fishingincome, by using the single filing status tocompute the increase in section 1 taxes forthe base years in which the individual filedas single.

* * * * *(4) Alternative minimum tax. A farm

income averaging election is disregardedin computing the tentative minimum taxand the regular tax under section 55 forthe election year or any base year. Theelection is taken into account, however, indetermining the regular tax liability undersection 53(c) for the election year.

* * * * *(g) Effective/applicability date. This

section applies for taxable years beginningafter December 15, 2010. See the provi-sions of §§1.1301–1 and 1.1301–1T as ineffect on December 14, 2010, for rules thatapply for taxable years beginning on or be-fore December 15, 2010. In addition, ataxpayer may apply paragraph (b)(1)(ii) ofthis section in taxable years beginning af-ter December 31, 2003.

§1.1301–1T [Removed]

Par. 3. Section 1.1301–1T is removed.

Linda E. Stiff,Deputy Commissioner forServices and Enforcement.

Approved December 7, 2010.

Michael Mundaca,Assistant Secretary of

the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on December 10,2010, 8:45 a.m., and published in the issue of the FederalRegister for December 15, 2010, 75 F.R. 78157)

Section 6012.—PersonsRequired to Make Returnsof Income26 CFR 1.6012–2: Corporations required to makereturns of income.

T.D. 9510


Requirement of a StatementDisclosing Uncertain TaxPositions


ACTION: Final regulation.

SUMMARY: This document contains fi-nal regulations allowing the IRS to requirecorporations to file a schedule disclosinguncertain tax positions related to the tax re-turn as required by the IRS.

DATES: Effective Date: This regulation iseffective on December 15, 2010.

Applicability Date: For dates of appli-cability, see §1.6012–2 (a)(5).

FOR FURTHER INFORMATIONCONTACT: Kathryn Zuba at (202)622–3400 (not a toll-free number).


Background

This document contains amendments tothe Income Tax Regulations (26 CFR Part1) under section 6012 relating to the re-turns of income corporations are requiredto file. Section 6011 provides that per-sons liable for a tax imposed by Title 26shall make a return when required by reg-ulations prescribed by the Secretary of theTreasury according to the forms and regu-lations prescribed by the Secretary. Trea-sury Regulation §1.6011–1 requires everyperson liable for income tax to make the re-turns required by regulation. Section 6012requires corporations subject to an incometax to make a return with respect to thattax. Treasury Regulation §1.6012–2 setsout the corporations that are required to

February 7, 2011 453 2011–6 I.R.B.

file returns and the form those returns musttake.

A proposed regulation under sec-tion 6012 (REG–119046–10, 2010–40I.R.B. 415) was published in the Fed-eral Register on September 9, 2010.Requirement of a Statement DisclosingUncertain Tax Positions, 75 Fed. Reg.54802 (proposed Sept. 9, 2010). TheIRS received one written comment con-cerning the proposed regulation, and apublic hearing regarding the proposedregulation was held on October 19, 2010.Neither of the two speakers at the publichearing had comments relating to theproposed regulation, although bothorganizations the speakers represented hadpreviously submitted written commentsconcerning the draft Schedule UTP andinstructions. Announcement 2010–30,2010–19 I.R.B. 668. After consideringthe comments, the proposed regulation isadopted by this Treasury decision withone non-substantive change related tothe effective date. While the proposedregulation applied to returns filed for taxyears beginning after December 15, 2009and ending after the date the regulationswere published in the Federal Register,the final regulation applies to returnsfiled for tax years beginning on or afterJanuary 1, 2010.

Explanation and Summary ofComments

This rule will authorize the IRS to re-quire certain corporations, as set out informs, publications, instructions, or otherguidance, to provide information con-cerning uncertain tax positions concurrentwith the filing of a return. On Septem-ber 24, 2010, the IRS released ScheduleUTP with accompanying instructions thatexplain how the IRS plans to implementthe authority provided by this regulation.One commentator asked that the proposedregulation not be adopted because Sched-ule UTP would require the disclosure ofprivileged information. If the regulation isadopted, the commentator recommendedit should state that taxpayer may assertany applicable privileges to providing in-formation sought by Schedule UTP andthat any disclosure of information on thatschedule will not constitute a waiver ofany applicable privilege.

The final regulation does not adoptthis recommendation. The regulationaddresses the IRS’s authority to requirecertain corporations to provide informa-tion concerning uncertain tax positions.The IRS has decided to require the filingof Schedule UTP based on its determina-tion that the information about uncertaintax positions taken in a tax return requiredby the schedule is essential to achievingan effective and efficient self-assessmenttax system. Provisions relating to the as-sertion of privilege are not included inthis regulation, since it does not affect theexistence of any applicable privileges tax-payers may have concerning informationrequested by a return or how they mayassert those privileges.

Special Analyses

It has been determined that this finalrule is not a significant regulatory action asdefined in Executive Order 12866. There-fore, a regulatory assessment is not re-quired.

This regulation will only affect taxpay-ers that prepare or are required to issue au-dited financial statements. Small entitiesrarely prepare or are required to issue au-dited financial statements due to the ex-pense involved. It is hereby certified thatthis regulation will not have a significanteconomic impact on a substantial numberof small entities pursuant to the Regula-tory Flexibility Act (5 U.S.C. chapter 6).Accordingly, a regulatory flexibility anal-ysis is not required. Pursuant to 5 U.S.C.553(d)(3), it has been determined that thereis good cause for the effective date of thisfinal rule, which is less than 30 days afterthe date of publication.

Pursuant to section 7805(f) of the Inter-nal Revenue Code, the notice of proposedrulemaking preceding this regulation wassubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on their impact on small busi-ness.


The principal author of these regula-tions is Kathryn Zuba of the Office of theAssociate Chief Counsel (Procedure andAdministration).

* * * * *


Accordingly, 26 CFR part 1 is amendedas follows:


Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.6012–2 is also issued under

the authority of 26 U.S.C. 6011 and 6012.Par. 2. Section 1.6012–2 is amended by

adding paragraphs (a)(4) and (a)(5) to readas follows:

§1.6012–2 Corporations required to makereturns of income.

(a) * * *(4) Disclosure of uncertain tax posi-

tions. A corporation required to makea return under this section shall attachSchedule UTP, Uncertain Tax PositionStatement, or any successor form, to suchreturn, in accordance with forms, in-structions, or other appropriate guidanceprovided by the IRS.

(5) Effective/applicability date. Para-graph (a)(4) of this section applies to re-turns filed for tax years beginning on or af-ter January 1, 2010.

* * * * *

Steven T. Miller,Deputy Commissioner forServices and Enforcement.


Michael Mundaca,Assistant Secretary of

the Treasury (Tax Policy).


2011–6 I.R.B. 454 February 7, 2011

Section 6229.—Periodof Limitations for MakingAssessments

26 CFR 301.6229(c)(2)–1: Substantial omission ofincome.

T.D. 9511


Definition of Omission fromGross Income


ACTION: Final regulations.

SUMMARY: This document contains fi-nal regulations defining an omission fromgross income for purposes of the six-yearminimum period for assessment of tax at-tributable to partnership items and the six-year period for assessing tax. The reg-ulations resolve a continuing issue as towhether an overstatement of basis in a soldasset results in an omission from gross in-come. The regulations will affect any tax-payer who overstates basis in a sold assetcreating an omission from gross incomeexceeding twenty-five percent of the in-come stated in the return. Additionally,provisions related to estate, gift and excisetax are reinstated from the prior final reg-ulation.

DATES: Effective Date: These regulationsare effective on December 14, 2010.

Applicability Date: The regulationsrelating to income taxes apply to taxableyears with respect to which the periodfor assessing tax was open on or afterSeptember 24, 2009, which is the date thatthe proposed and temporary regulations towhich these regulations relate were filedwith the Federal Register. For dates ofapplicability regarding the regulations re-lating to estate, gift and excise taxes, see§301.6501(e)–1(e)(2).

FOR FURTHER INFORMATIONCONTACT: William A. Heard, III at (202)622–4570 (not a toll-free number).


Background

This document contains amendmentsto the Procedure and Administration Reg-ulations (26 CFR Part 301) under section6229(c)(2) and section 6501(e) of the In-ternal Revenue Code. On September 28,2009, temporary regulations (T.D. 9466,2009–43 I.R.B. 551) regarding the defi-nition of an omission from gross incomefor purposes of the six-year period forassessment were published in the Fed-eral Register (74 FR 49321). A notice ofproposed rulemaking (REG–108045–08,2009–43 I.R.B. 557) cross-referencing thetemporary regulations was published inthe Federal Register for the same day(74 FR 49354). One written commentwas received from the public in responseto the notice of proposed rulemaking.No public hearing was requested or held.After consideration of the comment,the proposed regulations are adopted asamended by this Treasury decision, andthe corresponding temporary regulationsare removed.

Summary of Comments andExplanation of Revisions

These final regulations amend the Pro-cedure and Administration Regulations(26 CFR part 301) relating to sections6229(c)(2) and 6501(e). In addition tothe revisions set forth in the proposedregulations cross-referencing the tem-porary regulations, the final regulationsreflect structural amendments to sections6229(c)(2) and 6501(e) in the Hiring In-centives To Restore Employment Act(Public Law 111–147, 124 Stat. 112) toaccommodate an additional threshold trig-gering the six-year period of limitationsfor omissions from gross income attribut-able to assets subject to certain reportingrequirements, which is not otherwise ad-dressed in these final regulations. Thefinal regulations also clarify the effec-tive/applicability date provisions in thesection 6229(c)(2) and section 6501(e)regulations to eliminate a perceived am-biguity in the temporary regulations, thatwas brought to light by the Tax Court inIntermountain Insurance Service of Vail v.Commissioner, 134 T.C. No. 11 (2010),appeal docketed, No. 10–1204 (D.C. Cir.).

As explained in the preamble to thetemporary regulations, the United StatesCourts of Appeals for the Ninth Cir-cuit and the Federal Circuit construedsection 6501(e)(1) in cases outside thetrade-or-business context contrary to theinterpretation provided in these final reg-ulations, holding that an overstatement ofbasis does not constitute an “omission.”Bakersfield Energy Partners v. Commis-sioner, 568 F.3d 767 (9th Cir. 2009);Salman Ranch Ltd v. United States, 573F.3d 1362 (Fed. Cir. 2009). Those courtsrelied on the Supreme Court’s opinion inColony v. Commissioner, 357 U.S. 28(1958), which dealt with an omission fromgross income in the context of a trade orbusiness under the predecessor of sec-tion 6501(e). The Treasury Departmentand the Internal Revenue Service dis-agree with those courts that the SupremeCourt’s reading of the predecessor to sec-tion 6501(e) in Colony applies to sections6501(e)(1) and 6229(c)(2), for the reasonsset forth in the preamble to the temporaryregulations.

After publication of the temporaryregulations, the Tax Court declared thetemporary regulations invalid, adheringto its prior opinion in Bakersfield EnergyPartners v. Commissioner, 128 T.C. 207(2007). Intermountain Insurance Serviceof Vail v. Commissioner, 134 T.C. No. 11(2010), appeal docketed, No. 10–1204(D.C. Cir.). In part, the Tax Court in In-termountain concluded that the SupremeCourt’s opinion in Colony was the onlypermissible interpretation of the statutorylanguage in question (“omits from grossincome”). The Treasury Department andthe Internal Revenue Service disagreewith Intermountain. The Supreme Courtstated in Colony that the statutory phrase“omits from gross income” is ambiguous,meaning that it is susceptible to more thanone reasonable interpretation. The inter-pretation adopted by the Supreme Courtin Colony represented that court’s inter-pretation of the phrase but not the onlypermissible interpretation of it. Under theauthority of Nat’l Cable & Telecomms.Ass’n v. Brand X Internet Servs., 545 U.S.967, 982–83 (2005), the Treasury Depart-ment and the Internal Revenue Service arepermitted to adopt another reasonable in-terpretation of “omits from gross income,”particularly as it is used in a new statu-tory setting. See Hernandez-Carrera v.

February 7, 2011 455 2011–6 I.R.B.

Carlson, 547 F.3d 1237 (10th Cir. 2008)(agencies are free to promulgate a reason-able construction of an ambiguous statutethat contradicts any court’s interpretation,even the Supreme Court’s). The inter-pretation of the phrase “omits from grossincome” as used in section 6501(e)(1) iscurrently pending before several UnitedStates Courts of Appeals.

Because these regulations are a clarifi-cation of the period of limitations providedin sections 6501(e)(1) and 6229(c)(2) andare consistent with the Secretary’s applica-tion of those provisions both with respectto a trade or business (that is, gross incomemeans gross receipts), as well as outside ofthe trade-or-business context (that is, thesection 61 definition of gross income ap-plies), they are applicable to all cases withrespect to which the period for assessingtax was open on or after September 24,2009, the date the temporary regulationswere filed with the Federal Register.

1. Retroactivity

The sole written comment received inresponse to the notice of proposed rule-making by cross-reference to the tempo-rary regulations questioned the applicationof the regulations, characterizing them asretroactive, and recommended that theybe applied only prospectively. The com-mentator stated that the temporary regu-lations apply with retroactive effect “inthat taxable years which had closed arenow reopened.” The Treasury Departmentand the Internal Revenue Service disagreewith the characterization of the regulationsas retroactive. The final regulations havebeen clarified to emphasize that they onlyapply to open tax years, and do not reopenclosed tax years as suggested by the com-mentator.

The commentator also relied on the1996 amendments to section 7805(b) toargue that retroactively effective Treasuryregulations are impermissible, with lim-ited exceptions. The 1996 amendments tosection 7805(b), however, do not apply tothe regulations under sections 6229(c)(2)and 6501(e)(1). That is because thoseamendments are only effective for regula-tions that relate to statutory provisions en-acted on or after July 30, 1996. TaxpayerBill of Rights 2 (Public Law 104–168,section 1101(a), 110 Stat. 1469). Sincesection 6229(c)(2) was enacted in 1982

and section 6501(e)(1)(A) was enacted in1954 (and redesignated as subparagraph(B) as part of the HIRE Act in 2010), the1996 amendments to section 7805(b) areinapplicable to the regulations. Prior tothe 1996 amendments, section 7805(b)provided, “The Secretary may prescribethe extent, if any, to which any ruling orregulation, relating to the internal revenuelaws, shall be applied without retroactiveeffect.” Although these regulations are notretroactive, a retroactive regulation inter-preting sections 6229(c)(2) and 6501(e)(1)is expressly permitted by the applicableversion of section 7805(b), which pre-sumes regulations to apply retroactivelyunless otherwise provided.

2. Intermountain

The Tax Court’s majority in Intermoun-tain erroneously interpreted the applica-bility provisions of the temporary andproposed regulations, which provided thatthe regulations applied to taxable yearswith respect to which “the applicable pe-riod for assessing tax did not expire beforeSeptember 24, 2009.” The Internal Rev-enue Service will continue to adhere tothe position that “the applicable period” oflimitations is not the “general” three-yearlimitations period. The three-year limita-tions period is one of several limitationsperiods in the Internal Revenue Code,including the six-year limitations periodunder sections 6229(c)(2) and 6501(e)(1).The expiration of the three-year perioddoes not “close” a taxable year if a longerperiod applies. Consistent with that posi-tion, the final regulations apply to taxableyears with respect to which the six-yearperiod for assessing tax under section6229(c)(2) or 6501(e)(1) was open on orafter September 24, 2009. This includes,but is not limited to, all taxable years(1) for which six years had not elapsedfrom the later of the date that a tax returnwas due or actually filed, (2) that are thesubject of any case pending before anycourt of competent jurisdiction (includingthe United States Tax Court and Court ofFederal Claims) in which a decision hadnot become final (within the meaning ofsection 7481) or (3) with respect to whichthe liability at issue had not become fixedpursuant to a closing agreement enteredinto under section 7121. The Internal Rev-enue Service’s position is consistent with

the effective/applicability date provisionsof these final regulations.

3. Other Revisions

The final regulations are amended toreinstate estate, gift and excise tax provi-sions that were inadvertently removed bythe temporary regulations.

Special Analyses

It has been determined that these regu-lations are not a significant regulatory ac-tion as defined in Executive Order 12866.Therefore, a regulatory assessment is notrequired. It also has been determined thatsection 553(b) of the Administrative Pro-cedure Act (5 U.S.C. chapter 5) does notapply to these regulations, and becausethese regulations do not impose a collec-tion of information on small entities, theRegulatory Flexibility Act (5 U.S.C. chap-ter 6) does not apply. Pursuant to sec-tion 7805(f) of the Internal Revenue Code,the NPRM cross-referencing the tempo-rary regulations preceding these regula-tions was submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on their impacton small business.


The principal author of these regula-tions is William A. Heard III of the Officeof the Associate Chief Counsel (Procedureand Administration).

* * * * *


Accordingly, 26 CFR Part 301 isamended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 is amended by adding the entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 301.6229(c)(2)–1 is also issued

under 26 U.S.C. 6230(k). * * *Par. 2. Section 301.6229(c)(2)–1 is

added to read as follows:

2011–6 I.R.B. 456 February 7, 2011

§301.6229(c)(2)–1 Substantial omissionof income.

(a) Partnership return—(1) Generalrule. (i) If any partnership omits fromthe gross income stated in its return anamount properly includible therein andthat amount is described in clause (i) ofsection 6501(e)(1)(A), subsection (a) ofsection 6229 shall be applied by substitut-ing “6 years” for “3 years.”

(ii) For purposes of paragraph (a)(1)(i)of this section, the term gross income, asit relates to a trade or business, means thetotal of the amounts received or accruedfrom the sale of goods or services, to theextent required to be shown on the re-turn, without reduction for the cost of thosegoods or services.

(iii) For purposes of paragraph (a)(1)(i)of this section, the term gross income, asit relates to any income other than fromthe sale of goods or services in a trade orbusiness, has the same meaning as pro-vided under section 61(a), and includes thetotal of the amounts received or accrued,to the extent required to be shown on thereturn. In the case of amounts receivedor accrued that relate to the disposition ofproperty, and except as provided in para-graph (a)(1)(ii) of this section, gross in-come means the excess of the amount re-alized from the disposition of the propertyover the unrecovered cost or other basisof the property. Consequently, except asprovided in paragraph (a)(1)(ii) of this sec-tion, an understated amount of gross in-come resulting from an overstatement ofunrecovered cost or other basis constitutesan omission from gross income for pur-poses of section 6229(c)(2).

(iv) An amount shall not be consideredas omitted from gross income if informa-tion sufficient to apprise the Commissionerof the nature and amount of the item is dis-closed in the return, including any sched-ule or statement attached to the return.

(b) Effective/applicability date. Therules of this section apply to taxableyears with respect to which the periodfor assessing tax was open on or afterSeptember 24, 2009.

§301.6229(c)(2)–1T [Removed]

Par. 3. Section 6229(c)(2)–1T is re-moved.

Par. 4. Section 301.6501(e)–1 is addedto read as follows:

§301.6501(e)–1 Omission from return.

(a) Income taxes—(1) General rule. (i)If a taxpayer omits from the gross incomestated in the return of a tax imposed bysubtitle A of the Internal Revenue Code anamount properly includible therein that isin excess of 25 percent of the gross incomeso stated, the tax may be assessed, or aproceeding in court for the collection ofthat tax may be begun without assessment,at any time within 6 years after the returnwas filed.

(ii) For purposes of paragraph (a)(1)(i)of this section, the term gross income, asit relates to a trade or business, means thetotal of the amounts received or accruedfrom the sale of goods or services, to theextent required to be shown on the re-turn, without reduction for the cost of thosegoods or services.

(iii) For purposes of paragraph (a)(1)(i)of this section, the term gross income, asit relates to any income other than fromthe sale of goods or services in a trade orbusiness, has the same meaning as pro-vided under section 61(a), and includes thetotal of the amounts received or accrued,to the extent required to be shown on thereturn. In the case of amounts receivedor accrued that relate to the disposition ofproperty, and except as provided in para-graph (a)(1)(ii) of this section, gross in-come means the excess of the amount re-alized from the disposition of the propertyover the unrecovered cost or other basisof the property. Consequently, except asprovided in paragraph (a)(1)(ii) of this sec-tion, an understated amount of gross in-come resulting from an overstatement ofunrecovered cost or other basis constitutesan omission from gross income for pur-poses of section 6501(e)(1)(A)(i).

(iv) An amount shall not be consideredas omitted from gross income if informa-tion sufficient to apprise the Commissionerof the nature and amount of the item is dis-closed in the return, including any sched-ule or statement attached to the return.

(b) Estate and gift taxes—(1) If the tax-payer omits from the gross estate as statedin the estate tax return, or from the totalamount of the gifts made during the periodfor which the gift tax return was filed (see§25.6019–1 of this chapter) as stated in the

gift tax return, an item or items properly in-cludible therein the amount of which is inexcess of 25 percent of the gross estate asstated in the estate tax return, or 25 percentof the total amount of the gifts as stated inthe gift tax return, the tax may be assessed,or a proceeding in court for the collectionthereof may be begun without assessment,at any time within 6 years after the estatetax or gift tax return, as applicable, wasfiled.

(2) For purposes of this paragraph (b),an item disclosed in the return or in anyschedule or statement attached to the re-turn in a manner sufficient to apprise theCommissioner of the nature and amountthereof shall not be taken into account indetermining items omitted from the grossestate or total gifts, as the case may be.Further, there shall not be taken into ac-count in computing the 25 percent omis-sion from the gross estate stated in the es-tate tax return or from the total gifts statedin the gift tax return, any increases in thevaluation of assets disclosed on the return.

(c) Excise taxes—(1) In general. If thetaxpayer omits from a return of a tax im-posed under a provision of subtitle D anamount properly includible thereon, whichamount is in excess of 25 percent of theamount of tax reported thereon, the taxmay be assessed or a proceeding in courtfor the collection thereof may be begunwithout assessment, at any time within 6years after the return was filed. For specialrules relating to chapter 41, 42, 43 and 44taxes, see subparagraphs (2), (3), (4) and(5) of this paragraph (c).

(2) Chapter 41 excise taxes. If an or-ganization discloses an expenditure in itsreturn (or in a schedule or statement at-tached thereto) in a manner sufficient toapprise the Commissioner of the existenceand nature of the expenditure, the three-year limitation on assessment and collec-tion described in section 6501(a) shall ap-ply with respect to any tax under chapter41 arising from the expenditure. If a tax-payer fails to so disclose an expenditurein its return (or in a schedule or statementattached thereto), the tax arising from theexpenditure not so disclosed may be as-sessed, or a proceeding in court for the col-lection of the tax may be begun without as-sessment, at any time within 6 years afterthe return was filed.

(3) Chapter 42 excise taxes. (i) If a pri-vate foundation omits from its annual re-

February 7, 2011 457 2011–6 I.R.B.

turn with respect to the tax imposed by sec-tion 4940 an amount of tax properly in-cludible therein that is in excess of 25 per-cent of the amount of tax imposed by sec-tion 4940 that is reported on the return,the tax may be assessed, or a proceedingin court for the collection of the tax maybe begun without assessment, at any timewithin 6 years after the return was filed.If a private foundation discloses in its re-turn (or in a schedule or statement attachedthereto) the nature, source, and amount ofany income giving rise to any omitted tax,the tax arising from the income shall becounted as reported on the return in com-puting whether the foundation has omittedmore than 25 percent of the tax reported onits return.

(ii) If a private foundation, trust, orother organization (as the case may be) dis-closes an item in its return (or in a scheduleor statement attached thereto) in a mannersufficient to apprise the Commissioner ofthe existence and nature of the item, thethree-year limitation on assessment andcollection described in section 6501(a)shall apply with respect to any tax imposedunder sections 4941(a), 4942(a), 4943(a),4944(a), 4945(a), 4951(a), 4952(a), 4953and 4958, arising from any transactiondisclosed by the item. If a private foun-dation, trust, or other organization (as thecase may be) fails to so disclose an itemin its return (or in a schedule or statementattached thereto), the tax arising fromany transaction not so disclosed may beassessed or a proceeding in court for thecollection of the tax may be begun withoutassessment, at any time within 6 yearsafter the return was filed.

(4) Chapter 43 excise taxes. If a tax-payer discloses an item in its return (or ina schedule or statement attached thereto)in a manner sufficient to apprise the Com-missioner of the existence and nature ofthe item, the three-year limitation on as-sessment and collection described in sec-tion 6501(a) shall apply with respect to any

tax imposed under sections 4971(a), 4972,4973, 4974 and 4975(a), arising from anytransaction disclosed by the item. If a tax-payer fails to so disclose an item in its re-turn (or in a schedule or statement attachedthereto), the tax arising from any transac-tion not so disclosed may be assessed, or aproceeding in court for the collection of thetax may be begun without assessment, atany time within 6 years after the return wasfiled. The applicable return for the tax un-der sections 4971, 4972, 4973 and 4974, isthe return designated by the Commissionerfor reporting the respective tax. The appli-cable return for the tax under section 4975is the return filed by the plan used to reportthe act giving rise to the tax.

(5) Chapter 44 excise taxes. If a realestate investment trust omits from its an-nual return with respect to the tax imposedby section 4981 an amount of tax properlyincludible therein that is in excess of 25percent of the amount of tax imposed bysection 4981 that is reported on the return,the tax may be assessed, or a proceedingin court for the collection of the tax maybe begun without assessment, at any timewithin 6 years after the return was filed.If a real estate investment trust disclosesin its return (or in a schedule or statementattached thereto) the nature, source, andamount of any income giving rise to anyomitted tax, the tax arising from the in-come shall be counted as reported on thereturn in computing whether the trust hasomitted more than 25 percent of the tax re-ported on its return.

(d) Exception. The provisions of thissection do not limit the application of sec-tion 6501(c).

(e) Effective/applicability date—(1) In-come taxes. The rules set forth in para-graph (a) of this section apply to taxableyears with respect to which the period forassessing tax was open on or after Septem-ber 24, 2009.

(2) Estate, gift and excise taxes. Para-graphs (b) through (d) of this section con-

tinue to apply as they did prior to beingremoved inadvertently on September 28,2009. Specifically, paragraph (b) of thissection applies to returns filed on or afterMay 2, 1956, except for the amendmentto paragraph (b)(1) of this section that ap-plies to returns filed on or after Decem-ber 29, 1972. Paragraph (c) of this sec-tion applies to returns filed on or after Oc-tober 7, 1982, except for the amendment toparagraph (c)(3)(ii) of this section that ap-plies to returns filed on or after January 10,2001. Paragraph (d) of this section appliesto returns filed on or after May 2, 1956.

§301.6501(e)–1T [Removed].

Par. 5. Section 301.6501(e)–1T is re-moved.



Michael Mundaca,Assistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on December 14,2010, 4:15 p.m., and published in the issue of the FederalRegister for December 17, 2010, 75 F.R. 78897)

Section 7520.—ValuationTables


Section 7872.—Treatmentof Loans With Below-MarketInterest Rates


2011–6 I.R.B. 458 February 7, 2011

Part III. Administrative, Procedural, and MiscellaneousBranded Prescription DrugSales

Notice 2011–9

Purpose

This notice modifies, restates, and su-persedes Notice 2010–71, 2010–50 I.R.B.822, which provides guidance on the an-nual fee imposed by section 9008 of theAffordable Care Act on certain manufac-turers and importers (covered entities) ofbranded prescription drugs. The modifica-tions reflected in this notice affect Part I —Information Requested from Covered En-tities, Part II — Preliminary Fee Calcula-tion for 2011, and Part III — Request forComments. All other sections of Notice2010–71 are restated in this notice withoutchange.

Modifications Made to Notice 2010–71

Notice 2010–71, Part I — Informa-tion Requested from Covered Entities,asks covered entities to submit five gen-eral items of information on Form 8947,Report of Branded Prescription Drug In-formation. The Treasury Department andthe IRS received a number of commentson the information requested on Form8947. In response to these comments, thisnotice makes the following changes to thesection on Information Requested fromCovered Entities:

• Item 1 (controlled group). The instruc-tions to Form 8947 provided that eachdesignated entity should list informa-tion on “all” members of its controlledgroup. This item is modified to clarifythat information is requested for onlythose members of the controlled groupthat are manufacturers and importerswith gross receipts from the sale of abranded prescription drug(s) to a spec-ified government program(s).

• Item 3 (orphan drugs). Notice2010–71 provided for reporting ofeach orphan drug for which a cov-ered entity was allowed a section 45Ccredit. In response to comments, thisitem is modified to provide that forpurposes of section 9003(e)(3), thecredit is considered “allowed” for anyparticular drug if any person claimed

the credit. Thus, the section 45C creditis considered to be allowed if anyentity claimed the credit even if thatentity was not part of the covered en-tity at the time the credit was claimed.

• Item 4 (Medicare Part D rebates). No-tice 2010–71 provided for reportingof rebates for drug sales as taken intoaccount on a covered entity’s tax re-turn. Commentators indicated thatpharmaceutical manufacturers gener-ally compile rebate information at anaggregate entity level for tax purposes,rather than at the drug product level.In response to these comments, thisitem is revised to provide that rebatesshould be reported for drugs dispensedin the 2009 sales year if the rebates arepaid before Form 8947 is filed.

• Item 5 (Medicaid rebates). This itemis also revised in response to the com-ments about the difficulty of reportingrebates as taken into account on thecovered entity’s tax return. This itemis revised to require reporting of re-bates invoiced by states for drugs reim-bursed by states in the 2009 sales yearand paid before Form 8947 is filed.

• Reporting of rebate information. Thisnotice provides that rebate informationwill be taken into account in calculat-ing a covered entity’s annual fee for2011 only if it is reported on a timelyfiled Form 8947.

Notice 2010–71, Part II — PreliminaryFee Calculation for 2011, provides the duedate for filing Form 8947 and a time sched-ule for notification of the preliminary feecalculation for 2011. Commentators re-quested additional time to file Form 8947.In response to these comments, the duedate for filing Form 8947 is deferred toFebruary 11, 2011, and the remaining timeschedule for preparing the preliminary feecalculation has been revised accordingly.

Notice 2010–71, Part III — Request forComments, is revised to defer the deadlinefor submitting comments to June 15, 2011.

Restatement of Notice 2010–71, asmodified by this notice

This notice provides guidance on theannual fee imposed on covered entities en-gaged in the business of manufacturing

or importing branded prescription drugsby section 9008 of the Patient Protectionand Affordable Care Act (ACA), PublicLaw 111–148 (124 Stat. 119 (2010)), asamended by section 1404 of the HealthCare and Education Reconciliation Act of2010 (HCERA), Public Law 111–152 (124Stat. 1029 (2010)). All references in thisnotice to section 9008 are references tosection 9008 of the ACA, as amended bysection 1404 of HCERA.

Part I of this notice describes a pro-posed methodology for calculating the sec-tion 9008 fee. Part II of this notice de-scribes how the Internal Revenue Service(IRS) will use this proposed methodol-ogy to provide each covered entity witha preliminary 2011 fee calculation. TheIRS and Treasury Department intend thata covered entity’s preliminary fee calcula-tion for 2011 will serve as a basis for com-ments by the covered entity on the pro-posed methodology. Part III of this noticesolicits public comments on all aspects ofthe notice.

Part I — Proposed Methodology forCalculating the Fee

Section 9008(b)(4) sets an applicablefee amount for each year, beginning with2011, that will be allocated among coveredentities with aggregate branded prescrip-tion drug sales of over $5 million to spec-ified government programs or pursuant tocoverage under such programs. Section9008(e)(2) provides that “branded pre-scription drug” means (i) any prescriptiondrug the application for which was sub-mitted under section 505(b) of the FederalFood, Drug, and Cosmetic Act (21 U.S.C.355(b)), or (ii) any biological product thelicense for which was submitted undersection 351(a) of the Public Health Ser-vice Act (42 U.S.C. 262(a)). The specifiedgovernment programs are the MedicarePart B program, the Medicare Part D pro-gram, the Medicaid program, any programunder which branded prescription drugsare procured by the Department of Vet-erans Affairs, any program under whichbranded prescription drugs are procuredby the Department of Defense, and theTRICARE retail pharmacy program (col-lectively, the Programs). The applicablefee amount is allocated among the cov-

February 7, 2011 459 2011–6 I.R.B.

ered entities using a formula specified insection 9008(b) based on sales to the Pro-grams, which sales data is to be providedby the Centers for Medicare and MedicaidServices of the Department of Health andHuman Services (CMS), the Departmentof Veterans Affairs (VA), and the Depart-ment of Defense (DOD) (collectively, theAgencies).

There are two years relevant to the cal-culation of the section 9008 fee — the cal-endar year in which the fee must be paid(herein referred to as the fee year) and thecalendar year of the branded prescriptiondrug sales, which will be used to determinethe amount of the fee (herein referred to asthe sales year). As discussed more fullybelow, the IRS and Treasury Departmentare proposing to use the second calendaryear proceeding the fee year as the salesyear for purposes of calculating the section9008 fee. An adjustment amount will alsobe calculated as discussed below.

Definition of Covered Entity

Section 9008(a) imposes the fee on eachcovered entity engaged in the business ofmanufacturing or importing branded pre-scription drugs. Section 9008(d)(1) de-fines a covered entity as “any manufac-turer or importer with gross receipts frombranded prescription drug sales.” For pur-poses of section 9008(a), a manufactureror importer is the person identified in theLabeler Code of the National Drug Code(NDC) for a branded prescription drug.The NDC is an identifier assigned by theFood and Drug Administration (FDA) to abranded prescription drug, as well as otherdrugs. The Labeler Code is the first fivenumeric characters of the NDC or the firstsix numeric characters when the availablefive-character code combinations are ex-hausted.

Section 9008(d)(2) provides a con-trolled group rule under which all personstreated as a single employer under sec-tion 52(a), 52(b), 414(m), or 414(o) ofthe Internal Revenue Code (Code) shallbe treated as a single covered entity. Forthis purpose, a foreign entity subject totax under section 881 is included withina controlled group under section 52(a) or52(b). This controlled group rule will beapplied as of the end of the day on De-

cember 31 of the sales year. All personstreated as a single employer under section9008(d)(2) are jointly and severally liablefor the fee. See section 9008(d)(3).

In the case of a controlled group thatis treated as a single covered entity undersection 9008(d)(2), the controlled groupmust identify a single person as the “des-ignated entity” that may act for the con-trolled group with respect to the section9008 fee. If the controlled group, withoutregard to foreign corporations included un-der section 9008(d)(2)(B), is also an affil-iated group that filed a consolidated returnfor federal income tax purposes, the des-ignated entity is the common parent of theaffiliated group as identified on the tax re-turn filed for the sales year. In all othersituations, the controlled group must se-lect a person as the designated entity onForm 8947, Report of Branded Prescrip-tion Drug Information1 (discussed furtherbelow), which is signed by the designatedentity under penalties of perjury, statingthat all the manufacturers or importers ofbranded prescription drugs who are mem-bers of the covered entity have consentedto the selection of the designated entity.

Sales Taken Into Account

Section 9008(b) provides that the an-nual fee for each covered entity is calcu-lated by determining the ratio of (i) thecovered entity’s branded prescription drugsales taken into account during the pre-ceding calendar year to (ii) the aggregatebranded prescription drug sales taken intoaccount for all covered entities during thesame year, and applying this ratio to the ap-plicable amount as specified in the statute.“Sales taken into account” means sales ex-clusive of certain orphan drugs and af-ter application of the percentage adjust-ment table in section 9008(b)(2). Sec-tion 9008(b)(1) provides that the calcula-tion of the fee in any given year is basedon branded prescription drug sales in theimmediately preceding calendar year.

Section 9008(b)(3) provides that theSecretary of the Treasury shall determinethe amount of each covered entity’s fee.In determining that amount, the Secre-tary may rely on reports submitted by theAgencies and any other source of infor-mation. Section 9008(i) also provides

the Secretary with regulatory authority tocarry out the purposes of the statute.

The IRS and Treasury Department havedetermined that, although the DOD andVA are expected to have complete data onbranded prescription drug sales for the cal-endar year immediately preceding the feeyear within the time frame necessary toadminister the fee, CMS is not expectedto have comparable data because it can-not complete its data processing within thenecessary time frame. Accordingly, theIRS and Treasury Department will calcu-late the fee based on the branded prescrip-tion drug sales data provided by the Agen-cies for the second calendar year preced-ing the fee year. Because the use of thesecond preceding year, rather than the im-mediately preceding year, as the sales yearmay affect the amount of the fee paid byany particular covered entity, the fee duein every year after 2011 will include an ad-justment amount.

Adjustment Methodology

An adjustment amount will be calcu-lated for each NDC and will be added orsubtracted, as appropriate, to the fee other-wise payable by the covered entity respon-sible for the NDC in the fee year in whichthe adjustment is calculated. The adjust-ment amount added or subtracted to theamount payable in a fee year will reflectthe difference between the fee determinedfor the NDC in the immediately prior feeyear, using data from the second calen-dar year preceding that fee year, and whatthe fee for that NDC would have been forthe immediately prior fee year using datafrom the calendar year immediately pre-ceding that prior fee year. For example,the amount due from a covered entity inthe 2012 fee year will include an adjust-ment amount for each NDC for which thecovered entity is responsible in 2012 equalto the difference between the 2011 fee as-sociated with that NDC using 2009 data,and what the 2011 fee for that NDC wouldhave been using 2010 data.

To calculate the adjustment amount foran NDC, the IRS will first determine tworatios: one based on data from the sec-ond preceding calendar year; and the otherbased on data from the third preceding cal-endar year. In both cases, the numerator of

1 The Office of Management and Budget approved Form 8947 under control number 1545–2192.

2011–6 I.R.B. 460 February 7, 2011

the ratio is the sales taken into account forthe particular NDC during the relevant cal-endar year, and the denominator of the ra-tio is aggregate branded prescription drugsales taken into account for all NDCs dur-ing the relevant calendar year. For eachNDC, the IRS will then take the differencebetween the ratio using second precedingyear data and the ratio using third pre-ceding year data and multiply that amountby the applicable amount of the fee forthe relevant fee year, as set forth in sec-tion 9008(b)(4), to determine an adjust-ment for the NDC. The adjustment amountfor any particular NDC will then be addedto, or subtracted from, as appropriate, theamount of the fee otherwise payable by thecovered entity associated with the NDCfor the fee year in which the adjustmentamount is calculated.

For example, in 2012 the fee payableby each covered entity will consist of twocomponents. First, the applicable amountfor 2012 will be allocated to the coveredentities based on sales data for 2010 (i.e.,the second preceding calendar year). Sec-ond, an adjustment amount will be calcu-lated in 2012 for each NDC with respectto the 2011 fee year, by multiplying (i)the difference between the sales ratio de-termined using 2010 data and the sales ra-tio determined using 2009 data by (ii) theapplicable amount of the fee for 2011. Theadjustment amount for each NDC will thenbe added to, or subtracted from, as appro-priate, the fee otherwise payable in 2012by the covered entity associated with theNDC for the 2012 fee year.

The adjustment amount is applied onlywith respect to the amount of the fee oth-erwise payable by the relevant covered en-tity in the year in which the adjustment iscalculated, and is not a refund, credit, orrecalculation of a fee payable by any cov-ered entity in any preceding fee year. Inany given fee year, the amount assessed bythe IRS will be based on data provided to itby the Agencies. The IRS does not intendto recalculate either the fee allocations orthe adjustment amounts based on data thatbecomes available after those amounts areassessed.

Information Requested from CoveredEntities

Annually, each covered entity shouldsubmit a Form 8947 and provide the infor-

mation specified by the form and instruc-tions. The designated entity for a coveredentity described in section 9008(d)(2) sub-mits a single form for the covered entity. Acovered entity should submit a completedForm 8947 by December 15 of each yearunless an alternative date is prescribed bythe form or instructions. The Form 8947information is return information subjectto the confidentiality protections of sec-tion 6103. The IRS will take into accountthe rebate information in calculating a cov-ered entity’s annual fee for 2011 only ifthe rebate information is reported in accor-dance with items 4 and 5 below on a timelyfiled Form 8947. Form 8947 is available athttp://www.irs.gov.

Form 8947 solicits the following infor-mation from each covered entity:

1. For a single-person covered en-tity, the covered entity’s name, address,and employer identification number. Fora covered entity described in section9008(d)(2), the name, address, and em-ployer identification number of the des-ignated entity and each manufacturer orimporter with gross receipts from the saleof branded prescription drugs to speci-fied government programs (or sales dueto coverage under the programs) that wasincluded in the covered entity as of the endof the day on December 31 of the salesyear.

Part I of Form 8947 instructions are re-vised by this notice to provide that eachdesignated entity should list the name, ad-dress, and employer identification num-ber of itself and each manufacturer or im-porter with gross receipts from the saleof branded prescription drugs to specifiedgovernment programs (or sales due to cov-erage under the programs) that was in-cluded in the covered entity as of the end ofthe day on December 31 of the sales year.

2. All of the NDCs for branded pre-scription drugs in which the covered entityis identified in the labeler code as of theend of the day on December 31 of the salesyear. For a covered entity described in sec-tion 9008(d)(2), this includes all NDCs inwhich a member of the covered entity isidentified in the labeler code as of the endof the day on December 31 of the salesyear.

3. The brand name and NDC for eachorphan drug for which a credit was al-lowed for any taxable year under section45C of the Code. For purposes of section

9008(e)(3), the credit was “allowed” forany particular drug if any person claimedthe credit and there has not been a final as-sessment or a court order disallowing thefull credit taken for the drug. In addition,even if the credit has been allowed, a cov-ered entity must not report an NDC for anorphan drug for any sales year followingthe calendar year in which the FDA ap-proved the drug for marketing for any indi-cation other than the treatment of the raredisease or condition for which the section45C credit was allowed.

4. The rebates for each NDC paid forthe sales year by the covered entity toMedicare Part D plans with respect to salesoccurring in that sales year. For this pur-pose, report rebates paid for drugs dis-pensed in the 2009 sales year if paid be-fore Form 8947 is filed. This informationis needed for the 2009 sales year because,at this time, CMS does not have rebatedata on branded prescription drug sales byNDC. However, starting in 2011, CMS isplanning to collect this rebate informationby NDC for the 2010 and subsequent salesyears. It is therefore possible that coveredentities will not report this rebate informa-tion for years following 2009.

5. The state supplemental rebates foreach NDC paid in the sales year by thecovered entity with respect to sales underMedicaid occurring in that sales year. Forthis purpose, report rebates invoiced bystates for drugs reimbursed by states in the2009 sales year and paid before Form 8947is filed. This information is needed be-cause Medicaid data will not include statesupplemental rebates.

Information Provided by the Agencies

The IRS will compile a list of brandedprescription drugs by NDC using the datasubmitted on Forms 8947. Appropriatedue diligence will be performed to checkfor potential oversights. For example, theIRS may use information published by theFDA identifying drugs for which applica-tions were submitted under section 505(b)of the Federal Food, Drug, and CosmeticAct. The IRS will provide the Agencieswith the compiled list of branded prescrip-tion drugs.

For each year in which the fee is due,the Agencies will provide data to the IRSon the branded prescription drug sales dur-ing the sales year by Program and NDC.

February 7, 2011 461 2011–6 I.R.B.

The calculation methodology for each Pro-gram, including any reasonable estimationtechniques and assumptions that the Agen-cies expect to use, are described below.

1. Medicare Part D. Section 9008 re-quires CMS to report the product of theper-unit ingredient cost reported by PartD sponsors (net of any per-unit rebate orother price concessions) and the number ofunits for each branded prescription drug.CMS currently collects prescription levelencounter data from Part D sponsors on thePrescription Drug Event (PDE) records.On the PDE records, Part D sponsors re-port the NDC, as well as the ingredientcost, dispensing fee, sales tax, and units.CMS will aggregate the ingredient cost re-ported in the “Ingredient Cost Paid” fieldand the units reported in the “Quantity Dis-pensed” field of the PDE records for PartD covered drugs. These amounts will beaggregated at the NDC level for each salesyear. Only PDE data that Part D spon-sors have submitted by the PDE submis-sion deadline (within 6 months after theend of the sales year) and have been ap-proved for inclusion in the Part D paymentreconciliation will be included.

2. Medicare Part B. First, for Health-care Common Procedure Coding System(HCPCS) codes that consist solely and ex-clusively of branded prescription drugs (asidentified by their respective NDCs) man-ufactured by a single entity, CMS will pro-vide the total Medicare-allowed chargesfor the HCPCS code for the appropriatesales year.

Second, for HCPCS codes consistingof a mixture of branded prescription drugsmade by different manufacturers or a mix-ture of branded prescription and genericdrugs, CMS will determine: (i) the totalMedicare-allowed charges for the HCPCScode for the appropriate sales year; (ii) theentities engaged in manufacturing eachNDC assigned to the HCPCS code; and(iii) those entities (if any) that are man-ufacturing branded prescription drugs.CMS will then: (i) estimate the amountof Medicare-allowed charges for eachmanufacturer by applying the utilizationpercentage attributed to each manufactureras determined under the Medicare Part BProgram using manufacturer reported Av-erage Sales Price sales data; (ii) multiplythat percentage by the Medicare-allowedcharge for that HCPCS code; and (iii) as-

sign the result to each manufacturer withinthat HCPCS code.

Third, for the remainder of HCPCScodes that consist of multiple branded pre-scription drugs (as identified by their re-spective NDCs) manufactured by multipleentities that cannot be reliably calculatedusing the two methods above, CMS willdetermine: (i) the total Medicare-allowedcharges for the HCPCS code for the appro-priate sales year; (ii) the entities engagedin manufacturing each NDC assigned tothe HCPCS code; and (iii) those entities(if any) that are manufacturing brandedprescription drugs. CMS will then: (i)estimate the amount of Medicare-allowedcharges for each manufacturer by apply-ing the utilization percentage attributed toeach manufacturer as determined underthe Medicare Part D Program; (ii) multiplythat percentage by the Medicare-allowedcharge for that HCPCS code; and (iii) as-sign the result to each manufacturer withinthat HCPCS code.

Thus, the amounts attributed to brandedprescription drugs within the HCPCS codewill be estimated. CMS will calculate thesum of these components to arrive at anestimate of Medicare Part B spending onbranded prescription drugs for each manu-facturer.

3. Medicaid. The branded prescrip-tion drug sales for Medicaid may be de-termined as the per-unit Average Manufac-turer Price less the Unit Rebate Amounts(URA) that CMS calculates based on man-ufacturer-reported pricing data multipliedby the number of units reported billed bystates to manufacturers. This data wouldbe based on the data reported to Medicaidby covered entities and the states. CMSdoes not currently intend to reduce this cal-culation for state supplemental rebates.

4. Department of Veterans Affairs. VAwill provide, by NDC, the total amountpaid for each branded prescription drugprocured by the VA for its beneficiaries.The basis of this information will be na-tional procurement data reported by VA’sPharmaceutical Prime Vendor to the VAPharmacy Benefits Management Serviceand National Acquisition Center. Thisinformation will not include procurementdata that resides exclusively at the indi-vidual medical treatment facility level.

5. Department of Defense. The DODwill provide, by Labeler Code, the man-ufacturer’s name, the NDC, brand name,

and the amount paid (net of rebates) foreach branded prescription drug procuredby DOD. TRICARE Management Activ-ity will provide, by Labeler Code, the man-ufacturer’s name, the NDC, brand name,and the amount paid (net of refunds or re-bates) for each branded prescription drugprocured by DOD through the TRICARERetail Pharmacy Program.

Fee calculation

After receiving data from the Agenciesand information from the covered entities,the IRS will calculate each covered en-tity’s branded prescription drug sales foreach Program by NDC. A covered entity’sbranded prescription drug sales for eachProgram will equal (i) the sum of all thecovered entity’s branded prescription drugsales reported by the Program, less (ii) thesum of all branded prescription drug salesreported by the Program for each NDC forwhich the covered entity has appropriatelyclaimed the orphan drug exclusion, less(iii) the sum of rebates reported by the cov-ered entity on Form 8947 for the sales year.

After calculating the branded prescrip-tion drug sales for each Program, theIRS will calculate each covered entity’sbranded prescription drug sales takeninto account for purposes of the ratio setforth in section 9008(b)(1). A coveredentity’s branded prescription drug salestaken into account for purposes of sec-tion 9008(b)(1)(A) will equal the sum ofthe covered entity’s branded prescriptiondrug sales for all Programs reduced bythe appropriate percentages set forth insection 9008(b)(2). The IRS will thencalculate the aggregate branded prescrip-tion drug sales of all covered entitiestaken into account for purposes of section9008(b)(1)(B), which is the sum of all thecovered entities branded prescription drugsales taken into account for purposes ofsection 9008(b)(1)(A).

To determine each covered entity’sfee, the IRS will divide each coveredentity’s branded prescription drug salestaken into account for purposes of section9008(b)(1)(A) by the aggregate brandedprescription drug sales of all covered en-tities taken into account for purposes ofsection 9008(b)(1)(B) and multiply thatfraction by the applicable amount for theappropriate year as set forth in section9008(b)(4).

2011–6 I.R.B. 462 February 7, 2011

Part II — Preliminary Fee Calculationfor 2011

The IRS will use the proposed method-ology described in Part I to provide eachcovered entity with a preliminary 2011 feecalculation. The notification of the prelim-inary fee calculation will include the fol-lowing: (1) the covered entity’s fee; (2) thecovered entity’s branded prescription drugsales, by NDC, for each Program; (3) thecovered entity’s branded prescription drugsales taken into account after applicationof section 9008(a)(2); and (4) the aggre-gate branded prescription drug sales takeninto account for all covered entities.

To facilitate the preliminary 2011 feecalculation, Form 8947 should be submit-ted to the IRS by February 11, 2011. Fromthe data on the Forms 8947, the IRS willcompile a list of NDCs and provide thatlist to the Agencies as soon as the data hasbeen processed. The IRS will use the datasubmitted on the Forms 8947 and the salesdata provided by the Agencies to calculatethe preliminary fee and will send to eachcovered entity notification of its prelimi-nary fee calculation by May 16, 2011.

If the IRS and Treasury Departmentsubsequently promulgate regulations thatmodify the methodology for calculatingeach covered entity’s fee, the modifiedmethodology will be adopted in determin-ing the final fee amount for each coveredentity for 2011. Thus, if the methodologychanges, the amount of the final fee for2011 may vary from the preliminary feecalculation. The IRS will send the finalfee calculation to each covered entity byAugust 15, 2011.

Part III — Request for comments

The IRS and Treasury Departmentrequest comments on the procedures de-scribed in this notice for considerationwhen promulgating regulations settingforth procedures for 2011 and the follow-ing years. The deadline for submissionof comments is June 15, 2011. Thisdate will give covered entities the op-portunity to consider the informationreceived in their preliminary fee calcu-lation when providing comments. Allmaterials submitted will be available forpublic inspection and copying. Writtencomments should be submitted to: In-ternal Revenue Service, CC:PA:LPD:PR

(Notice 2011–9), Room 5203, InternalRevenue Service, PO Box 7604, BenFranklin Station, Washington, DC 20044.Submissions may be hand-delivered Mon-day through Friday between the hours of8 a.m. and 4 p.m. to CC:PA:LPD:PR(Notice 2011–9), Courier’s Desk, InternalRevenue Service, 1111 ConstitutionAvenue, NW, Washington, DC. Commentsmay be transmitted electronicallyvia the following e-mail address:[email protected] include “Notice 2011–9” inthe subject line of any electroniccommunications.

Effect on Other Documents

Notice 2010–71 is modified and super-seded.


The principal author of this notice isCelia A. Gabrysh of the Office of As-sociate Chief Counsel (Passthroughs &Special Industries). For further infor-mation regarding this notice, contactCelia A. Gabrysh at (202) 622–3130 (nota toll-free call). For further informationregarding Form 8947, contact Lou Milanoat (908) 301–2118 (not a toll-free call).

Biodiesel and AlternativeFuels; Claims for 2010;Excise Tax

Notice 2011–10

Section 1. PURPOSE

This notice provides rules under whichtaxpayers may make a one-time claim forpayment of the credits and payments al-lowable under §§ 6426 and 6427 of the In-ternal Revenue Code (Code) for biodiesel(including renewable diesel) mixtures, al-ternative fuels, and alternative fuel mix-tures sold or used during calendar year2010 (collectively, 2010 biodiesel and al-ternative fuel incentives). These rules areprescribed under §§ 701(c) (biodiesel) and704(c) (alternative fuel) of the Tax Re-lief, Unemployment Insurance Reautho-rization, and Job Creation Act of 2010(Act) (Pub. L. 111–312).

Section 2. BACKGROUND

Sections 6426(a) and (c) allow ablender of a biodiesel (including re-newable diesel) mixture to claim a$1.00-per-gallon credit against its tax li-ability under § 4081 (relating to the taximposed on taxable fuel). The blendermay claim any excess as a payment under§ 6427(e) or as a refundable income taxcredit under § 34. Similar rules applyto blenders of alternative fuel mixtures(§ 6426(e)) and to persons that sell oruse alternative fuel as a fuel in a motorvehicle or a motorboat and in aviation(§ 6426(d)), except that the credit amountis $0.50 per gallon and the credit for alter-native fuel is taken against the claimant’stax liability under § 4041 (relating to thetax imposed on diesel fuel and alternativefuel). As an alternative to the paymentsand credits allowed under §§ 6426, 6427,and 34, a blender of a biodiesel (includingrenewable diesel) mixture may claim anonrefundable income tax credit under§ 40A (see Section 3 of this notice foradditional information).

The Code provisions that authorizethese credits and payments expired forsales and uses after December 31, 2009,but were reinstated by the Act for salesand uses during 2010 and 2011. Sections701(c) and 704(c) of the Act direct theSecretary of the Treasury (Secretary) toissue guidance providing for a one-timesubmission of claims under §§ 6426 and6427 covering periods during 2010. TheAct requires the guidance to provide fora 180-day period for the submission ofclaims (in such manner as prescribed bythe Secretary) to begin not later than 30days after the guidance is issued.

Section 3. SCOPE

This notice provides the only methodfor claiming 2010 biodiesel and alterna-tive fuel incentives. The Internal RevenueService (IRS) will neither process nor payclaims for 2010 biodiesel and alternativefuel incentives submitted by any method,or on any form, that is not described in thisnotice. Thus, the IRS will neither processnor pay 2010 biodiesel and alternativefuel incentive claims that are submittedon Form 720, Quarterly Federal ExciseTax Return. In addition, claimants thatfiled “protective” or anticipatory claims

February 7, 2011 463 2011–6 I.R.B.

during 2010 for biofuel and alternativefuel incentives covered by this notice mustrefile their claims pursuant to the proce-dures provided in this notice. The IRSwill neither process nor pay protective oranticipatory claims previously filed withthe IRS.

Except as provided by this notice,the rules in Notice 2005–4, 2005–1 C.B.289 (as modified by Notice 2005–62,2005–2 C.B. 443), and Notice 2006–92,2006–2 C.B. 774, apply to claims for2010 biodiesel and alternative fuel in-centives. However, § 704(b) of the Actmodifies the definition of alternative fuelunder § 6426(d)(2) to exclude any fuel(including lignin, wood residues, or spentpulping liquors) derived from the pro-duction of paper or pulp. Thus, blackliquor, a byproduct of the paper millingprocess in kraft mills, is not eligible forcredits and payments related to the saleor use of alternative fuel mixtures afterDecember 31, 2009.

This notice does not affect 2010 claimsfor the alcohol fuel mixture credit under§ 6426(b) or the alcohol fuel mixture pay-ment under § 6427(e). Taxpayers shouldcontinue to submit these claims separatelyon, and in accordance with, the appropri-ate form and form instructions for thoseclaims.

The credit for liquefied hydrogen didnot expire at the end of 2009, and claimsrelating to liquefied hydrogen sold or usedduring 2010 may be submitted by themethod prescribed in this notice (if thecredit was not previously claimed) or byany method that was permitted for claimsrelating to liquefied hydrogen sold or usedbefore calendar year 2010.

This notice does not affect 2010 claimsfor the nonrefundable income tax creditunder § 40A(b)(1) for biodiesel (includ-ing renewable diesel) mixtures, under§ 40A(b)(2) for biodiesel (including re-newable diesel), or under § 40A(b)(4) forthe small agri-biodiesel producer credit.Taxpayers should continue to submit theseclaims separately on, and in accordancewith, Form 8864, Biodiesel and Renew-able Diesel Fuels Credit. A taxpayer mustsubmit Form 8864 with its income taxreturn in accordance with the instructionsto its income tax return form. Taxpayersare reminded that under § 40A(c), creditsallowable under § 40A must be reducedto the extent that any benefit is claimed

under §§ 6426 and 6427 with respect tothe same biodiesel (including renewablediesel).

Similarly, this notice does not affect2010 claims for the refundable income taxcredit under § 34 for biodiesel mixtures, al-ternative fuel, or alternative fuel mixtures.Taxpayers should continue to submit theseclaims separately on, and in accordancewith, Form 4136, Credit for Federal TaxPaid on Fuels. A taxpayer must submitForm 4136 with its income tax return inaccordance with the instructions to its in-come tax return form. Taxpayers are re-minded that under § 34(b), credits are notallowed under § 34 for any amount prop-erly payable under § 6427 and claimed ina timely filed claim. For this purpose, theIRS will treat as timely filed any claim sub-mitted for amounts payable under § 6427that conforms to the rules provided in thisnotice.

Section 4. HOW TO MAKE A CLAIMFOR PAYMENT OF CREDITS ANDPAYMENTS ALLOWABLE UNDER§§ 6426 AND 6427

Claimants must follow the procedureslisted below to make a claim under thisnotice for payment of credits and paymentsallowable under §§ 6426 and 6427.

• Claimants must submit claims for 2010biodiesel and alternative fuel incen-tives on Form 8849, Claim for Refundof Excise Taxes.

• Claimants must include Schedule 3(Form 8849), Certain Fuel Mixturesand the Alternative Fuel Credit, withtheir submission and enter amountsfor 2010 biodiesel and alternative fuelincentives on Line 2 and Line 3 ofSchedule 3, as appropriate.

• Claimants must follow the instructionsto Form 8849 and Schedule 3 whenpreparing their submission to the ex-tent that those instructions do not con-flict with this notice.

• Each claimant must claim all 2010biodiesel and alternative fuel incen-tives on a single Form 8849; the IRSwill not process multiple submissionsfrom a single claimant. Therefore, aclaimant’s single submission should

encompass all 2010 biodiesel and al-ternative fuel incentives for which theclaimant is eligible.

• Each claimant must mail its submis-sion to the address listed for Sched-ule 3 in the instructions to Form 8849under Where To File. Alternatively,claimants may electronically file Form8849 and Schedule 3 through any elec-tronic return originator, transmitter, orintermediate service provider partici-pating in the IRS e-file program for ex-cise taxes.

• Claimants are reminded that they mustbe registered by the IRS in order tomake alternative fuel and alternativefuel mixture claims under §§ 6426(d),6426(e), and 6427(e). Claimants thatare not already registered by the IRSmay apply to the IRS for registrationby filing Form 637, Application forRegistration (For Certain Excise TaxActivities), in accordance with the in-structions to Form 637.

Section 5. CLAIM PERIOD AND DUEDATE

Although a claimant may submitits claim under this notice as early asJanuary 14, 2011, the 180-day claimperiod for 2010 biodiesel and alternativefuel incentives begins on February 2,2011. The IRS will deem any claim that issubmitted by the method prescribed in thisnotice before February 2, 2011, as filedon February 2, 2011. Consequently, allclaims for 2010 biodiesel and alternativefuel incentives must be filed on or beforeAugust 1, 2011. The IRS will not processclaims filed after that date. If the IRS doesnot pay a 2010 biodiesel and alternativefuel incentives claim that conforms tothis notice within 60 days after the claimis received, the IRS will pay the claimwith interest from the claim filing date(February 2, 2011, in the case of claimssubmitted before that date) using theoverpayment rate and method provided by§ 6621 of the Code.

Section 6. DRAFTING INFORMATION

The principal author of this noticeis Michael H. Beker of the Office ofAssociate Chief Counsel (Passthroughs

2011–6 I.R.B. 464 February 7, 2011

& Special Industries). For further in-formation regarding this notice, contactMichael H. Beker at (202) 622–3130 (nota toll-free call).

Qualified Zone Academy BondAllocations for 2011

Rev. Proc. 2011–19

SECTION 1. PURPOSE

This revenue procedure sets forth themaximum face amount of Qualified ZoneAcademy Bonds (“QZABs”) that may beissued for each State for the calendar year2011 under § 54E(c)(2) of the InternalRevenue Code. Under § 54A(e)(3), theterm State includes the District of Co-lumbia and any possession of the UnitedStates.

SECTION 2. BACKGROUND

.01 INTRODUCTION

Section 313 of the Tax Extenders andAlternative Minimum Tax Relief Act of2008, Div. C of Pub. L. No. 110–343,122 Stat. 3765 (2008) (“Act”) added new§ 54E, which provides revised programprovisions for QZABs in lieu of the ex-isting provisions under §1397E, effectivefor obligations issued after October 3,2008. The Act amended § 54A(d)(1) toprovide that the term qualified tax creditbond (“QTCB”) means, in part, a qual-ified zone academy bond which is partof an issue that meets the requirementsof §§ 54A(d)(2), (3), (4), (5), and (6) re-garding expenditures of bond proceeds,information reporting, arbitrage, matu-rity limitations, and prohibitions againstfinancial conflicts of interest. The Actalso amended § 54A(d)(2)(C) to providethat, for purposes of § 54A(d)(2), the term“qualified purpose” for a QZAB meansa purpose specified in § 54E(a)(1), de-scribed below.

The Act added § 54E(c)(1) to providea national zone academy bond limitationauthorization for QZABs of $400 millionfor each of calendar years 2008 and 2009.Section 1522 of Title I of Division B of theAmerican Recovery and Reinvestment Actof 2009, Pub. L. No. 111–5, 123 Stat. 115

(2009) (“2009 Act”) amended § 54E(c)(1)to provide an increased national zoneacademy bond limitation authorization forQZABs of $1.4 billion for each of cal-endar years 2009 and 2010. Section 758of the Tax Relief, Unemployment Insur-ance Reauthorization, and Job CreationAct of 2010, Public L. No. 111–312, 124Stat. 3296 (2010) (“2010 Act”) furtheramended § 54E(c)(1) to provide an autho-rization for QZABs of $400 million forcalendar year 2011.

.02 QUALIFIED ZONE ACADEMYBOND UNDER § 54E

Section 54E(d) defines “qualified zoneacademy” as any public school (or aca-demic program within a public school)which is established by and operated un-der the supervision of an eligible localeducation agency to provide educationor training below the postsecondary levelprovided: (A) the public school or pro-gram is designed in cooperation withbusiness to enhance the academic curricu-lum, increase graduation and employmentrates and prepare students for college andthe workforce; (B) students will be sub-ject to the same academic standards andassessments as other students educatedby the eligible local education agency;(C) the comprehensive education plan isapproved by the eligible local educationagency; and (D)(i) such public schoolis located in an empowerment zone orenterprise community including such des-ignated after October 3, 2008; or (ii) thereis a reasonable expectation (as of the dateof bond issuance) that at least 35 percentof the students will be eligible for freeor reduced cost lunches under the schoollunch program established under the Na-tional School Lunch Act.

Section 54E(a) provides that a “quali-fied zone academy bond” or QZAB meansany bond issued as part of an issue if: (1)100 percent of the available project pro-ceeds of such issue are to be used for aqualified purpose with respect to a quali-fied zone academy established by an eli-gible local education agency; (2) the bondis issued by a State or local governmentwithin the jurisdiction of which such acad-emy is located, and (3) the issuer: (A) des-ignates such bond for purposes of this sec-tion; (B) certifies that it has written assur-ances that the private business contribution

requirement of § 54E(b) will be met; and,(C) certifies that it has the written approvalof the eligible local education agency forsuch bond issuance.

Section 54E(d)(3) provides that a qual-ified purpose with respect to each acad-emy means: (A) rehabilitating or repair-ing the public school facility; (B) provid-ing equipment; (C) developing course ma-terials; and, (D) training teachers and otherschool personnel. The private businesscontribution requirement of § 54E(b) ismet if the eligible local education agencythat established the qualified zone acad-emy has written commitments from pri-vate entities to make qualified contribu-tions having a present value (as of the dateof issuance of the issue) of not less than10 percent of the proceeds of the issue.Section 54E(d)(4) defines “qualified con-tributions” as any contribution (of a typeand quality acceptable to the eligible lo-cal education agency) of: (A) equipmentfor use in the qualified zone academy (in-cluding state-of-the-art technology and vo-cational equipment); (B) technical assis-tance in developing curriculum or in train-ing teachers to promote appropriate marketdriven technology in the classroom; (C)employees’ services as volunteer mentors;(D) internships, field trips, or other educa-tional opportunities outside the academy;or (E) any other property or service speci-fied by the eligible education agency. Sec-tion 54E(d)(2) defines “eligible local ed-ucation agency” as any local educationalagency as defined in § 9101 of the Elemen-tary and Secondary Education Act of 1965.

Section 54E(c)(2) provides that theDepartment of the Treasury shall allocatethe national zone academy bond limitationamong the States on the basis of their re-spective populations of individuals belowthe poverty line (as defined by the Officeof Management and Budget). The limi-tation amount allocated to a State underthe preceding sentence shall be allocatedby the State education agency to qualifiedzone academies within such State.

Under § 54E(c)(3), the maximum ag-gregate face amount of bonds issuedduring any calendar year which may bedesignated as QZABs with respect to anyqualified zone academy shall not exceedthe limitation amount allocated to suchacademy for such calendar year. However,under § 54E(c)(4)(A), if for any calendaryear the limitation amount for any State

February 7, 2011 465 2011–6 I.R.B.

exceeds the amount of bonds issued duringsuch year which are designated QZABswith respect to qualified zone academieswithin such State, the limitation amountfor such State for the following calendaryear shall be increased by the amountof such excess. Under § 54E(c)(4)(B),however, any carryforward of a limitationamount may be carried only to the first2 years following the unused limitationyear. For these purposes, the limitation

amount shall be treated as used on a first-infirst-out basis.

Sections 1.1397–1 (the “Final Regula-tions”) and 1.1397–1T (the “TemporaryRegulations”) set forth regulations thatwere issued under § 1397E. For otherguidance concerning the applicability ofthe regulations issued under § 1397E, thecredit rate, and the sinking fund yield seeNotice 2009–15, 2009–6 I.R.B. 449, No-

tice 2009–30, 2009–16 I.R.B. 852, andNotice 2010–22, 2010–10 I.R.B. 435.

SECTION 3. NATIONAL ZONEACADEMY BOND LIMITATIONFOR 2011

The national limitation for QZABs is-sued under § 54E for calendar year 2011is $400 million. This amount is allocatedamong the States as follows:

Qualified Zone Academy Bond Allocations by State or Territory, 2011

State or Territory QZAB Allocation (in dollars)

Alabama $7,194,000Alaska $553,000Arizona $9,521,000Arkansas $4,637,000California $45,855,000Colorado $5,527,000Connecticut $2,841,000Delaware $861,000DC $898,000Florida $24,235,000Georgia $14,161,000Hawaii $1,178,000Idaho $1,943,000Illinois $14,932,000Indiana $8,001,000Iowa $3,058,000Kansas $3,213,000Kentucky $6,896,000Louisiana $6,870,000Maine $1,443,000Maryland $4,549,000Massachusetts $5,883,000Michigan $13,987,000Minnesota $4,986,000Mississippi $5,543,000Missouri $7,597,000Montana $1,271,000Nebraska $1,897,000Nevada $2,892,000New Hampshire $990,000New Jersey $7,132,000New Mexico $3,208,000New York $24,194,000North Carolina $13,178,000North Dakota $651,000Ohio $15,181,000Oklahoma $5,143,000Oregon $4,796,000Pennsylvania $13,556,000Rhode Island $1,093,000South Carolina $6,730,000South Dakota $990,000Tennessee $9,431,000Texas $37,014,000Utah $2,872,000Vermont $618,000Virginia $7,197,000

2011–6 I.R.B. 466 February 7, 2011

Qualified Zone Academy Bond Allocations by State or Territory, 2011

State or Territory QZAB Allocation (in dollars)

Washington $7,176,000West Virginia $2,824,000Wisconsin $6,102,000Wyoming $482,000American Samoa $358,000Guam $366,000Northern Mariana Islands $212,000Puerto Rico $15,765,000Virgin Islands $319,000Total Allocation $400,000,000

SECTION 4. EFFECTIVE DATE OFNATIONAL ZONE ACADEMY BONDLIMITATIONS

The national limitation allocated in sec-tion 3 is effective for QZABs issued on orafter January 1, 2011.

SECTION 5. DRAFTINGINFORMATION

The principal authors of this revenueprocedure are Timothy L. Jones andDavid E. White of the Office of AssociateChief Counsel (Financial Institutions

and Products). For further informationregarding this revenue procedure, contactDavid E. White or Timothy L. Jones at(202) 622–3980 (not a toll-free call).

February 7, 2011 467 2011–6 I.R.B.

Part IV. Items of General InterestNotice of ProposedRulemaking

Sales-Based Royalties andVendor Allowances

REG–149335–08


ACTION: Notice of proposed rulemaking.

SUMMARY: This document containsproposed regulations relating to the capi-talization and allocation of royalties thatare incurred only upon the sale of prop-erty produced or property acquired forresale (sales-based royalties). This docu-ment also contains proposed regulationson adjusting the cost of merchandise in-ventory for an allowance, discount, orprice rebate based on merchandise sales(sales-based vendor allowances). The reg-ulations modify the simplified productionmethod and the simplified resale methodof allocating capitalized costs betweenending inventory and cost of goods sold.The regulations affect taxpayers that in-cur capitalizable sales-based royalties andearn sales-based vendor allowances.

DATES: Written or electronic commentsand a request for a public hearing must bereceived by March 17, 2011.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–149335–08),room 5203, Internal Revenue Service,P.O. Box 7604, Ben Franklin Station,Washington, DC 20044. Submissions maybe hand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to: CC:PA:LPD:PR (REG–149335–08),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, taxpayersmay submit comments electronicallyvia the Federal eRulemakingPortal at www.regulations.gov (IRSREG–149335–08).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, John Roman Faron, (202)

622–4930 (not a toll-free number); con-cerning submission of comments or arequest for a public hearing, Richard Hurstat [email protected].


Background

This document contains proposedamendments to 26 CFR part 1 relating tothe allocation under section 263A of theInternal Revenue Code (Code) of certainsales-based royalties. Sales-based roy-alties are royalty costs that become dueonly upon the sale of property. Thus, thefact of the liability arises, and the royaltyis incurred within the meaning of section461, only upon sale.

This document also contains proposedamendments to 26 CFR part 1 relating tothe determination of cost of goods in in-ventory under section 471 when a tax-payer receives a sales-based vendor al-lowance. Sales-based vendor allowancesare allowances, discounts, or price rebatesthat a reseller receives, earns, or otherwisebecomes entitled to based on the resale ofa vendor’s merchandise to a third party.

Capitalization and Allocation ofSales-Based Royalties Under Section263A

Section 263A requires taxpayers tocapitalize the direct costs and indirectcosts that are properly allocable to (1) realor tangible personal property the taxpayerproduces, and (2) real property or personalproperty described in section 1221(a)(1)that the taxpayer acquires for resale. Tax-payers must allocate costs required to becapitalized under section 263A to propertyproduced or acquired for resale duringthe taxable year using a cost allocationmethod described in the regulations. Ataxpayer generally determines whether thecost of goods is included in cost of goodssold or in ending inventory using a costflow assumption (for example, first-in,first-out or last-in, first-out). However, asexplained later in this preamble, a taxpayermay use a simplified method to allocatecosts required to be capitalized under sec-tion 263A between cost of goods sold andending inventory.

Section 1.263A–1(e)(3)(i) defines indi-rect costs as all costs other than direct ma-terial costs and direct labor costs (in thecase of property produced) or acquisitioncosts (in the case of property acquired forresale). Indirect costs are properly alloca-ble to property produced or acquired for re-sale when the costs directly benefit or areincurred by reason of the performance ofproduction or resale activities.

Section 1.263A–1(e)(3)(ii) provides anon-exclusive list of indirect costs thatmust be capitalized to the extent they areproperly allocable to property producedor property acquired for resale. Thesecosts include licensing and franchise costsincurred in securing the contractual rightto use a trademark, corporate plan, man-ufacturing procedure, special recipe, orother similar right associated with prop-erty produced or property acquired forresale. Section 1.263A–1(e)(3)(ii)(U).Thus, royalty costs, including sales-basedroyalty costs, incurred in securing the con-tractual right to use a trademark, corporateplan, manufacturing procedure, specialrecipe, or other similar right associatedwith property produced or property ac-quired for resale, are indirect costs thatare properly allocable to the property pro-duced or acquired for resale to the extentthe costs directly benefit or are incurred byreason of production or resale activities.See, for example, Plastic Engineering &Technical Services, Inc. v. Commissioner,TC Memo. 2001–324; but see RobinsonKnife Manufacturing Company, Inc. v.Commissioner, No. 09–1496–ag, 2010WL 986532 (2d Cir. March 19, 2010).

Section 1.263A–1(f) provides various“facts-and-circumstances” cost allocationmethods that taxpayers may use to allocatedirect and indirect costs to units of prop-erty produced or acquired for resale. Thefacts-and-circumstances methods allocatecosts based on a relationship between thecosts incurred and the units of propertyproduced or acquired for resale.

In lieu of a facts-and-circumstancesallocation method, taxpayers may usethe simplified methods provided in§1.263A–2(b) (the simplified productionmethod) or §1.263A–3(d) (the simplifiedresale method) to allocate costs to eligibleproperty produced or eligible property

2011–6 I.R.B. 468 February 7, 2011

acquired for resale. The simplified meth-ods differ from facts-and-circumstancesmethods in that they allocate a pool of cap-italizable costs (additional section 263Acosts) between ending inventory and costof goods sold using a defined ratio ratherthan allocating specific costs to particulargoods. Additional section 263A costs aredefined in §1.263A–1(d)(3) as the costs,other than interest, that were not capi-talized under the taxpayer’s method ofaccounting immediately prior to the ef-fective date of section 263A, but that arerequired to be capitalized under section263A. Under the simplified methods, tax-payers allocate additional section 263Acosts between ending inventory and costof goods sold using a formula that includesall additional section 263A costs incurredduring the taxable year (including capital-izable sales-based royalties, if any).

Section 471 Inventory Rules Related toSales-Based Vendor Allowances

Section 471 provides that inventoriesmust be taken on the basis the Secretaryprescribes as conforming to the best ac-counting practice in the trade or businessand as most clearly reflecting income.

Section 1.471–2(c) permits merchantsand manufacturers to value inventoriesat either (1) cost, or (2) cost or market,whichever is lower. Under §1.471–3(b),the cost of merchandise purchased by tax-payers in general is the invoice price lesstrade or other discounts.

Section 1.471–8 allows a retail mer-chant to use the retail inventory method toarrive at an approximate cost of goods inending inventory. This cost is determinedby multiplying the aggregate selling pricesof the goods in ending inventory by theratio of (1) the cost of the goods in be-ginning inventory plus the cost of goodspurchased during the year, to (2) the re-tail selling prices of the goods in beginninginventory plus the retail selling prices ofinventory purchased during the year, withproper adjustments to the selling prices formark-ups and mark-downs. However, re-tail selling prices are not adjusted for tem-porary mark-downs. Rev. Rul. 79–115,1979–1 C.B. 185, see §601.601(d)(2).

Explanation of Provisions

1. Capitalization and Allocation ofSales-Based Royalties Under Section263A

The proposed regulations clarify thatsales-based royalties, like other royalties,may be capitalizable to property a taxpayerproduces or acquires for resale, but alsoprovide that sales-based royalties requiredto be capitalized are allocable only to prop-erty that a taxpayer has sold.

In Robinson Knife, the Court of Ap-peals for the Second Circuit held thatroyalties for the right to use certain trade-marks in manufacturing kitchen tools werenot allocable to the property producedbecause the taxpayer’s royalty paymentswere calculated as a percentage of net salesand were incurred only on the sale of theproduct. The court stated that the royaltycosts were not incurred by reason of anddid not directly benefit the performance ofproduction activities, and therefore werenot capitalizable under the section 263Aregulations. The court reasoned that, al-though the licensing agreements may havedirectly benefited or been incurred byreason of production activities, the regula-tions did not require the capitalization ofthe royalty costs because the costs them-selves did not directly benefit and werenot incurred by reason of the performanceof production activities.

The proposed regulations are consistentwith the court’s conclusion that, becauseof their relationship to sales, sales-basedroyalties inherently should not be capital-ized to ending inventory. Because sales-based royalties are not incurred (within themeaning of section 461) until a unit ofproperty is sold, sales-based royalties aremore directly related to units of propertysold during the taxable year than to un-sold units. Therefore, the proposed regula-tions provide that capitalizable sales-basedroyalties are properly allocable to units ofproperty produced or acquired for resalethat are sold, or deemed sold, during thetaxable year.

However, Robinson Knife misconstruedthe nature of costs required to be capital-ized. Royalties are the costs associatedwith the right to use intellectual propertysuch as copyrighted works or patented in-ventions. If the use of those rights directlybenefits or is incurred by reason of pro-

duction activities, then the cost of securingthose rights do as well. The fact that theamount of sales-based royalties is deter-mined by reference to the number of unitsof property a taxpayer sells or is calculatedas a percentage of revenue from the saleof inventory affects when a taxpayer in-curs (within the meaning of section 461)that amount, but does not change an oth-erwise capitalizable production or resalecost into a non-capitalizable cost. There-fore, the proposed regulations also clar-ify that an indirect cost may directly ben-efit or be incurred by reason of the per-formance of production or resale activitieseven if the costs are incurred only uponthe sale of inventory. Sales-based royal-ties, like other costs that directly benefitor are incurred by reason of production orresale activities, are capitalizable licensingand franchise costs within the meaning of§1.263A–1(e)(3)(ii)(U).

The proposed regulations achieve asimilar result to that in Robinson Knife, butrather than determining that sales-basedroyalty costs are inherently non-capital-izable, the proposed regulations providethat otherwise capitalizable sales-basedroyalty costs are properly allocable toproperty sold during the taxable year.

2. Sales-Based Vendor Allowances

Under §1.471–3(b), the cost of mer-chandise a taxpayer purchases generally isthe invoice price less trade or other dis-counts. A sales-based vendor allowance isan allowance, discount, or price rebate ataxpayer earns as a result of selling a ven-dor’s merchandise, typically at a temporar-ily reduced price. The taxpayer’s right toreceive the sales-based vendor allowancedepends on actual sales of the vendor’sproducts. The amount received directly re-lates to the specific merchandise the tax-payer sells and properly is treated as a re-duction in the cost of that merchandise.Therefore, the proposed regulations clarifythat a sales-based vendor allowance is anadjustment to the cost of the merchandisesold or deemed sold under the taxpayer’scost flow assumption.

3. Adjusting the Cost of Goods Sold andGoods in Ending Inventory

Sales-based royalties and sales-basedvendor allowances are properly alloca-ble to property sold during the taxable

February 7, 2011 469 2011–6 I.R.B.

year. Therefore, it is inappropriate totreat sales-based royalties and sales-basedvendor allowances as adjustments tothe cost of goods in ending inventory.The proposed regulations provide thatsales-based royalties and sales-based ven-dor allowances are allocable to the unitsof property sold or deemed sold under thetaxpayer’s cost flow assumption and arenot included in determining the inventorycost or value of goods on hand at the endof the taxable year under any inventorymethod.

Because the proposed regulations ex-pressly allocate sales-based royalties andsales-based vendor allowances to propertythat has been sold or deemed sold, theproposed regulations revise the simplifiedproduction and simplified resale methodsto remove costs such as capitalizable sales-based royalties and cost reductions suchas sales-based vendor allowances, whichare properly allocable to property that hasbeen sold, from the formulas used to allo-cate additional section 263A costs to end-ing inventory. Taxpayers must continueto include capitalizable sales-based royaltycosts in both the numerator and denomina-tor of the production cost allocation ratiounder §1.263A–1(h)(5) for purposes of de-termining capitalized mixed service costsunder the simplified service cost method.

The proposed regulations do not mod-ify the retail inventory method under§1.471–8 specifically. Section 1.471–3and section 263A determine the cost ofpurchases for purposes of the retail inven-tory method, and the proposed regulationsunder §§1.263A–1 and 1.471–3 preclude ataxpayer from including sales-based roy-alties and sales-based vendor allowancesin the cost of goods in the fraction used todetermine the value of ending inventoryunder §1.471–8. Similarly, if the sellingprice markdown in a sales-based vendorallowance arrangement is temporary, theretail selling price component of the frac-tion is not adjusted.

Effective/Applicability Date

These regulations are proposed to applyfor taxable years ending on or after thedate the regulations are published as finalregulations in the Federal Register.

Special Analyses

This notice of proposed rulemaking isnot a significant regulatory action as de-fined in Executive Order 12866. There-fore, a regulatory assessment is not re-quired. It also has been determined thatsection 553(b) of the Administrative Pro-cedure Act (5 U.S.C. chapter 5) does notapply to these regulations. Because theregulations do not impose a collection ofinformation on small entities, the Regula-tory Flexibility Act (5 U.S.C. chapter 6)does not apply. Pursuant to section 7805(f)of the Code, this notice of proposed rule-making has been submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments thatare submitted timely to the IRS. Commentsmay be submitted electronically or via asigned original with eight (8) copies. TheIRS and the Treasury Department requestcomments on the clarity of the proposedrules and how they can be made easier tounderstand. All comments will be avail-able for public inspection and copying.

A public hearing will be scheduled ifrequested in writing by any person thattimely submits comments. If a public hear-ing is scheduled, notice of the date, time,and place for the hearing will be publishedin the Federal Register.


The principal author of these regula-tions is John Roman Faron of the Office ofthe Associate Chief Counsel (Income Taxand Accounting). However, other person-nel from the IRS and Treasury Departmentparticipated in their development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto be amended as follows:


Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.263A–1 also issued under

26 U.S.C. 263A.Section 1.263A–2 also issued under

26 U.S.C. 263A.Section 1.263A–3 also issued under

26 U.S.C. 263A. * * *Section 1.471–3 also issued under

26 U.S.C. 471. * * *Par. 2. Section 1.263A–0 is

amended by adding new entries for§§1.263A–1(c)(5), 1.263A–1(k),1.263A–1(l), 1.263A–2(b)(3)(ii)(C),1.263A–2(e), 1.263A–2(f),1.263A–3(d)(3)(i)(C)(3), and1.263A–3(f) and revising the entry for§§1.263A–1(e)(3)(ii) in the table ofcontents to read as follows:

§1.263A–0 Outline of regulations undersection 263A.

* * * * *

§1.263A–1 Uniform Capitalization ofCosts.

* * * * *(c) * * *(5) Costs allocable only to sold prop-

erty.

* * * * *(e) * * *(3) * * *(ii) Types of indirect costs required to

be capitalized.

* * * * *(k) Change in method of accounting.(1) In general.(2) Scope limitations.(3) Audit protection.(4) Section 481(a) adjustment.(5) Time for requesting change.(l) Effective/applicability date.

§1.263A–2 Rules Relating to PropertyProduced by the Taxpayer.

* * * * *(b) * * *(3) * * *(ii) * * *

2011–6 I.R.B. 470 February 7, 2011

(C) Costs allocable only to sold prop-erty.

* * * * *(e) Change in method of accounting.(1) In general.(2) Scope limitations.(3) Audit protection.(4) Section 481(a) adjustment.(5) Time for requesting change.(f) Effective/applicability date.

§1.263A–3 Rules Relating to PropertyAcquired for Resale.

* * * * *(d) * * *(3) * * *(i) * * *(C) * * *(3) Costs allocable only to sold prop-

erty.

* * * * *(f) Effective/applicability date.

* * * * *Par. 3. Section 1.263A–1 is amended

by:1. Adding a new paragraph (c)(5).2. Revising paragraph (e)(3)(i).3. Revising the introductory text of

paragraph (e)(3)(ii).3. Redesignating paragraph

(e)(3)(ii)(U) as paragraph (e)(3)(ii)(U)(1)and adding a sentence to the endof newly-designated paragraph(e)(3)(ii)(U)(1).

4. Adding a new paragraph(e)(3)(ii)(U)(2).

5. Revising paragraph (l).The additions and revisions read as fol-

lows:

§1.263A–1 Uniform capitalization ofcosts.

* * * * *(c) * * *(5) Costs allocable only to sold prop-

erty. Any cost that is required under thissection, §1.263A–2, or §1.263A–3, to beallocated only to property sold, or deemedto be sold under the inventory cost flow as-sumption (such as first-in, first-out, last-in,first-out, or a specific-goods method) thetaxpayer uses to identify the costs in end-ing inventory, must be included in cost ofgoods sold and is not included in determin-ing the inventory cost or value of goods onhand at the end of the taxable year.

* * * * *(e) * * *(3) * * *(i) In general. (A) Indirect costs are

defined as all costs other than direct ma-terial costs and direct labor costs (in thecase of property produced) or acquisitioncosts (in the case of property acquired forresale). Taxpayers subject to section 263Amust capitalize all indirect costs properlyallocable to property produced or prop-erty acquired for resale. Indirect costs areproperly allocable to property produced orproperty acquired for resale when the costsdirectly benefit or are incurred by reasonof the performance of production or resaleactivities. Indirect costs may directly ben-efit or be incurred by reason of the per-formance of production or resale activitieseven if the costs are calculated as a per-centage of sales revenue from inventoryor are incurred only upon the sale of in-ventory. Indirect costs may be allocableto both production and resale activities, aswell as to other activities that are not sub-ject to section 263A. Taxpayers must makea reasonable allocation of indirect costs be-tween production, resale, and other activi-ties.

(B) Example. The following exampleillustrates the provisions of this paragraph(e)(3)(i):

Example. (i) Taxpayer A manufactures table-cloths and other linens. A enters into a licensingagreement with Company L under which A may labelits tablecloths with L’s trademark if the tableclothsmeet certain specified quality standards. In exchangefor its right to use L’s trademark, the licensing agree-ment requires A to pay L a royalty of $X for eachtablecloth carrying L’s trademark that A sells. Thelicensing agreement does not require A to pay L anyminimum or lump-sum royalties.

(ii) The licensing agreement provides A with theright to use L’s intellectual property, a trademark. Thelicensing agreement also requires A to conduct itsproduction activities according to certain standards asa condition of exercising that right. Thus, A’s right touse L’s trademark under the licensing agreement isdirectly related to A’s production of tablecloths. Theroyalties the licensing agreement requires A to payfor using L’s trademark are the costs A incurs in ex-change for these rights. Therefore, although A incursroyalty costs only when A sells a tablecloth carry-ing L’s trademark, the royalty costs directly benefitproduction activities and are incurred by reason ofproduction activities within the meaning of paragraph(e)(3)(i) of this section.

(ii) Types of indirect costs required tobe capitalized. The following are typesof indirect costs that must be capitalizedto the extent they are properly allocable to

property produced or property acquired forresale:

* * * * *(U) Licensing and franchise costs. (1)

* * * These costs also include fees, pay-ments, and royalties otherwise described inthis paragraph (e)(3)(ii)(U) that a taxpayerincurs (within the meaning of section 461)only upon the sale of property produced oracquired for resale.

(2) If a taxpayer incurs (within themeaning of section 461) a fee, payment,or royalty described in this paragraph(e)(3)(ii)(U) only upon the sale of propertyproduced or acquired for resale and thecost is required to be capitalized under thisparagraph (e)(3), the cost is allocable onlyto the property that has been sold or, for in-ventory property, deemed to be sold underthe inventory cost flow assumption (suchas first-in, first-out; last-in, first-out; or aspecific-goods method) the taxpayer usesto identify the costs in ending inventory.

* * * * *(l) Effective/applicability date. (1)

Paragraphs (h)(2)(i)(D), (k), and (l) of thissection apply for taxable years ending onor after August 2, 2005.

(2) Paragraphs (c)(5), (e)(3)(i), and(e)(3)(ii)(U) of this section apply for tax-able years ending on or after the date theseregulations are published as final regula-tions in the Federal Register.

Par. 4. Section 1.263A–2 is amendedby:

1. Adding paragraphs (b)(3)(ii)(C) and(b)(4)(ii)(A)(4).

2. Revising paragraph (f).The additions and revision read as fol-

lows:

§1.263A–2 Rules relating to propertyproduced by the taxpayer.

* * * * *(b) * * *(3) * * *(ii) * * *(C) Costs allocable only to sold prop-

erty. Additional section 263A costs in-curred during the taxable year, as definedin paragraph (b)(3)(ii)(A)(1) of this sec-tion, section 471 costs incurred duringthe taxable year, as defined in paragraph(b)(3)(ii)(A)(2) of this section, and section471 costs remaining on hand at year end,as defined in paragraph (b)(3)(ii)(B) of

February 7, 2011 471 2011–6 I.R.B.

this section, do not include costs specifi-cally described in §1.263A–1(e)(3)(ii) orcost reductions described in §1.471–3(e)as properly allocable only to property thathas been sold or, for inventory property,deemed to be sold under the inventory costflow assumption (such as first-in, first-out;last-in, first-out; or a specific-goodsmethod) a taxpayer uses to identify thecosts in ending inventory.

* * * * *(4) * * *(ii) * * *(A) * * *(4) Additional section 263A costs in-

curred during the test period, as definedin paragraph (b)(4)(ii)(A)(2) of this sec-tion and section 471 costs incurred dur-ing the test period, as defined in para-graph (b)(4)(ii)(A)(3) of this section, donot include costs specifically described in§1.263A–1(e)(3)(ii) or cost reductions de-scribed in §1.471–3(e) as properly alloca-ble only to property that has been sold or,for inventory property, deemed to be soldunder the inventory cost flow assumption(such as first-in, first-out; last-in, first-out;or a specific-goods method) a taxpayeruses to identify the costs in ending inven-tory.

* * * * *(f) Effective/applicability date. (1)

Paragraphs (b)(2)(i)(D), (e), and (f) of thissection apply for taxable years ending onor after August 2, 2005.

(2) Paragraphs (b)(3)(ii)(C) and(b)(4)(ii)(A)(4) of this section apply fortaxable years ending on or after the datethese regulations are published as finalregulations in the Federal Register.

Par. 5. In §1.263A–3, para-graphs (d)(3)(i)(C)(3), (d)(3)(i)(D)(3),(d)(3)(i)(E)(3), and (f) are added to readas follows:

§1.263A–3 Rules relating to propertyacquired for resale.

* * * * *(d) * * *(3) * * *(i) * * *(C) * * *(3) Costs allocable only to sold prop-

erty. Section 471 costs remaining onhand at year end, as defined in paragraph(d)(3)(i)(C)(2) of this section, do not in-clude costs that are specifically describedin §1.263A–1(e)(3)(ii) or cost reductionsdescribed in §1.471–3(e) as properly allo-cable only to property that has been sold or,for inventory property, deemed to be soldunder the inventory cost flow assumption(such as first-in, first-out; last-in, first-out;or a specific-goods method) a taxpayeruses to identify the costs in ending inven-tory.

(D) * * *(3) Current year’s storage and handling

costs, beginning inventory, and currentyear’s purchases, as defined in paragraph(d)(3)(i)(D)(2) of this section, do not in-clude costs that are specifically describedin §1.263A–1(e)(3)(ii) or cost reductionsdescribed in §1.471–3(e) as properly allo-cable only to property that has been sold or,for inventory property, deemed to be soldunder the inventory cost flow assumption(such as first-in, first-out; last-in, first-out;or a specific-goods method) a taxpayeruses to identify the costs in ending inven-tory.

(E) * * *(3) Current year’s purchasing costs and

current year’s purchases, as defined inparagraph (d)(3)(i)(E)(2) of this section,do not include costs that are specificallydescribed in §1.263A–1(e)(3)(ii) or costreductions described in §1.471–3(e) asproperly allocable only to property thathas been sold or, for inventory property,deemed to be sold under the inventory cost

flow assumption (such as first-in, first-out;last-in, first-out; or a specific-goodsmethod) a taxpayer uses to identify thecosts in ending inventory.

* * * * *(f) Effective/applicability date. Para-

graphs (d)(3)(i)(C)(3), (d)(3)(i)(D)(3), and(d)(3)(i)(E)(3) of this section apply for tax-able years ending on or after the date theseregulations are published as final regula-tions in the Federal Register.

Par. 6. Section 1.471–3 is amended by:1. Adding paragraphs (e) and (g).2. Designating the undesignated text

following paragraph (d) as paragraph (f).The additions read as follows:

§1.471–3 Inventories at cost.

* * * * *(e) The amount of an allowance, dis-

count, or price rebate a taxpayer earns byselling specific merchandise is a reductionin the cost (as determined under paragraph(a), (b), or (d) of this section) of the mer-chandise sold or deemed to be sold underthe inventory cost flow assumption (suchas first-in, first-out; last-in, first-out; or aspecific-goods method) the taxpayer usesto identify the costs in ending inventory.This amount decreases cost of goods soldand does not reduce the inventory cost orvalue of goods on hand at the end of thetaxable year.

* * * * *(g) Effective/applicability date. Para-

graph (f) of this section applies to taxableyears ending on or after the date these reg-ulations are published as final regulationsin the Federal Register.



2011–6 I.R.B. 472 February 7, 2011

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome of casesin litigation, or the outcome of a Servicestudy.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.

ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.

PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D. —Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z —Corporation.

February 7, 2011 i 2011–6 I.R.B.

Numerical Finding List1

Bulletin 2011–1 through 2011–6

Announcements:

2011-1, 2011-2 I.R.B. 304

2011-2, 2011-3 I.R.B. 324

2011-3, 2011-3 I.R.B. 324

2011-4, 2011-4 I.R.B. 424

2011-5, 2011-4 I.R.B. 430

2011-6, 2011-4 I.R.B. 433

2011-7, 2011-5 I.R.B. 446

2011-8, 2011-5 I.R.B. 446

Notices:

2011-1, 2011-2 I.R.B. 259

2011-2, 2011-2 I.R.B. 260

2011-3, 2011-2 I.R.B. 263

2011-4, 2011-2 I.R.B. 282

2011-5, 2011-3 I.R.B. 314

2011-6, 2011-3 I.R.B. 315

2011-7, 2011-5 I.R.B. 437

2011-9, 2011-6 I.R.B. 459

2011-10, 2011-6 I.R.B. 463

Proposed Regulations:

REG-149335-08, 2011-6 I.R.B. 468

REG-124018-10, 2011-2 I.R.B. 301

Revenue Procedures:

2011-1, 2011-1 I.R.B. 1

2011-2, 2011-1 I.R.B. 90

2011-3, 2011-1 I.R.B. 111

2011-4, 2011-1 I.R.B. 123

2011-5, 2011-1 I.R.B. 167

2011-6, 2011-1 I.R.B. 195

2011-7, 2011-1 I.R.B. 233

2011-8, 2011-1 I.R.B. 237

2011-9, 2011-2 I.R.B. 283

2011-10, 2011-2 I.R.B. 294

2011-11, 2011-4 I.R.B. 329

2011-12, 2011-2 I.R.B. 297

2011-13, 2011-3 I.R.B. 318

2011-14, 2011-4 I.R.B. 330

2011-15, 2011-3 I.R.B. 322

2011-16, 2011-5 I.R.B. 440

2011-17, 2011-5 I.R.B. 441

2011-18, 2011-5 I.R.B. 443

2011-19, 2011-6 I.R.B. 465

Revenue Rulings:

2011-1, 2011-2 I.R.B. 251

2011-2, 2011-2 I.R.B. 256

2011-3, 2011-4 I.R.B. 326

2011-4, 2011-6 I.R.B. 448

Treasury Decisions:

9507, 2011-3 I.R.B. 305

9509, 2011-6 I.R.B. 450

9510, 2011-6 I.R.B. 453

9511, 2011-6 I.R.B. 455

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2010–27 through 2010–52 is in Internal Revenue Bulletin2010–52, dated December 27, 2010.

2011–6 I.R.B. ii February 7, 2011

Finding List of Current Actions onPreviously Published Items1

Bulletin 2011–1 through 2011–6

Announcements:

85-88

Obsoleted by

Rev. Proc. 2011-10, 2011-2 I.R.B. 294

2008-11

Modified by

Ann. 2011-6, 2011-4 I.R.B. 433

2009-62

Obsoleted by

Rev. Proc. 2011-10, 2011-2 I.R.B. 294

Notices:

2010-59

Modified by

Notice 2011-5, 2011-3 I.R.B. 314

2010-71

Modified and superseded by

Notice 2011-9, 2011-6 I.R.B. 459

2010-79

Clarified and modified by

Notice 2011-4, 2011-2 I.R.B. 282

Revenue Procedures:

72-50


Rev. Proc. 2011-10, 2011-2 I.R.B. 294

76-34

Modified and supersed by

Rev. Proc. 2011-10, 2011-2 I.R.B. 294

83-23


Rev. Proc. 2011-15, 2011-3 I.R.B. 322

94-17


Rev. Proc. 2011-15, 2011-3 I.R.B. 322

97-27

Clarified and modified by

Rev. Proc. 2011-4, 2011-1 I.R.B. 330

2001-10

Modified by

Rev. Proc. 2011-4, 2011-4 I.R.B. 330

2002-28

Modified by

Rev. Proc. 2011-4, 2011-4 I.R.B. 330

2003-21


Rev. Proc. 2011-15, 2011-3 I.R.B. 322

Revenue Procedures— Continued:

2004-34

Modified by

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

Modified and clarified by

Rev. Proc. 2011-18, 2011-5 I.R.B. 443

2006-44

Modified by

Ann. 2011-6, 2011-4 I.R.B. 433

2006-56

Modified by

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

2008-52

Modified by

Notice 2011-4, 2011-2 I.R.B. 282Rev. Proc. 2011-17, 2011-5 I.R.B. 441

Superseded in part by

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

2009-39

Superseded in part by

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

2009-44

Modified by

Ann. 2011-6, 2011-4 I.R.B. 433

2010-1

Superseded by

Rev. Proc. 2011-1, 2011-1 I.R.B. 1

2010-2

Superseded by

Rev. Proc. 2011-2, 2011-1 I.R.B. 283

2010-3

Superseded by

Rev. Proc. 2011-3, 2011-1 I.R.B. 111

2010-4

Superseded by

Rev. Proc. 2011-4, 2011-1 I.R.B. 123

2010-5

Superseded by

Rev. Proc. 2011-5, 2011-1 I.R.B. 167

2010-6

Superseded by

Rev. Proc. 2011-6, 2011-1 I.R.B. 195

2010-7

Superseded by

Rev. Proc. 2011-7, 2011-1 I.R.B. 233

2010-8

Superseded by

Rev. Proc. 2011-8, 2011-1 I.R.B. 237

2010-9

Superseded by

Rev. Proc. 2011-9, 2011-2 I.R.B. 283

Revenue Procedures— Continued:

2010-15

Updated by

Rev. Proc. 2011-13, 2011-3 I.R.B. 318

2011-1

Corrected by

Ann. 2011-7, 2011-5 I.R.B. 446

2011-8

Corrected by

Ann. 2011-8, 2011-5 I.R.B. 446

Revenue Rulings:

81-100

Modified by

Rev. Rul. 2011-1, 2011-2 I.R.B. 251

2004-67

Modified by

Rev. Rul. 2011-1, 2011-2 I.R.B. 251

2008-40

Modified by

Rev. Rul. 2011-1, 2011-2 I.R.B. 251

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2010–27 through 2010–52 is in Internal Revenue Bulletin 2010–52, dated December 27,2010.

February 7, 2011 iii 2011–6 I.R.B.

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