76612 Federal Register / Vol. 69, No. 245 / Wednesday, December 22, 2004 / Rules and Regulations 

June 2003, the CPI has increased from 

156.7 to 183.7, or 17.2%. Applying this 

percentage increase to currently 

adjusted civil penalty amounts, the FTC 

is adjusting civil penalty amounts 

currently set at $5,500 under two 

statutes: Clayton Act § 11(l), for 

violations of cease-and-desist orders 

issued under § 11(b) of that Act; and 

§ 525(a) of the Energy Policy and 

Conservation Act, for recycled oil 

labeling violations. Each will be 

adjusted to $6,500, in accordance with 

the rounding rules of the adjustment 

statute, and the FTC is amending 

paragraphs (b) and (l) of Rule 1.98 to 

reflect these adjustments, which will 

become effective thirty days following 

publication. The FTC is thus deleting 

the second sentence of the Rule’s 

introductory text, regarding the prior 

effective date, which is potentially 

confusing and, in any event, 

superfluous. 

The statute’s rounding rules do not 

authorize the FTC at this time to 

increase the amounts of the other civil 

penalties within its jurisdiction. 

Increases in civil penalties of greater 

than $10,000 and less than or equal to 

$100,000 must be in $5,000 increments, 

and the increase in the CPI was not high 

enough to round up any adjustment to 

$5,000. Likewise, increases in civil 

penalties of greater than $100 and less 

than or equal to $1,000 must be in $100 

increments, and the increase in the CPI 

was not high enough to round up any 

adjustment to $100. Accordingly, all 

other paragraphs of Rule 1.98 remain 

unchanged. 

Likewise, the FTC is not adding any 

new adjustments to the rule for other 

statutory civil penalty amounts that 

have been enacted since the last 

adjustments, such as § 621(a)(2) of the 

Fair Credit Reporting Act, 15 U.S.C. 

1681s, or § 1115(a) of the Medicare Act, 

Pub. L. 108–173. These authorities are 

too recent to warrant adjustments for 

inflation. 

In light of the ministerial nature of the 

adjustments, the public comment 

requirements of the Administrative 

Procedure Act (APA) do not apply to 

this action. 5 U.S.C. 553(b)(B) 

(exception when public comment is 

unnecessary). For this reason, the 

requirements of the Regulatory 

Flexibility Act also do not apply. 5 

U.S.C. 603, 604 (no regulatory flexibility 

analyses required where the APA does 

not require public comment).

List of Subjects for 16 CFR Part 1

Administrative practice and 

procedure, Penalties, Trade practices.

■ For the reasons set forth in the 

preamble, the Federal Trade 

Commission amends Title 16, chapter I, 

subchapter A, of the Code of Federal 

Regulations, as follows:

PART 1—GENERAL PROCEDURES

Subpart L—Civil Penalty Adjustments 

Under the Federal Civil Penalties 

Inflation Adjustment Act of 1990 as 

Amended by the Debt Collection 

Improvement Act of 1996

■ 1. The authority citation for subpart L 

continues to read as follows:

Authority: 28 U.S.C. 2461 note.

■ 2. Revise the introductory text of § 1.98 

and paragraphs (b) and (l) to read as 

follows:

§ 1.98 Adjustment of civil monetary 

penalty amounts. 

This section makes inflation 

adjustments in the dollar amounts of 

civil monetary penalties within the 

Commission’s jurisdiction.

* * * * *

(b) Section 11(l) of the Clayton Act, 15 

U.S.C. 21(l)—$6,500;

* * * * *

(l) Sections 525(a) and (b) of the 

Energy Policy and Conservation Act, 42 

U.S.C. 6395(a) and (b), respectively—

$6,500 and $11,000, respectively; and

* * * * *

By direction of the Commission. 

Donald S. Clark, 

Secretary.

[FR Doc. 04–27980 Filed 12–21–04; 8:45 am] 

BILLING CODE 6750–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service 

26 CFR Part 1

[TD 9170] 

RIN 1545–BD99

Section 1374 Effective Dates

AGENCY: Internal Revenue Service (IRS), 

Treasury.

ACTION: Final and temporary 

regulations. 

SUMMARY: These temporary regulations 

provide guidance concerning the 

applicability of section 1374 to S 

corporations that acquire assets in 

carryover basis transactions from C 

corporations on or after December 27, 

1994, and to certain corporations that 

terminate S corporation status and later 

elect again to become S corporations. 

The text of the temporary regulations 

also serves as the text of the proposed 

regulations set forth in the notice of 

proposed rulemaking on this subject in 

the Proposed Rules section in this issue 

of the Federal Register.

DATES: Effective Date: These regulations 

are effective December 22, 2004. 

Applicability Dates: Section 1.1374–

8T applies to any transaction described 

in section 1374(d)(8) that occurs on or 

after December 27, 1994. Section 

1.1374–10T applies for taxable years 

beginning after December 22, 2004. The 

applicability of § 1.1374(d)–8T and 

§ 1.1374(d)–10T will expire on or before 

December 21, 2007.

FOR FURTHER INFORMATION CONTACT:

Stephen R. Cleary; (202) 622–7750, (not 

a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of 

Provisions 

1. Section 1374 and Its Effective Dates 

Under the General Utilities doctrine, 

see General Utilities & Operating Co. v. 

Helvering, 296 U.S. 200 (1935), a C 

corporation, in certain cases, could 

distribute appreciated assets to its 

shareholders or sell appreciated assets 

without recognizing gain. Section 1374 

of the Internal Revenue Code of 1986 

(Code), amended in the Tax Reform Act 

of 1986 (TRA) as part of the repeal of the 

General Utilities doctrine, prevents a 

corporation from circumventing General 

Utilities repeal by converting to S 

corporation status before distributing 

appreciated assets to its shareholders or 

selling appreciated assets. 

Section 1374 generally imposes a 

corporate level tax on an S corporation’s 

net recognized built-in gain attributable 

to assets that it held on the date it 

converted from a C corporation to an S 

corporation. This tax is imposed on 

built-in gain recognized during the 10-

year period beginning on the first day 

the corporation is an S corporation. 

Section 1374(d)(8), which was added by 

the Technical and Miscellaneous 

Revenue Act of 1988 (TAMRA), imposes 

a corporate level tax on an S 

corporation’s net recognized built-in 

gain attributable to assets that it 

acquired in a carryover basis transaction 

from a C corporation for the 10-year 

recognition period beginning on the day 

of the carryover basis transaction.

Under section 1374(d)(9), which also 

was added by TAMRA, any reference in 

section 1374 to the first taxable year the 

corporation was an S corporation is a 

reference to the first taxable year it was 

an S corporation pursuant to its most 

recent S corporation election under 

section 1362. 

Federal Register / Vol. 69, No. 245 / Wednesday, December 22, 2004 / Rules and Regulations 76613

Section 1019 of TAMRA states that, 

except as otherwise provided, any 

amendments made by TAMRA are 

effective as if included in the provision 

of TRA to which such amendment 

relates. 

The current version of section 1374 

replaced a prior version of section 1374 

that generally only taxed income or gain 

recognized within the three year period 

following the date the corporation 

converted from C to S status. Section 

633 of TRA, as amended by TAMRA, 

provides the effective dates of the 

current version of section 1374. 

Specifically, section 633(b)(1) of TRA, 

as amended by TAMRA, provides that 

the amendments to section 1374 apply 

to taxable years beginning after 

December 31, 1986, but only in cases 

where the return for the taxable year is 

filed pursuant to an S election made 

after December 31, 1986. Section 

633(d)(8) of TRA, as amended by 

TAMRA, provides a transition rule 

granting a limited postponement of the 

above effective date for ‘‘qualified 

corporations’’, which are certain small 

corporations as defined in that section. 

Under the transition rule, if a C 

corporation that is a qualified 

corporation makes an election to be an 

S corporation under section 1362 before 

January 1, 1989, then it is subject to 

former section 1374 for dispositions of 

long-term capital gain assets and current 

section 1374 for dispositions of shortterm capital gain assets and ordinary 

income assets, without regard to 

whether such corporation is completely 

liquidated. 

2. Section 1374(d)(8) 

As discussed above, the general 

effective date of current section 1374, 

which is contained in section 633(b)(1) 

of the TRA, as amended by TAMRA, 

provides that current section 1374 

applies to tax years beginning after 

December 31, 1986, but only in cases 

where the return for the taxable year is 

filed pursuant to an S election made 

after December 31, 1986. In TAMRA, 

Congress added subsection (d)(8) to 

section 1374, and provided that the 

provision was effective as if included in 

TRA. 

Section 1.1374–8 provides regulations 

interpreting section 1374(d)(8). Example 

1 of § 1.1374–8(d) applies section 

1374(d)(8) to a merger of a C corporation 

into an S corporation that elected S 

status before the effective date of TRA 

amendments, as further amended by 

TAMRA, to section 1374. Section 

1.1374–10(a) provides that § 1.1374–8 

applies for taxable years ending on or 

after December 27, 1994, but only in 

cases where the corporation’s tax return 

is filed pursuant to an S election or a 

section 1374(d)(8) transaction occurring 

after December 27, 1994 (emphasis 

added). 

Despite the provisions of § 1.1374–8 

and the effective date provisions of 

§ 1.1374–10, the IRS understands that 

some taxpayers contend that section 

1374(d)(8) does not apply to carryover 

basis transfers from S corporations to S 

corporations that filed S elections before 

January 1, 1987, because the provisions 

in TAMRA that added section 

1374(d)(8) indicated that the 

amendment was effective only if the 

return for the taxable year was filed 

pursuant to an S election made after 

December 31, 1986.

Section 337(d)(1) authorizes the 

Secretary to prescribe regulations to 

prevent the circumvention of the 

purposes of the repeal of the General 

Utilities doctrine through the use of any 

provision of law or regulations. The 

Treasury Department and the IRS 

believe that these temporary regulations 

are necessary to implement General 

Utilities repeal to prevent the use of 

corporations with pre-1987 S elections 

as a method for C corporations to 

transfer appreciated assets out of C 

corporation solution without gain 

recognition. Accordingly, these 

regulations confirm that section 

1374(d)(8) applies to any transaction 

described in that section that occurs on 

or after December 27, 1994, the effective 

date of § 1.1374–8, regardless of the date 

of the S corporation’s election under 

section 1362. 

3. Revocation and Re-Election of S 

Corporation Status 

As discussed above, section 633(d)(8) 

of TRA, as amended by TAMRA, 

provides a transition rule granting a 

limited postponement of the general 

effective date of current section 1374 for 

qualified corporations that make an 

election to be an S corporation under 

section 1362 before January 1, 1989. In 

Colorado Gas Compression, Inc. v. 

Commissioner, 366 F.3d 863 (10th Cir. 

2004), reversing and remanding 116 

T.C. 1 (2001), a qualified corporation 

eligible for the special transition rule 

elected S corporation status on February 

1, 1988 (before the extended effective 

date of January 1, 1989), revoked S 

status on December 1, 1989, and 

subsequently re-elected S status 

effective on January 1, 1994. During the 

years 1994 through 1996, the taxpayer 

sold assets. The Tax Court held that 

such sales were subject to current 

section 1374, and that the transition rule 

did not preclude the application of 

current section 1374 because the 

taxpayer’s most recent S election was 

made after 1989. The Tax Court 

concluded that section 1374(d)(9) 

requires that the 1994 election, the 

taxpayer’s most recent election, be the 

election considered for effective date 

purposes. The Tenth Circuit reversed 

the Tax Court, holding that, because the 

1988 election was made before the 

extended effective date, the corporation 

was exempt from current section 1374 

despite the intervening revocation of S 

status. 

The Treasury Department and the IRS 

believe that the Tenth Circuit’s holding 

is inconsistent with the legislative 

history and underlying policy of section 

663 of TRA, as amended by TAMRA, 

and believe the Tax Court was correct in 

holding that a corporation’s most recent 

S election must have been made before 

the deadline of the transition rule (i.e.,

before January 1, 1989) in order for the 

corporation to be entitled to the benefit 

of the transition rule. As indicated 

above, section 337(d)(1) authorizes the 

Secretary to prescribe regulations to 

prevent the circumvention of the 

purposes of the repeal of the General 

Utilities doctrine through the use of any 

provision of law or regulations. The 

Treasury Department and the IRS 

believe that these temporary regulations 

are necessary to implement General 

Utilities repeal to prevent avoidance of 

corporate level tax on appreciation in 

the assets of a C corporation attributable 

to periods after the extended effective 

date of January 1, 1989. Accordingly, 

these regulations provide that the 

transition rule regarding qualified 

corporations in section 633(d)(8) of 

TRA, as amended by TAMRA, applies 

only if the corporation’s most recent S 

election was made before January 1, 

1989. Although these regulations apply 

to built-in gain recognized in taxable 

years beginning after December 22, 

2004, the IRS will continue to assert this 

position for prior taxable years.

In summary, the temporary 

regulations provide that (1) section 

1374(d)(8) applies to any transaction 

described in that section that occurs on 

or after December 27, 1994, regardless of 

the date of the S corporation’s election 

under section 1362, and (2) for purposes 

of section 633(d)(8) of TRA, as amended 

by TAMRA, a corporation’s most recent 

S election, not an earlier election that 

has been revoked or terminated, 

determines whether or not it is subject 

to current section 1374. 

Special Analyses 

It has been determined that this 

temporary regulation is not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

76614 Federal Register / Vol. 69, No. 245 / Wednesday, December 22, 2004 / Rules and Regulations 

also has been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) does not apply 

to § 1.1374–8T(a)(2) of these regulations. 

With respect to § 1.1374–10T(c) of these 

regulations, it has been determined, 

pursuant to 5 U.S.C. 553(b)(B), that it 

would be contrary to the public interest 

to issue the regulations with notice and 

public procedure and, pursuant to 5 

U.S.C. 553(d)(3), that good cause exists 

to dispense with a delayed effective 

date. The regulations are necessary to 

provide immediate guidance to 

taxpayers with respect to the 

application of the transition rule 

regarding qualified corporations in 

section 633(d)(8) of TRA, as amended by 

TAMRA, and, accordingly, with respect 

to the application of current section 

1374 to asset dispositions which occur 

during taxable years beginning after 

December 22, 2004. For applicability of 

the Regulatory Flexibility Act (5 U.S.C. 

chapter 6), refer to the Special Analysis 

section of the Notice of Proposed 

Rulemaking published in the Proposed 

Rules section in this issue of the Federal 

Register. Pursuant to section 7805(f) of 

the Code, these temporary regulations 

have been submitted to the Chief 

Counsel for Advocacy of the Small 

Business Administration for comment 

on their impact on small business. 

Drafting Information 

The principal author of these 

regulations is Stephen R. Cleary of the 

Office of Associate Chief Counsel 

(Corporate). Other personnel from 

Treasury and the IRS participated in 

their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and 

recordkeeping requirements.

Adoption of Amendments to the 

Regulations

■ Accordingly, 26 CFR part 1 is amended 

as follows:

PART 1—INCOME TAXES

■ Paragraph 1. The authority citation for 

part 1 is amended by adding entries in 

numerical order to read as follows:

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

Section 1.1374–8T also issued under 26 

U.S.C. 337(d) and 1374(e). * * *

Section 1.1374–10T also issued under 26 

U.S.C. 337(d) and 1374(e). * * *

■ Par. 2. Section 1.1374–8 is amended by 

redesignating paragraph (a) as paragraph 

(a)(1) and adding paragraph (a)(2) to read 

as follows:

§ 1.1374–8 Section 1374(d)(8) transactions 

(a)(1) * * *

(2) (Reserved) For further guidance 

see § 1.1374–8T(a)(2).

* * * * *

■ Par. 3. Section 1.1374–8T is added to 

read as follows:

§ 1374–8T 1374(d)(8) transactions 

(temporary) 

(a)(1) (Reserved) For further guidance 

see § 1374–8(a). 

(2) Section 1374(d)(8) transaction, as 

defined in paragraph (a)(1) of this 

regulation, that occurs on or after 

December 27, 1994, without regard to 

the date of the corporation’s election to 

be an S corporation under section 1362. 

(b) through (d) (Reserved) For further 

guidance see § 1.1374–8(b) through (d).

■ Par. 4. Section 1.1374–10 is amended 

by adding paragraph (c) to read as 

follows:

§ 1.1374–10 Effective date and additional 

rules

* * * * *

(c) (Reserved) For further guidance 

see § 1.1374–10T(c).

■ Par. 5. Section 1.1374–10T is added to 

read as follows:

§ 1.1374–10T Effective date and additional 

rules (temporary) 

(a) through (b)(4) (Reserved) For 

further guidance see § 1.1374–10(a) 

through (b)(4). 

(c) Revocation and re-election of S 

corporation status—(1) In general. For 

purposes of section 633(d)(8) of the Tax 

Reform Act of 1986, as amended, any 

reference to an election to be an S 

corporation under section 1362 shall be 

treated as a reference to the 

corporation’s most recent election to be 

an S corporation under section 1362. 

This paragraph (c) applies for taxable 

years beginning after December 22, 2004 

without regard to the date of the 

corporation’s most recent election to be 

an S corporation under section 1362. 

(2) Example. The following example 

illustrates the rules of this paragraph(c):

Example. (i) On February 1, 1988, X, a C 

corporation that is a qualified corporation 

under section 633(d) of the Tax Reform Act 

of 1986, as amended, elects to be an S 

corporation under section 1362. On 

December 1, 1989, X revokes its S status and 

becomes a C corporation. On January 1, 2004, 

X again elects to be an S corporation under 

section 1362. X disposes of assets in 2006, 

2007, and 2008, recognizing gain. 

(ii) X is not eligible for treatment under the 

Transition rule of section 633(d)(8) of the Tax 

Reform Act of 1986, as amended, with 

respect to these assets. Accordingly, X is 

subject to section 1374, as amended by the 

Tax Reform Act of 1986 and TAMRA, and the 

10-year recognition period begins January 1, 

2004. 

(iii) To the extent the gain that X 

recognizes on the assest sales in 2006, 2007, 

and 2008 reflects built-in gain inherent in 

such assets in X’s hands on January 1, 2004, 

such gain is subject to tax under section 1374 

as amended by the Tax Reform Act of 1986 

and TAMRA.

Mark E. Matthews, 

Deputy Commissioner for Services and 

Enforcement.

Approved: December 15, 2004. 

Gregory F. Jenner, 

Acting Assistant Secretary of the Treasury.

[FR Doc. 04–28013 Filed 12–21–04; 8:45 am] 

BILLING CODE 4820–01–M

DEPARTMENT OF THE TREASURY

Internal Revenue Service 

26 CFR Parts 1 and 602

[TD 9168] 

RIN 1545–BC13

Optional 10-Year Writeoff of Certain 

Tax Preferences

AGENCY: Internal Revenue Service (IRS), 

Treasury.

ACTION: Final regulation.

SUMMARY: This document contains final 

regulations relating to the optional 10-

year writeoff of certain tax preference 

items under section 59(e) of the Internal 

Revenue Code (Code). The final 

regulations affect taxpayers who utilize 

section 59(e) for the optional 10-year 

writeoff of certain tax preferences. 

These final regulations provide 

guidance on the time and manner of 

making an election under section 59(e). 

The regulations also provide guidance 

on revoking an election under section 

59(e). The regulations reflect changes to 

the law made by the Tax Reform Act of 

1986, the Technical and Miscellaneous 

Revenue Act of 1988, and the Omnibus 

Budget Reconciliation Act of 1989.

DATES: Effective Date: This rule is 

effective December 22, 2004. 

Applicability Date: These regulations 

apply to a section 59(e) election made 

for a taxable year ending, or a request 

to revoke a section 59(e) election 

submitted, on or after December 22, 

2004.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act 

The collection of information 

contained in these final regulations has 

been reviewed and approved by the 

Office of Management and Budget in 

accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 

3507(d)) under control number 1545–

1903. Responses to this collection of