Source: https://www.irs.gov/irb/2011-45_IRB
Timestamp: 2019-04-22 04:48:29+00:00

Document:
Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for November 2011.
Proposed regulations under section 471 of the Code provide rules relating to the retail inventory method of accounting. The regulations clarify the computation of ending inventory values under the retail inventory method and provide special rules for sales-based vendor allowances and for margin protection payments and similar vendor allowances.
This notice provides for the suspension of certain requirements under section 42 of the Code for low-income housing credit projects in order to provide emergency housing relief needed as a result of the devastation in the State of New York caused by either Hurricane Irene during the period of August 26, 2011, to September 5, 2011, or the remnants of Tropical Storm Lee during the period of September 7, 2011, to September 11, 2011.
Cost-of-living adjustments for 2012. This procedure sets forth the 2012 cost-of-living adjustments to certain items due to inflation as required under various provisions of the Code and Service guidance.
This notice provides guidance on section 7528(b)(2) of the Code. Section 7528(b)(2) provides for exemption from the requirement to pay a user fee for certain applications to the Service for determination letters on the qualified status of pension, profit-sharing, stock bonus, annuity, and employee stock ownership (ESOP) plans. This notice explains how to determine, for purposes of eligibility for exemption from the user fee requirement, if such an application has been filed within a remedial amendment period with respect to the plan beginning within the plan’s first five plan years. The guidance in this notice generally pertains to such applications that are filed with the Service after January 31, 2011. Notice 2002-1 amplified.
The IRS has revoked its determination that Carib News Foundation of New York, NY; Caring and Sharing, Inc., of Kansas City, MO; Center for AIDS Prevention of Beverly Hills, CA; Ezer Akeres Habais, Inc., of Brooklyn, NY; National Carbon Offset Coalition of Butte, MT; Nazarene Ministry of Help of Portland, OR; Thumpers Therapeutic Center of Milwaukee, OR; Tradewinds Foundation, Inc., of New Hartford, NY; Texas Team Sports of San Antonio, TX; and United Homeless Organization, Inc., of Bronx, PA, qualify as organizations described in sections 501(c)(3) and 170(c)(2) of the Code.
Proposed regulations under section 6695 of the Code would modify existing regulations related to the tax return preparer penalties. A public hearing is scheduled for November 7, 2011.
This revenue ruling provides various prescribed rates for federal income tax purposes for November 2011 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(1) for buildings placed in service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, and before December 31, 2013, shall not be less than 9%. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.
This notice provides guidance on § 7528(b)(2) of the Internal Revenue Code. Section 7528(b)(2) provides for exemption from the requirement to pay a user fee for certain applications to the Service for determination letters on the qualified status of pension, profit-sharing, stock bonus, annuity, and employee stock ownership (ESOP) plans. The guidance in this notice generally pertains to such applications that are filed with the Service after January 31, 2011. This notice amplifies Notice 2002-1, 2002-1 C.B. 283, by explaining how to determine, for purposes of eligibility for exemption from the user fee requirement, if such an application has been filed within a remedial amendment period with respect to the plan beginning within the plan’s first five plan years.
Section 7528 directs the Secretary of the Treasury to establish a program requiring the payment of a user fee for requests to the Service for ruling letters, opinion letters, determination letters, and other similar requests. Rev. Proc. 2011-8, 2011-1 I.R.B. 237, as corrected by Announcement 2011-8, 2011-5 I.R.B. 446, contains the procedures under the Service’s user fee program with respect to requests involving employee plans and exempt organizations.
Section 7528(b)(2)(A) provides that the Secretary shall provide for such exemptions from the user fee requirement (and reduced fees) as the Secretary deems appropriate. Section 7528(b)(2)(B) and (C) provides that an application for a determination letter on the qualified status of a pension, profit-sharing, stock bonus, annuity, or ESOP plan or the exempt status of any trust which is part of the plan shall be exempt from the user fee requirement if the plan is maintained solely by one or more eligible employers (within the meaning of § 7528(b)(2)(C)(ii)) and the application is filed by the later of the last day of the fifth plan year the plan is in existence or the last day of any remedial amendment period with respect to the plan beginning within the first five plan years.
Section 7528 was added to the Code in 2003, effective for requests made after October 1, 2003. Provisions identical to § 7528(b)(2)(B) and (C) were set forth in section 620 of the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16 (EGTRRA), and applied to requests made after December 31, 2001 and before the effective date of § 7528. Notice 2002-1, as amplified by Notice 2003-49, 2003-2 C.B. 294, provides guidance on section 620 of EGTRRA, including guidance on who is an eligible employer, when a plan is in existence, the types of determination letter applications that are eligible for exemption from the user fee requirement, and when a plan’s EGTRRA remedial amendment period begins for purposes of determining if a determination letter application is eligible for exemption from the user fee requirement. The guidance in Notice 2002-1, as amplified by Notice 2003-49, applies to § 7528(b)(2)(B) and (C), as well as to section 620 of EGTRRA, and continues to be effective, as further amplified by this notice.
Rev. Proc. 2007-44, 2007-2 C.B. 54, provides for a system of cyclical remedial amendment periods and staggered submission periods for determination letter applications for employee plans. Under the system set forth in Rev. Proc. 2007-44, applications for determination letters for a plan are generally not submitted more frequently than once every five or six years, depending on whether the plan is (1) individually designed and subject to a 5-year remedial amendment cycle or (2) pre-approved and subject to a 6-year cycle. Any remedial amendment period with respect to a plan that would otherwise expire before the end of the plan’s current 5- or 6-year cycle (and after the end of the plan’s preceding cycle) is extended to the end of the plan’s current cycle.
For example, the current 5-year remedial amendment cycle for an individually designed Cycle A plan (as defined in section 9 of Rev. Proc. 2007-44) ends on January 31, 2012, and the one-year determination letter submission period for the plan under the current cycle runs from February 1, 2011 to January 31, 2012. Any remedial amendment period with respect to the plan that would otherwise expire after January 31, 2007 and before January 31, 2012 is extended to January 31, 2012. The current 5-year remedial amendment cycles for individually designed Cycle B, C, D, and E plans end on January 31, 2013, 2014, 2015, and 2016, respectively. Similar remedial amendment cycle rules apply to pre-approved plans, except that the cycles are six years in length and are based on whether a plan is a defined contribution or a defined benefit plan.
An application for a determination letter does not meet the requirements in § 7528(b)(2)(B) and (C) for exemption from the user fee requirement if the application is not submitted to the Service by the later of the last day of the fifth plan year the plan is in existence or the last day of any remedial amendment period with respect to the plan beginning within the first five plan years. Ascertaining whether a particular application satisfies this requirement would require consideration of the effective dates with respect to the plan of changes in law and published guidance, the adoption and effective dates of the plan and amendments to the plan, and the plan’s current remedial amendment cycle. A separate analysis could be required for every application that is otherwise eligible for exemption from the user fee requirement.
In order to simplify the process for establishing whether a user fee is required to be paid with a determination letter application for a plan, for purposes of § 7528(b)(2), the Service will treat an application as having been filed by the last day of a remedial amendment period with respect to the plan beginning within the first five plan years if both of the following conditions are met: (1) the application is filed with the Service by the last day of the submission period for the plan’s current remedial amendment cycle, and (2) the plan is first in existence no earlier than January 1 of the tenth calendar year immediately preceding the year in which the submission period for the plan’s current remedial amendment cycle begins. For example, for purposes of § 7528(b)(2), the Service will treat an application for a determination letter for a Cycle A plan as filed by the last day of a remedial amendment period with respect to the plan beginning within the first five plan years if the application is filed with the Service by January 31, 2012 (i.e., the last day of the submission period for the plan’s current remedial amendment cycle) and the plan is first in existence no earlier than January 1, 2001 (i.e., January 1 of the tenth calendar year immediately preceding 2011, the year in which the submission period for the plan’s current remedial amendment cycle begins). An application for a determination letter for a Cycle B plan will be treated as filed by the last day of a remedial amendment period with respect to the plan beginning within the first five plan years if the application is filed with the Service by January 31, 2013, and the plan is first in existence no earlier than January 1, 2002.
There may be certain situations in which an application that is filed by the last day of a remedial amendment period with respect to the plan beginning within the first five plan years would nevertheless not be treated as such under the rule described in the preceding paragraph (i.e., where a remedial amendment period beginning within the first five plan years ends on the last day of a submission period that begins more than ten years after the year in which the plan is first in existence). In such cases, where the other requirements for exemption from user fees are also met, the applicant should not include payment of a user fee with the application but should explain in a cover letter how the application meets the requirements for exemption. If the Service determines that the application is not exempt, the applicant will be asked to submit the required user fee.
The preceding rules apply to all applications for determination letters that are filed with the Service after January 31, 2011, other than applications filed by April 30, 2012 for EGTRRA determination letters for defined benefit plans that are eligible for the 6-year EGTRRA remedial amendment cycle ending on April 30, 2012. Notice 2003-49 explains how to determine eligibility for exemption from the user fee requirement for a determination letter application filed within a plan’s EGTRRA remedial amendment period. Notice 2003-49 applies to applications for determination letters for defined benefit plans that are eligible for the 6-year EGTRRA remedial amendment cycle ending on April 30, 2012, regardless of whether such an application is filed on Form 5307, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans, or Form 5300, Application for Determination for Employee Benefit Plan.
This notice is effective with respect to applications for determination letters on the qualified status of employee plans that are filed with the Service after January 31, 2011.
The principal drafter of this notice is James Flannery of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans’ taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number) or Mr. Flannery at RetirementPlanQuestions@irs.gov.
The Internal Revenue Service is suspending certain requirements under § 42 of the Internal Revenue Code for low-income housing credit projects to provide emergency housing relief needed as a result of the devastation in the State of New York caused by either Hurricane Irene during the period of August 26, 2011 to September 5, 2011, or the remnants of Tropical Storm Lee during the period of September 7, 2011 to September 11, 2011. This relief is being granted pursuant to the Service’s authority under § 42(n) and § 1.42-13(a) of the Income Tax Regulations.
On August 31, 2011, and September 13, 2011, the President declared major disasters for the State of New York. The declarations were made under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121 et seq. Subsequently, the Federal Emergency Management Agency (FEMA) designated jurisdictions for Individual Assistance. The State of New York has requested that the Service allow owners of low-income housing credit projects to provide temporary housing in vacant units to individuals who resided in jurisdictions designated for Individual Assistance in the State of New York and who have been displaced because their residences were destroyed or damaged as a result of the devastation caused by Hurricane Irene or the remnants of Tropical Storm Lee. Based upon this request and because of the widespread damage to housing caused by Hurricane Irene and the remnants of Tropical Storm Lee, the Service has determined that the New York State Homes and Community Renewal Agency (Agency) may provide approval to project owners to provide temporary emergency housing for displaced individuals in accordance with this notice.
The Service has determined that it is appropriate to temporarily suspend certain income limitation requirements under § 42 for certain qualified low-income housing projects. The suspension will apply to low-income housing projects approved by the Agency, in which vacant units are rented to displaced individuals. The Agency will determine the appropriate period of temporary housing for each project, not to extend beyond October 31, 2012 (temporary housing period).
A displaced individual temporarily occupying a unit during the first year of the credit period under § 42(f)(1) will be deemed a qualified low-income tenant for purposes of determining the project’s qualified basis under § 42(c)(1), and for meeting the project’s 20-50 test or 40-60 test as elected by the project owner under § 42(g)(1). After the end of the temporary housing period established by the Agency (not to extend beyond October 31, 2012), a displaced individual will no longer be deemed a qualified low-income tenant.
During the temporary housing period established by the Agency, the status of a vacant unit (that is, market-rate or low-income for purposes of § 42 or never previously occupied) after the first year of the credit period that becomes temporarily occupied by a displaced individual remains the same as the unit’s status before the displaced individual moves in. Displaced individuals temporarily occupying vacant units will not be treated as low-income tenants under § 42(i)(3)(A)(ii). However, even if it houses a displaced individual, a low-income or market rate unit that was vacant before the effective date of this notice will continue to be treated as a vacant low-income or market rate unit. Similarly, a unit that was never previously occupied before the effective date of this notice will continue to be treated as a unit that has never been previously occupied even if it houses a displaced individual. Thus, the fact that a vacant unit becomes occupied by a displaced individual will not affect the building’s applicable fraction under § 42(c)(1)(B) for purposes of determining the building’s qualified basis, nor will it affect the 20-50 test or 40-60 test of § 42(g)(1). If the income of occupants in low-income units exceeds 140 percent of the applicable income limitation, the temporary occupancy of a unit by a displaced individual will not cause application of the available unit rule under § 42(g)(2)(D)(ii). In addition, the project owner is not required during the temporary housing period to make attempts to rent to low-income individuals the low-income units that house displaced individuals.
The non-transient use requirement of § 42(i)(3)(B)(i) shall not apply to any unit providing temporary housing to a displaced individual during the temporary housing period determined by the Agency in accordance with section I of this notice.
In the case of an individual displaced by the devastation caused by Hurricane Irene, the displaced individual must have resided in a New York jurisdiction designated for Individual Assistance by FEMA as a result of the devastation in the State of New York caused by Hurricane Irene during the period of August 26, 2011 to September 5, 2011.
In the case of an individual displaced by the devastation caused by the remnants of Tropical Storm Lee, the displaced individual must have resided in a New York jurisdiction designated for Individual Assistance by FEMA as a result of the devastation in the State of New York caused by the remnants of Tropical Storm Lee during the period of September 7, 2011 to September 11, 2011.
The project owner must obtain approval from the Agency for the relief described in this notice. The Agency will determine the appropriate period of temporary housing for each project, not to extend beyond October 31, 2012.
To comply with the requirements of § 1.42-5, project owners are required to maintain and certify certain information concerning each displaced individual temporarily housed in the project, specifically the following: name, address of damaged residence, social security number, and a statement signed under penalties of perjury by the displaced individual that, because of damage to the individual’s residence in a New York jurisdiction designated for Individual Assistance by FEMA as a result of the devastation caused in the State of New York by either Hurricane Irene during the period of August 26, 2011 to September 5, 2011, or the remnants of Tropical Storm Lee during the period of September 7, 2011 to September 11, 2011, as applicable, the individual requires temporary housing. The owner must notify the Agency that vacant units are available for rent to displaced individuals.
The owner must also certify the date the displaced individual began temporary occupancy and the date the project will discontinue providing temporary housing as established by the Agency. The certifications and recordkeeping for displaced individuals must be maintained as part of the annual compliance monitoring process with the Agency.
Rents for the low-income units that house displaced individuals must not exceed the existing rent-restricted rates for the low-income units established under § 42(g)(2).
Existing tenants in occupied low-income units cannot be evicted or have their tenancy terminated as a result of efforts to provide temporary housing for displaced individuals.
This notice is effective August 31, 2011 (the date of the President’s major disaster declaration) for devastation caused by Hurricane Irene in the State of New York during the period of August 26, 2011 to September 5, 2011. This notice is effective September 13, 2011 (the date of the President’s major disaster declaration) for devastation caused by the remnants of Tropical Storm Lee in the State of New York during the period of September 7, 2011 to September 11, 2011.
The collection of information contained in this notice has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-2220.
The collection of information in this notice is in the section titled “OTHER REQUIREMENTS” under “(3) Certifications and Recordkeeping.” This information is required to enable the Service to verify whether individuals are displaced as a result of the devastation caused in the State of New York by either Hurricane Irene during the period of August 26, 2011 to September 5, 2011, or the remnants of Tropical Storm Lee during the period of September 7, 2011 to September 11, 2011, and thus warrant temporary housing in vacant low-income housing units. The collection of information is required to obtain a benefit. The likely respondents are individuals and businesses.
The estimated total annual recordkeeping burden is 300 hours.
The estimated annual burden per recordkeeper is approximately 15 minutes. The estimated number of recordkeepers is 1200.
The principal author of this notice is David Selig of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice, contact Mr. Selig at (202) 622-3040 (not a toll-free call).
This revenue procedure sets forth inflation adjusted items for 2012.
.02 Unearned Income of Minor Children Taxed as if Parent’s Income (the “Kiddie Tax”). For taxable years beginning in 2012, the amount in § 1(g)(4)(A)(ii)(I), which is used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $950. This amount is the same as the $950 standard deduction amount provided in section 3.11(2) of this revenue procedure. The same $950 amount is used for purposes of § 1(g)(7) (that is, to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax”). For example, one of the requirements for the parental election is that a child’s gross income is more than the amount referenced in § 1(g)(4)(A)(ii)(I) but less than 10 times that amount; thus, a child’s gross income for 2012 must be more than $950 but less than $9,500.
.04 Child Tax Credit. For taxable years beginning in 2012, the value used in § 24(d)(1)(B)(i) to determine the amount of credit under § 24 that may be refundable is $3,000.
.05 Hope Scholarship, American Opportunity, and Lifetime Learning Credits.
(1) For taxable years beginning in 2012, the Hope Scholarship Credit under § 25A(b)(1), as increased under § 25A(i) (the American Opportunity Tax Credit), is an amount equal to 100 percent of qualified tuition and related expenses not in excess of $2,000, plus 25 percent of those expenses in excess of $2,000, but not in excess of $4,000. Accordingly, the maximum Hope Scholarship Credit allowable under § 25A(b)(1) for taxable years beginning in 2012 is $2,500.
(2) For taxable years beginning in 2012, a taxpayer’s modified adjusted gross income in excess of $80,000 ($160,000 for a joint return) is used to determine the reduction under § 25A(d)(2) in the amount of the Hope Scholarship Credit otherwise allowable under § 25A(a)(1). For taxable years beginning in 2012, a taxpayer’s modified adjusted gross income in excess of $52,000 ($104,000 for a joint return) is used to determine the reduction under § 25A(d)(2) in the amount of the Lifetime Learning Credit otherwise allowable under § 25A(a)(2).
(1) In general. For taxable years beginning in 2012, the following amounts are used to determine the earned income credit under § 32(b). The “earned income amount” is the amount of earned income at or above which the maximum amount of the earned income credit is allowed. The “threshold phaseout amount” is the amount of adjusted gross income (or, if greater, earned income) above which the maximum amount of the credit begins to phase out. The “completed phaseout amount” is the amount of adjusted gross income (or, if greater, earned income) at or above which no credit is allowed. The threshold phaseout amounts and the completed phaseout amounts shown in the table below for married taxpayers filing a joint return include the increase provided in § 32(b)(3)(B)(i), as adjusted for inflation for taxable years beginning in 2012.
(2) Excessive investment income. For taxable years beginning in 2012, the earned income tax credit is not allowed under § 32(i) if the aggregate amount of certain investment income exceeds $3,200.
.07 Rehabilitation Expenditures Treated as Separate New Building. For calendar year 2012, the per low-income unit qualified basis amount under § 42(e)(3)(A)(ii)(II) is $6,200.
.08 Low-Income Housing Credit. For calendar year 2012, the amount used under § 42(h)(3)(C)(ii) to calculate the State housing credit ceiling for the low-income housing credit is the greater of (1) $2.20 multiplied by the State population, or (2) $2,525,000.
.09 Alternative Minimum Tax Exemption for a Child Subject to the “Kiddie Tax.” For taxable years beginning in 2012, for a child to whom the § 1(g) “kiddie tax” applies, the exemption amount under §§ 55 and 59(j) for purposes of the alternative minimum tax under § 55 may not exceed the sum of (1) the child’s earned income for the taxable year, plus (2) $6,950.
.10 Transportation Mainline Pipeline Construction Industry Optional Expense Substantiation Rules for Payments to Employees under Accountable Plans. For calendar year 2012, an eligible employer may pay certain welders and heavy equipment mechanics an amount of up to $16 per hour for rig-related expenses that is deemed substantiated under an accountable plan if paid in accordance with Rev. Proc. 2002-41, 2002-1 C.B. 1098. If the employer provides fuel or otherwise reimburses fuel expenses, up to $10 per hour is deemed substantiated if paid under Rev. Proc. 2002-41.
(2) Dependent. For taxable years beginning in 2012, the standard deduction amount under § 63(c)(5) for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of (1) $950, or (2) the sum of $300 and the individual’s earned income.
(3) Aged or blind. For taxable years beginning in 2012, the additional standard deduction amount under § 63(f) for the aged or the blind is $1,150. These amounts are increased to $1,450 if the individual is also unmarried and not a surviving spouse.
.12 Qualified Transportation Fringe Benefit. For taxable years beginning in 2012, the monthly limitation under § 132(f)(2)(A), regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass, is $125. The monthly limitation under § 132(f)(2)(B), regarding the fringe benefit exclusion amount for qualified parking, is $240.
.13 Income from United States Savings Bonds for Taxpayers Who Pay Qualified Higher Education Expenses. For taxable years beginning in 2012, the exclusion under § 135, regarding income from United States savings bonds for taxpayers who pay qualified higher education expenses, begins to phase out for modified adjusted gross income above $109,250 for joint returns and $72,850 for other returns. The exclusion is completely phased out for modified adjusted gross income of $139,250 or more for joint returns and $87,850 or more for other returns.
.15 Private Activity Bonds Volume Cap. For calendar year 2012, the amounts used under § 146(d)(1) to calculate the State ceiling for the volume cap for private activity bonds is the greater of (1) $95 multiplied by the State population, or (2) $284,560,000.
.16 Loan Limits on Agricultural Bonds. For calendar year 2012, the loan limit amount on agricultural bonds under § 147(c)(2)(A) for first-time farmers is $488,600.
.17 General Arbitrage Rebate Rules. For bond years ending in 2012, the amount of the computation credit determined under permission to rely on § 1.148-3(d)(4) of the proposed Income Tax Regulations is $1,550.
.18 Safe Harbor Rules for Broker Commissions on Guaranteed Investment Contracts or Investments Purchased for a Yield Restricted Defeasance Escrow. For calendar year 2012, under § 1.148-5(e)(2)(iii)(B)(1), a broker’s commission or similar fee for the acquisition of a guaranteed investment contract or investments purchased for a yield restricted defeasance escrow is reasonable if (1) the amount of the fee that the issuer treats as a qualified administrative cost does not exceed the lesser of (A) $37,000, and (B) 0.2 percent of the computational base (as defined in § 1.148-5(e)(2)(iii)(B)(2)) or, if more, $4,000; and (2) the issuer does not treat more than $103,000 in brokers’ commissions or similar fees as qualified administrative costs for all guaranteed investment contracts and investments for yield restricted defeasance escrows purchased with gross proceeds of the issue.
.19 Personal Exemption. For taxable years beginning in 2012, the personal exemption amount under § 151(d) is $3,800.
.20 Election to Expense Certain Depreciable Assets. For taxable years beginning in 2012, under § 179(b)(1)(C) the aggregate cost of any § 179 property a taxpayer may elect to treat as an expense cannot exceed $139,000. Under § 179(b)(2)(C), the $139,000 limitation is reduced (but not below zero) by the amount the cost of § 179 property placed in service during the 2012 taxable year exceeds $560,000.
(1) Self-only coverage. For taxable years beginning in 2012, the term “high deductible health plan” as defined in § 220(c)(2)(A) means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,100 and not more than $3,150, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,200.
(2) Family coverage. For taxable years beginning in 2012, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,200 and not more than $6,300, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $7,650.
.23 Interest on Education Loans. For taxable years beginning in 2012, the $2,500 maximum deduction for interest paid on qualified education loans under § 221 begins to phase out under § 221(b)(2)(B) for taxpayers with modified adjusted gross income in excess of $60,000 ($125,000 for joint returns), and is completely phased out for taxpayers with modified adjusted gross income of $75,000 or more ($155,000 or more for joint returns).
.24 Treatment of Dues Paid to Agricultural or Horticultural Organizations. For taxable years beginning in 2012, the limitation under § 512(d)(1), regarding the exemption of annual dues required to be paid by a member to an agricultural or horticultural organization, is $151.
.25 Insubstantial Benefit Limitations for Contributions Associated with Charitable Fund-Raising Campaigns.
(1) Low cost article. For taxable years beginning in 2012, the unrelated business income of certain exempt organizations under § 513(h)(2) does not include a “low cost article” of $9.90 or less.
(2) Other insubstantial benefits. For taxable years beginning in 2012, the $5, $25, and $50 guidelines in section 3 of Rev. Proc. 90-12, 1990-1 C.B. 471 (as amplified by Rev. Proc. 92-49, 1992-1 C.B. 987, and modified by Rev. Proc. 92-102, 1992-2 C.B. 579), for disregarding the value of insubstantial benefits received by a donor in return for a fully deductible charitable contribution under § 170, are $9.90, $49.50, and $99, respectively.
.26 Expatriation to Avoid Tax. For calendar year 2012, an individual with “average annual net income tax” of more than $151,000 for the five taxable years ending before the date of the loss of United States citizenship under § 877(a)(2)(A) is a covered expatriate for purposes of § 877A(g)(1).
.27 Tax Responsibilities of Expatriation. For taxable years beginning in 2012, the amount that would be includible in the gross income of a covered expatriate by reason of § 877A(a)(1) is reduced (but not below zero) by $651,000.
.28 Foreign Earned Income Exclusion. For taxable years beginning in 2012, the foreign earned income exclusion amount under § 911(b)(2)(D)(i) is $95,100.
.29 Unified Credit Against Estate Tax. For an estate of any decedent dying during calendar year 2012, the basic exclusion amount is $5,120,000 for determining the amount of the unified credit against estate tax under § 2010.
.30 Valuation of Qualified Real Property in Decedent’s Gross Estate. For an estate of a decedent dying in calendar year 2012, if the executor elects to use the special use valuation method under § 2032A for qualified real property, the aggregate decrease in the value of qualified real property resulting from electing to use § 2032A for purposes of the estate tax cannot exceed $1,040,000.
.31 Annual Exclusion for Gifts.
(1) For calendar year 2012, the first $13,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts under § 2503 made during that year.
(2) For calendar year 2012, the first $139,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts under §§ 2503 and 2523(i)(2) made during that year.
.32 Tax on Arrow Shafts. For calendar year 2012, the tax imposed under § 4161(b)(2)(A) on the first sale by the manufacturer, producer, or importer of any shaft of a type used in the manufacture of certain arrows is $0.46 per shaft.
.33 Passenger Air Transportation Excise Tax. For calendar year 2012, the tax under § 4261(b)(1) on the amount paid for each domestic segment of taxable air transportation is $3.80. For calendar year 2012, the tax under § 4261(c)(1) on any amount paid (whether within or without the United States) for any air transportation, if the transportation begins or ends in the United States, generally is $16.70. However, for a domestic segment beginning or ending in Alaska or Hawaii as described in § 4261(c)(3), the tax applies only to departures and the rate is $8.40.
.34 Reporting Exception for Certain Exempt Organizations with Nondeductible Lobbying Expenditures. For taxable years beginning in 2012, the annual per person, family, or entity dues limitation to qualify for the reporting exception under § 6033(e)(3) (and section 5.05 of Rev. Proc. 98-19, 1998-1 C.B. 547), regarding certain exempt organizations with nondeductible lobbying expenditures, is $105 or less.
.35 Notice of Large Gifts Received from Foreign Persons. For taxable years beginning in 2012, recipients of gifts from certain foreign persons may be required to report these gifts under § 6039F if the aggregate value of gifts received in a taxable year exceeds $14,723.
.36 Persons Against Whom a Federal Tax Lien Is Not Valid. For calendar year 2012, a federal tax lien is not valid against (1) certain purchasers under § 6323(b)(4) who purchased personal property in a casual sale for less than $1,430, or (2) a mechanic’s lienor under § 6323(b)(7) who repaired or improved certain residential property if the contract price with the owner is not more than $7,160.
.37 Property Exempt from Levy. For calendar year 2012, the value of property exempt from levy under § 6334(a)(2) (fuel, provisions, furniture, and other household personal effects, as well as arms for personal use, livestock, and poultry) cannot exceed $8,570. The value of property exempt from levy under § 6334(a)(3) (books and tools necessary for the trade, business, or profession of the taxpayer) cannot exceed $4,290.
.38 Interest on a Certain Portion of the Estate Tax Payable in Installments. For an estate of a decedent dying in calendar year 2012, the dollar amount used to determine the “2-percent portion” (for purposes of calculating interest under § 6601(j)) of the estate tax extended as provided in § 6166 is $1,390,000.
.39 Attorney Fee Awards. For fees incurred in calendar year 2012, the attorney fee award limitation under § 7430(c)(1)(B)(iii) is $180 per hour.
.40 Periodic Payments Received under Qualified Long-Term Care Insurance Contracts or under Certain Life Insurance Contracts. For calendar year 2012, the stated dollar amount of the per diem limitation under § 7702B(d)(4), regarding periodic payments received under a qualified long-term care insurance contract or periodic payments received under a life insurance contract that are treated as paid by reason of the death of a chronically ill individual, is $310.
.01 General Rule. Except as provided in section 4.02, this revenue procedure applies to taxable years beginning in 2012.
.02 Calendar Year Rule. This revenue procedure applies to transactions or events occurring in calendar year 2012 for purposes of sections 3.07 (rehabilitation expenditures treated as separate new building), 3.08 (low-income housing credit), 3.10 (transportation mainline pipeline construction industry optional expense substantiation rules for payments to employees under accountable plans), 3.15 (private activity bonds volume cap), 3.16 (loan limits on agricultural bonds), 3.17 (general arbitrage rebate rules), 3.18 (safe harbor rules for broker commissions on guaranteed investment contracts or investments purchased for a yield restricted defeasance escrow), 3.26 (expatriation to avoid tax), 3.29 (unified credit against estate tax), 3.30 (valuation of qualified real property in decedent’s gross estate), 3.31 (annual exclusion for gifts), 3.32 (tax on arrow shafts), 3.33 (passenger air transportation excise tax), 3.36 (persons against whom a federal tax lien is not valid), 3.37 (property exempt from levy), 3.38 (interest on a certain portion of the estate tax payable in installments), 3.39 (attorney fee awards), and 3.40 (periodic payments received under qualified long-term care insurance contracts or under certain life insurance contracts).
This document contains proposed regulations that would modify existing regulations related to the tax return preparer penalties under section 6695 of the Internal Revenue Code (Code). These proposed regulations are necessary to monitor and to improve compliance with the tax return preparer due diligence requirements of section 6695(g). The proposed regulations affect tax return preparers. This document also provides notice of a public hearing on these proposed regulations.
Written or electronic comments must be received by November 10, 2011. Outlines of topics to be discussed at the public hearing scheduled for November 7, 2011, must be received by November 1, 2011.
Send submissions to: CC:PA:LPD:PR (REG-140280-09), room 5205, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-140280-09), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC, or sent electronically via the Federal eRulemaking Portal at http://www.regulations.gov/ (IRS REG-140280-09). The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, N.W., Washington, DC.
Concerning the proposed regulations, Spence Hanemann, (202) 622-4940; concerning submissions of comments, the hearing, or to be placed on the building access list to attend the hearing, Richard Hurst, (202) 622-7180 (not toll-free numbers) or Richard.A.Hurst@irscounsel.treas.gov.
How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology.
The collection of information is in §1.6695-2(b)(1) and (b)(4) of these proposed regulations, and is an increase in the total annual burden from the burden in the current regulations. The collection of this information will improve the IRS’ ability to enforce compliance with the due diligence requirements under section 6695(g) with respect to determining eligibility for, or the amount of, the earned income credit (EIC) under section 32.
Currently, the IRS estimates that there are 550,000 persons who are tax return preparers with respect to determining the eligibility for, or the amount of, EIC.
This collection of information is mandatory. The likely respondents are individuals and businesses.
Estimated total annual recordkeeping and reporting burden is 3,025,000 hours.
Estimated annual burden per tax return preparer varies from 30 minutes to 10 hours, depending on individual circumstances, with an estimated average of 5 hours and 30 minutes.
Estimated number of affected practitioners is 550,000.
Estimated annual frequency of responses is one time per tax return or claim for refund on which EIC is reported.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number.
Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law.
This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 6695 of the Code.
The Treasury Department and the IRS published final regulations in the Federal Register on December 22, 2008, as T.D. 9436, 2009-3 I.R.B. 268, 73 FR 78430 (the December 2008 final regulations). The December 2008 final regulations were a product of a comprehensive review and overhaul of the regulations related to tax return preparer penalties, including those under section 6695. These proposed regulations introduce additional measures intended to improve compliance with the tax return preparer EIC due diligence requirements of section 6695(g).
The following is a summary of the proposed changes to the existing regulations affecting tax return preparers.
Section 301.7701-15(a) of the Procedure and Administration regulations defines a “tax return preparer” as “any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claim for refund of tax . . . .” Proposed §1.6695-2(a) changes “signing tax return preparer” to “tax return preparer.” Consequently, under the proposed regulations, all tax return preparers (whether an individual or firm) who determine eligibility for, or amount of, EIC under section 32 of the Code and who fail to satisfy the due diligence requirements of paragraph (b) of these proposed regulations are subject to the penalty under section 6695(g). Under the proposed regulations, a firm that employs a person to prepare for compensation a tax return or claim for refund may be subject to the penalty for its employee’s failure to comply with the due diligence requirements.
Because a firm might not have direct knowledge of an employee’s failure to comply with the due diligence requirements, however, proposed §1.6695-2(c) provides additional requirements that must be met before the penalty will be imposed on a firm. Proposed §1.6695-2(c)(1) provides that a firm will be subject to the penalty if a member of its principal management or the principal management of a branch office participated in or knew of the failure to comply with the due diligence requirements. Proposed §1.6695-2(c)(2) also provides that a firm will be subject to the penalty if it failed to establish reasonable and appropriate procedures to ensure compliance with the due diligence requirements. Finally, proposed §1.6695-2(c)(3) provides that, even if a firm has established reasonable and appropriate compliance procedures, it will be subject to the penalty if it disregarded its compliance procedures through willfulness, recklessness, or gross indifference in the preparation of the tax return or claim for refund for which the penalty is imposed. A firm has demonstrated gross indifference if it ignores facts that would lead a person of reasonable prudence and competence to investigate or ascertain whether an employee is complying with the due diligence requirements.
Current §1.6695-2(b)(1) requires a tax return preparer to complete Form 8867, “Paid Preparer’s Earned Income Credit Checklist,” or otherwise record the information required by Form 8867 in the tax return preparer’s files. In response to concerns over improper payments of EIC determined by tax return preparers, the Department of the Treasury and the IRS are proposing to require tax return preparers to submit the Form 8867 with the tax return or claim for refund claiming the EIC.
Proposed §1.6695-2(b)(1)(i), therefore, requires that the Form 8867 be submitted to the IRS in the manner required by forms, instructions, or other appropriate guidance. Comments are specifically requested regarding the best way for the Department of Treasury and the IRS to implement this submission requirement. Comments are also requested regarding how Form 8867 and Schedule EIC might be revised to reduce payments of improper EIC claims and to improve the IRS’ ability to detect these claims.
A tax return preparer has satisfied the due diligence requirements of current §1.6695-2(b)(1) if the tax return preparer records, in paper or electronic files, the information necessary to complete Form 8867. Under proposed §1.6695-2(b)(1), the due diligence requirements of paragraph (b)(1) can only be satisfied by completion and submission of the Form 8867 (or its successor form) and, therefore, cannot be satisfied by submission of any other form or document.
The amendments in proposed §1.6695-2(b)(2) are not substantive. The term “tax return preparer” has been substituted for the term “preparer.” Under the proposed regulations, tax return preparers would continue to complete the EIC Worksheet in the Form 1040 Instructions or any other form prescribed by the IRS, or otherwise record in paper or electronic files their EIC computation, including the method and information used to make the computation. To improve clarity, however, the defined terms “Computation Worksheet” and “Alternative Computation Record” have been replaced throughout the proposed regulation with descriptive language.
Under proposed §1.6695-2(b)(4)(i)(C), tax return preparers must still retain a record of how and when the information used to complete Form 8867 and the EIC Worksheet (or other record of the tax return preparer’s EIC computation permitted under §1.6695-2(b)(2)(i)(B)) was obtained. Additionally, a tax return preparer must also retain a copy of any document that was provided by the taxpayer and on which the tax return preparer relied to complete Form 8867 or the EIC Worksheet (or other record of the tax return preparer’s EIC computation permitted under §1.6695-2(b)(2)(i)(B)).
Proposed §1.6695-2(b)(4)(ii) makes two changes. It substitutes “paragraph (b)(4)(i)” for “paragraph (b)(4)” in order to account for prior restructuring of paragraph (b)(4). It also changes the date through which tax return preparers must retain the records required by this section. The current retention date is three years after the June 30th following the date the return or claim for refund was presented to the taxpayer for signature. The proposed retention date is three years from the later of the due date of the return (determined without regard to any extension of time for filing) or the date the return or claim for refund was filed. This revision to the retention date will simplify the determination of the retention date for both the IRS and tax return preparers.
Proposed §1.6695-2(d) retains the existing exception to the penalty, but excludes from the exception a firm that is subject to the penalty under the special rules for firms in proposed §1.6695-2(c). Thus, in no case could a firm that is subject to the penalty under proposed §1.6695-2(c) satisfy the facts and circumstances test provided in proposed §1.6695-2(d).
Proposed §1.6695-2(e) provides that the rules in this notice of proposed rulemaking will apply to tax returns and claims for refund for tax years ending on or after December 31, 2011 that are filed after the date the final regulations are published in the Federal Register.
It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. 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.
When an agency issues a rulemaking proposal, the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), requires the agency to “prepare and make available for public comment an initial regulatory flexibility analysis” that will “describe the impact of the proposed rule on small entities.” (5 U.S.C. 603(a)). Section 605 of the RFA provides an exception to this requirement if the agency certifies that the proposed rulemaking will not have a significant economic impact on a substantial number of small entities.
The proposed rules affect tax return preparers who determine the eligibility for, or the amount of, EIC. The NAICS code that relates to tax preparation services (NAICS code 541213) is the appropriate code for tax return preparers subject to this notice of proposed rulemaking. Entities identified as tax preparation services are considered small under the Small Business Administration size standards (13 CFR 121.201) if their annual revenue is less than $7 million. The IRS estimates that approximately 75 to 85 percent of the 550,000 persons who work at firms or are self-employed tax return preparers are operating as or employed by small entities. The IRS has determined that these proposed rules will have an impact on a substantial number of small entities.
The IRS has determined, however, that the impact on entities affected by the proposed rule will not be significant. The current regulations under section 6695(g) already require tax return preparers to complete the Form 8867 or otherwise record in their files the information necessary to complete the form. Tax return preparers also must currently maintain records of the checklists and EIC computations, as well as a record of how and when the information used to compute the EIC was obtained by the tax return preparer. The amount of time necessary to submit, record, and retain the additional information required in these proposed regulations, therefore, should be minimal for these tax return preparers.
Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The Treasury Department and the IRS request comments on the clarity of the proposed regulations and how they can be made easier to understand. All comments will be available for public inspection and copying at www.regulations.gov or upon request.
A public hearing has been scheduled for November 7, 2011, at 10:00 A.M. in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. 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 30 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 and 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 November 1, 2011. A period of 10 minutes will be allotted 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.
§1.6695-2 Tax return preparer due diligence requirements for determining earned income credit eligibility.
(a) Penalty for failure to meet due diligence requirements. A person who is a tax return preparer of a tax return or claim for refund under the Internal Revenue Code with respect to determining the eligibility for, or the amount of, the earned income credit (EIC) under section 32 and who fails to satisfy the due diligence requirements of paragraph (b) of this section will be subject to a penalty of $100 for each such failure.
(1) Completion and submission of Form 8867—(i) The tax return preparer must complete Form 8867, “Paid Preparer’s Earned Income Credit Checklist,” or such other form and such other information as may be prescribed by the Internal Revenue Service (IRS), and submit it in the manner required by forms, instructions, or other appropriate guidance.
(ii) The tax return preparer’s completion of Form 8867 (or successor form) must be based on information provided by the taxpayer to the tax return preparer or otherwise reasonably obtained by the tax return preparer.
(B) Otherwise record in one or more documents in the tax return preparer’s paper or electronic files the tax return preparer’s EIC computation, including the method and information used to make the computation.
(ii) The tax return preparer’s completion of the Earned Income Credit Worksheet (or other record of the tax return preparer’s EIC computation permitted under paragraph (b)(2)(i)(B) of this section) must be based on information provided by the taxpayer to the tax return preparer or otherwise reasonably obtained by the tax return preparer.
(C) A record of how and when the information used to complete Form 8867 (or successor form) and the Earned Income Credit Worksheet (or other record of the tax return preparer’s EIC computation permitted under paragraph (b)(2)(i)(B) of this section) was obtained by the tax return preparer, including the identity of any person furnishing the information, as well as a copy of any document that was provided by the taxpayer and on which the tax return preparer relied to complete Form 8867 (or successor form) or the Earned Income Credit Worksheet (or other record of the tax return preparer’s EIC computation permitted under paragraph (b)(2)(i)(B) of this section).
(ii) The items in paragraph (b)(4)(i) of this section must be retained for three years from the due date of the return (determined without regard to any extension of time for filing) or the date the return or claim for refund was filed, whichever date is later, and may be retained on paper or electronically in the manner prescribed in applicable regulations, revenue rulings, revenue procedures, or other appropriate guidance (see §601.601(d)(2) of this chapter).
(3) The firm disregarded its reasonable and appropriate compliance procedures through willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate or ascertain) in the preparation of the tax return or claim for refund with respect to which the penalty is imposed.
(d) Exception to penalty. The section 6695(g) penalty will not be applied with respect to a particular tax return or claim for refund if the tax return preparer can demonstrate to the satisfaction of the Internal Revenue Service that, considering all the facts and circumstances, the tax return preparer’s normal office procedures are reasonably designed and routinely followed to ensure compliance with the due diligence requirements of paragraph (b) of this section, and the failure to meet the due diligence requirements of paragraph (b) of this section with respect to the particular return or claim for refund was isolated and inadvertent. The preceding sentence does not apply to a firm that is subject to the penalty as a result of paragraph (c) of this section.
(e) Effective/applicability date. This section is effective for tax returns and claims for refund filed after the date that these regulations are published as final regulations in the Federal Register, and applies to tax returns and claims for refund for tax years ending on or after December 31, 2011.
The principal author of these proposed regulations is Spence Hanemann, Office of the Associate Chief Counsel (Procedure and Administration).
This document contains proposed regulations relating to the retail inventory method of accounting. The regulations restate and clarify the computation of ending inventory values under the retail inventory method and provide a special rule for certain taxpayers that receive margin protection payments and similar vendor allowances. The regulations affect taxpayers that are retailers and elect to use a retail inventory method.
Written or electronically generated comments and requests for a public hearing must be received by January 5, 2012.
Send submissions to: CC:PA:LPD:PR (REG-125949-10), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 am and 4 pm to: CC:PA:LPD:PR (REG-125949-10), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-125949-10).
Concerning the proposed regulations, Natasha M. Mulleneaux, (202) 622-3967; concerning submission of comments and requests for a public hearing, Richard Hurst at Richard.A.Hurst@irscounsel.treas.gov.
This document contains proposed amendments to 26 CFR part 1 relating to the retail inventory method under §1.471-8 of the Income Tax Regulations.
Section 471 provides that a taxpayer’s method of accounting for inventories must clearly reflect income. Section 1.471-2(c) provides that the bases of inventory valuation most commonly used and meeting the requirements of section 471 are (1) cost and (2) cost or market, whichever is lower (LCM). Section 1.471-8 allows retailers to approximate cost or LCM by using the retail inventory method. A last-in, first out (LIFO) taxpayer that elects to use the retail inventory method must approximate cost.
Under the retail inventory method, the retail selling price of ending inventory is converted to approximate cost or approximate LCM using a cost-to-retail ratio, or cost complement. The numerator of the cost complement is the value of beginning inventory plus the cost of purchases during the taxable year, and the denominator is the retail selling prices of beginning inventories plus the initial retail selling prices of purchases. The cost complement is then multiplied by the retail selling price of ending inventory (multiplicand) to determine the ending inventory value.
Section 1.471-3 provides that, for inventory valuation purposes, the cost of purchases during the year generally includes invoice price less trade or other discounts. A discount may be based on a retailer’s sales volume (sales-based allowance) or on the quantity of merchandise a retailer purchases (volume-based allowance), or may relate to a retailer’s reduction in retail selling price (markdown allowance or margin protection payment). A vendor may provide a retailer with a markdown allowance or margin protection payment when the retailer temporarily or permanently reduces the retail selling price of its inventory to sell it. A markdown allowance or margin protection payment differs from other types of discounts because it is intended to maintain the retailer’s profit margin and therefore is directly related to the inventory selling price.
Under proposed §1.471-3(e) (75 FR 78944), the amount of an allowance, discount, or price rebate a taxpayer earns by selling specific merchandise (a sales-based vendor allowance) is a reduction in the cost of the merchandise sold and does not reduce the inventory cost or value of goods on hand at the end of the taxable year.
The proposed regulations restructure and restate the regulations under §1.471-8 in plain language. The proposed regulations also add rules addressing the treatment of sales-based vendor allowances and of vendor markdown allowances and margin protection payments in the retail inventory method computation.
The proposed regulations clarify the interaction of proposed §1.471-3(e) with the retail inventory method by excluding from the numerator of the cost complement formula the amount of a sales-based vendor allowance.
The retail inventory method determines an ending inventory value by maintaining proportionality between costs and selling prices. Under the retail LCM method, a reduction in retail selling price reduces the value of ending inventory in the same ratio as the cost complement.
If a taxpayer earns an allowance, discount, or price rebate, the inventory cost in the numerator of the cost complement declines, resulting in a reduction of ending inventory value computed under the retail inventory method. If the allowance, discount, or price rebate is related to a permanent markdown of the retail selling price (as in the case of a markdown allowance or margin protection payment), ending inventory value is further reduced as a result of the decrease in ending retail selling prices (the multiplicand in the formula). This additional reduction of ending inventory value caused by reducing both the numerator of the cost complement and the multiplicand (1) generally results in a lower ending inventory value for a retail LCM method taxpayer than for a similarly situated first-in, first-out (FIFO) taxpayer that values inventory at LCM, and (2) does not clearly reflect income.
To address this distortion, the proposed regulations provide that a retail LCM method taxpayer may not reduce the numerator of the cost complement for an allowance, discount, or price rebate that is related to or intended to compensate for a permanent markdown of retail selling prices. Thus, in the case of markdown allowances and margin protection payments, the value of ending inventory as computed under the retail LCM method is reduced solely as a result of the reduction in retail selling price, avoiding an unwarranted additional reduction in inventory value for a single markdown allowance and more reasonably approximating LCM.
As an alternative to this proposed modification, the retail inventory method could achieve the same result by permitting taxpayers to reduce the numerator of the cost complement for all non-sales based allowances, discounts, or price rebates, including markdown allowances, but requiring a reduction of the denominator of the cost complement for all permanent markdowns related to markdown allowances. Comments are specifically requested on whether the final regulations should provide this or other alternative retail LCM methods.
The proposed regulations clarify that under the retail inventory method taxpayers do not adjust the cost complement or ending retail selling prices for temporary markdowns and markups.
These regulations are proposed to apply for taxable years beginning after the date the regulations are published as final regulations in the Federal Register.
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 these 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 their impact on small business.
Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments that are submitted timely to the IRS. Comments may be submitted electronically or via a signed original with eight (8) copies. Comments are requested on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying.
A public hearing will be scheduled if requested in writing by any person that timely submits comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register.
§1.471-8 Inventories of retail merchants.
(a) In general. A taxpayer that is a retail merchant may use the retail inventory method of accounting described in this section. The retail inventory method uses a formula to convert the retail selling price of ending inventory to an approximation of cost (retail cost method) or an approximation of lower of cost or market (retail LCM method). A taxpayer may use the retail inventory method instead of valuing inventory at cost under §1.471-3 or lower of cost or market under §1.471-4.
(b) Computation—(1) In general. A taxpayer computes the value of ending inventory under the retail inventory method by multiplying a cost complement by the retail selling prices of the goods on hand at the end of the taxable year.
(B) The denominator is the retail selling prices of beginning inventory plus the retail selling prices of goods purchased during the year (that is, the bona fide retail selling prices of the items at the time acquired), adjusted for all permanent markups and markdowns, including markup and markdown cancellations and corrections. The denominator is not adjusted for temporary markups or markdowns.
(ii) Sales-based vendor allowances. A taxpayer may not reduce the numerator of the cost complement by the amount of an allowance, discount, or price rebate a taxpayer earns by selling specific merchandise.
(iii) Special rules for cost complement for retail LCM method—(A) Margin protection payments and similar allowances. A taxpayer using the retail inventory method to approximate LCM may not reduce the numerator of the cost complement by the amount of an allowance, discount, or price rebate that is related to or intended to compensate for a permanent reduction in the taxpayer’s retail selling price of inventory (for example, a margin protection payment or markdown allowance).
(B) Exclusion of markdowns in denominator. A taxpayer using the retail inventory method to approximate LCM excludes markdowns (and markdown cancellations or corrections) from the denominator of the cost complement. Any markups must be reduced by the markdowns made to cancel or correct them.
(3) Ending inventory retail selling prices. A taxpayer must include all permanent markups and markdowns but may not include temporary markups or markdowns in determining the retail selling prices of goods on hand at the end of the taxable year. A taxpayer may not include a markdown that is not an actual reduction of retail selling price.
(c) Special rules for LIFO taxpayers. A taxpayer using the last-in, first-out (LIFO) inventory method with the retail inventory method uses the retail inventory method to approximate cost. See §1.472-1(k) for additional adjustments for a taxpayer using the LIFO inventory method with the retail cost method.
(d) Scope of retail inventory method. A taxpayer may use the retail inventory method to value ending inventory for a department, a class of goods, or a stock-keeping unit. A taxpayer maintaining more than one department or dealing in classes of goods with different percentages of gross profit must compute cost complements separately for each department or class of goods.
Example 1. (i) R, a retail merchant who uses the retail method to approximate LCM, has no beginning inventory in 2010. R purchases 40 tables during 2010 for $60 each for a total of $2,400. R offers the tables for sale at $100 each for an aggregate retail selling price of $4,000. R does not sell any tables at a price of $100, so R permanently marks down the retail selling price of its tables to $90 each. As a result of the $10 markdown, R’s supplier provides R a $6 per table margin protection payment. R sells 25 tables during 2010 and has 15 tables in ending inventory at the end of 2010.
(ii) Under paragraph (b)(2)(i)(A) of this section, the numerator of the cost complement is the aggregate cost of the tables. Under paragraph (b)(2)(iii)(A) of this section, R may not reduce the numerator of the cost complement by the amount of the margin protection payment. Under paragraph (b)(2)(i)(B) of this section, the denominator of the cost complement is the aggregate of the bona fide retail selling prices of all the tables at the time acquired. Under paragraph (b)(2)(iii)(B) of this section, R excludes the markdown from the denominator of the cost complement. Therefore, R’s cost complement is $2,400/$4,000, or 60 percent.
(iii) Under paragraph (b)(3) of this section, R includes the permanent markdown in determining year-end retail selling prices. Therefore, the aggregate retail selling price of R’s ending table inventory is $1,350 (15 * $90). Approximating LCM under the retail method, the value of R’s ending table inventory is $810 (60 percent * $1,350).
Example 2. (i) The facts are the same as in Example 1, except that R permanently reduces the retail selling price of all 40 tables to $50 per unit and the 15 tables on hand at the end of the year are marked for sale at that price. In contrast to the $10 markdown, the additional $40 markdown is unrelated to a margin protection payment or other allowance.
(ii) Under paragraph (b)(2)(iii)(B) of this section, R excludes the markdowns from the denominator of the cost complement. Therefore, R’s cost complement is $2,400/$4,000, or 60 percent.
(iii) Under paragraph (b)(3) of this section, R includes the markdowns in determining year-end retail selling prices. Therefore, the aggregate retail selling price of R’s ending inventory is $750 (15 * $50). Approximating LCM under the retail method, the value of R’s ending inventory is $450 (60 percent * $750).
Example 3. (i) The facts are the same as in Example 1, except that R uses the LIFO inventory method. R must value inventories at cost and, under paragraph (c) of this section, uses the retail method to approximate cost.
(ii) Under paragraph (b)(2)(i)(A) of this section, R reduces the numerator of the cost complement by the amount of the margin protection payment. Under paragraph (b)(2)(i)(B) of this section, R includes the markdown in the denominator of the cost complement. Therefore, R’s cost complement is $2,160/$3,600, or 60 percent.
(iii) Under paragraph (b)(3) of this section, R includes the markdown in determining year-end retail selling prices. Therefore, the aggregate retail selling price of R’s ending inventory is $1,350 (15 * $90). Approximating cost under the retail method, the value of R’s ending inventory is $810 (60 percent * $1,350).
(f) Effective/applicability date. This section applies to taxable years beginning after the date these regulations are published as final regulations in the Federal Register.
The principal author of these regulations is Natasha M. Mulleneaux of the Office of the Associate Chief Counsel (Income Tax & Accounting). Other personnel from the IRS and Treasury Department participated in their development.
If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) would begin November 7, 2011, and would end on the date the court first determines that the organization is not described in section 170(c)(2) as more particularly set forth in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a husband and wife treated as one contributor. This benefit is not extended to any individual, in whole or in part, for the acts or omissions of the organization that were the basis for revocation.

References: § 7528
 § 7528
 § 7528
 § 7528
 § 7528
 § 7528
 § 7528
 § 7528
 § 42
 § 42
 § 1
 § 42
 § 42
 § 42
 § 42
 § 42
 § 42
 § 42
 § 42
 § 42
 § 42
 § 1
 § 42
 § 1
 § 1
 § 1
 § 24
 § 24
 § 25
 § 25
 § 25
 § 25
 § 25
 § 25
 § 25
 § 32
 § 32
 § 32
 § 42
 § 42
 § 1
 § 55
 § 63
 § 63
 § 132
 § 132
 § 135
 § 146
 § 147
 § 1
 § 1
 § 1
 § 151
 § 179
 § 179
 § 179
 § 179
 § 220
 § 221
 § 221
 § 512
 § 513
 § 170
 § 877
 § 877
 § 877
 § 911
 § 2010
 § 2032
 § 2032
 § 2503
 § 4161
 § 4261
 § 4261
 § 4261
 § 6033
 § 6039
 § 6323
 § 6323
 § 6334
 § 6334
 § 6601
 § 6166
 § 7430
 § 7702
 §1
 §1
 §1
 §1
 §1
 §1
 §1
 §1
 §1
 §1
 §1
 §1
 §1
 §1
 §1
 §1
 §1
 §1
 §1
 §1

§1
 §601
 §1
 §1
 §1
 §1

§1
 §1
 §1
 §1