78940 Federal Register / Vol. 75, No. 242 / Friday, December 17, 2010 / Proposed Rules 

collection extension request. For more 

information on this request, see http:// 

www.reginfo.gov. 

DATES: This correction is effective 

December 17, 2010. 

FOR FURTHER INFORMATION CONTACT: For 

information on this correction, contact 

Thomas M. Dowd, Administrator, Office 

of Policy Development and Research, 

Employment and Training 

Administration, U.S. Department of 

Labor, 200 Constitution Avenue, NW., 

Room N–5641, Washington, DC 20210. 

Telephone: (202) 693–3700 (this is not 

a toll-free number). Individuals with 

hearing or speech impairments may 

access the telephone via TTY by calling 

the toll-free Federal Information Relay 

Service at 1–800–877–8339. 

SUPPLEMENTARY INFORMATION: 

Correction 

In proposed rule FR Doc. 2010–29424 

(75 FR 71514), beginning on page 71514 

in the issue of November 23, 2010, make 

the following correction in the 

SUPPLEMENTARY INFORMATION section. On 

page 71517, in the 2nd column, in the 

8th line, delete the sentence: ‘‘The 

approval expires October 31, 2010.’’ 

Replace that sentence with ‘‘The 

approval for 1205–0040 remains current 

on a month-by-month basis until OMB 

acts on the currently pending 

information collection extension 

request. For more information on this 

request, see http://www.reginfo.gov.’’ 

Signed in Washington, DC, this 13th day of 

December 2010. 

Jane Oates, 

Assistant Secretary, Employment and 

Training Administration, Labor. 

[FR Doc. 2010–31680 Filed 12–16–10; 8:45 am] 

BILLING CODE 4510–FN–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–149335–08; RIN 1545–BI57] 

Sales-Based Royalties and Vendor 

Allowances 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations relating to the 

capitalization and allocation of royalties 

that are incurred only upon the sale of 

property produced or property acquired 

for resale (sales-based royalties). This 

document also contains proposed 

regulations on adjusting the cost of 

merchandise inventory for an 

allowance, discount, or price rebate 

based on merchandise sales (sales-based 

vendor allowances). The regulations 

modify the simplified production 

method and the simplified resale 

method of allocating capitalized costs 

between ending inventory and cost of 

goods sold. The regulations affect 

taxpayers that incur capitalizable salesbased royalties and earn sales-based 

vendor allowances. 

DATES: Written or electronic comments 

and a request for a public hearing must 

be received 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 

may be hand-delivered Monday through 

Friday between the hours of 8 a.m. and 

4 p.m. to: CC:PA:LPD:PR (REG–149335– 

08), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC. Alternatively, 

taxpayers may submit comments 

electronically via the Federal 

eRulemaking Portal at http:// 

www.regulations.gov (IRS REG–149335– 

08). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

John Roman Faron, (202) 622–4930 (not 

a toll-free number); concerning 

submission of comments or a request for 

a public hearing, Richard Hurst at 

Richard.A.Hurst@irscounsel.treas.gov. 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains proposed 

amendments to 26 CFR part 1 relating 

to the allocation under section 263A of 

the Internal Revenue Code (Code) of 

certain sales-based royalties. Salesbased royalties are royalty costs that 

become due only upon the sale of 

property. Thus, the fact of the liability 

arises, and the royalty is incurred 

within the meaning of section 461, only 

upon sale. 

This document also contains 

proposed amendments to 26 CFR part 1 

relating to the determination of cost of 

goods in inventory under section 471 

when a taxpayer receives a sales-based 

vendor allowance. Sales-based vendor 

allowances are allowances, discounts, or 

price rebates that a reseller receives, 

earns, or otherwise becomes entitled to 

based on the resale of a vendor’s 

merchandise to a third party. 

Capitalization and Allocation of SalesBased Royalties Under Section 263A 

Section 263A requires taxpayers to 

capitalize the direct costs and indirect 

costs that are properly allocable to 

(1) real or tangible personal property the 

taxpayer produces, and (2) real property 

or personal property described in 

section 1221(a)(1) that the taxpayer 

acquires for resale. Taxpayers must 

allocate costs required to be capitalized 

under section 263A to property 

produced or acquired for resale during 

the taxable year using a cost allocation 

method described in the regulations. A 

taxpayer generally determines whether 

the cost of goods is included in cost of 

goods sold or in ending inventory using 

a cost flow assumption (for example, 

first-in, first-out or last-in, first-out). 

However, as explained later in this 

preamble, a taxpayer may use a 

simplified method to allocate costs 

required to be capitalized under section 

263A between cost of goods sold and 

ending inventory. 

Section 1.263A–1(e)(3)(i) defines 

indirect costs as all costs other than 

direct material costs and direct labor 

costs (in the case of property produced) 

or acquisition costs (in the case of 

property acquired for resale). Indirect 

costs are properly allocable to property 

produced or acquired for resale when 

the costs directly benefit or are incurred 

by reason of the performance of 

production or resale activities. 

Section 1.263A–1(e)(3)(ii) provides a 

non-exclusive list of indirect costs that 

must be capitalized to the extent they 

are properly allocable to property 

produced or property acquired for 

resale. These costs include licensing 

and franchise costs incurred in securing 

the contractual right to use a trademark, 

corporate plan, manufacturing 

procedure, special recipe, or other 

similar right associated with property 

produced or property acquired for 

resale. Section 1.263A–1(e)(3)(ii)(U). 

Thus, royalty costs, including salesbased royalty costs, incurred in securing 

the contractual right to use a trademark, 

corporate plan, manufacturing 

procedure, special recipe, or other 

similar right associated with property 

produced or property acquired for 

resale, are indirect costs that are 

properly allocable to the property 

produced or acquired for resale to the 

extent the costs directly benefit or are 

incurred by reason of production or 

resale activities. See, for example, 

Plastic Engineering & Technical 

Services, Inc. v. Commissioner, TC 

Memo. 2001–324; but see Robinson 

Knife Manufacturing Company, Inc. v. 

Commissioner, No. 09–1496–ag, 2010 

WL 986532 (2d Cir. March 19, 2010). 

Section 1.263A–1(f) provides various 

‘‘facts-and-circumstances’’ cost 

allocation methods that taxpayers may 

use to allocate direct and indirect costs 


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Federal Register / Vol. 75, No. 242 / Friday, December 17, 2010 / Proposed Rules 78941 

to units of property produced or 

acquired for resale. The facts-andcircumstances methods allocate costs 

based on a relationship between the 

costs incurred and the units of property 

produced or acquired for resale. 

In lieu of a facts-and-circumstances 

allocation method, taxpayers may use 

the simplified methods provided in 

§ 1.263A–2(b) (the simplified 

production method) or § 1.263A–3(d) 

(the simplified resale method) to 

allocate costs to eligible property 

produced or eligible property acquired 

for resale. The simplified methods differ 

from facts-and-circumstances methods 

in that they allocate a pool of 

capitalizable costs (additional section 

263A costs) between ending inventory 

and cost of goods sold using a defined 

ratio rather than allocating specific costs 

to particular goods. Additional section 

263A costs are defined in § 1.263A– 

1(d)(3) as the costs, other than interest, 

that were not capitalized under the 

taxpayer’s method of accounting 

immediately prior to the effective date 

of section 263A, but that are required to 

be capitalized under section 263A. 

Under the simplified methods, 

taxpayers allocate additional section 

263A costs between ending inventory 

and cost of goods sold using a formula 

that includes all additional section 

263A costs incurred during the taxable 

year (including capitalizable sales-based 

royalties, if any). 

Section 471 Inventory Rules Related to 

Sales-Based Vendor Allowances 

Section 471 provides that inventories 

must be taken on the basis the Secretary 

prescribes as conforming to the best 

accounting practice in the trade or 

business and as most clearly reflecting 

income. 

Section 1.471–2(c) permits merchants 

and manufacturers to value inventories 

at either (1) cost, or (2) cost or market, 

whichever is lower. Under § 1.471–3(b), 

the cost of merchandise purchased by 

taxpayers in general is the invoice price 

less trade or other discounts. 

Section 1.471–8 allows a retail 

merchant to use the retail inventory 

method to arrive at an approximate cost 

of goods in ending inventory. This cost 

is determined by multiplying the 

aggregate selling prices of the goods in 

ending inventory by the ratio of (1) the 

cost of the goods in beginning inventory 

plus the cost of goods purchased during 

the year, to (2) the retail selling prices 

of the goods in beginning inventory plus 

the retail selling prices of inventory 

purchased during the year, with proper 

adjustments to the selling prices for 

mark-ups and mark-downs. However, 

retail selling prices are not adjusted for 

temporary mark-downs. Rev. Rul. 79– 

115 (1979–1 CB 185), see 

§ 601.601(d)(2). 

Explanation of Provisions 

1. Capitalization and Allocation of 

Sales-Based Royalties Under Section 

263A 

The proposed regulations clarify that 

sales-based royalties, like other 

royalties, may be capitalizable to 

property a taxpayer produces or 

acquires for resale, but also provide that 

sales-based royalties required to be 

capitalized are allocable only to 

property that a taxpayer has sold. 

In Robinson Knife, the Court of 

Appeals for the Second Circuit held that 

royalties for the right to use certain 

trademarks in manufacturing kitchen 

tools were not allocable to the property 

produced because the taxpayer’s royalty 

payments were calculated as a 

percentage of net sales and were 

incurred only on the sale of the product. 

The court stated that the royalty costs 

were not incurred by reason of and did 

not directly benefit the performance of 

production activities, and therefore 

were not capitalizable under the section 

263A regulations. The court reasoned 

that, although the licensing agreements 

may have directly benefited or been 

incurred by reason of production 

activities, the regulations did not 

require the capitalization of the royalty 

costs because the costs themselves did 

not directly benefit and were not 

incurred by reason of the performance 

of production activities. 

The proposed regulations are 

consistent with the court’s conclusion 

that, because of their relationship to 

sales, sales-based royalties inherently 

should not be capitalized to ending 

inventory. Because sales-based royalties 

are not incurred (within the meaning of 

section 461) until a unit of property is 

sold, sales-based royalties are more 

directly related to units of property sold 

during the taxable year than to unsold 

units. Therefore, the proposed 

regulations provide that capitalizable 

sales-based royalties are properly 

allocable to units of property produced 

or acquired for resale that are sold, or 

deemed sold, during the taxable year. 

However, Robinson Knife 

misconstrued the nature of costs 

required to be capitalized. Royalties are 

the costs associated with the right to use 

intellectual property such as 

copyrighted works or patented 

inventions. If the use of those rights 

directly benefits or is incurred by reason 

of production activities, then the cost of 

securing those rights do as well. The 

fact that the amount of sales-based 

royalties is determined by reference to 

the number of units of property a 

taxpayer sells or is calculated as a 

percentage of revenue from the sale of 

inventory affects when a taxpayer incurs 

(within the meaning of section 461) that 

amount, but does not change an 

otherwise capitalizable production or 

resale cost into a non-capitalizable cost. 

Therefore, the proposed regulations also 

clarify that an indirect cost may directly 

benefit or be incurred by reason of the 

performance of production or resale 

activities even if the costs are incurred 

only upon the sale of inventory. Salesbased royalties, like other costs that 

directly benefit or are incurred by 

reason of production or resale activities, 

are capitalizable licensing and franchise 

costs within the meaning of § 1.263A– 

1(e)(3)(ii)(U). 

The proposed regulations achieve a 

similar result to that in Robinson Knife, 

but rather than determining that salesbased royalty costs are inherently noncapitalizable, the proposed regulations 

provide that otherwise capitalizable 

sales-based royalty costs are properly 

allocable to property sold during the 

taxable year. 

2. Sales-Based Vendor Allowances 

Under § 1.471–3(b), the cost of 

merchandise a taxpayer purchases 

generally is the invoice price less trade 

or other discounts. A sales-based vendor 

allowance is an allowance, discount, or 

price rebate a taxpayer earns as a result 

of selling a vendor’s merchandise, 

typically at a temporarily reduced price. 

The taxpayer’s right to receive the salesbased vendor allowance depends on 

actual sales of the vendor’s products. 

The amount received directly relates to 

the specific merchandise the taxpayer 

sells and properly is treated as a 

reduction in the cost of that 

merchandise. Therefore, the proposed 

regulations clarify that a sales-based 

vendor allowance is an adjustment to 

the cost of the merchandise sold or 

deemed sold under the taxpayer’s cost 

flow assumption. 

3. Adjusting the Cost of Goods Sold and 

Goods in Ending Inventory 

Sales-based royalties and sales-based 

vendor allowances are properly 

allocable to property sold during the 

taxable year. Therefore, it is 

inappropriate to treat sales-based 

royalties and sales-based vendor 

allowances as adjustments to the cost of 

goods in ending inventory. The 

proposed regulations provide that salesbased royalties and sales-based vendor 

allowances are allocable to the units of 

property sold or deemed sold under the 

taxpayer’s cost flow assumption and are 


srobinson on DSKHWCL6B1PROD with PROPOSALS
78942 Federal Register / Vol. 75, No. 242 / Friday, December 17, 2010 / Proposed Rules 

not included in determining the 

inventory cost or value of goods on 

hand at the end of the taxable year 

under any inventory method. 

Because the proposed regulations 

expressly allocate sales-based royalties 

and sales-based vendor allowances to 

property that has been sold or deemed 

sold, the proposed regulations revise the 

simplified production and simplified 

resale methods to remove costs such as 

capitalizable sales-based royalties and 

cost reductions such as sales-based 

vendor allowances, which are properly 

allocable to property that has been sold, 

from the formulas used to allocate 

additional section 263A costs to ending 

inventory. Taxpayers must continue to 

include capitalizable sales-based royalty 

costs in both the numerator and 

denominator of the production cost 

allocation ratio under § 1.263A–1(h)(5) 

for purposes of determining capitalized 

mixed service costs under the simplified 

service cost method. 

The proposed regulations do not 

modify the retail inventory method 

under § 1.471–8 specifically. Section 

1.471–3 and section 263A determine the 

cost of purchases for purposes of the 

retail inventory method, and the 

proposed regulations under §§ 1.263A– 

1 and 1.471–3 preclude a taxpayer from 

including sales-based royalties and 

sales-based vendor allowances in the 

cost of goods in the fraction used to 

determine the value of ending inventory 

under § 1.471–8. Similarly, if the selling 

price markdown in a sales-based vendor 

allowance arrangement is temporary, 

the retail selling price component of the 

fraction is not adjusted. 

Effective/Applicability Date 

These regulations are proposed to 

apply for taxable years ending on or 

after the date the regulations are 

published as final regulations in the 

Federal Register. 

Special Analyses 

This notice of proposed rulemaking is 

not a significant regulatory action as 

defined in Executive Order 12866. 

Therefore, a regulatory assessment is not 

required. It also has been determined 

that section 553(b) of the Administrative 

Procedure Act (5 U.S.C. chapter 5) does 

not apply to these regulations. Because 

the regulations do not impose a 

collection of information on small 

entities, the Regulatory Flexibility Act 

(5 U.S.C. chapter 6) does not apply. 

Pursuant to section 7805(f) of the Code, 

this notice of proposed rulemaking has 

been submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on its 

impact on small business. 

Comments and Requests for a Public 

Hearing 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

written comments that are submitted 

timely to the IRS. Comments may be 

submitted electronically or via a signed 

original with eight (8) copies. The IRS 

and the Treasury Department request 

comments on the clarity of the proposed 

rules and how they can be made easier 

to understand. All comments will be 

available for public inspection and 

copying. 

A public hearing will be scheduled if 

requested in writing by any person that 

timely submits comments. If a public 

hearing is scheduled, notice of the date, 

time, and place for the hearing will be 

published in the Federal Register. 

Drafting Information 

The principal author of these 

regulations is John Roman Faron of the 

Office of the Associate Chief Counsel 

(Income Tax and Accounting). However, 

other personnel from the IRS and 

Treasury Department participated in 

their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

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

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), and 

1.263A–3(f) and revising the entry for 

§§ 1.263A–1(e)(3)(ii) in the table of 

contents to read as follows: 

§ 1.263A–0 Outline of regulations under 

section 263A. 

* * * * * 

§ 1.263A–1 Uniform Capitalization of 

Costs. 

* * * * * 

(c) * * * 

(5) Costs allocable only to sold 

property. 

* * * * * 

(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 Property 

Produced by the Taxpayer. 

* * * * * 

(b) * * * 

(3) * * * 

(ii) * * * 

(C) Costs allocable only to sold 

property. 

* * * * * 

(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 Property 

Acquired for Resale. 

* * * * * 

(d) * * * 

(3) * * * 

(i) * * * 

(C) * * * 

(3) Costs allocable only to sold 

property. 

* * * * * 

(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 end of 

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 

follows: 

§ 1.263A–1 Uniform capitalization of costs. 

* * * * * 

(c) * * * 

(5) Costs allocable only to sold 

property. Any cost that is required 


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Federal Register / Vol. 75, No. 242 / Friday, December 17, 2010 / Proposed Rules 78943 

under this section, § 1.263A–2, or 

§ 1.263A–3, to be allocated only to 

property sold, or deemed to be sold 

under the inventory cost flow 

assumption (such as first-in, first-out, 

last-in, first-out, or a specific-goods 

method) the taxpayer uses to identify 

the costs in ending inventory, must be 

included in cost of goods sold and is not 

included in determining the inventory 

cost or value of goods on hand at the 

end of the taxable year. 

* * * * * 

(e) * * * 

(3) * * * 

(i) In general. (A) Indirect costs are 

defined as all costs other than direct 

material costs and direct labor costs (in 

the case of property produced) or 

acquisition costs (in the case of property 

acquired for resale). Taxpayers subject 

to section 263A must capitalize all 

indirect costs properly allocable to 

property produced or property acquired 

for resale. Indirect costs are properly 

allocable to property produced or 

property acquired for resale when the 

costs directly benefit or are incurred by 

reason of the performance of production 

or resale activities. Indirect costs may 

directly benefit or be incurred by reason 

of the performance of production or 

resale activities even if the costs are 

calculated as a percentage of sales 

revenue from inventory or are incurred 

only upon the sale of inventory. Indirect 

costs may be allocable to both 

production and resale activities, as well 

as to other activities that are not subject 

to section 263A. Taxpayers must make 

a reasonable allocation of indirect costs 

between production, resale, and other 

activities. 

(B) Example. The following example 

illustrates the provisions of this 

paragraph (e)(3)(i): 

Example. (i) Taxpayer A manufactures 

tablecloths and other linens. A enters into a 

licensing agreement with Company L under 

which A may label its tablecloths with L’s 

trademark if the tablecloths meet certain 

specified quality standards. In exchange for 

its right to use L’s trademark, the licensing 

agreement requires A to pay L a royalty of $X 

for each tablecloth carrying L’s trademark 

that A sells. The licensing agreement does 

not require A to pay L any minimum or 

lump-sum royalties. 

(ii) The licensing agreement provides A 

with the right to use L’s intellectual property, 

a trademark. The licensing agreement also 

requires A to conduct its production 

activities according to certain standards as a 

condition of exercising that right. Thus, A’s 

right to use L’s trademark under the licensing 

agreement is directly related to A’s 

production of tablecloths. The royalties the 

licensing agreement requires A to pay for 

using L’s trademark are the costs A incurs in 

exchange for these rights. Therefore, although 

A incurs royalty costs only when A sells a 

tablecloth carrying L’s trademark, the royalty 

costs directly benefit production activities 

and are incurred by reason of production 

activities within the meaning of paragraph 

(e)(3)(i) of this section. 

(ii) Types of indirect costs required to 

be capitalized. The following are types 

of indirect costs that must be capitalized 

to the extent they are properly allocable 

to property produced or property 

acquired for resale: 

* * * * * 

(U) Licensing and franchise costs. (1) 

* * * These costs also include fees, 

payments, and royalties otherwise 

described in this paragraph (e)(3)(ii)(U) 

that a taxpayer incurs (within the 

meaning of section 461) only upon the 

sale of property produced or acquired 

for resale. 

(2) If a taxpayer incurs (within the 

meaning of section 461) a fee, payment, 

or royalty described in this paragraph 

(e)(3)(ii)(U) only upon the sale of 

property produced or acquired for resale 

and the cost is required to be capitalized 

under this paragraph (e)(3), the cost is 

allocable only to the property that has 

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 specificgoods method) the taxpayer uses to 

identify the costs in ending inventory. 

* * * * * 

(l) Effective/applicability date. (1) 

Paragraphs (h)(2)(i)(D), (k), and (l) of 

this section apply for taxable years 

ending on or after August 2, 2005. 

(2) Paragraphs (c)(5), (e)(3)(i), and 

(e)(3)(ii)(U) of this section apply for 

taxable years ending on or after the date 

these regulations are published as final 

regulations in the Federal Register. 

Par. 4. Section 1.263A–2 is amended 

by: 

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

(b)(4)(ii)(A)(4). 

2. Revising paragraph (f). 

The additions and revision read as 

follows: 

§ 1.263A–2 Rules relating to property 

produced by the taxpayer. 

* * * * * 

(b) * * * 

(3) * * * 

(ii) * * * 

(C) Costs allocable only to sold 

property. Additional section 263A costs 

incurred during the taxable year, as 

defined in paragraph (b)(3)(ii)(A)(1) of 

this section, section 471 costs incurred 

during the taxable year, as defined in 

paragraph (b)(3)(ii)(A)(2) of this section, 

and section 471 costs remaining on 

hand at year end, as defined in 

paragraph (b)(3)(ii)(B) of this section, do 

not include costs specifically described 

in § 1.263A–1(e)(3)(ii) or cost reductions 

described in § 1.471–3(e) as properly 

allocable only to property that has 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-goods 

method) a taxpayer uses to identify the 

costs in ending inventory. 

* * * * * 

(4) * * * 

(ii) * * * 

(A) * * * 

(4) Additional section 263A costs 

incurred during the test period, as 

defined in paragraph (b)(4)(ii)(A)(2) of 

this section and section 471 costs 

incurred during the test period, as 

defined in paragraph (b)(4)(ii)(A)(3) of 

this section, do not include costs 

specifically described in § 1.263A– 

1(e)(3)(ii) or cost reductions described 

in § 1.471–3(e) as properly allocable 

only to property that has 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-goods 

method) a taxpayer uses to identify the 

costs in ending inventory. 

* * * * * 

(f) Effective/applicability date. (1) 

Paragraphs (b)(2)(i)(D), (e), and (f) of this 

section apply for taxable years ending 

on or after August 2, 2005. 

(2) Paragraphs (b)(3)(ii)(C) and 

(b)(4)(ii)(A)(4) of this section apply for 

taxable years ending on or after the date 

these regulations are published as final 

regulations in the Federal Register. 

Par. 5. In § 1.263A–3, paragraphs 

(d)(3)(i)(C)(3), (d)(3)(i)(D)(3), 

(d)(3)(i)(E)(3), and (f) are added to read 

as follows: 

§ 1.263A–3 Rules relating to property 

acquired for resale. 

* * * * * 

(d) * * * 

(3) * * * 

(i) * * * 

(C) * * * 

(3) Costs allocable only to sold 

property. Section 471 costs remaining 

on hand at year end, as defined in 

paragraph (d)(3)(i)(C)(2) of this section, 

do not include costs that are specifically 

described in § 1.263A–1(e)(3)(ii) or cost 

reductions described in § 1.471–3(e) as 

properly allocable only to property that 

has 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 specificgoods method) a taxpayer uses to 

identify the costs in ending inventory. 

(D) * * * 


srobinson on DSKHWCL6B1PROD with PROPOSALS
78944 Federal Register / Vol. 75, No. 242 / Friday, December 17, 2010 / Proposed Rules 

(3) Current year’s storage and 

handling costs, beginning inventory, 

and current year’s purchases, as defined 

in paragraph (d)(3)(i)(D)(2) of this 

section, do not include costs that are 

specifically described in § 1.263A– 

1(e)(3)(ii) or cost reductions described 

in § 1.471–3(e) as properly allocable 

only to property that has 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-goods 

method) a taxpayer uses to identify the 

costs in ending inventory. 

(E) * * * 

(3) Current year’s purchasing costs 

and current year’s purchases, as defined 

in paragraph (d)(3)(i)(E)(2) of this 

section, do not include costs that are 

specifically described in § 1.263A– 

1(e)(3)(ii) or cost reductions described 

in § 1.471–3(e) as properly allocable 

only to property that has 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-goods 

method) a taxpayer uses to identify the 

costs in ending inventory. 

* * * * * 

(f) Effective/applicability date. 

Paragraphs (d)(3)(i)(C)(3), (d)(3)(i)(D)(3), 

and (d)(3)(i)(E)(3) of this section apply 

for taxable years ending on or after the 

date these regulations are published as 

final regulations 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, 

discount, or price rebate a taxpayer 

earns by selling specific merchandise is 

a reduction in the cost (as determined 

under paragraph (a), (b), or (d) of this 

section) of the merchandise sold or 

deemed to be sold under the inventory 

cost flow assumption (such as first-in, 

first-out; last-in, first-out; or a specificgoods method) the taxpayer uses to 

identify the costs in ending inventory. 

This amount decreases cost of goods 

sold and does not reduce the inventory 

cost or value of goods on hand at the 

end of the taxable year. 

* * * * * 

(g) Effective/applicability date. 

Paragraph (f) of this section applies to 

taxable years ending on or after the date 

these regulations are published as final 

regulations in the Federal Register. 

Steven T. Miller, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2010–31597 Filed 12–16–10; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Alcohol and Tobacco Tax and Trade 

Bureau 

27 CFR Part 9 

[Docket No. TTB–2010–0003; Notice No. 

112; re: Notice Nos. 105 and 107] 

RIN 1513–AB41 

Proposed Establishment of the Pine 

Mountain-Mayacmas Viticultural Area; 

Comment Period Reopening 

AGENCY: Alcohol and Tobacco Tax and 

Trade Bureau, Treasury. 

ACTION: Notice of proposed rulemaking; 

reopening of comment period. 

SUMMARY: The Alcohol and Tobacco Tax 

and Trade Bureau is reopening the 

comment period for Notice No. 105, 

which concerned a proposal to establish 

an American viticultural area having the 

name Pine Mountain-Mayacamas. This 

reopening of the comment period 

solicits comments from the public on 

issues that were raised in public 

comments received in response to 

Notice No. 105. Three specific issues 

which we seek comments on concern 

the proper name for the proposed 

viticultural area, the viticultural 

significance of a suggested alternative 

name for the viticultural area, and the 

propriety of expanding the boundary of 

the proposed viticultural area. 

DATES: We must receive written 

comments on or before February 15, 

2011. 

ADDRESSES: You may send comments on 

this notice to one of the following 

addresses: 

• http://www.regulations.gov: Use the 

comment form for this notice as posted 

within Docket No. TTB–2010–0003 on 

‘‘Regulations.gov,’’ the Federal erulemaking portal, to submit comments 

via the Internet; 

• Mail: Director, Regulations and 

Rulings Division, Alcohol and Tobacco 

Tax and Trade Bureau, P.O. Box 14412, 

Washington, DC 20044–4412. 

• Hand Delivery/Courier in Lieu of 

Mail: Alcohol and Tobacco Tax and 

Trade Bureau, 1310 G Street, NW., Suite 

200–E, Washington, DC 20005. 

See the Public Participation section of 

this notice for specific instructions and 

requirements for submitting comments, 

and for information on how to request 

a public hearing. 

You may view copies of all published 

notices and all comments received 

about this proposal within Docket No. 

TTB–2010–0003 at http:// 

www.regulations.gov. A direct link to 

this docket is posted on the TTB Web 

site at http://www.ttb.gov/wine/winerulemaking.shtml under Notice No. 105. 

You also may view copies of all 

published notices, all supporting 

materials, and any comments we receive 

about this proposal by appointment at 

the TTB Information Resource Center, 

1310 G Street, NW., Washington, DC 

20220. Please call 202–453–2270 to 

make an appointment. 

FOR FURTHER INFORMATION CONTACT: 

Elisabeth C. Kann, Regulations and 

Rulings Division, Alcohol and Tobacco 

Tax and Trade Bureau, 1310 G Street 

NW., Suite 200–E, Washington, DC 

20220; phone 202–453–2002. 

SUPPLEMENTARY INFORMATION: 

Petition History 

The Alcohol and Tobacco Tax and 

Trade Bureau (TTB) received a petition 

from Sara Schorske of Compliance 

Service of America, prepared and filed 

on her own behalf and on behalf of local 

wine industry members, to establish the 

4,600-acre ‘‘Pine Mountain-Mayacmas’’ 

American viticultural area in northern 

California. About two-thirds of the 

proposed viticultural area lies in the 

extreme southern portion of Mendocino 

County, with the remaining one-third 

located in the extreme northern portion 

of Sonoma County. The proposed Pine 

Mountain-Mayacmas viticultural area is 

totally within the multicounty North 

Coast viticultural area (27 CFR 9.30), 

and it overlaps the northernmost 

portions of the established Alexander 

Valley viticultural area (27 CFR 9.53) 

and the Northern Sonoma viticultural 

area (27 CFR 9.70). 

In Notice No. 105, published in the 

Federal Register (75 FR 29686) on May 

27, 2010, TTB described the petitioners’ 

rationale for the proposed establishment 

of the Pine Mountain-Mayacmas 

viticultural area and requested 

comments on the proposal on or before 

July 26, 2010. 

On July 16, 2010, TTB received a 

letter request from attorney Richard 

Mendelson on behalf of the Napa Valley 

Vintners (NVV), a wine industry trade 

association. The request explained that 

due to periodic scheduling of the NVV’s 

committee and board of directors 

meetings, the group would be unable to 

meet the original July 26, 2010, 

comment deadline for Notice No. 105. 


srobinson on DSKHWCL6B1PROD with PROPOSALS