Part IV. Items of General Interest

Notice of Proposed Rulemaking and Notice of Public Hearing

Tax Return Preparer Penalties Under Section 6695

REG–140280–09

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: 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.

DATES: 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.

ADDRESSES: 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.

FOR FURTHER INFORMATION CONTACT: 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 .

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these proposed regulations was previously reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545–1570. Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, D.C. 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, D.C. 20224. Comments on the collection of information should be received by November 10, 2011. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the IRS, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proper collection of information;

How the quality, utility, and clarity of the information to be collected may be enhanced; and

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.

Background

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).

Explanation of Provisions

The following is a summary of the proposed changes to the existing regulations affecting tax return preparers.

2011–45 I.R.B. 709 November 7, 2011

the proposed regulation with descriptive language.

Retention of Records

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.

Exception to the Penalty Under Section 6695(g)

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 Effective and Applicability Dates

Proposed §1.6695–2(e) provides that the rules in this notice of proposed rule

Tax Return Preparers Subject to Due Diligence Requirements

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.

Submission of Form 8867

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.

Computation of Credit

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

November 7, 2011 710 2011–45 I.R.B.

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.

Drafting Information

The principal author of these proposed regulations is Spence Hanemann, Office of the Associate Chief Counsel (Procedure and Administration).

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Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * * Section 1.6695–2 also issued under 26 U.S.C. 6695(g). - * * Par. 2. In §1.6695–2, paragraphs (a), (b)(1), (b)(2), (b)(4), (c), and (d) are revised and new paragraph (e) is added to read as follows:

§1.6695–2 Tax return preparer due diligence requirements for determining earned income credit eligibility.

(a) Penalty for failure to meet due dili- gence 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.

(b) - * (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

making 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 .

Special Analyses

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.

Based on these facts, the IRS hereby certifies that the collection of information contained in this notice of proposed rulemaking will not have a significant economic impact on a substantial number of small entities. Accordingly, a Regulatory Flexibility Analysis is not required.

Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on the impact on small business.

Comments and Public Hearing

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

2011–45 I.R.B. 711 November 7, 2011

fund for tax years ending on or after December 31, 2011.

Steven T. Miller, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on October 6, 2011, 11:15 a.m., and published in the issue of the Federal Register for October 11, 2011, 76 F.R. 62689)

Notice of Proposed Rulemaking

Retail Inventory Method

REG–125949–10

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: 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.

DATES: Written or electronically generated comments and requests for a public hearing must be received by January 5, 2012.

ADDRESSES: 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.regu- lations.gov (IRS REG–125949–10).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Natasha M. Mulleneaux,

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.

(2) Computation of credit —(i) The tax return preparer must either—

(A) Complete the Earned Income Credit Worksheet in the Form 1040 instructions or such other form and such other information as may be prescribed by the IRS; or

(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.

• • • • (4) Retention of records —(i) The tax return preparer must retain—

(A) A copy of the completed Form 8867 (or successor form);

(B) A copy of the completed 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); and

(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).

(c) Special rule for firms . A firm that employs a tax return preparer subject to a penalty under section 6695(g) is also subject to penalty if, and only if—

(1) One or more members of the principal management (or principal officers) of the firm or a branch office participated in or knew of the failure to comply with the due diligence requirements of this section;

(2) The firm failed to establish reasonable and appropriate procedures to ensure compliance with the due diligence requirements of this section; or

(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 re

November 7, 2011 712 2011–45 I.R.B.

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.

4. Temporary Price Adjustments

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.

Effective/Applicability Date

These regulations are proposed to apply for taxable years beginning after the date the regulations are published as final regulations in the Federal Register.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive

(202) 622–3967; concerning submission of comments and requests for a public hearing, Richard Hurst at Richard.A.Hurst@irscounsel.treas.gov.

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to 26 CFR part 1 relating to the 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.

Explanation of Provisions

1. Overview

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.

2. Sales-Based Vendor Allowances

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.

3. Computation of Cost Complement under the Retail LCM Method

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

2011–45 I.R.B. 713 November 7, 2011

selling price of inventory (for example, a margin protection payment or markdown allowance).

(B) Exclusion of markdowns in denom- inator . 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.

(e) Examples . The following examples illustrate the rules of this section:

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

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.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments that are submitted timely to the IRS. Comments may be submitted electronically or via a signed original with eight (8) copies. 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 .

Drafting Information

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.

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Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.471–8 is revised to read as follows:

§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.

(2) Cost complement —(i) In general . The cost complement is a ratio computed as follows—

(A) The numerator is the value of beginning inventory plus the cost of goods purchased during the taxable year; and

(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 pro- tection 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

November 7, 2011 714 2011–45 I.R.B.

activities or omissions of the organization that brought about this revocation.

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.

Carib News Foundation

New York, NY Caring and Sharing, Inc.

Kansas City, MO Center for AIDS Prevention

Beverly Hills, CA Ezer Akeres Habais, Inc.

Brooklyn, NY National Carbon Offset Coalition

Butte, MT Nazarene Ministry of Help

Portland, OR Texas Team Sports

San Antonio, TX Thumpers Therapeutic Center

Milwaukee, OR Tradewinds Foundation, Inc.

New Hartford, NY United Homeless Organization, Inc.

Bronx, PA

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 yearend 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 Ex- ample 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 Exam- ple 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 .

Steven T. Miller, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on October 6, 2011, 8:45 a.m., and published in the issue of the Federal Register for October 7, 2011, 76 F.R. 62327)

Deletions From Cumulative List of Organizations Contributions to Which are Deductible Under Section 170 of the Code

Announcement 2011–70

The Internal Revenue Service has revoked its determination that the organizations listed below qualify as organizations described in sections 501(c)(3) and 170(c)(2) of the Internal Revenue Code of 1986. Generally, the Service will not disallow deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the Service is not precluded from disallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c)(2) if the organization has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the

2011–45 I.R.B. 715 November 7, 2011