Federal Register / Vol. 65, No. 98 / Friday, May 19, 2000 / Proposed Rules 31841

Limitations section of the FAA-approved

airplane flight manual to reflect the revised

engine limitations; in accordance with Shorts

Service Bulletin SD360–11–23, dated

November 17, 1998.

Alternative Methods of Compliance

(b) An alternative method of compliance or

adjustment of the compliance time that

provides an acceptable level of safety may be

used if approved by the Manager,

International Branch, ANM–116, FAA,

Transport Airplane Directorate. Operators

shall submit their requests through an

appropriate FAA Principal Maintenance

Inspector, who may add comments and then

send it to the Manager, International Branch,

ANM–116.

Note 2: Information concerning the

existence of approved alternative methods of

compliance with this AD, if any, may be

obtained from the International Branch,

ANM–116.

Special Flight Permits

(c) Special flight permits may be issued in

accordance with 21.197 and 21.199 of the

Federal Aviation Regulations (14 CFR 21.197

and 21.199) to operate the airplane to a

location where the requirements of this AD

can be accomplished.

Note 3: The subject of this AD is addressed

in British airworthiness directive 015–11–98.

Issued in Renton, Washington, on May 15,

2000.

Donald L. Riggin,

Acting Manager, Transport Airplane

Directorate, Aircraft Certification Service.

[FR Doc. 00–12673 Filed 5–18–00; 8:45 am]

BILLING CODE 4910–13–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–107644–98]

RIN 1545–AX20

Dollar-Value LIFO Regulations;

Inventory Price Index Computation

Method

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations under section 472

of the Internal Revenue Code that relate

to accounting for inventories under the

last-in, first-out (LIFO) method. The

proposed regulations provide guidance

regarding methods of valuing dollarvalue LIFO pools and affect persons

who elect to use the dollar-value LIFO

and inventory price index computation

(IPIC) methods. This document also

provides notice of a public hearing on

these proposed regulations.

DATES: Written and electronic comments

must be received by August 17, 2000.

Requests to speak (with outlines of oral

comments) at a public hearing

scheduled for September 15, 2000, at 10

a.m., must be received by August 25,

2000.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–107644–98),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions

may be hand delivered Monday through

Friday between the hours of 8 a.m. and

5 p.m. to:

CC:DOM:CORP:R (REG–107644–98),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue,

NW., Washington, DC.

Alternatively, taxpayers may submit

comments electronically via the Internet

by selecting the ‘‘Tax Regs’’ option on

the IRS Home Page, or by submitting

comments directly to the IRS Internet

site at http://www.irs.ustreas.gov/

tax_regs/regslist.html. The public

hearing will be held in room 4718,

Internal Revenue Building, 1111

Constitution Avenue, NW., Washington,

DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations,

Jeffery G. Mitchell, (202)622–4970;

concerning submissions of comments,

the hearing, and/or to be placed on the

building access list to attend the

hearing, Guy Traynor of the Regulations

Unit at (202) 622–7180 (not toll-free

calls).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed

amendments to the Income Tax

Regulations (26 CFR part 1) that relate

to the last-in, first-out (LIFO) inventory

accounting method under section 472 of

the Internal Revenue Code (Code). The

LIFO method of accounting for goods

treats inventories on hand at the end of

the year as consisting first of inventory

on hand at the beginning of the year and

then of inventories acquired during the

year.

Under § 1.472–8, a taxpayer is

permitted to use the dollar-value LIFO

method of accounting for inventories,

which accounts for inventories in terms

of dollars of cost rather than specific

goods. The dollar-value LIFO method

measures increases or decreases in

inventory quantities by comparing the

total cost of the quantity of goods on

hand at the beginning and end of the

taxable year in terms of equivalent-value

dollars, i.e., base-year cost. The currentyear dollar cost of beginning and ending

inventory may be converted into a baseyear dollar cost using price indexes.

Then, the quantity of base-year cost in

beginning and ending inventory can be

compared and the increase (increment)

or decrease (liquidation) can be

measured.

Section 472(f) directs the Secretary to

prescribe regulations that permit the use

of suitable published governmental

price indexes for purposes of the LIFO

method. The IRS and Treasury

Department prescribed the inventory

price index computation (IPIC) method

in § 1.472–8(e)(3) (TD 7814, 47 FR

11271, 1982–1 C.B. 84), pursuant to

authority contained in sections 472 and

7805. Under the IPIC method, inventory

price indexes are computed with

reference to consumer or producer price

indexes published by the United States

Bureau of Labor Statistics (BLS). The

IPIC method was intended to simplify

the use of the dollar-value LIFO method

so that the LIFO method could be used

by more taxpayers and would be easier

to use by taxpayers already using the

dollar-value LIFO method.

Explanation of Provisions

This document contains proposed

amendments to the IPIC method

provided in § 1.472–8(e)(3) of

computing the LIFO value of a dollarvalue inventory pool that are intended

to simplify and clarify certain aspects of

the IPIC method as well as to modify the

computational methodology so that the

IPIC method produces a more accurate

and suitable inventory price index. In

addition, the proposed regulations

provide rules for computing the LIFO

value of a dollar-value pool when a

taxpayer receives LIFO inventories in

certain nonrecognition transactions.

1. Elimination of Requirement To Use

10 Percent Categories and BLS Weights

Section 1.472–8(e)(3)(iii) of the

regulations provides detailed rules for

assigning inventory items to index

categories published by the BLS in the

‘‘CPI Detailed Report’’ or the ‘‘PPI

Detailed Report’’ for purposes of

computing an inventory price index.

Items are first assigned to the most

detailed index category listed in the

appropriate table of the ‘‘CPI Detailed

Report’’ or the ‘‘PPI Detailed Report’’

that contains those items. If the total

current-year cost of the items in a single

detailed index category equals or

exceeds 10 percent of the total inventory

value, the taxpayer must use the

published index for that selected index

category for all items that are included

in that detailed index category. If the

total current-year cost of items in a

31842 Federal Register / Vol. 65, No. 98 / Friday, May 19, 2000 / Proposed Rules

single detailed index category is less

than 10 percent of the total inventory

value, the taxpayer must investigate

successively less detailed index

categories until it reaches an index

category that meets the 10 percent

threshold. The taxpayer, however, may

only use the published index for a less

detailed selected index category if it has

at least one item that would have been

included in each of the most detailed

index categories subsumed by the

selected category. For example, a

taxpayer may only use the published

index for the ‘‘Fresh fruits’’ category

from the ‘‘CPI Detailed Report’’ if its

inventory includes at least one apple,

banana, orange, citrus fruit other than

orange, and other fresh fruit. If the

taxpayer’s inventory does not contain at

least one item in each of the most

detailed index categories within the

selected index category, the taxpayer

must compute an appropriate index for

the selected index category. An

appropriate index for the selected index

category is a weighted average of the

published indexes for the most detailed

index categories that include at least

one of the taxpayer’s inventory items.

The weights to be used in computing

the appropriate index are the BLS

weights listed for the detailed index

categories. In computing an index for a

pool, however, a taxpayer must weight

the appropriate indexes for the selected

index categories comprising the pool

according to the taxpayer’s actual

inventory weights for those selected

index categories.

The proposed regulations eliminate

the requirement to use 10 percent

categories and BLS weights to determine

an appropriate index for two reasons.

First, the weight assigned to an index

category by the BLS may vary

dramatically from the taxpayer’s actual

inventory weight for that category.

Consequently, the index computed for

those items using BLS weights will not

accurately reflect the taxpayer’s

inflation experience. Second, the

requirement to use 10 percent categories

and BLS weights was intended to

simplify the index computation

procedure for those taxpayers that did

not keep detailed inventory records. In

practice, however, this requirement

adds complexity to the index

computation for most taxpayers.

Moreover, even the most detailed BLS

index categories are fairly broad and,

with current inventory recordkeeping

procedures and practices, most

taxpayers have sufficiently detailed

books and records to classify their

inventory items according to the most

detailed BLS index categories.

The proposed regulations require a

taxpayer to classify its inventory items

into the most detailed index category

listed in the ‘‘CPI Detailed Report’’ or

the ‘‘PPI Detailed Report.’’ For purposes

of computing a weighted average pool

index, the weight assigned to each

selected index category will be the

relative current-year cost of the items in

that category. The IRS and Treasury

Department request written comments

regarding rules for excluding index

categories that contain items with a de

minimis amount of relative current-year

cost from the pool index computation.

2. Weighted Harmonic Mean for

Computing Pool Index

A pool index computed using the

dollar-value LIFO method should reflect

a weighted average of the inflation rates

of the items contained in the ending

inventory. Under LIFO methods that

compute an internal index, the index

computation procedure automatically

produces an appropriately weighted

pool index. However, when a taxpayer

computes a LIFO inventory pool index

using externally generated inflation

rates, the taxpayer must weight the

inflation rates to compute an

appropriate composite index for the

pool.

Section 1.472–8(e)(3)(iii)(B) states that

the appropriate indexes are weighted

according to the relative current-year

costs of the items in each selected index

category. However, the regulations do

not set forth how to compute a weighted

average of the appropriate indexes using

the amount of relative current-year costs

in each selected index category. The IRS

provided an example of IPIC weighting

methodology in Rev. Proc. 84–57 (1984–

2 C.B. 496). The example computes a

weighted average pool index based on a

weighted arithmetic mean of the

appropriate indexes. (Weighted

Arithmetic Mean = [Sum of (Weight ×

Appropriate Index)]/Sum of Weights).

The example provided in Rev. Proc. 98–

49 (1998–37 I.R.B. 9), also used a

weighted arithmetic mean to compute a

weighted average percent change for a

selected index category.

The IRS and Treasury Department

have determined that a weighted

arithmetic mean is mathematically

inappropriate for averaging inflation

indexes based on current-year costs. The

mathematically correct method of

averaging inflation indexes using

relative current-year costs is a weighted

harmonic mean. (Weighted Harmonic

Mean = Sum of Weights/Sum of

[Weight/Appropriate Index]). Therefore,

the proposed regulations make the

weighted harmonic mean the only

acceptable method of computing a

weighted average pool index using

relative current-year costs of items in

ending inventory.

3. Double-Extension or Link-Chain

Method of Index Computation

The current regulations do not

indicate whether the inventory price

index should be computed using a linkchain or double-extension methodology.

Section 1.472–8(e)(3)(ii) merely states

that ‘‘[a]n inventory price index

computed [under the IPIC method] shall

be a stated percentage of the percent

change in the selected consumer or

producer price index or indexes for a

specific category or categories of goods.’’

In practice, some taxpayers have used

a link-chain methodology, and others a

double-extension methodology. The

proposed regulations specifically permit

either method. The proposed

regulations also explain how to compute

an index under each method and

provide examples.

4. Selecting Indexes as of an

Appropriate Month

Section 1.472–8(e)(3)(iii)(C) states that

a taxpayer not using the retail inventory

method must select indexes ‘‘as of the

month or months’’ most appropriate to

its method of determining current-year

cost, or make a one-time binding

election of an appropriate representative

month. The IRS has ruled that a month

is an appropriate representative month

if there is a nexus between the selected

month, the taxpayer’s method of

determining current-year cost, and the

taxpayers’ historical experience of

inventory purchases. Rev. Rul. 89–29

(1989–1 C.B. 168). In practice, there has

been confusion about the meaning of the

phrase ‘‘month or months most

appropriate to the taxpayer’s method of

determining current-year cost.’’

The proposed regulations clarify that,

for each dollar-value pool, a taxpayer

should either annually determine the

month most appropriate to its method of

determining the current-year cost of the

pool (appropriate month) or make a onetime election of a representative

appropriate month (representative

month) for the pool. The principles of

Rev. Rul. 89–29 continue to apply for

purposes of determining whether a

particular month is appropriate or

representative. An appropriate index is

computed by comparing the published

cumulative index for the appropriate or

representative month to the published

cumulative index for the appropriate or

representative month used for the

immediately preceding year (in the case

of a taxpayer using the link-chain IPIC

method) or the published cumulative

index for the month preceding the first

Federal Register / Vol. 65, No. 98 / Friday, May 19, 2000 / Proposed Rules 31843

day of the base year (in the case of a

taxpayer using the double-extension

IPIC method). The proposed regulations

also clarify that a taxpayer electing to

use a representative month must use an

appropriate month, rather than the

representative month, to compute an

appropriate index in certain

circumstances, such as a short taxable

year.

5. Taxpayers Eligible To Use

‘‘Department Store Inventory Price

Indexes’’

The current regulations prohibit the

use of the IPIC method by a taxpayer

that is eligible to use inventory price

indexes prepared by the BLS for the

purpose of valuing the LIFO inventories

of a specific industry. Specifically,

§ 1.472–8(e)(3)(i) provides that a

taxpayer eligible to use the retail price

indexes prepared by the BLS and

published in ‘‘Department Store

Inventory Price Indexes’’ may not use

the IPIC method.

Some retailers may carry goods

traditionally carried by department

stores and other goods that are not

traditionally carried by department

stores. Such taxpayers may qualify as

department stores, but ‘‘Department

Store Inventory Price Indexes’’ may not

provide indexes that are applicable for

some of the taxpayers’ departments.

Whenever one or more departments of

a department store do not fit into any

one of the 23 major groups established

by the BLS or into the special

combinations listed in Rev. Proc. 86–46

(1986–2 C.B. 739), the taxpayer may use

either an index that represents an

average for the whole of the remainder

of the LIFO inventory or the store total

index published by the BLS. However,

the express terms of the current

regulations prohibit taxpayers eligible to

value their LIFO inventories using

‘‘Department Store Inventory Price

Indexes’’ from using the IPIC method to

compute an index for any dollar-value

pool.

The proposed regulations eliminate

the eligibility restrictions applicable to

the IPIC method. Generally, any

taxpayer may adopt the IPIC method as

long as it uses that method for all goods

accounted for under the dollar-value

LIFO method. However, a taxpayer

eligible to use ‘‘Department Store

Inventory Price Indexes’’ may elect to

use those indexes for LIFO inventory

items that fall within any of the 23

major groups listed in ‘‘Department

Store Inventory Price Indexes’’ and the

IPIC method for the remainder of its

LIFO inventory items, or may elect to

use the IPIC method for all of its LIFO

inventories. The proposed regulations

do not, however, affect the ability of an

eligible taxpayer to use ‘‘Department

Store Inventory Price Indexes’’ to value

its LIFO inventories in accordance with

§ 1.472–1(k) and Rev. Proc. 86–46.

6. Selection From ‘‘CPI Detailed Report’’

or ‘‘PPI Detailed Report’’

Section 1.472–8(e)(3)(iii)(C) states that

a retailer may select indexes from the

‘‘CPI Detailed Report’’ or the ‘‘PPI

Detailed Report,’’ but if equally

appropriate indexes may be selected

from either, a retailer using the retail

inventory method must select from the

‘‘CPI Detailed Report’’ and a retailer not

using the retail inventory method must

select from the ‘‘PPI Detailed Report.’’

The proposed regulations eliminate

the need for a retailer to determine

whether the ‘‘CPI Detailed Report’’ and

‘‘PPI Detailed Report’’ contain equally

appropriate indexes. The proposed

regulations require retailers using the

retail inventory method to select

indexes from the ‘‘CPI Detailed Report.’’

All other taxpayers must select indexes

from the ‘‘PPI Detailed Report.’’

7. Elimination of Requirement To

Convert Published Indexes Into Retail

Price Indexes or Cost Price Indexes

Section 1.472–8(e)(3)(iii)(C) provides

that if a retailer using the retail

inventory method selects an index from

the ‘‘PPI Detailed Report,’’ the selected

index must be converted into a retail

price index, and that if a retailer not

using the retail inventory method

selects an index from the ‘‘CPI Detailed

Report,’’ the selected index must be

converted into a cost price index. The

regulations further provide that

manufacturers, processors, wholesalers,

jobbers, and distributors must convert

selected indexes into cost price indexes.

This conversion requirement in the

current regulations was intended to

more accurately represent the taxpayer’s

inflation experience relative to the

selected price index. However, due to

the inability of many taxpayers to

determine gross profit percentages at the

detailed index category level and the

fact that gross profit percentages for

many taxpayers are relatively constant,

this conversion requirement may not

actually increase the accuracy of the

indexes used in the inventory price

index computation. The IRS and

Treasury Department have concluded

that the administrative burden of

converting published indexes into retail

price or cost price indexes outweighs

any benefits of increased accuracy from

the procedure. Thus, the proposed

regulations eliminate the requirement to

convert published price indexes into

either retail price indexes or cost price

indexes.

8. Relocation and Clarification of

Special Pooling Rules

Section 1.472–8(e)(3)(iv) provides

special, elective pooling rules for

retailers, wholesalers, jobbers, and

distributors that use the IPIC method.

Such taxpayers are permitted to

establish an inventory pool for any

group of goods included in one of the

eleven general categories of consumer

goods described in the ‘‘CPI Detailed

Report.’’ Although wholesalers, jobbers

and distributors are allowed to pool

goods according to categories found in

the ‘‘CPI Detailed Report,’’ they must

select indexes from the ‘‘PPI Detailed

Report’’ pursuant to § 1.472–

8(e)(3)(iii)(C). The current regulations

provide no special, elective pooling

rules for manufacturers that use the IPIC

method. However, Rev. Proc. 84–57

provides that an inventory pool or pools

may be established for any group of

goods included within one of the 15

general categories of producer goods

described in Table 6 of the ‘‘PPI

Detailed Report.’’

The proposed regulations provide

special, elective pooling rules for LIFO

inventories accounted for under the IPIC

method. Specifically, retailers using the

retail inventory method may establish

an inventory pool for any group of

goods accounted for under the IPIC

method included within one of the

general expenditure categories (i.e.,

major groups) in Table 3 of the ‘‘CPI

Detailed Report.’’ Retailers not using the

retail method, wholesalers, jobbers,

distributors, processors, and

manufacturers may establish an

inventory pool for any group of goods

accounted for under the IPIC method

included within one of the 2-digit

commodity codes (i.e., major

commodity groups) in Table 6 of the

‘‘PPI Detailed Report.’’ The special,

elective pooling rules provided in the

proposed regulations correspond with

the pooling rules found in section

474(b) so that a taxpayer may change

from the simplified dollar-value LIFO

method of section 474 to the IPIC

method without changing its pooling

structure. In addition, the special,

elective pooling rules for taxpayers

using the IPIC method are relocated

with the general pooling rules

applicable to all taxpayers in § 1.472–

8(b) and (c).

9. Clarification of the Definition of

‘‘Eligible Small Business’’

Section 1.472–8(e)(3)(ii) permits an

eligible small business, as defined under

section 474(b) of the Internal Revenue

31844 Federal Register / Vol. 65, No. 98 / Friday, May 19, 2000 / Proposed Rules

Code of 1954, to compute an inventory

price index for its pool(s) using 100

percent of the percent change in the

selected indexes. All other taxpayers

must compute an inventory price index

for their pools using 80 percent of the

percent change in the selected indexes.

At the time the regulations were

published, section 474(b) defined an

eligible small business as a taxpayer

with average annual gross receipts that

did not exceed $2,000,000 for the 3-

taxable-year period ending with the

taxable year.

Section 474 was amended by the Tax

Reform Act of 1986. Public Law 99–514,

100 Stat. 2348. An eligible small

business is now defined by section

474(c) as a taxpayer with average annual

gross receipts that do not exceed

$5,000,000 for the 3 preceding taxable

years. The proposed regulations clarify

that the IPIC method definition of

‘‘eligible small business’’ mirrors the

definition in current section 474.

10. New Base Year for IPIC Method

Changes

Section 1.472–8(e)(vi) requires a

taxpayer that changes to the IPIC

method from another dollar-value LIFO

method to treat the year of change as the

base year in determining the LIFO value

of the inventory pool(s) for the year of

change and later taxable years. The

taxpayer is also required to restate

indexes of existing layers of increment

in terms of new base-year cost. This

procedure is generally known as

updating the base year.

The proposed regulations clarify that

the base year updating procedure

applies in the case of a voluntary change

to the IPIC method, but is discretionary

in the case of an involuntary change to

the IPIC method. If an examining agent

determines that a taxpayer’s dollarvalue LIFO method does not clearly

reflect income, the agent may require

the taxpayer to change to the doubleextension IPIC method on a cut-off basis

with or without an updated base year.

If the examining agent chooses not to

update the base year, the examining

agent will ascertain the amount of any

increment in terms of base-year cost for

the year of change by comparing the

total base-year cost of the beginning

inventory determined under the

taxpayer’s dollar-value LIFO method

and the total base-year cost of the

ending inventory determined under the

double-extension IPIC method. Any

increment so determined will be valued

using the index computed under the

double-extension IPIC method.

11. Inventories Received in a

Nonrecognition Transaction

Under current law, the treatment of

LIFO inventories received in a

nonrecognition transaction depends

upon whether the transaction qualifies

as a corporate reorganization to which

section 381 applies. Section 381(c)(5)

provides that inventory accounting

methods generally carry over,

uninterrupted, to a transferee in a

transaction described in section 381(a).

However, inventory accounting

methods generally do not carry over to

a transferee in other nonrecognition

transactions such as transfers to a

controlled corporation under section

351, divisive ‘‘D’’ reorganizations under

section 368(a)(1)(D), or contributions to

a partnership under section 721 (nonsection 381 transfers). Textile Apron

Company, Inc. v. Commissioner, 21 T.C.

146 (1953), acq., 1954–1 C.B. 7. But see

§ 1.263A–7(c)(4); 1.1502–17. If a

transferee that has never owned

inventories or that has accounted for

inventories using a method other than

LIFO wants to use the LIFO method to

account for inventories received in a

non-section 381 transfer, it must elect

the LIFO method for the year of transfer.

The inventories received in the transfer

are treated as opening inventory and

their cost is determined using the

average cost method as provided in

section 472(b)(3). Rev. Rul. 70–564

(1970–2 C.B. 109). A transferee that

previously elected to use the LIFO

method may account for the LIFO

inventories received in a non-section

381 transfer using its preexisting LIFO

method. The LIFO layers of the

transferor retain the transferor’s original

acquisition dates and costs and are

integrated into the transferee’s existing

LIFO layers. Commissioner v. Joseph E.

Seagram & Sons, Inc., 394 F.2d 738

(1968), rev’g, 46 T.C. 698 (1966); Rev.

Rul. 70–565 (1970–2 C.B. 110).

An election to use the dollar-value

LIFO method for LIFO inventories

received in a non-section 381 transfer,

however, may not continue the LIFO

reserve of the transferor. If the mix of

goods in the inventory changes

significantly after the transfer, the

mechanics of the dollar-value LIFO

method may produce an increment in

the first taxable year that effectively

eliminates the LIFO reserve established

by the transferor. This occurs because

the transferee’s base year is the year in

which it elects LIFO.

A taxpayer using the dollar-value

LIFO method determines whether there

is an increase or decrease in the

quantity of inventory by comparing the

base-year cost of the ending inventory to

the base-year cost of the beginning

inventory. When inventory is received

in a non-section 381 transfer, the

transferee’s basis is determined by

reference to the transferor’s basis in the

inventory. The transferee’s base-year

cost, however, is not determined by

reference to the transferor’s base-year

cost. The transferee’s base-year cost of

inventory received in a non-section 381

transfer is equal to the transferee’s cost

of the inventory, which is generally the

carryover basis of the inventory. Since

the transferor’s basis was established by

reference to the actual cost of the goods

in years prior to the transfer, the

carryover basis of the inventory may be

considerably lower than what it would

cost to purchase or produce the goods

in the current year. If a new item enters

the transferee’s inventory, § 1.472–

8(e)(2)(iii) only permits the transferee to

reconstruct the base-year unit cost of

that item back to the year in which it

elected LIFO. If the transferee elected

LIFO in the year in which the nonsection 381 transfer occurred, the baseyear unit cost of the new item will not

be comparable to the base-year unit cost

of the items that were received in the

transfer and comprised the opening

inventory. The disparity in the base-year

unit costs may produce an increment in

terms of base-year cost that would not

have occurred but for the low base-year

unit cost of the inventory received in

the transfer.

While the current regulations contain

a provision requiring a taxpayer that

changes to the IPIC method from

another LIFO method to treat the year of

change as the base year in determining

the LIFO value of the inventory pool(s)

for the year of change and later taxable

years, the provision does not apply to an

initial adoption of LIFO by a transferee.

When a transferee elects the LIFO and

IPIC methods for LIFO inventories

received in a non-section 381 transfer,

the transferee will have an increment in

the year in which the inventories are

received even without a significant

change in the mix of goods in the

transferee’s ending inventory. The IPIC

method invariably produces an

increment because the index used to

convert the current-year cost of the

ending inventory to base-year cost will

reflect only one year of inflation while

the difference between the current-year

cost and the carryover basis of the

opening inventory reflects more than

one year of inflation.

The IRS and Treasury Department

have determined that recapture of the

LIFO reserve established by the

transferor’s use of the dollar-value LIFO

method solely by virtue of the

mechanical application of the dollarVerDate 11<MAY>2000 16:44 May 18, 2000 Jkt 190000 PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 E:\FR\FM\19MYP1.SGM pfrm01 PsN: 19MYP1
Federal Register / Vol. 65, No. 98 / Friday, May 19, 2000 / Proposed Rules 31845

value LIFO method after a non-section

381 transfer is inappropriate, given the

business continuity principles

governing the tax treatment of the

underlying transaction. Accordingly, the

proposed regulations provide that if a

transferee uses the dollar-value LIFO

method for inventories that were

received in a nonrecognition transaction

to which section 381 does not apply and

that were accounted for using the dollarvalue LIFO method by the transferor,

the transferee must use the year of

transfer as the base year and the

transferor’s current-year cost of the

inventory received as the new base-year

cost of such inventory for purposes of

determining future increments and

liquidations. The proposed regulations

do not affect a newly formed transferee’s

ability to elect new accounting methods

or the holdings of Rev. Rul. 70–564 and

Rev. Rul. 70–565. However, the new

base year rule does not apply to a nonsection 381 transaction if the transaction

was made with the principal purpose of

availing the transferee of a method of

accounting that would be unavailable to

the transferor (or would be unavailable

without securing consent from the

Commissioner). In determining the

principal purpose of a transfer,

consideration will be given to all of the

facts and circumstances. However, if a

transferor acquired inventory in a

bargain purchase within the five taxable

years preceding the year of the transfer

and accounted for that inventory using

a dollar-value LIFO method that did not

treat the bargain purchase inventory and

physically identical inventory acquired

at market prices as separate items, the

transfer will be deemed made with the

principal purpose of availing the

transferee of a method of accounting

that would be unavailable to the

transferor (or would be unavailable

without securing consent from the

Commissioner).

Proposed Effective Date

These regulations are proposed to be

effective for taxable years beginning on

or after the date they are published in

the Federal Register as final regulations.

Effect on Other Documents

Rev. Proc. 84–57 will become obsolete

as of the date these regulations are

published in the Federal Register as

final regulations. In addition, Rev. Proc.

98–49 is modified with respect to the

requirements to use 10 percent

categories and BLS weights, to compute

a weighted average using a weighted

arithmetic mean, and to convert selected

indexes to cost, as of the date these

regulations are published in the Federal

Register as final regulations.

Special Analyses

It has been determined that 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, and because the

regulations do not impose a collection

of information on small entities, the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed

rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

written comments (a signed original and

eight (8) copies) and electronic

comments that are submitted timely to

the IRS. The IRS and 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 has been scheduled

for September 15, 2000, at 10 a.m., in

room 4718, Internal Revenue Building,

1111 Constitution Avenue, NW.,

Washington, DC. Due to building

security procedures, visitors must enter

at the 10th Street entrance, located

between Constitution and Pennsylvania

Avenues, NW. In addition, all visitors

must present photo identification to

enter the building. Because of access

restrictions, visitors will not be

admitted beyond the immediate

entrance area more than 15 minutes

before the hearing starts. For

information about having your name

placed on the building access list to

attend the hearing, see the FOR FURTHER

INFORMATION CONTACT section of this

preamble.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons who wish to present oral

comments at the hearing must submit

written or electronic comments by

August 17, 2000 and submit an outline

of the topics to be discussed and the

time to be devoted to each topic (a

signed original and eight (8) copies) by

August 25, 2000.

A period of 10 minutes will be

allocated to each person for making

comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting information. The principal

author of these regulations is Jeffery G.

Mitchell of the Office of Assistant 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 is amended by adding an entry

in numerical order to read in part as

follows:

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

§ 1.472–8 also issued under 26 U.S.C. 472.

***

Par. 2. Section 1.472–8 is amended as

follows:

1. Paragraph (b)(4) is added.

2. The text of paragraph (c) following

the paragraph heading is redesignated as

paragraph (c)(1) and a paragraph

heading for newly designated paragraph

(c)(1) is added.

3. Paragraph (c)(2) is added.

4. Paragraphs (e)(3) and (h) are

revised.

The revisions and additions read as

follows:

§ 1.472–8 Dollar-value method of pricing

LIFO inventories.

* * * * *

(b) * * *

(4) Inventory price index pools. A

manufacturer or processor that elects to

use the inventory price index

computation method described in

paragraph (e)(3) of this section to value

its dollar-value pools may establish an

inventory pool for any group of goods

included within one of the 2-digit

commodity codes (i.e., major

commodity groups) in Table 6 (Producer

price indexes for commodity groups,

subgroups, product classes, and

individual items) of the ‘‘PPI Detailed

Report’’ published by the United States

Bureau of Labor Statistics (Available

from New Orders, Superintendent of

Documents, P.O. Box 371954,

Pittsburgh, PA 15250–7954). Inventory

pools that comprise less than 5 percent

of the total inventory value may be

combined to form a single

miscellaneous inventory pool. If the

resulting miscellaneous inventory pool

31846 Federal Register / Vol. 65, No. 98 / Friday, May 19, 2000 / Proposed Rules

itself comprises less than 5 percent of

the total inventory value, that pool may

be combined only with the largest

inventory pool.

(c) * * * (1) In general. * * *

(2) Inventory price index pools. A

retailer using the retail inventory

method that elects to use the inventory

price index computation method

described in paragraph (e)(3) of this

section (the IPIC method) may establish

an inventory pool for any group of

goods accounted for under the IPIC

method included within one of the

general expenditure categories (i.e.,

major groups) in Table 3 (Consumer

Price Index for all Urban Consumers

(CPI-U): U.S. city average, detailed

expenditure categories) of the ‘‘CPI

Detailed Report’’ published by the

United States Bureau of Labor Statistics

(Available from New Orders,

Superintendent of Documents, P.O. Box

371954, Pittsburgh, PA 15250–7954). A

retailer not using the retail inventory

method, wholesaler, jobber, or

distributor electing to use the IPIC

method may establish an inventory pool

for any group of goods accounted for

under the IPIC method included within

one of the 2-digit commodity codes (i.e.,

major commodity groups) in Table 6

(Producer price indexes for commodity

groups, subgroups, product classes, and

individual items) of the ‘‘PPI Detailed

Report’’ published by the United States

Bureau of Labor Statistics. Inventory

pools that comprise less than 5 percent

of the total inventory value may be

combined to form a single

miscellaneous inventory pool. If the

resulting miscellaneous inventory pool

itself comprises less than 5 percent of

the total inventory value, that pool may

be combined only with the largest

inventory pool.

* * * * *

(e) * * *

(3) Inventory price index computation

method—(i) In general. The inventory

price index computation method

provided by this paragraph (e)(3) (the

IPIC method) is a method of

determining the LIFO value of a dollarvalue inventory pool with reference to

indexes published by the United States

Bureau of Labor Statistics (BLS). An

inventory price index computed using

the IPIC method will be accepted by the

Commissioner as an appropriate method

of computing an index, and the use of

that inventory price index to compute

the LIFO value of a dollar-value

inventory pool will be accepted as

accurate, reliable, and suitable. The

appropriateness of a taxpayer’s

computation of an inventory price

index, including the selection of the

consumer or producer price indexes and

the propriety of all computations

incidental to the use of those consumer

or producer price indexes, will be

determined in connection with the

examination of the taxpayer’s income

tax return. A taxpayer using the IPIC

method may elect to establish inventory

pools in accordance with the special

rules in paragraphs (b)(4) and (c)(2) of

this section or the general rules for

establishing inventory pools in

paragraphs (b) and (c) of this section.

Taxpayers eligible to use the IPIC

method are described in paragraph

(e)(3)(ii) of this section. The manner in

which an inventory price index is

computed using the IPIC method is

described in paragraph (e)(3)(iii) of this

section. Rules relating to the adoption

of, or change to, the IPIC method are in

paragraph (e)(3)(iv) of this section.

(ii) Eligibility. Any taxpayer electing

to use the dollar-value LIFO method

may elect to compute an inventory price

index in accordance with the IPIC

method. Except as provided in this

paragraph (e)(3)(ii), a taxpayer using the

IPIC method must use that method in

determining the value of all goods for

which the taxpayer has elected to use

the dollar-value LIFO method. A

taxpayer that uses the retail price

indexes prepared by the BLS and

published in ‘‘Department Store

Inventory Price Indexes’’ (Available

from the BLS by calling (202) 606–6325

and entering document code 2415) may

elect to use the IPIC method for

inventory items that do not fall within

any of the major groups listed in

‘‘Department Store Inventory Price

Indexes.’’

(iii) Computation of an inventory

price index—(A) In general. An

inventory price index computed using

the IPIC method is used to convert the

current-year cost of the inventory in a

dollar-value inventory pool to base-year

cost for purposes of determining

whether an increment or liquidation in

terms of base-year cost exists and to

value the increment, if any, at currentyear cost. A taxpayer must compute a

separate inventory price index for each

dollar-value inventory pool. The

computation of an index for each pool

involves the following four steps which

are described in more detail in this

paragraph (e)(3)(iii): First, selection of a

BLS table and an appropriate month,

second, selection of an index category,

third computation of an appropriate

index for each selected index category,

and fourth, computation of a pool index.

A taxpayer may compute an inventory

price index for each dollar-value

inventory pool under the IPIC method

using a double-extension method (the

double-extension IPIC method) or a

link-chain method (the link-chain IPIC

method) without regard to whether the

use of a double-extension method is

impractical or unsuitable. See

paragraphs (e)(3)(iii)(D) and (E) of this

section. The use of the double-extension

IPIC method or the link-chain IPIC

method is a method of accounting, and

whichever method is adopted must be

applied consistently to all of the

taxpayer’s dollar-value inventory pools

accounted for using the IPIC method.

(B) Selection of a BLS table and

appropriate month—(1) In general. An

inventory price index computed using

the IPIC method is computed with

reference to the consumer or producer

price indexes for specific categories of

inventory items listed in the ‘‘CPI

Detailed Report’’ or ‘‘PPI Detailed

Report’’ published by the BLS for the

appropriate month. A taxpayer may

elect to use either the preliminary or

final indexes published by the BLS for

the appropriate month provided that the

chosen indexes are used consistently

from year to year. A taxpayer that elects

to use final indexes must use

preliminary indexes for the appropriate

month for any taxable year in which it

files its original federal income tax

return before the BLS publishes final

indexes.

(2) BLS table selection. Manufacturers, processors, wholesalers, jobbers,

distributors, and retailers not using the

retail inventory method must select

indexes from Table 6 (Producer price

indexes for commodity groups,

subgroups, product classes, and

individual items) of the ‘‘PPI Detailed

Report,’’ unless the taxpayer can

demonstrate that the selection of an

index from another table of the ‘‘PPI

Detailed Report’’ would be more

appropriate. Retailers using the retail

inventory method must select indexes

from Table 3 (Consumer Price Index for

all Urban Consumers (CPI–U): U.S. city

average, detailed expenditure

categories) of the ‘‘CPI Detailed Report.’’

(3) Appropriate month. In the case of

a retailer using the retail inventory

method, the appropriate month is the

last month of the retailer’s taxable year.

In the case of all other taxpayers, the

appropriate month is a month most

appropriate to the taxpayer’s method of

determining the current-year cost of

each dollar-value inventory pool under

paragraph (e)(2)(ii) of this section. A

taxpayer not using the retail inventory

method may annually select an

appropriate month for each dollar-value

inventory pool or make an election of a

representative appropriate month

(representative month). An election of a

representative month is a method of

Federal Register / Vol. 65, No. 98 / Friday, May 19, 2000 / Proposed Rules 31847

accounting and must be used for the

taxable year of the election and all

subsequent taxable years, unless the

taxpayer obtains the consent of the

Commissioner as provided in § 1.446–

1(e) to change or revoke its election. The

election of a representative month must

be clearly set forth on Form 970. See

paragraph (e)(3)(iv)(A) of this section.

(C) Selection of an index category—(1)

In general. The inventory items in each

dollar-value pool should be classified

according to the most detailed listings

in the appropriate tables of the ‘‘CPI

Detailed Report’’ or the ‘‘PPI Detailed

Report.’’ The selection of a consumer or

producer price index category for a

specific item to compute an inventory

price index under the IPIC method is a

method of accounting. However, the

selection of a new consumer or

producer price index category for a

specific item as a result of revisions to

the ‘‘CPI Detailed Report’’ or the ‘‘PPI

Detailed Report’’ is a change in

underlying facts and not a change in

method of accounting. Change in

method of accounting rules relating to

changes in selected indexes are in

paragraph (e)(3)(iv) of this section.

(2) Index selection from the PPI

Detailed Report. Manufacturers,

processors, wholesalers, jobbers,

distributors, and retailers not using the

retail inventory method must classify

their inventory items according to the

detailed listings in the appropriate

table(s) of the ‘‘PPI Detailed Report.’’

Each specific inventory item in the

taxpayer’s inventory must be assigned to

the most detailed index category listed

in the appropriate tables (as determined

under paragraph (e)(3)(iii)(B)(2) of this

section) of the ‘‘PPI Detailed Report’’

that includes that specific inventory

item. Manufacturers and processors

must assign each raw material inventory

item to the most detailed index category

that includes that raw material and each

finished good inventory item to the

most detailed index category that

includes that finished good.

Manufacturers and processors must

assign work-in-process inventory items

to the most detailed index category that

includes the finished good into which

the item will be manufactured or

processed. For this purpose, the term

finished good means a good that is in a

saleable state. For example, a gasoline

engine manufacturer that also produces

pistons for the engines must assign

finished pistons that have not yet been

affixed to an engine block and the

piston work-in-process items to the

most detailed index category that

includes pistons. Finished pistons that

have been affixed to an engine block

must be assigned to the most detailed

index category that includes the engine.

(3) Index selection from the CPI

Detailed Report. Retailers using the

retail inventory method must classify

their inventory items according to the

detailed listings in the appropriate

tables of the ‘‘CPI Detailed Report.’’

Each specific inventory item in the

taxpayer’s inventory must be placed in

the most detailed index category listed

in the appropriate table (as determined

under paragraph (e)(3)(iii)(B)(2) of this

section) of the ‘‘CPI Detailed Report’’

that includes that specific inventory

item.

(D) Computation of an appropriate

index—(1) Double-extension IPIC

method. In the case of a taxpayer using

the double-extension IPIC method, an

appropriate index for a selected index

category is the percent change in the

published cumulative indexes for that

category for the index period between

the appropriate or representative month

of the current taxable year (determined

under paragraph (e)(3)(iii)(B)(3) of this

section) and the month preceding the

first day of the base year (the base

month). The percent change in the

published indexes is equal to the

quotient of the published cumulative

index for the appropriate or

representative month of the current year

divided by the published cumulative

index for the base month.

(2) Link-chain IPIC method. In the

case of a taxpayer using the link-chain

IPIC method, an appropriate index for a

selected index category is the percent

change in the published cumulative

indexes for that category during the

index period between the appropriate or

representative month of the current

taxable year (determined under

paragraph (e)(3)(iii)(B)(3) of this section)

and the appropriate or representative

month used for the immediately

preceding taxable year. The percent

change in the published indexes is

equal to the quotient of the published

cumulative index for the appropriate or

representative month of the current year

divided by the published cumulative

index for the appropriate or

representative month used for the

immediately preceding year (or, for the

month immediately preceding the first

day of the taxable year, if such year is

the first taxable year in which the

taxpayer uses dollar-value LIFO).

(3) Limitation on index period. A

taxpayer electing to use a representative

month under paragraph (e)(3)(iii)(B)(3)

of this section must use an appropriate

month, rather than the representative

month, to determine the index period in

the circumstances described in this

paragraph (e)(3)(iii)(D)(3) and other

similar circumstances. For example, if

the first taxable year in which the

taxpayer uses the IPIC method is also

the first taxable year in which the

taxpayer uses the dollar-value LIFO

method, the index period is the period

between the month immediately

preceding the first day of the taxable

year and an appropriate month for that

taxable year. Likewise, in the case of a

short taxable year, the index period

ordinarily is the period between the

base month (double-extension IPIC

method) or the appropriate or

representative month used for the

preceding taxable year (link-chain IPIC

method) and the appropriate month for

the short taxable year. Similarly, if a

taxpayer using the link-chain IPIC

method is granted consent to change its

method of determining the current-year

cost of a dollar-value pool and its

representative month, the index period

is the period between the old

representative month used for the

preceding taxable year and the new

representative month for the year of

change.

(E) Computation of a pool index—(1)

Weighted average pool index. To

compute an inventory price index for a

dollar-value pool, a taxpayer must

compute a weighted average pool index.

A weighted average pool index is a

weighted harmonic mean of the

appropriate indexes (determined under

paragraph (e)(3)(iii)(D) of this section)

for each selected index category

represented in the taxpayer’s ending

inventory. The formula for computing a

weighted harmonic mean is: Sum of

weights/Sum of (Weight/Appropriate

Index). The costs to be used in

computing a weighted harmonic mean

are the relative amount of current-year

costs (or, in the case of a retailer using

the retail inventory method, the relative

retail selling prices) in each index

category represented in the ending

inventory of the pool.

(2) Double-extension IPIC method.

Under the double-extension IPIC

method, an inventory price index

computed for each pool is 1.0 plus a

stated percentage of the increase since

the base date in the weighted average

pool index determined under paragraph

(e)(3)(iii)(E)(1) of this section. In the

case of an eligible small business as

defined in section 474, the stated

percentage is 100%. In the case of all

other taxpayers, the stated percentage is

80%. Thus, the inventory price index

for an eligible small business is equal to

the weighted average pool index

determined under paragraph

(e)(3)(iii)(E)(1) of this section. The

inventory price index for all other

taxpayers is computed using the

31848 Federal Register / Vol. 65, No. 98 / Friday, May 19, 2000 / Proposed Rules

following formula: 1 + [ 0.8 * (weighted

average pool index ¥ 1)].

(3) Link-chain IPIC method. Under the

link-chain IPIC method, an inventory

price index for each pool is 1.0 plus a

stated percentage of the increase since

the base date in a cumulative index. In

the case of an eligible small business as

defined in section 474, the stated

percentage is 100%. In the case of all

other taxpayers, the stated percentage is

80%. The cumulative index for each

taxable year is the product of the

weighted average pool index

determined under paragraph

(e)(3)(iii)(E)(1) of this section multiplied

by the cumulative index for the

immediately preceding taxable year.

The cumulative index for the taxable

year is computed using the following

formula: (weighted average pool index *

preceding year’s Cumulative Index). The

inventory price index for a taxable year

of an eligible small business is equal to

the cumulative index for the taxable

year. The inventory price index for a

taxable year of all other taxpayers is

computed using the following formula:

1 + [0.8 * (Cumulative Index for the

taxable year ¥ 1)].

(F) Examples. The following examples

illustrate the rules of this paragraph

(e)(3)(iii):

Example 1. Double-extension Method.

(i) Introduction. R is a retail furniture

merchant with more than $5,000,000 in

average annual gross receipts for all relevant

years. For the taxable year ending December

31, 1996, R used the first-in, first-out method

of identifying inventory and valued its

inventory at cost. R’s inventory on December

31, 1996, had a cost of $850,000.00. R elected

to use the dollar-value LIFO and doubleextension IPIC methods for its taxable year

ending December 31, 1997. R determines the

current-year cost of inventory items by

reference to the actual cost of the goods most

recently purchased. R elected to pool its

inventory in accordance with the special IPIC

pooling rules of paragraph (b)(4) of this

section. R does not use the retail inventory

method. All of R’s inventory items fall within

the 2-digit commodity code in Table 6

(Producer price indexes for commodity

groups, subgroups, product classes, and

individual items) of the ‘‘PPI Detailed

Report’’ for ‘‘furniture and household

durables.’’ Therefore, R will maintain a single

inventory pool.

(ii) Select a BLS table and appropriate

month for the 1997 taxable year. R

determines that the appropriate month for

the taxable year ending December 31, 1997,

is October. Because R is a retailer not using

the retail inventory method, R must select

indexes from the ‘‘PPI Detailed Report.’’ The

indexes in Table 6 of the ‘‘PPI Detailed

Report’’ are appropriate for R’s inventory.

(iii) Select index categories for the 1997

taxable year. R’s inventory items can be

classified into five detailed categories listed

in Table 6 of the ‘‘PPI Detailed Report’’

published for October, 1997. The categories

and current-year cost of items in those

categories can be summarized as follows:

Commodity code Category Current-year cost

12120101 ............................ Living Room Table ....................................................................................................................... $111,924.00

12120211 ............................ Dining Room table ........................................................................................................................ 159,578.00

12120216 ............................ Dining Room chairs ...................................................................................................................... 98,639.00

12130101 ............................ Upholstered Sofas ........................................................................................................................ 332,488.00

12130111 ............................ Upholstered Chairs ....................................................................................................................... 218,751.00

921,380.00

(IV) Compute appropriate indexes for the 1997 taxable year. Because R elected to use the double-extension IPIC method, R will

compute appropriate indexes in accordance with paragraph (e)(3)(iii)(D)(1) of this section (published cumulative index for October,

1997 divided by published cumulative index for December, 1996). R computes the appropriate indexes as follows:

Category Oct. ’97 index Dec. ’96 index Appropriate index

Living Room Table ..................................................................................................... 172.4 169.2 1.018913

Dining Room Table .................................................................................................... 171.9 168.1 1.022606

Dining Room Chairs .................................................................................................. 172.8 169.7 1.018268

Upholstered Sofas ..................................................................................................... 142.2 140.9 1.009226

Upholstered Chairs .................................................................................................... 134.1 132.5 1.012075

(v) Compute a weighted average pool index for the 1997 taxable year. R must first compute a weighted average pool index

using the formula set forth in paragraph (e)(3)(iii)(E)(1) of this section (Sum of weights/Sum of [Weight/Appropriate Index]). The

weighted average pool index is computed as follows:

Category Weight Appropriate index Quotient

Living Room Table ..................................................................................................... $111,924.00 1.018913 $109,846.47

Dining Room Table .................................................................................................... 159,578.00 1.022606 156,050.33

Dining Room Chairs .................................................................................................. 98,639.00 1.018268 96,869.39

Upholstered Sofas ..................................................................................................... 332,488.00 1.009226 329,448.51

Upholstered Chairs .................................................................................................... 218,751.00 1.012075 216,141.10

Total ................................................................................................................ 921,380.00 .............................. $908,355.80

Sum of weights Sum of (weight/appropriate index) Weighted average pool index

$921,380.00 $908,355.80 1.0143382

(vi) Compute an inventory price index for

the 1997 taxable year. R computes an

inventory price index for the pool using the

formula set forth in paragraph (e)(3)(iii)(E)(2)

of this section. The inventory price index is

1.0114710 (1 + [0.8 * (1.0143382 ¥1)]).

(vii) Determine the LIFO value of the pool

for the 1997 taxable year. R determines the

total base-year cost of its ending inventory by

dividing the total current-year cost of the

inventory items in the pool by the inventory

price index. The total base-year cost of R’s

ending inventory is $910,930.71 ($921,380/

1.011471). R compares the ending inventory

at base-year cost to the beginning inventory

at base-year cost and determines that the

amount of the layer of increment for the

taxable year in terms of base-year cost is

Federal Register / Vol. 65, No. 98 / Friday, May 19, 2000 / Proposed Rules 31849

$60,930.71 ($910,930.71¥$850,000.00). R

multiplies the base-year cost of the increment

by the inventory price index computed for

the taxable year and determines that the LIFO

value of the increment is $61,629.65

($60,930.71 * 1.011471). Thus, the LIFO

value of R’s inventory at the end of the 1997

taxable year is $911,629.65 ($850,000

opening inventory + $61,629.65 increment).

(viii) Select a BLS table and appropriate

month for the 1998 taxable year. For the 1998

taxable year, R must compute a new

inventory price index under the doubleextension IPIC method to determine the LIFO

value of its dollar-value pool. R determines

that the appropriate month for the taxable

year ending December 31, 1998, is November.

(ix) Select index categories for the 1998

taxable year. The inventory items contained

in R’s ending inventory can be classified into

five detailed categories listed in Table 6 of

the ‘‘PPI Detailed Report’’ published for

November, 1998. The categories and currentyear cost of items in those categories can be

summarized as follows:

Commodity code Category Current-year cost

12120103 Living Room Desks $125,008.00

12120211 Dining Room Table 136,216.00

12120216 Dining Room Chairs 113,569.00

12130101 Upholstered Sofas 343,900.00

12130111 Upholstered Chairs 233,050.00

951,743.00

(x) Compute appropriate indexes for the 1998 taxable year. Because R uses the double-extension IPIC method, R will compute

an appropriate index in accordance with paragraph (e)(3)(iii)(D)(1) of this section (published cumulative index for November, 1998

divided by published cumulative index for December, 1996). R computes the appropriate indexes as follows:

Category Nov. ’98 index Dec. ’96 index Appropriate index

Living Room Desks .................................................................................................... 172.6 160.3 1.076731

Dining Room Table .................................................................................................... 174.8 168.1 1.039857

Dining Room Chairs .................................................................................................. 177.0 169.7 1.043017

Upholstered Sofas ..................................................................................................... 144.9 140.9 1.028389

Upholstered Chairs .................................................................................................... 136.6 132.5 1.030943

(xi) Compute a pool index for the 1998 taxable year. R must first compute a weighted average pool index using the formula

set forth in paragraph (e)(3)(iii)(E)(1) of this section (Sum of weights/(Sum of [Weight/Appropriate Index])). The weighted average

pool index is computed as follows:

Category Weight Appropriate index Quotient

Living Room Desks ...................................................................... $125,008.00 1.076731 $116,099.56

Dining Room Table ...................................................................... 136,216.00 1.039857 130,994.93

Dining Room Chairs .................................................................... 113,569.00 1.043017 108,885.09

Upholstered Sofas ....................................................................... 343,900.00 1.028389 334,406.53

Upholstered Chairs ...................................................................... 233,050.00 1.030943 226,055.17

Total .................................................................................. 951,743.00 ........................................ 916,441.28

Sum of weights Sum of (weight/appropriate index) Weighted average pool index

$951,743.00 $916,441.28 1.0385204

(xii) Compute an inventory price index for

the 1997 taxable year. R computes the

inventory price index for the pool using the

formula set forth in paragraph (e)(3)(iii)(E)(2)

of this section. The inventory price index is

1.0308163 (1 + [0.8 * (1.0385204 ¥1)]).

(xiii) Determine the LIFO value of the pool

for the 1998 taxable year. R determines the

total base-year cost of its ending inventory by

dividing the total current-year cost of the

inventory items in the pool by the pool

index. The total base-year cost of the ending

inventory is $923,290.60 ($951,743.00/

1.0308163). R compares the ending inventory

at base-year cost to the beginning inventory

at base-year cost and determines that the

amount of the layer of increment for the

taxable year in terms of base-year cost is

$12,359.89 ($923,290.60 ¥$910,930.71). R

multiplies the base-year cost of the increment

by the pool index computed for the taxable

year and determines that the LIFO value of

the increment is $12,740.78 ($12,359.89 *

1.0308163). Thus, the LIFO value of R’s

inventory at the end of the 1997 taxable year

is $924,370.43 ($850,000.00 base year layer +

$61,629.65 1997 layer + $12,740.78 1998

layer).

Example 2. Link-chain Method. (i)

Introduction. The facts are the same as

Example 1, except that R uses the link-chain

IPIC method. The double-extension IPIC

method and the link-chain IPIC method yield

the same results for the first taxable year in

which the IPIC method is used. Therefore,

this example only illustrates how R would

compute an inventory price index and

determine the LIFO value of its dollar-value

pool for the 1998 taxable year.

(ii) Select a BLS table and appropriate

month for the 1998 taxable year. R

determines that the appropriate index month

for the taxable year ending December 31,

1998, is November.

(iii) Select index categories for the 1998

taxable year. R’s inventory items can be

classified into five detailed categories listed

in Table 6 of the ‘‘PPI Detailed Report’’

published for November, 1998. The

categories and current-year cost of items in

those categories can be summarized as

follows:

Commodity code Category Current-year cost

12120103 ............................ Living Room Desks ...................................................................................................................... $125,008.00

12120211 ............................ Dining Room Table ...................................................................................................................... 136,216.00

31850 Federal Register / Vol. 65, No. 98 / Friday, May 19, 2000 / Proposed Rules

Commodity code Category Current-year cost

12120216 ............................ Dining Room Chairs ..................................................................................................................... 113,569.00

12130101 ............................ Upholstered Sofas ........................................................................................................................ 343,900.00

12130111 ............................ Upholstered Chairs ....................................................................................................................... 233,050.00

951,743.00

(iv) Compute appropriate indexes for the 1998 taxable year. Because R uses the link-chain IPIC method, R will compute an

appropriate index in accordance with paragraph (e)(3)(iii)(D)(2) of this section (published cumulative index for the November, 1998

divided by published cumulative index for the October, 1997). R computes the appropriate indexes as follows:

Category Nov. ’98 index Oct. ’97 index Appropriate index

Living Room Desks .................................................................................................... 172.6 162.0 1.065432

Dining Room Table .................................................................................................... 174.8 171.9 1.016870

Dining Room Chairs .................................................................................................. 177.0 172.8 1.024306

Upholstered Sofas ..................................................................................................... 144.9 142.2 1.018987

Upholstered Chairs .................................................................................................... 136.6 134.1 1.018643

(v) Compute a pool index for the 1998 taxable year. R must first compute a weighted average pool index using the formula

set forth in paragraph (e)(3)(iii)(E)(1) of this section (Sum of weights/Sum of [Weight/Appropriate Index]). The weighted average pool

index is computed as follows:

Category Weight Appropriate index Quotient

Living Room Desks .................................................................................................... $125,008.00 1.065432 $117,330.81

Dining Room Table .................................................................................................... 136,216.00 1.016870 133,956.16

Dining Room Chairs .................................................................................................. 113,569.00 1.024306 110,874.09

Upholstered Sofas ..................................................................................................... 343,900.00 1.018987 337,492.04

Upholstered Chairs .................................................................................................... 233,050.00 1.018643 228,784.77

Total ................................................................................................................ 951,743.00 .............................. 928,437.87

Sum of weights Sum of (weight/appropriate index) Weighted average pool index

$951,743.00 $928,437.87 1.0251014

(vi) Compute an inventory price index for

the 1997 taxable year. R computes the

inventory price index in accordance with

paragraph (e)(3)(iii)(E)(3) of this section. R

multiplies the weighted average pool index

by the prior year’s cumulative index to get

the cumulative index for the taxable year.

Because 1997 was the first year in which R

used the link-chain IPIC method, the prior

year’s cumulative index is equal to the 1997

weighted average pool index. The cumulative

index for 1998 is 1.0397995 (1.0143382 *

1.0251014). R computes the inventory price

index using the formula set forth in

paragraph (e)(3)(iii)(E)(3) of this section. The

inventory price index is 1.0318396 (1 + [0.80

* (1.0397995 ¥1)]).

(vii) Determine the LIFO value of the pool

for the 1998 taxable year. R determines the

total base-year cost of its ending inventory by

dividing the total current-year cost of the

inventory items in the pool by the inventory

price index. The total base-year cost of the

ending inventory is $922,374.95

($951,743.00/1.0318396). R compares the

ending inventory at base-year cost to the

beginning inventory at base-year cost and

determines that the amount of the layer of

increment for the taxable year in terms of

base-year cost is $11,444.24 ($922,374.95

¥$910,930.71). R multiplies the base-year

cost of the increment by the pool index

computed for the taxable year and

determines that the LIFO value of the

increment is $11,808.62 ($11,444.24 *

1.0318396). Thus, the LIFO value of R’s

inventory at the end of the 1998 taxable year

is $923,438.27 ($850,000 base year layer +

$61,629.65 1997 layer + $11,808.62 1998

layer).

(iv) Adoption or change of method—

(A) Adoption or change to IPIC method.

The use of an inventory price index

computed using the IPIC method is a

method of accounting. A taxpayer

permitted to adopt the dollar-value

LIFO method without first securing the

consent of the Commissioner may also

adopt the IPIC method incident to that

adoption without first securing the

consent of the Commissioner. The IPIC

method may be adopted and used only

if the taxpayer indicates on a Form 970,

‘‘Application to Use LIFO Inventory

Method,’’ or in such other manner as

may be acceptable to the Commissioner,

a listing of each dollar-value inventory

pool, the type of goods included in each

pool, the consumer or producer price

index or indexes selected for each pool,

whether the taxpayer will use the

double-extension IPIC method or the

link-chain IPIC method of computing an

inventory price index, and if the

taxpayer makes a one-time binding

election of an appropriate representative

month, the representative month. In the

case of a taxpayer permitted to adopt the

IPIC method without requesting the

Commissioner’s consent, the Form 970

shall be attached to the taxpayer’s

income tax return for the taxable year of

that adoption. In all other cases, a

taxpayer may change to the IPIC method

prescribed by this paragraph only after

first securing the consent of the

Commissioner as provided in § 1.446–

1(e). In such cases, the Form 970

containing the information described

above must be attached to a Form 3115,

‘‘Application for Change in Accounting

Method,’’ filed in accordance with

§ 1.446–1(e). Taxpayers must maintain

adequate books and records in order to

satisfy the requirements of § 1.472–2(h),

including adequate books and records of

the use and computations of the IPIC

method. Notwithstanding the rules in

paragraph (e)(1) of this section, a

taxpayer that adopts or changes to the

use of an inventory price index

computed using the IPIC method is not

required to demonstrate that the use of

any other method of computing the

LIFO value of a dollar-value inventory

pool is impractical.

(B) Change in selected index. The

selection of a consumer or producer

price index category for a specific item

Federal Register / Vol. 65, No. 98 / Friday, May 19, 2000 / Proposed Rules 31851

to compute an appropriate index under

paragraph (e)(3)(iii)(B) of this section is

a method of accounting. A taxpayer

desiring to change the selection of such

a consumer or producer price index

must secure the consent of the

Commissioner as provided in § 1.446–

1(e).

(C) New base year—(1) Voluntary

change—(i) In general. In the case of a

taxpayer using a method other than the

IPIC method to determine the LIFO

value of a dollar-value inventory pool,

any layers of inventory increments

previously determined by that method

and the LIFO value of those layers are

retained if the taxpayer voluntarily

changes to the use of the IPIC method.

In the case of a taxpayer changing the

selection of an index category for an

inventory item, any layers of inventory

increments previously determined and

the LIFO value of those layers are

retained. Instead of using the earliest

taxable year for which the taxpayer

adopted the LIFO method for any items

in the pool, the year of change is used

as the new base year in determining the

LIFO value of the inventory pool for the

year of change and later taxable years.

The cumulative index as of the first day

of the year of change (the base date) is

1.00. The base-year costs of layers of

increment in the pool at the beginning

of the year of change must be restated

in terms of new base-year cost, using the

year of change as the new base year, and

the indexes for previously determined

inventory increments must be

recomputed accordingly. The new baseyear cost of a pool is equal to the total

current-year cost of all the items in the

pool as determined pursuant to the

taxpayer’s established method of

determining the total current-year cost

of items making up the pool under

paragraph (e)(2)(ii) of this section. See

paragraph (f)(2) of this section for rules

relating to a change to the dollar-value

method from another method of pricing

LIFO inventories.

(ii) Example. The following example

illustrates the rules of this paragraph

(e)(3)(iv)(C)(1):

Example. (i) X began using a dollar-value

LIFO method other than the IPIC method in

1990 and maintains a single dollar-value

pool. X is granted permission to change to

the IPIC method, beginning with the taxable

year ending December 31, 2000. X will

continue to use a single dollar-value pool

under the IPIC method. X’s beginning

inventory as of January 1, 2000, computed

using its former method, is as follows:

Base-year costs Index LIFO value

Base layer .................................................................................................................. $135,000 1.00 $135,000

1991 layer .................................................................................................................. 20,000 1.43 28,600

1994 layer .................................................................................................................. 60,000 1.55 93,000

1995 layer .................................................................................................................. 13,000 1.59 20,670

1997 layer .................................................................................................................. 2,000 1.61 3,220

Totals .............................................................................................................. 230,000 .............................. 280,490

(ii) Under X’s method of determining the current-year cost of items, the current-year cost of the beginning inventory is $391,000.

Thus, X’s new base-year cost as of January 1, 2000 is $391,000. X allocates this new base-year cost to each LIFO layer based on

the ratio of old base-year cost of the layer to the total old base-year cost of the pool. To recompute the indexes for each of its

LIFO layers, X divides the LIFO value of each layer by the new base-year cost attributable to the layer. The new base-year costs,

recomputed indexes, and LIFO value of X’s inventory are as follows:

Base-year costs Index LIFO value

Base layer .................................................................................................................. $229,500 0.588235 $135,000

1991 layer .................................................................................................................. 34,000 0.841176 28,600

1994 layer .................................................................................................................. 102,000 0.911765 93,000

1995 layer .................................................................................................................. 22,100 0.935294 20,670

1997 layer .................................................................................................................. 3,400 0.947059 3,220

Totals .............................................................................................................. 391,000 .............................. 280,490

(2) Involuntary change—(i) In general.

If a taxpayer uses a method of

accounting other than the IPIC method

to determine the LIFO value of a dollarvalue inventory pool and the

Commissioner determines that the

method does not clearly reflect income,

the Commissioner may require the

taxpayer to change to the IPIC method.

If a taxpayer is unable to provide a

sufficient basis, including information

from its books and records, to compute

an adjustment under section 481, and

the Commissioner requires the taxpayer

to change to the IPIC method, the

Commissioner will require the taxpayer

to change to the double-extension IPIC

method and implement the change on a

cut-off basis without a new base year.

Under the cut-off basis without a new

base year, the Commissioner will

determine the amount of any increment

in terms of base-year cost for the year of

change by comparing the total base-year

cost of the beginning inventory under

the taxpayer’s method and the total

base-year cost of the ending inventory

under the double-extension IPIC method

described in this paragraph (e)(3) and

value any increment so determined

using the inventory price index

computed under the double-extension

IPIC method.

(ii) Example. The following example

illustrates the rules of this paragraph

(e)(3)(iv)(C)(2):

Example. (i) Y began using a dollar-value

LIFO method other than the IPIC method in

1994 and maintains a single dollar-value

pool. Under Y’s method of determining the

current-year cost of items, the current-year

cost of Y’s ending inventory for the 2000

taxable year is $348,160. Y’s beginning

inventory as of January 1, 2000, computed

using its method, is as follows:

Base-year costs Index LIFO value

Base layer .................................................................................................................. $105,000 1.00 $105,000

1995 layer .................................................................................................................. 3,000 1.70 5,100

1996 layer .................................................................................................................. 5,500 2.00 11,000

31852 Federal Register / Vol. 65, No. 98 / Friday, May 19, 2000 / Proposed Rules

Base-year costs Index LIFO value

1997 layer .................................................................................................................. 2,900 2.50 7,250

1998 layer .................................................................................................................. 1,400 2.85 3,990

Totals .............................................................................................................. 117,800 .............................. 132,340

(ii) Upon examination, it is determined

that Y’s dollar-value LIFO method does not

clearly reflect income. If Y is unable to

provide the examining agent with a sufficient

basis to compute a section 481 adjustment

arising from a change to a dollar-value LIFO

method that does clearly reflect income, and

the examining agent chooses to change Y to

the IPIC method, the change will be

implemented as follows. First, the examining

agent will compute an inventory price index

under the double-extension IPIC method in

accordance with this paragraph (e)(3). For

purposes of this example, assume that the

inventory price index computed under the

double-extension IPIC method is 1.438793.

Second, the examining agent will divide the

current-year cost of Y’s ending inventory by

the inventory price index to determine the

base-year cost of Y’s inventory under the

double-extension IPIC method. The base-year

cost is $241,980.60 ($348,160/1.438793).

Third, the examining agent will compare the

base-year cost of the ending inventory

determined under the double-extension IPIC

method to the base-year cost of the beginning

inventory determined under Y’s method of

accounting to determine the amount of any

increment. The increment at base-year cost

for the 2000 taxable year is $124,180.60

($241,980.60 ¥$117,800.00). Fourth, the

examining agent will value the increment by

multiplying the base-year cost of the

increment by the inventory price index. The

LIFO value of the increment is $178,670.18

($241,980.60 * 1.438793). Finally, the

examining agent will reduce Y’s cost of goods

sold and increases Y’s gross income for the

2000 taxable year by the increase in the LIFO

value of the 2000 ending inventory, or

$178,670.18.

(v) Effective date—(A) In general. The

rules of this paragraph (e)(3) and

paragraphs (b)(4) and (c)(2) of this

section are applicable for taxable years

beginning on or after the date these

regulations are published in the Federal

Register as final regulations.

(B) Change in method of accounting.

Any change in a taxpayer’s method of

accounting necessary to comply with

this paragraph (e)(3) or paragraphs (b)(4)

or (c)(2) of this section is a change in

method of accounting to which the

provisions of section 446 and the

regulations thereunder apply. For the

first taxable year beginning on or after

the date these regulations are published

in the Federal Register as final

regulations, a taxpayer is granted the

consent of the Commissioner to change

its method of accounting to a method

required or permitted by this paragraph

(e)(3) and paragraphs (b)(4) and (c)(2) of

this section. A taxpayer that wants to

change its method of accounting under

this paragraph (e)(3)(v) must follow the

automatic consent procedures in Rev.

Proc. 99–49 (1999–52 I.R.B. 725) (see

§ 601.601(d)(2) of this chapter).

However, the scope limitations in

section 4.02 of Rev. Proc. 99–49 do not

apply. In addition, if the taxpayer’s

method of accounting for its LIFO

inventories is an issue under

consideration at the time the application

is filed with the national office, the

audit protection of section 7 of Rev.

Proc. 99–49 does not apply. If a taxpayer

changing its method of accounting

under this paragraph (e)(3)(v)(B) is

under examination, before an appeals

office, or before a federal court with

respect to any income tax issue, the

taxpayer must provide a copy of the

application to the examining agent(s),

appeals officer or counsel for the

government, as appropriate, at the same

time it files the application with the

national office. A change under this

paragraph (e)(3)(v)(B) must be made

using a cut-off basis and new base year

in accordance with paragraph

(e)(3)(iv)(C)(1) of this section. Because a

change under this paragraph (e)(3)(v)(B)

is made on a cut-off basis, a section

481(a) adjustment is not required.

However, a taxpayer changing its

method of accounting under this

paragraph (e)(3)(v)(B) must comply with

the requirements of section 10.04(3) of

the APPENDIX of Rev. Proc. 99–49

(concerning bargain purchases).

* * * * *

(h) Inventories received in certain

nonrecognition transactions—(1) In

general. Except as provided in

paragraph (h)(3) of this section, if

inventories are received in a transaction

described in paragraph (h)(2) of this

section, then for purposes of

determining future increments and

liquidations the transferee must use the

year of the transfer as the base year and

the current-year cost (determined under

the transferor’s method of accounting) of

the inventories received as the new

base-year cost of such inventories.

Likewise, the transferee must use the

current-year cost (determined under the

transferee’s method of accounting) of its

beginning inventory, if any, as the new

base-year cost of the beginning

inventory for purposes of determining

future increments and liquidations. The

total new base-year cost of the

transferee’s beginning inventory is equal

to the new base-year cost of the

inventories received and the new baseyear cost of the beginning inventory.

The cumulative index as of the first day

of the year in which the inventory is

received (the base date) is 1.00. The

base-year costs of any layers of

increment in the pool, as determined

after the transfer, must be restated in

terms of new base-year costs and the

indexes for all such layers must be

restated in terms of the new base year

index. See paragraph (e)(3)(iv)(C)(1) of

this section for an example of this

computation.

(2) Transactions to which this

paragraph (h) applies. A transaction is

described in this paragraph (h) if—

(i) The transferee determines its basis

in the inventories, in whole or in part,

by reference to the basis of the

inventories in the hands of the

transferor;

(ii) The transferor used the dollarvalue LIFO method to account for the

transferred inventories;

(iii) The transferee uses the dollarvalue LIFO method to account for the

inventories in the year of the transfer;

and

(iv) The transaction is not described

in section 381(a).

(3) Anti-avoidance rule. The rule in

paragraph (h)(1) of this section will not

apply to a transaction entered into with

the principal purpose to avail the

transferee of a method of accounting

that would be unavailable to the

transferor (or would be unavailable to

the transferor without securing consent

from the Commissioner). In determining

the principal purpose of a transfer,

consideration will be given to all of the

facts and circumstances. However, a

transfer is deemed made with the

principal purpose to avail the transferee

of a method of accounting that would be

unavailable to the transferor without

securing consent from the

Commissioner if the transferor acquired

inventory in a bargain purchase within

the five taxable years preceding the year

of the transfer and used a dollar-value

LIFO method to account for that

inventory that did not treat the bargain

purchase inventory and physically

identical inventory acquired at market

prices as separate items. Inventory is

deemed acquired in a bargain purchase

Federal Register / Vol. 65, No. 98 / Friday, May 19, 2000 / Proposed Rules 31853

if the actual cost of the inventory (or, if

appropriate, the allocated cost of the

inventory) was less than or equal to 50

percent of the replacement cost of

physically identical inventory.

Inventory is not considered acquired in

a bargain purchase if the actual cost of

the inventory (or, if appropriate, the

allocated cost of the inventory) was

greater than or equal to 75 percent of the

replacement cost of physically identical

inventory.

(4) Effective date. The rules of this

paragraph (h) are applicable for transfers

on or after the date these regulations are

published in the Federal Register as

final regulations.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

[FR Doc. 00–12174 Filed 5–18–00; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–105089–99]

RIN 1545–AX38

Guidance Under Section 356 Relating

to the Treatment of Nonqualified

Preferred Stock and Other Preferred

Stock in Certain Exchanges and

Distributions; Hearing Cancellation

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Cancellation of notice of public

hearing on proposed rulemaking.

SUMMARY: This document provides

notice of cancellation of a public

hearing on proposed regulations relating

to the treatment of nonqualified

preferred stock and other preferred

stock in certain exchanges and

distributions under section 356 of the

Internal Revenue Code.

DATES: The public hearing originally

scheduled for Wednesday, May 31,

2000, at 10 a.m., is cancelled.

FOR FURTHER INFORMATION CONTACT:

LaNita Van Dyke of the Regulations

Unit, Assistant Chief Counsel

(Corporate), at (202) 622–7180 (not a

toll-free number).

SUPPLEMENTARY INFORMATION: A notice

of proposed rulemaking and notice of

public hearing that appeared in the

Federal Register on January 26, 2000,

(65 FR 4203), announced that a public

hearing was scheduled for May 31,

2000, at 10 a.m., in room 2615, Internal

Revenue Building, 1111 Constitution

Ave., NW., Washington, DC. The subject

of the public hearing is proposed

regulations under section 354, 355, 356,

and 1036 of the Internal Revenue Code.

The deadline for requests to speak and

outlines of oral comments expired on

May 10, 2000.

The notice of proposed rulemaking

and notice of public hearing, instructed

those interested in testifying at the

public hearing to submit a request to

speak and an outline of the topics to be

addressed. As of May 15, 2000, no one

has requested to speak. Therefore, the

public hearing scheduled for May 31,

2000, is cancelled.

Cynthia E. Grigsby,

Chief, Regulations Unit, Assistant Chief

Counsel (Corporate).

[FR Doc. 00–12682 Filed 5–18–00; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY

Bureau of Alcohol, Tobacco and

Firearms

27 CFR Part 9

[Notice No. 897]

RIN 1512–AA07

Red Mountain Viticultural Area (99R–

367P)

AGENCY: Bureau of Alcohol, Tobacco

and Firearms (ATF), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: The Bureau of Alcohol,

Tobacco and Firearms (ATF) has

received a petition proposing to

establish a viticultural area within the

State of Washington to be called ‘‘Red

Mountain.’’ The proposed viticultural

area is within Benton County and

entirely within the existing Yakima

Valley viticultural area as described in

the regulations. Mr. Lorne Jacobson of

Hedges Cellars submitted the petition.

Mr. Jacobson believes that ‘‘Red

Mountain’’ is a widely known name for

the petitioned area, that the area is well

defined, and that the area is

distinguished from other areas by its

soil and climate.

DATES: Send your comments on or

before July 18, 2000.

ADDRESSES: Send written comments to:

Chief, Regulations Division, Bureau of

Alcohol, Tobacco and Firearms, P.O.

Box 50221, Washington, DC 20091–0221

(Attn: Notice No. 897).

FOR FURTHER INFORMATION CONTACT:

Jennifer Berry, Regulations Division,

Bureau of Alcohol, Tobacco and

Firearms, 650 Massachusetts Avenue,

NW, Washington, DC 20226, (202) 927–

8210.

SUPPLEMENTARY INFORMATION:

1. Background on Viticultural Areas

What Is ATF’s Authority To Establish a

Viticultural Area?

ATF published Treasury Decision

ATF–53 (43 FR 37672, 54624) on

August 23, 1978. This decision revised

the regulations in 27 CFR part 4,

Labeling and Advertising of Wine, to

allow the establishment of definitive

viticultural areas. The regulations allow

the name of an approved viticultural

area to be used as an appellation of

origin on wine labels and in wine

advertisements. On October 2, 1979,

ATF published Treasury Decision ATF–

60 (44 FR 56692) which added 27 CFR

part 9, American Viticultural Areas, for

the listing of approved American

viticultural areas, the names of which

may be used as appellations of origin.

What Is the Definition of an American

Viticultural Area?

An American viticultural area is a

delimited grape-growing region

distinguishable by geographic features.

Viticultural features such as soil,

climate, elevation, topography, etc.,

distinguish it from surrounding areas.

What Is Required To Establish a

Viticultural Area?

Any interested person may petition

ATF to establish a grape-growing region

as a viticultural area. The petition

should include:

• Evidence that the name of the

proposed viticultural area is locally

and/or nationally known as referring to

the area specified in the petition;

• Historical or current evidence that

the boundaries of the viticultural area

are as specified in the petition;

• Evidence relating to the

geographical characteristics (climate,

soil, elevation, physical features, etc.)

which distinguish the viticultural

features of the proposed area from

surrounding areas;

• A description of the specific

boundaries of the viticultural area,

based on features which can be found

on United States Geological Survey

(U.S.G.S.) maps of the largest applicable

scale; and

• A copy (or copies) of the

appropriate U.S.G.S. map(s) with the

boundaries prominently marked.

2. Red Mountain Petition

ATF has received a petition proposing

to establish a viticultural area within the

State of Washington to be known as

‘‘Red Mountain.’’ The petitioner is Mr.

Lorne Jacobson of Hedges Cellars. The

proposed viticultural area is entirely

within the existing Yakima Valley