Part IV. Items — Internal Revenue Bulletin 2016-51

Tax Return Preparer Due Diligence Penalty under Section 6695(g)

REG–102952–16

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.

SUMMARY: In the Rules and Regulations section of this issue of the Internal Revenue Bulletin, the IRS is issuing temporary regulations that will modify the existing regulations related to the penalty under section 6695(g) of the Internal Revenue Code (Code) relating to tax return preparer due diligence. The temporary regulations implement recent law changes that expand the tax return preparer due diligence penalty under section 6695(g) so that it applies to the child tax credit (CTC), additional child tax credit (ACTC), and the American Opportunity Tax Credit (AOTC), in addition to the earned income credit (EIC). The text of those regulations also serves as the text of these proposed regulations.

DATES: Written or electronic comments and requests for a public hearing must be received by March 5, 2017.

ADDRESSES: Send submissions to: CC: PA:LPD:PR (REG–102952–16), room 5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be handdelivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–102952–16), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224, or sent electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG–102952–16).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Rachel L. Gregory, 202-3176845; concerning submissions of comments and the hearing, Regina Johnson, 202-317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information in current §1.6695–2 was previously reviewed and approved under control number 15451570. Control number 1545-1570 was discontinued in 2014, as the burden for the collection of information contained in §1.6695–2 is reflected in the burden on Form 8867, “Paid Preparer’s Due Diligence Checklist,” under control number 1545-1629.

Background and explanation of provisions

Temporary regulations in the Rules and Regulations section of this issue of the Internal Revenue Bulletin amend 26 CFR 1.6695–2 by imposing due diligence requirements on tax return preparers with respect to determining the eligibility for, or the amount of, the CTC/ACTC or AOTC, in addition to the EIC, on any return or claim for refund. The temporary regulations also amend section 1.6695–2 to reflect the changes made by section 208(c), Div. B of the Tax Increase Prevention Act of 2014, Pub. L. 113–295 (128 Stat. 4010, 4073 (2014)), requiring the IRS to index the penalty for inflation for returns and claims for refund filed after December 31, 2014.

The text of those regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments.

Special Analyses

Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory assessment is not required.

Pursuant to the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it is hereby certified that these proposed rules, if adopted, would not have a significant economic impact on a substantial number of small entities. When an agency issues a notice of proposed rulemaking, the RFA 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, the EIC, the CTC/ ACTC and/or the AOTC. The North American Industry Classification System (NAICS) code that relates to tax return preparation services (NAICS code 541213) is the appropriate code for tax return preparers subject to this notice of proposed rulemaking. Entities identified as tax return preparation services are considered small under the Small Business Administration size standards (13 CFR 121.201) if their annual revenue is less than $20.5 million. The IRS estimates that approximately 75 to 85 percent of the 505,000 persons who work at firms or are self-employed tax return preparers are operating as or employed by small entities. The IRS has therefore determined that these proposed rules will have an impact on a substantial number of small entities.

The IRS has further determined, however, that the economic impact on entities affected by the proposed rules will not be significant. The current regulations under section 6695(g) already require tax return preparers to complete the Form 8867 when a return or claim for refund includes a claim of the EIC. 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 information needed to document eligibility for the CTC/ACTC and the AOTC largely duplicates the information needed to compute the EIC and complete other parts of the return or claim for refund. Even if certain preparers are required to maintain the checklists and complete Form 8867 for the first time, the IRS estimates that the total time required should be minimal for these tax return preparers. Further, the IRS does not expect that the requirements in these proposed regula

December 19, 2016 860 Bulletin No. 2016–51

tions would necessitate the purchase of additional software or equipment in order to meet the additional information retention requirements.

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 Requests for Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are timely submitted to the IRS as prescribed in this preamble under the “Addresses” heading. The IRS and Treasury Department request comments on all aspects of the proposed rules. All comments will be available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Reg- ister.

Drafting Information

The principal author of this regulation is Rachel L. Gregory, Office of the Associate Chief Counsel (Procedure & Administration).

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 1.6695–2 is amended by revising the section heading and paragraphs (a), (b)(1)(i) introductory text, (b)(1)(ii), (b)(2), (b)(3)(i) and (ii), (b)(4)(i)(B) and (C), (c)(3), and (e) to read as follows:

§ 1.6695–2 Tax return preparer due diligence requirements for certain credits .

(a) [The text of the proposed amendment to §1.6695–2(a) is the same as the text of §1.6695–2T(a) published elsewhere in this issue of the Federal Regis- ter ].

(b) - - (1) - - (i) [The text of the proposed amendment to §1.6695–2(b)(1)(i) is the same as the text of §1.6695–2T(b)(1)(i) published elsewhere in this issue of the Internal Revenue Bulletin ].

- - - (ii) [The text of the proposed amendment to §1.6695–2(b)(1)(ii) is the same as the text of §1.6695–2T(b)(1)(ii) published elsewhere in this issue of the Internal Revenue Bulletin ].

(2) [The text of the proposed amendment to §1.6695–2(b)(2) is the same as the text of §1.6695–2T(b)(2) published elsewhere in this issue of the Internal Reve- nue Bulletin ].

(3) - - (i) [The text of the proposed amendment to §1.6695–2(b)(3)(i) is the same as the text of §1.6695–2T(b)(3)(i) published elsewhere in this issue of the Internal Revenue Bulletin ].

(ii) [The text of the proposed amendment to §1.6695–2(b)(3)(ii) is the same as the text of §1.6695–2T(b)(3)(ii) published elsewhere in this issue of the Internal Revenue Bulletin ].

(4) - - (i) - - (B) [The text of the proposed amendment to §1.6695–2(b)(4)(i)(B) is the same as the text of §1.6695–2T(b)(4)(i)(B) published elsewhere in this issue of the Inter- nal Revenue Bulletin ].

(C) [The text of the proposed amendment to §1.6695–2T(b)(4)(i)(C) is the same as the text of §1.6695– 2T(b)(4)(i)(C) published elsewhere in this issue of the Internal Revenue Bulletin ].

- - - (c) - - (3) [The text of the proposed amendment to §1.6695–2T(c)(3) is the same as the text of §1.6695–2T(c)(3) published elsewhere in this issue of the Internal Revenue Bulletin ].
- - - (e) Applicability date . The rules of this section apply to tax returns and claims for refunds prepared on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register with respect to tax years beginning after December 31, 2015.

John M Dalrymple, Deputy Commissioner for Services and

Enforcement.

(Filed by the Office of the Federal Register on December 2, 2016, 8:45 a.m., and published in the issue of the Federal Register for December 5, 2016, 81 F.R. 87502)

Update to Minimum Present Value Requirements for Defined Benefit Plan Distributions

REG–107424–12

AGENCY: Internal Revenue Service (IRS), Treasury.

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

SUMMARY: This document contains proposed regulations providing guidance relating to the minimum present value requirements applicable to certain defined benefit pension plans. These proposed regulations would provide guidance on changes made by the Pension Protection Act of 2006 and would provide other modifications to these rules as well. These regulations would affect participants, beneficiaries, sponsors, and administrators of defined benefit pension plans. This document also provides a notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by February 27, 2017. Outlines of topics to be discussed at the public hearing scheduled for March 7,

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2017, must be received by February 27, 2017.

ADDRESSES: Send submissions to: CC: PA:LPD:PR (REG–107424–12), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be handdelivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–107424–12), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG– 107424–12). The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Neil S. Sandhu or Linda S. F. Marshall at (202) 317-6700; concerning submissions of comments, the hearing, and/or being placed on the building access list to attend the hearing, Oluwafunmilayo (Funmi) Taylor at (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Section 401(a)(11) of the Internal Revenue Code (Code) provides that, in order for a defined benefit plan to qualify under section 401(a), except as provided under section 417, in the case of a vested participant who does not die before the annuity starting date, the accrued benefit payable to such participant must be provided in the form of a qualified joint and survivor annuity. In the case of a vested participant who dies before the annuity starting date and who has a surviving spouse, a defined benefit plan must provide a qualified preretirement survivor annuity to the surviving spouse of such participant, except as provided under section 417. Section 411(d)(6)(B) provides that a plan amendment that has the effect of eliminating or reducing an early retire

ment benefit or a retirement-type subsidy, or eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment is treated as impermissibly reducing accrued benefits. However, the last sentence of section 411(d)(6)(B) provides that the Secretary may by regulations provide that section 411(d)(6)(B) does not apply to a plan amendment that eliminates an optional form of benefit (other than a plan amendment that has the effect of eliminating or reducing an early retirement benefit or a retirement-type subsidy).

Section 417(e)(1) provides that a plan may provide that the present value of a qualified joint and survivor annuity or a qualified preretirement survivor annuity will be immediately distributed if that present value does not exceed the amount that can be distributed without the participant’s consent under section 411(a)(11). Section 417(e)(2) provides that, if the present value of the qualified joint and survivor annuity or the qualified preretirement survivor annuity exceeds the amount that can be distributed without the participant’s consent under section 411(a)(11), then a plan may immediately distribute the present value of a qualified joint and survivor annuity or the qualified preretirement survivor annuity only if the participant and the spouse of the participant (or where the participant has died, the surviving spouse) consent in writing to the distribution.

Section 417(e)(3)(A) provides that the present value shall not be less than the present value calculated by using the applicable mortality table and the applicable interest rate. ³

Section 417(e)(3)(B) of the Code, as amended by section 302 of the Pension Protection Act of 2006 (PPA ’06), Public Law 109–280, 120 Stat. 780 (2006), provides that the term “applicable mortality table“ means a mortality table, modified as appropriate by the Secretary, based on the mortality table specified for the plan year under section 430(h)(3)(A) (without regard to section 430(h)(3)(C) or (3)(D)).

Section 417(e)(3)(C) of the Code, as amended by section 302 of PPA ‘06, provides that the term “applicable interest

rate“ means the adjusted first, second, and third segment rates applied under rules similar to the rules of section 430(h)(2)(C) of the Code for the month before the date of the distribution or such other time as the Secretary may prescribe by regulations. However, for purposes of section 417(e)(3), these rates are to be determined without regard to the segment rate stabilization rules of section 430(h)(2)(C)(iv). In addition, under section 417(e)(3)(D), these rates are to be determined using the average yields for a month, rather than the 24-month average used under section 430(h)(2)(D). Section 411(a)(13) of the Code, as added by section 701(b) of PPA ‘06, provides that an “applicable defined benefit plan,” as defined by section 411(a)(13)(C), is not treated as failing to meet the requirements of section 417(e) with respect to accrued benefits derived from employer contributions solely because the present value of a participant’s accrued benefit (or any portion thereof) may be, under the terms of the plan, equal to the amount expressed as the hypothetical account balance or as an accumulated percentage of such participant’s final average compensation.

Section 1107(a)(2) of PPA ’06 provides that a pension plan does not fail to meet the requirements of section 411(d)(6) by reason of a plan amendment to which section 1107 applies, except as provided by the Secretary of the Treasury. Section 1107 of PPA ’06 applies to plan amendments made pursuant to the provisions of PPA ’06 or regulations issued thereunder that are adopted no later than a specified date, generally the last day of the first plan year beginning on or after January 1, 2009.

Final regulations under section 417 relating to the qualified joint and survivor and qualified preretirement survivor annuity requirements have not been amended to reflect PPA ’06. The regulations, which were issued on August 22, 1988, were amended on April 3, 1998, to reflect changes enacted by the Uruguay Round Agreements Act, Public Law 103–465 (GATT).

3Under section 411(a)(11)(B), the same applicable mortality table and applicable interest rate are used for purposes of determining whether the present value of a participant’s nonforfeitable accrued benefit exceeds the maximum amount that can be immediately distributed without the participant’s consent.

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by the Treasury Department and the IRS in the Federal Register on September 9, 2016 (81 FR 62359).

Explanation of Provisions

Overview

These proposed regulations would amend the current final regulations under section 417(e) regarding the minimum present value requirements of section 417(e)(3) in several areas. Specifically, the proposed regulations would update the regulations for changes made by PPA ’06 and to eliminate certain obsolete provisions. The proposed regulations also contain a few other clarifying changes.

Updates to reflect statutory and regulatory changes

The proposed regulations would update the existing regulatory provisions to reflect the statutory changes made by PPA ’06, including the new interest rates and mortality tables set forth in section 417(e)(3) and the exception from the valuation rules for certain applicable defined benefit plans set forth in section 411(a)(13). The proposed regulations clarify that the interest rates that are published by the Commissioner pursuant to the provisions as modified by PPA ’06 are to be used without further adjustment. In addition, the proposed regulations would eliminate obsolete provisions of the regulations relating to the transition from pre-1995 law to the interest rates and mortality assumptions provided by GATT. Furthermore, the proposed regulations make conforming changes to reflect the final regulations under section 417(e) that permit defined benefit plans to simplify the treatment of certain optional forms of benefit that are paid partly in the form of an annuity and partly in a more accelerated form.

Other clarifying changes

A. Treatment of preretirement mortality

The proposed regulations would include rules relating to the treatment of

Section 1.417(e)–1(d)(1) provides that a defined benefit plan generally must provide that the present value of any accrued benefit and the amount of any distribution, including a single sum, must not be less than the amount calculated using the specified applicable interest rate and the specified applicable mortality table. The present value of any optional form of benefit cannot be less than the present value of the accrued benefit determined in accordance with the preceding sentence.

Section 1.417(e)–1(d)(6) provides an exception from the minimum present value requirements of section 417(e) and § 1.417(e)–1(d). This exception applies to the amount of a distribution paid in the form of an annual benefit that either does not decrease during the life of the participant (or, in the case of a qualified preretirement survivor annuity, the life of the participant’s spouse), or that decreases during the life of the participant merely because of the death of the survivor annuitant (but only if the reduction is to a level not below 50 percent of the annual benefit payable before the death of such survivor annuitant) or the cessation or reduction of Social Security supplements or qualified disability benefits.

Notice 2007–81, 2007–2 CB 899 (see 26 CFR 601.601(d)(2)(ii)( b )), provides guidance on the applicable interest rate. Rev. Rul. 2007–67, 2007–2 CB 1047 (see 26 CFR 601.601(d)(2)(ii)( b )), provides guidance on the applicable mortality table ⁴

and the timing rules that apply to the determination of the applicable interest rate and the applicable mortality table.

The Worker, Retiree, and Employer Recovery Act of 2008, Public Law 109– 280 (120 Stat. 780), amended section 415(b)(2)(E)(v) to provide that the applicable mortality table under section 417(e)(3)(B) applies for purposes of adjusting a benefit or limitation pursuant to section 415(b)(2)(B), (C), or (D).

Sections 205(g), 203(e), and 204(g) of the Employee Retirement Income Security Act of 1974 (ERISA) contain rules that are parallel to Code sections 417(e), 411(a)(11), and 411(d)(6), respectively. Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secre

tary of the Treasury has interpretive jurisdiction over the subject matter addressed in these regulations for purposes of ERISA, as well as the Code. Thus, these regulations apply for purposes of the Code and the corresponding provisions of ERISA.

In West v. AK Steel Corporation Re- tirement Accumulation Pension Plan, 484 F.3d 395 (6 ^th Cir. 2007), the court held that a preretirement mortality discount could not be used in the computation of the present value of a participant’s singlesum distribution under a cash balance plan if the death benefit under the plan was equal in value to the participant’s accrued benefit under the plan. The court found that, if a participant’s beneficiary is entitled to the participant’s entire accrued benefit upon the participant’s death before attainment of normal retirement age, the use of a mortality discount for the period before normal retirement age would result in a partial forfeiture of benefits in violation of the ERISA vesting rules that correspond to the rules of section 411(a). See also Berger v. Xerox Corporation Retire- ment Income Guarantee Plan, 338 F.3d 755 (7 ^th Cir. 2003); Crosby v. Bowater, Inc. Ret. Plan, 212 F.R.D. 350 (W.D. Mich. 2002), rev’d on other grounds, 382 F.3d 587 (6 ^th Cir. 2004) (accrued benefits include not only retirement benefits themselves, but also death benefits which are directly related to the value of the retirement benefits). In Stewart v. AT&T Inc., 354 Fed. Appx. 111 (5 ^th Cir. 2009), however, the court held that a preretirement mortality discount was appropriately applied to determine a single-sum distribution under a traditional defined benefit plan. The court distinguished AK Steel and Berger on the basis that the plans at issue in those cases did not provide for a forfeiture of the accrued benefit on the death of the participant before retirement, whereas the plan at issue in Stewart provided for such a forfeiture.

Final regulations (TD 9783) under section 417(e) that permit defined benefit plans to simplify the treatment of certain optional forms of benefit that are paid partly in the form of an annuity and partly in a more accelerated form were published

4Notice 2008–85, 2008–2 CB 905, Notice 2013–49, 2013–32 IRB 127, Notice 2015–53, 2015–33 IRB 190, and Notice 2016–50, 2016–38 IRB 371, set forth the section 417(e)(3) applicable mortality tables for 2009 through 2017.

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preretirement mortality discounts in determining the minimum present value of accrued benefits under the regulations to address the issue raised by AK Steel and Berger of whether a plan that provides a death benefit equal in value to the accrued benefit may apply a preretirement mortality discount for the probability of death when determining the amount of a singlesum distribution.

Section 411(a) generally prohibits forfeitures of accrued benefits. Under section 411(a)(1), an employee’s rights in his accrued benefit derived from employee contributions must be nonforfeitable, and under section 411(a)(2), an employee’s rights in his accrued benefit derived from employer contributions must become nonforfeitable in accordance with a vesting schedule that is specified in the statute. Section 411(a)(3)(A) provides that a right to an accrued benefit derived from employer contributions is not treated as forfeitable solely because the plan provides that it is not payable if the participant dies (except in the case of a survivor annuity which is payable as provided in section 401(a)(11)). Section 411(a)(7)(A)(i) defines a participant’s accrued benefit under a defined benefit plan as the employee’s accrued benefit determined under the plan and, except as provided in section 411(c)(3), expressed in the form of an annual benefit commencing at normal retirement age. Section 1.411(a)–7(a)(1) defines a participant’s accrued benefit under a defined benefit plan as the annual benefit commencing at normal retirement age if the plan provides an accrued benefit in that form. If a defined benefit plan does not provide an accrued benefit in the form of an annual benefit commencing at normal retirement age, § 1.411(a)–7(a)(1)(ii) defines the accrued benefit as an annual benefit commencing at normal retirement age which is the actuarial equivalent of the accrued benefit determined under the plan. The regulation further clarifies that the term “accrued benefits” refers only to pension or retirement benefits. Consequently, accrued benefits do not include ancillary benefits not directly related to retirement benefits, such as incidental death benefits.

Section 411(d)(6)(A) prohibits a plan amendment that decreases a participant’s accrued benefit. Section 411(d)(6)(B) pro

vides that a plan amendment that has the effect of eliminating or reducing an early retirement benefit or retirement-type subsidy or eliminating an optional form of benefit with respect to benefits attributable to service before the amendment is treated as reducing accrued benefits for this purpose. Section 1.411(d)–3(g)(2)(v) provides that a death benefit under a defined benefit plan other than a death benefit that is part of an optional form of benefit is an ancillary benefit. Section 1.411(d)– 3(g)(6)(ii)(B) describes death benefits payable after the annuity starting date that are considered part of an optional form of benefit. Pursuant to § 1.411(d)–3(g)(14) and (15), section 411(d)(6) protected benefits do not include a death benefit under a defined benefit plan that is an ancillary benefit and not part of an optional form of benefit.

A death benefit under a defined benefit plan that is payable when the participant dies before attaining normal retirement age and before benefits commence is not part of the participant’s accrued benefit within the meaning of section 411(a)(7). Accordingly, the anti-forfeiture rules of section 411(a) do not apply to such a death benefit. This is the case even if the amount of the death benefit is the same as the amount the participant would have received had the participant separated from service and elected to receive a distribution immediately before death. Moreover, such a death benefit is an ancillary benefit within the meaning of § 1.411(d)– 3(g)(2)(v) — rather than a section 411(d)(6) protected benefit - and therefore can be eliminated by plan amendment (provided that a qualified preretirement survivor annuity for a surviving spouse is preserved, pursuant to section 401(a)(11)).

The minimum present value requirements of section 417(e)(3) do not take into account the value of ancillary benefits that are not part of the participant’s accrued benefit under the plan. Consistent with this, § 1.417(e)–1(d)(1)(i) does not require ancillary death benefits to be taken into account in the required minimum present value calculation. Because questions have arisen regarding this rule, the proposed regulations would clarify that the probability of death under the applicable mortality table is generally taken into account for purposes of determining the present

value under section 417(e)(3), without regard to the death benefits provided under the plan other than a death benefit that is part of the normal form of benefit or part of another optional form of benefit (as described in § 1.411(d)–3(g)(6)(ii)(B)) for which present value is determined.

However, a different rule applies with respect to whether the probability of death under the applicable mortality table is taken into account for purposes of determining the present value with respect to the accrued benefit derived from contributions made by an employee. This is because an employee’s rights in the accrued benefit derived from the employee’s own contributions are nonforfeitable under section 411(a)(1), and the exception for death under section 411(a)(3)(A) to the nonforfeitability of accrued benefits does not apply to the accrued benefit derived from employee contributions. As a result, for purposes of determining the present value under section 417(e)(3) with respect to the accrued benefit derived from contributions made by an employee (that is computed in accordance with the requirements of section 411(c)(3)), the probability of death during the assumed deferral period, if any, is not taken into account. For purposes of the preceding sentence, the assumed deferral period is the period between the date of the present value determination and the assumed commencement date for the annuity attributable to contributions made by an employee.

The proposed regulations include an example to illustrate the application of the minimum present value requirements of section 417(e)(3) in the case of a singlesum distribution of a participant’s entire accrued benefit that consists both of an accrued benefit derived from employee contributions and an employer-provided accrued benefit. Consistent with the rules in these proposed regulations, the example illustrates that a single-sum distribution of the participant’s entire accrued benefit in such a case must equal the sum of the minimum present value of the accrued benefit derived from employee contributions, determined under section 417(e)(3) (applying the special rules set forth in the preceding paragraph), and the minimum present value of the employer-provided accrued benefit, determined under section 417(e)(3). Note that Rev. Rul. 89–60,

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1989–1 CB 113 (1989) suggests that it is sufficient for a single-sum distribution in such a case to merely equal the greater of the minimum present value of the accrued benefit derived from employee contributions and the minimum present value of the participant’s entire accrued benefit. To the extent the guidance under Rev. Rul. 89–60 is inconsistent with the final regulations that adopt these proposed regulations, the regulations would supersede the guidance in Rev. Rul. 89–60.

B. Social security level income options

Questions have arisen regarding whether the minimum present value requirements of section 417(e)(3) apply to a social security level income option. As noted above, § 1.417(e)–1(d)(6) provides that the minimum present value requirements of section 417(e)(3) do not apply to the amount of a distribution paid in the form of an annual benefit that does not decrease during the life of the participant, or that decreases during the life of the participant merely because of the death of the survivor annuitant or the cessation or reduction of social security supplements or qualified disability benefits.

A social security supplement is defined in § 1.411(a)–7(c)(4) as a benefit for plan participants that commences before and terminates before the age when participants are entitled to old-age insurance benefits, unreduced on account of age, under title II of the Social Security Act, and does not exceed such old-age insurance benefit. A social security supplement (other than a QSUPP as defined in § 1.401(a)(4)–12) is an ancillary benefit that is not a section 411(d)(6) protected benefit.

A social security level income option is an optional form of benefit (protected under section 411(d)(6)) under which a participant’s accrued benefit is paid in the form of an annuity with larger payments in earlier years, before an assumed social security commencement age, to provide the participant with approximately level retirement income when the assumed social security payments are taken into account. It is appropriate to subject a social security level income option to the rules of section 417(e)(3) because, when a participant’s accrued benefit is paid as a so

cial security level income option, a portion of the participant’s accrued benefit (which may be substantial) is accelerated and paid over a short period of time until social security retirement age. Because the periodic payments under a social security level income option decrease during the lifetime of the participant and the decrease is not the result of the cessation of an ancillary social security supplement, § 1.417(e)–1(d)(6) does not provide an exception from the minimum present value requirements of section 417(e)(3) for such a distribution. These proposed regulations contain an example that illustrates this point.

C. Application of required assumptions to the accrued benefit

The proposed regulations would clarify the scope of the rule of § 1.417(e)–1(d)(1) under which the present value of any optional form of benefit cannot be less than the present value of the normal retirement benefit (with both values determined using the applicable interest rate and the applicable mortality table). The proposed regulations would require that the present value of any optional form of benefit cannot be less than the present value of the accrued benefit payable at normal retirement age, and would provide an exception for an optional form of benefit payable after normal retirement age to the extent that a suspension of benefits applies pursuant to section 411(a)(3)(B). Effective/ Applicability Dates

The changes under the proposed regulations are proposed to apply to distributions with annuity starting dates in plan years beginning on or after the date regulations that finalize these proposed regulations are published in the Federal Reg- ister. Prior to this applicability date, taxpayers must continue to apply existing regulations relating to section 417(e), modified to reflect the relevant statutory provisions during the applicable period (and guidance of general applicability relating to those statutory provisions, such as Rev. Rul. 2007–67).

Special Analyses

Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented

and reaffirmed 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, and because the proposed regulation does not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and 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 all aspects of these proposed regulations. In addition, the Treasury Department and the IRS specifically request comments on whether, in the case of a plan that provides a subsidized annuity payable upon early retirement and determines a single-sum distribution as the present value of the early retirement annuity, the present-value determination should be required to be calculated using the applicable interest rate and the applicable mortality table applied to the early retirement annuity (or whether the requirement to have a minimum present value that is equal to the present value of the annuity payable at normal retirement age determined in accordance with section 417(e)(3) provides the level of protection for the participant that is required by section 417(e)(3)). See Rybarc- zyk v. TRW, 235 F.3d 975 (6 ^th Cir. 2000).

All comments will be available at www.regulations.gov or upon request. A public hearing has been scheduled for March 7, 2017, beginning at 10 a.m. in the Auditorium, Internal Revenue Service, 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

Bulletin No. 2016–51 865 December 19, 2016

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 IN- FORMATION CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written or electronic comments by February 27, 2017, and an outline of topics to be discussed and the amount of time to be devoted to each topic (a signed original and eight (8) copies) by February 27, 2017. 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 authors of these regulations are Neil S. Sandhu and Linda S. F. Marshall, Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and the Treasury Department participated in the development of these regulations.

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 - - Par. 2. Section 1.417(e)–1 is amended by:

Revising paragraphs (d)(1)(i), (d)(2), (d)(3), (d)(4), and (d)(6).
Adding paragraph (d)(8)(vi).
Revising paragraph (d)(9).
Removing paragraph (d)(10). The addition and revisions read as follows:

§ 1.417(e)–1 Restrictions and valuations of distributions from plans subject to sections 401(a)(11) and 417.

- - - (d) Present value requirement —(1) General rule —(i) Defined benefit plans (A) In general . A defined benefit plan must provide that the present value of any accrued benefit and the amount (subject to sections 411(c)(3) and 415) of any distribution, including a single sum, must not be less than the amount calculated using the applicable mortality table described in paragraph (d)(2) of this section and the applicable interest rate described in paragraph (d)(3) of this section, as determined for the month described in paragraph (d)(4) of this section. The present value of any optional form of benefit, determined in accordance with the preceding sentence, cannot be less than the present value of the accrued benefit payable at normal retirement age, except to the extent that, for an optional form of benefit payable after normal retirement age, the requirements for suspension of benefits under section 411(a)(3)(B) are satisfied. The same rules used for the plan under this paragraph (d) must also be used to compute the present value of the benefit for purposes of determining whether consent for a distribution is required under paragraph (b) of this section.

(B) Payment of a portion of a partici- pant’s benefit . The rules of this paragraph (d)(1) apply with respect to a payment of only a portion of the accrued benefit in the same manner as these rules would apply to a distribution of the entire accrued benefit. See paragraph (d)(7) of this section.

(C) Special rules for applicable defined benefit plans . See section 411(a)(13) and the regulations thereunder for an exception from the rules of section 417(e)(3) and this paragraph (d) that applies to certain distributions from certain applicable defined benefit plans.

- - - (2) Applicable mortality table —(i) In general . The applicable mortality table for a calendar year is the mortality table that is prescribed by the Commissioner in guidance published in the Internal Revenue Bulletin. See § 601.601(d)(2) of this chapter. This mortality table is to be based on the table specified under section

430(h)(3)(A), but without regard to section 430(h)(3)(C) or (D).

(ii) Mortality discounts —(A) In gen- eral . Except as provided under paragraph (d)(2)(ii)(B) of this section, the probability of death under the applicable mortality table is taken into account for purposes of determining the present value under this paragraph (d) without regard to the death benefits provided under the plan (other than a death benefit that is part of the normal form of benefit or part of another optional form of benefit, as described in § 1.411(d)–3(g)(6)(ii)(B), for which present value is determined).

(B) Special rule for employee-provided benefit . For purposes of determining the present value under this paragraph (d) with respect to the accrued benefit derived from employee contributions (that is determined in accordance with the requirements of section 411(c)(3)), the probability of death during the assumed deferral period, if any, is not taken into account. For purposes of the preceding sentence, the assumed deferral period is the period between the date of the present value determination and the assumed commencement date for the annuity attributable to contributions made by an employee.

(3) Applicable interest rate —(i) In general . The applicable interest rate for a month is determined using the first, second, and third segment rates for that month under section 430(h)(2)(C), as modified pursuant to section 417(e)(3)(D) (and without regard to the segment rate stabilization rules of section 430(h)(2)(C)(iv)). The applicable interest rate is specified by the Commissioner in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin, and is applied under rules similar to the rules under § 1.430(h)(2)–1(b). Thus, for example, in determining the present value of a straight life annuity, the first segment is applied with respect to payments expected to be made during the 5-year period beginning on the annuity starting date, the second segment rate is applied with respect to payments expected to be made during the 15-year period following the end of that 5-year period, and the third segment rate is applied with respect to payments expected to be made after the end of that 15-year period. The interest rates that are published by the

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Commissioner are to be used for this purpose without further adjustment.

(ii) Examples . The following examples illustrate the rules of paragraphs (d)(2) and (3) of this section.

Example 1 . (i) Plan A is a non-contributory single-employer defined benefit plan with a calendar-year plan year, a one-year stability period coinciding with the calendar year, and a two-month lookback used for determining the applicable interest rate. The normal retirement age is 65, and all participant elections are made with proper spousal consent. Plan A provides for optional single sum payments equal to the present value of the participant’s accrued benefit. Plan A provides that the applicable interest rates are the segment rates as specified by the Commissioner for the second full calendar month preceding the calendar year that contains the annuity starting date. The applicable mortality table is the table specified by the Commissioner for the calendar year that contains the annuity starting date.

(ii) Participant P retires in May 2017 at age 60 and elects (with spousal consent) to receive a singlesum payment. P has an accrued benefit of $2,000 per month payable as a life annuity beginning at the plan’s normal retirement age of 65. The applicable mortality rates for 2017 apply. The applicable interest rates published by the Commissioner for November 2016 are 1.57%, 3.45%, and 4.39% for the first, second, and third segment rates, respectively. The deferred annuity factor calculated based on these interest rates and the applicable mortality table for 2017 is 10.931 for a participant age 60. To satisfy the requirements of section 417(e)(3) and this paragraph (d), the single-sum payment received by P cannot be less than $262,344 (that is, $2,000 x 12 x 10.931).

Example 2 . (i) The facts are the same as for Example 1 of this paragraph (d)(3)(ii), except that Plan A provides for mandatory employee contributions. Participant Q retires in May 2017 at age 60 and elects (with spousal consent) to receive a single-sum payment of Q’s entire accrued benefit. Q has an accrued benefit of $2,000 per month payable as a life annuity beginning at Plan A’s normal retirement age of 65, consisting of an accrued benefit derived from employee contributions determined in accordance with section 411(c)(2) (Q’s employee-provided accrued benefit) of $500 per month and an accrued benefit derived from employer contributions (Q’s employer-provided accrued benefit) of $1,500 per month.

(ii) Pursuant to paragraph (d)(2)(ii)(B) of this section, the single-sum payment used to settle Q’s employee-provided accrued benefit cannot be less than the present value of that portion of Q’s accrued benefit determined using the applicable interest and mortality rates described in paragraphs (d)(3)(i) and (d)(2)(ii) of this section, determined without taking the probability of death during the assumed deferral period into account. The deferred annuity factor calculated based on the interest and mortality rates specified in Example 1 of this paragraph (d)(3)(ii) (taking the probability of death only after age 65 into account) is 11.266 for a participant age 60. To satisfy the requirement of section 417(e)(3) and this paragraph (d), the single-sum payment received by Q with respect to the employee-provided portion of the

accrued benefit cannot be less than the minimum present value of $67,596 (that is, $500 x 12 x 11.266). (iii) The single-sum payment used to settle Q’s employer-provided accrued benefit cannot be less than the present value of that portion of Q’s accrued benefit determined using the applicable interest and mortality rates. However, for this purpose, Plan A is permitted to take the probability of death during the assumed deferral period into account. The singlesum payment received by Q with respect to the employer-provided portion of the accrued benefit cannot be less than $196,758 (that is, $1,500 x 12 x 10.931). (iv) The total single-sum payment received by Q cannot be less than the sum of the minimum present value of Q’s employee- and employer-provided accrued benefits, or $264,354 ($67,596 - $196,758).

(4) Time for determining interest rate and mortality table —(i) Interest rate gen- eral rule . Except as provided in paragraph (d)(4)(v) or (vi) of this section, the applicable interest rate to be used for a distribution is the applicable interest rate determined under paragraph (d)(3) of this section for the applicable lookback month. The applicable lookback month for a distribution is the lookback month (as described in paragraph (d)(4)(iv) of this section) for the stability period (as described in paragraph (d)(4)(iii) of this section) that contains the annuity starting date for the distribution. The time and method for determining the applicable interest rate for each participant’s distribution must be determined in a consistent manner that is applied uniformly to all participants in the plan.

(ii) Mortality table general rule . The applicable mortality table to be used for a distribution is the mortality table that is published for the calendar year during which the stability period containing the annuity starting date begins.

(iii) Stability period . A plan must specify the period for which the applicable interest rate remains constant (the stability period). This stability period may be one calendar month, one plan quarter, one calendar quarter, one plan year, or one calendar year. This same stability period also applies to the applicable mortality table.

(iv) Lookback month . A plan must specify the lookback month that is used to determine the applicable interest rate with respect to a stability period. The lookback month may be the first, second, third, fourth, or fifth full calendar month preceding the first day of the stability period.

(v) Permitted average interest rate . A plan may apply the rules of paragraph (d)(4)(i) of this section by substituting a permitted average applicable interest rate with respect to the plan’s stability period for the applicable interest rate determined under paragraph (d)(3) of this section for the applicable lookback month for the stability period. For this purpose, a permitted average applicable interest rate with respect to a stability period is the applicable interest rate that is computed by averaging the applicable interest rates determined under paragraph (d)(3) of this section for two or more consecutive months from among the first, second, third, fourth, and fifth calendar months preceding the first day of the stability period. For this paragraph (d)(4)(v) to apply, a plan must specify the manner in which the permitted average interest rate is computed.

(vi) Additional determination dates . The Commissioner may prescribe, in guidance published in the Internal Revenue Bulletin, other times that a plan may provide for determining the applicable interest rate.

(vii) Example . The following example illustrates the rules of this paragraph (d)(4):

Example . (i) The facts are the same as Example 1 of paragraph (d)(3)(ii) of this section, except that Plan A provides that the applicable interest rates are the rates for the third full calendar month preceding the beginning of the plan quarter that contains the annuity starting date. Plan A also provides that the applicable mortality table is the table specified by the Commissioner for the calendar year that contains the beginning of the stability period.

(ii) The segment interest rates that apply for annuity starting dates during the period beginning April 1, 2017 and ending June 30, 2017 are the segment rates for January 2017. This plan design permits the applicable interest rate to be fixed for each plan quarter and for the applicable interest rate for all distributions made during each plan quarter to be determined before the beginning of the plan quarter.

- - - (6) Exceptions —(i) In general . This paragraph (d) (other than the provisions relating to section 411(d)(6) requirements in paragraph (d)(9) of this section) does not apply to the amount of a distribution paid in the form of an annual benefit that—

(A) Does not decrease during the life of the participant, or, in the case of a QPSA, the life of the participant’s spouse; or

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(B) Decreases during the life of the participant merely because of—

( 1 ) The death of the survivor annuitant (but only if the reduction is to a level not below 50 percent of the annual benefit payable before the death of the survivor annuitant): or

( 2 ) The cessation or reduction of a social security supplement or qualified disability benefit (as defined in section 411(a)(9)). (ii) Example . The following example illustrates the rules of this paragraph (d)(6).

Example . (i) The facts are the same as Example 1 of paragraph (d)(3)(ii) of this section. Plan A also provides an optional distribution in the form of a Social Security level income option. Under this provision, the participant’s benefit is adjusted so that a larger amount is payable until age 65, at which time it is reduced to provide a level income in combination with the participant’s estimated social security benefit beginning at age 65. Participant R’s reduced early retirement benefit payable as a straight life annuity benefit commencing at age 60 is $1,300 per month (which is less than the actuarially equivalent benefit that would have been determined using the applicable interest and mortality rates under section 417(e)(3)) and R’s estimated social security benefit is $1,000 per month beginning at age 65.

(ii) Because the benefit payable under the social security level income option decreases at age 65 and the decrease is not on account of the death of the participant or a beneficiary or the cessation or reduction of social security supplements or qualified disability benefits, the benefits payable under the social security level income option are subject to the minimum present value requirements of section 417(e)(3). As illustrated in Example 1 of paragraph (d)(3)(ii) of this section, the minimum present value of Participant R’s benefits under section 417(e)(3) is $262,344, which is based on the present value of R’s accrued benefit, not R’s benefit that would be payable as a straight life annuity at the annuity starting date.

(iii) The deferred annuity factor for a participant age 60 with lifetime benefits commencing at age 65, based on the November 2016 segment rates and the applicable mortality table for 2017, is 10.931. The corresponding temporary annuity factor to age 65 is 4.752. The minimum benefits payable to Participant R in the form of a social security level income option (with a decrease of $1,000 - equal to the participant’s estimated social security benefit – occurring at age 65) are $2,090.99 per month until age 65 and $1,090.99 per month thereafter. Any amounts less than this would have a present value smaller than the required amount of $262,344, and thus would fail to satisfy the minimum present value requirement of section 417(e)(3).

- - - (8) - - (vi) Applicability date for provisions reflecting PPA ’06 updates and other rules. Paragraphs (d)(1) through (4) of this

section apply to distributions with annuity starting dates in plan years beginning on or after the date regulations that finalize these proposed regulations are published in the Federal Register. Prior to this applicability date, taxpayers must continue to apply the provisions of § 1.417(e)–1(d) as contained in 26 CFR part 1 as in effect immediately before publication of those final regulations, except to the extent superseded by statutory changes and guidance of general applicability relating to those statutory changes.

(9) Relationship with section 411(d)(6) —(i) In general . A plan amendment that changes the interest rate or the mortality assumptions used for the purposes described in paragraph (d)(1) of this section (including a plan amendment that changes the time for determining those assumptions) is generally subject to section 411(d)(6). However, for certain exceptions to the rule in the preceding sentence, see paragraph (d)(7)(iv) of this section, § 1.411(d)–4, Q&A-2(b)(2)(v) (with respect to plan amendments relating to involuntary distributions), and section 1107(a)(2) of the Pension Protection Act of 2006, Public Law 109–280, 120 Stat. 780 (2006) (PPA ’06) (with respect to certain plan amendments that were made pursuant to a change to the Internal Revenue Code by PPA ’06 or regulations issued thereunder).

(ii) Section 411(d)(6) relief for change in time for determining interest rate and mortality table . Notwithstanding the general rule of paragraph (d)(9)(i) of this section, if a plan amendment changes the time for determining the applicable interest rate (and, if the amendment changes the stability period described in paragraph (d)(4)(iii) of this section, the time for determining the applicable mortality table), including an indirect change as a result of a change in plan year, the amendment will not be treated as reducing accrued benefits in violation of section 411(d)(6) merely on account of this change if the conditions of this paragraph (d)(9)(ii) are satisfied. If the plan amendment is effective on or after the date the amendment is adopted, any distribution for which the annuity starting date occurs in the one-year period commencing at the time the amendment is effective must be determined using the interest rate and mortality table provided

under the plan determined at either the date for determining the interest rate and mortality table before the amendment or the date for determining the interest rate and mortality table after the amendment, whichever results in the larger distribution. If the plan amendment is adopted retroactively (that is, the amendment is effective prior to the adoption date), the plan must use the interest rate and mortality table determination dates resulting in the larger distribution for distributions with annuity starting dates occurring during the period beginning with the effective date and ending one year after the adoption date.

John Dalrymple, Deputy Commissioner for Services and

Enforcement.

(Filed by the Office of the Federal Register on November 23, 2016, 8:45 a.m., and published in the issue of the Federal Register for November 25, 2016, 81 F.R. 85190)

Dollar-Value LIFO Regulations: Inventory Price Index Computation (IPIC) Method Pools

REG–125946–10

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations that relate to the establishment of dollar-value last-in, firstout (LIFO) inventory pools by certain taxpayers that use the inventory price index computation (IPIC) pooling method. The proposed regulations provide rules regarding the proper pooling of manufactured or processed goods and wholesale or retail (resale) goods. The proposed regulations would affect taxpayers who use the IPIC pooling method and whose inventory for a trade or business consists of manufactured or processed goods and resale goods.

DATES: Comments and requests for a public hearing must be received by February 27, 2017.

December 19, 2016 868 Bulletin No. 2016–51

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–125946–10), 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–125946–10), 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–125946–10).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Natasha M. Mulleneaux, (202) 317-7007; concerning submission of comments and requests for a public hearing, Regina Johnson, (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Section 472 of the Internal Revenue Code permits a taxpayer to account for inventories using the LIFO method of accounting. The LIFO method of accounting for goods treats inventories on hand at the end of the year as consisting first of inventory on hand at the beginning of the year and then of inventories acquired during the year.

Section 1.472–8(a) of the Income Tax Regulations (26 CFR part 1) provides that any taxpayer may elect to determine the cost of its LIFO inventories using the dollar-value method, provided such method is used consistently and clearly reflects income. The dollar-value method of valuing LIFO inventories is a method of determining cost by using “base-year” cost expressed in terms of total dollars rather than the quantity and price of specific goods as the unit of measurement. The “base-year” cost is the aggregate of the cost (determined as of the beginning of the tax year for which the LIFO method is first adopted) of all items in a pool.

Pooling is central to the operation of the dollar-value LIFO method. Pooling requires costs related to different inventory products to be grouped into one or more inventory pools. To determine whether there is an increment or liquidation in a pool for a particular taxable year, the end

of the year inventory of the pool expressed in terms of base-year cost is compared with the beginning of the year inventory of the pool expressed in terms of base-year cost. The regulations prescribe rules for determining whether the number and composition of the pools used by the taxpayer are appropriate. The rules vary depending upon whether the taxpayer is engaged in the activity of manufacturing or processing or the activity of wholesaling or retailing.

The general pooling rules applicable to dollar-value LIFO taxpayers are in §1.472–8(b) and (c). These paragraphs provide separate pooling principles for taxpayers engaged in the manufacturing or processing of goods (§1.472–8(b)), and for taxpayers engaged in the wholesaling or retailing of goods purchased from others (§1.472–8(c)).

Section 1.472–8(b)(1) requires a manufacturer or processor to establish one pool for each natural business unit (natural business unit pooling method) unless the manufacturer or processor elects under §1.472–8(b)(3) to establish multiple pools. Further, §1.472–8(b)(2) provides that where a manufacturer or processor is also engaged in the wholesaling or retailing of goods purchased from others, the wholesaling or retailing operations with respect to such purchased goods shall not be considered a part of any manufacturing or processing unit. Additionally, §1.472– 8(b)(1) requires that where the manufacturer or processor is also engaged in the wholesaling or retailing of goods purchased from others, any pooling of the LIFO inventory of such purchased goods for wholesaling and retailing operations shall be determined in accordance with §1.472–8(c).

In Amity Leather Products Co. v. Com- missioner, 82 T.C. 726 (1984), the Tax Court considered whether a taxpayer that used the natural business unit pooling method was subject to the separate pooling requirements by virtue of being both a manufacturer and a wholesaler or retailer of merchandise. The court concluded that requiring separate inventory accounting for the two functions was reasonable and held that, where the taxpayer manufactured goods and regularly purchased identical goods from a subsidiary for resale, it was required to maintain separate pools

for manufactured and purchased inventory.

A manufacturer or processor using the natural business unit pooling method may elect to use the multiple pooling method described in §1.472–8(b)(3) for inventory items that are not within a natural business unit. Alternatively, a manufacturer or processor that does not use the natural business unit pooling method may elect to use the multiple pooling method. Under the multiple pooling method, generally each pool should consist of a group of inventory items that are substantially similar. Thus, raw materials that are substantially similar should be pooled together. Similarly, finished goods and goods-in-process should be placed in pools classified by major classes or types of goods.

Section 1.472–8(c)(1) requires wholesalers, retailers, jobbers, and distributors to establish inventory pools by major lines, types, or classes of goods. Mirroring §1.472–8(b)(1), §1.472–8(c)(1) requires that where a wholesaler or retailer is also engaged in the manufacturing or processing of goods, the pooling of the LIFO inventory for the manufacturing or processing operations must be determined in accordance with §1.472–8(b).

In general, any taxpayer that elects to use the dollar-value LIFO method to value LIFO inventories may elect to use the IPIC method to compute the base-year cost and determine the LIFO value of a dollar-value pool for a trade or business. A taxpayer that elects to use the IPIC method of determining the value of a dollar-value LIFO pool for a trade or business may also elect to establish dollarvalue pools, for those items accounted for using the IPIC method, using the IPIC pooling method provided in §1.472– 8(b)(4) and (c)(2). Section 1.472–8(b)(4) governs the application of the IPIC pooling method to manufacturers and processors that elect to use the IPIC method for a trade or business. Section 1.472–8(c)(2) governs the application of the IPIC pooling method to wholesalers, retailers, jobbers, and distributors that elect to use the IPIC method for a trade or business.

For manufacturers and processors using the IPIC pooling method under §1.472–8(b)(4), pools may be established for those items accounted for using the IPIC method based on the 2-digit com

Bulletin No. 2016–51 869 December 19, 2016

modity codes (that is, major commodity groups) in Table 9 (formerly Table 6) of the Producer Price Index Detailed Report (PPI Detailed Report), which is published monthly by the United States Bureau of Labor Statistics (BLS). A taxpayer establishing IPIC pools under §1.472– 8(b)(4) may combine IPIC pools that comprise less than 5 percent of the total inventory value of all dollar-value pools to form a single miscellaneous IPIC pool. If the resulting miscellaneous IPIC pool is less than 5 percent of the total inventory value of all dollar-value pools, the taxpayer may combine the miscellaneous IPIC pool with its largest IPIC pool.

For retailers using the IPIC pooling method under §1.472–8(c)(2), pools may be established for those purchased items accounted for using the IPIC method based on either the general expenditure categories (that is, major groups) in Table 3 of the Consumer Price Index Detailed Report (CPI Detailed Report), published monthly by BLS, or the 2-digit commodity codes (that is, major commodity groups) in Table 9 of the PPI Detailed Report. For wholesalers, jobbers, or distributors using the IPIC pooling method under §1.472–8(c)(2), pools may be established for those items accounted for using the IPIC method based on the 2-digit commodity codes in Table 9 of the PPI Detailed Report. A taxpayer establishing IPIC pools under §1.472–8(c)(2) may combine pools that comprise less than 5 percent of the total inventory value of all dollar-value pools to form a single miscellaneous IPIC pool. If the resulting miscellaneous IPIC pool is less than 5 percent of the total inventory value of all dollarvalue pools, the taxpayer may combine the miscellaneous IPIC pool with its largest IPIC pool.

Each of the 5-percent rules provided in §1.472–8(b)(4) or (c)(2) is a method of accounting. Thus, a taxpayer may not change to, or cease using either 5-percent rule without obtaining the prior consent of the Commissioner. Whether a specific IPIC pool or the miscellaneous IPIC pool satisfies the applicable 5-percent rule must be determined in the year of adoption or year of change (whichever is applicable) and redetermined every third taxable year. Any change in pooling required or permitted under a 5-percent rule is also a change

in method of accounting. A taxpayer must secure the consent of the Commissioner before combining or separating pools. The general procedures under section 446(e) and §1.446–1(e) that a taxpayer must follow to obtain the consent of the Commissioner to change a method of accounting for federal income tax purposes are contained in Rev. Proc. 2015–13, 2015–5 I.R.B. 419 (or its successors), as modified by Rev. Proc. 2015–33, 2015–24 I.R.B. 1067. See §601.601(d)(2)(ii)(b). The general pooling rules of §1.472– 8(b) and (c) provide that where a taxpayer is engaged in both a manufacturing or processing activity and a wholesaling or retailing activity, separate pooling rules apply to the separate activities, and goods purchased for resale may not be included in the same pool as manufactured or purchased goods. On the other hand, the IPIC pooling rules address circumstances where a trade or business consists entirely of a manufacturing, processing, retailing, or wholesaling activity. The Treasury Department and the IRS have become aware of confusion concerning how the IPIC pooling rules apply where a taxpayer is engaged in both a manufacturing or processing activity and a wholesaling or retailing activity. Accordingly, these proposed regulations address this issue.

Explanation of Provisions

Changes to IPIC Pooling Rules

The proposed regulations amend the IPIC pooling rules to clarify that those rules are applied consistently with the general LIFO pooling rule that manufactured or processed goods and resale goods may not be included in the same dollarvalue LIFO pool. This general rule is intended to limit cost transference, an inherent problem with pooling. Cost transference may occur, among other circumstances, when inventory items from separate economic activities (for example, manufacturing and resale activities) are placed in the same pool and may cause misallocation of cost or distortion of income.

Accordingly, the proposed regulations clarify that an IPIC-method taxpayer who elects the IPIC pooling method described in §1.472–8(b)(4) or (c)(2) and whose trade or business consists of both manu

facturing or processing activity and resale activity may not commingle the manufactured or processed goods and the resale goods within the same IPIC pool.

Specifically, the proposed regulations provide that a manufacturer or processor using the IPIC pooling method under §1.472–8(b)(4) that is also engaged, within the same trade or business, in wholesaling or retailing goods purchased from others may elect to establish dollarvalue pools for the manufactured or processed items accounted for using the IPIC method based on the 2-digit commodity codes in Table 9 of the PPI Detailed Report. If the manufacturer or processor makes this election, the manufacturer or processor must also establish pools for its resale goods in accordance with §1.472– 8(c)(2) (that is, based on the general expenditure categories in Table 3 of the CPI Detailed Report in the case of a retailer or the 2-digit commodity codes in Table 9 of the PPI Detailed Report in the case of a retailer, wholesaler, jobber, or distributor).

If the manufacturer or processor chooses to use the 5-percent method of pooling, manufactured or processed IPIC pools (IPIC pools consisting of manufactured or processed goods) of less than 5 percent of the total current year cost of all dollar-value pools may be combined to form a single miscellaneous IPIC pool of manufactured or processed goods. The manufacturer or processor may also combine resale IPIC pools (IPIC pools consisting of resale goods) of less than 5 percent of the total value of inventory to form a single miscellaneous IPIC pool of resale goods. If the miscellaneous IPIC pool of manufactured or processed goods is less than 5 percent of the total value of inventory, the manufacturer or processor may combine the miscellaneous IPIC pool of manufactured or processed goods with its largest manufactured or processed IPIC pool. The miscellaneous IPIC pool of resale goods may not be combined with any other IPIC pool.

The proposed regulations also provide that a wholesaler, retailer, jobber, or distributor using the IPIC pooling method under §1.472–8(c)(2) that is also engaged, within the same trade or business, in manufacturing or processing activities may elect to establish dollar-value pools for the

December 19, 2016 870 Bulletin No. 2016–51

Drafting Information

The principal author of these regulations is Natasha M. Mulleneaux of the Office of the Associate Chief Counsel (Income Tax & Accounting). However, other personnel from the IRS and the Treasury Department participated in their development.

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 1.472–8 also issued under 26 U.S.C 472. - - Par. 2. Section 1.472–8 is amended as follows:

Paragraph (b)(4) is revised.
Paragraph (c)(2) is revised.
Paragraph (e)(3)(ii) is revised.
Paragraph (e)(3)(iii)(B)( 2 ) is amended by removing “Table 6 (Producer price indexes and percent changes for commodity groupings and individual items, not seasonally adjusted)” and adding in its place “Table 9 (formerly Table

(Producer price indexes and percent changes for commodity and service groupings and individual items, not seasonally adjusted)” in the first sentence; and removing “Table 6” and adding in its place “Table 9” in the second sentence.

Paragraphs (e)(3)(iii)(C)( 1 ) and ( 2 ) are amended by removing “Table 6” and adding in its place “Table 9”.
Paragraph (e)(3)(v) is revised. The revisions read as follows:

§1.472–8 Dollar-value method of pricing LIFO inventories .

- - - (b) - - (4) IPIC method pools —(i) In general . A manufacturer or processor that elects to use the inventory price index computation method described in paragraph (e)(3) of this section (IPIC method) for a trade or business may elect to establish dollar

resale goods accounted for using the IPIC method in accordance with §1.472– 8(c)(2) (that is, based on the general expenditure categories in Table 3 of the CPI Detailed Report in the case of a retailer or the 2-digit commodity codes in Table 9 of the PPI Detailed Report in the case of a wholesaler, retailer, jobber, or distributor). If the wholesaler, retailer, jobber, or distributor makes this election, it must also establish pools for its manufactured or processed goods based on the 2-digit commodity codes in Table 9 of the PPI Detailed Report.

If the wholesaler, retailer, jobber, or distributor chooses to use the 5-percent method of pooling, resale IPIC pools of less than 5 percent of the total value of inventory may be combined to form a single miscellaneous IPIC pool of resale goods. The wholesaler, retailer, jobber, or distributor may also combine the IPIC pools of manufactured or processed goods of less than 5 percent of the total value of inventory to form a single miscellaneous IPIC pool of manufactured or processed goods. If the resale miscellaneous IPIC pool is less than 5 percent of the total value of inventory, the wholesaler, retailer, jobber, or distributor may combine the resale miscellaneous IPIC pool with the largest resale IPIC pool. The miscellaneous IPIC pool of manufactured or processed goods may not be combined with any other IPIC pool.

The Treasury Department and the IRS specifically request comments on the requirement that a taxpayer engaged in both manufacturing and resale activities within the same trade or business is required to use IPIC pooling for both activities.

Changes to Conform with Current BLS Publications

These proposed regulations modify §1.472–8(b), (c), and (e)(3) to update references from Table 6 (Producer price indexes and percent changes for commodity groupings and individual items, not seasonally adjusted) to Table 9 (Producer price indexes and percent changes for commodity and service groupings and individual items, not seasonally adjusted) because of BLS changes in the PPI Detailed Report.

These proposed regulations also modify §1.472–8(e)(3)(ii) to remove the exception to the trade or business requirement for taxpayers using the Department Store Inventory Price Indexes because BLS discontinued publishing these indexes after December 2013.

Effective/Applicability Date

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

Special Analyses

Certain IRS regulations, including these, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact 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, these proposed regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Comments and Request for a Public Hearing

A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Reg- ister.

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(b)(4)(i) of this section and that is also engaged in retailing or wholesaling may not include manufactured or processed goods in the same IPIC pool as goods purchased for resale. Further, in applying the 5-percent rules described in paragraphs (b)(4)(i) and (ii) of this section, a taxpayer may not combine an IPIC pool of manufactured or processed goods that comprises less than 5 percent of the total current-year cost of all dollar-value pools for that trade or business with a resale IPIC pool that comprises less than 5 percent of the total current-year cost of all dollar-value pools for the purpose of forming a single miscellaneous IPIC pool.

(iv) Examples . The rules of paragraph (b)(4) of this section may be illustrated by the following examples:

Example 1 . (i) Taxpayer is engaged in the trade or business of manufacturing products A, B, and C. In order to cover temporary shortages, Taxpayer also purchases a small quantity of identical products for resale to customers. Taxpayer treats its manufacturing and resale activities as a single trade or business. Taxpayer uses the IPIC method described in paragraph (e)(3) of this section. Pursuant to its election, Taxpayer establishes dollar-value pools for the manufactured items under paragraph (b)(4)(i) of this section, based on the 2-digit commodity codes in Table 9 of the PPI Detailed Report. Taxpayer also establishes dollar-value pools for the items purchased for resale under paragraph (b)(4)(ii) of this section, based on the 2-digit commodity codes in Table 9 of the PPI Detailed Report. Taxpayer does not choose to use the 5-percent rules under paragraphs (b)(4)(i) and (ii) of this section.

(ii) Even though Taxpayer has manufactured items and resale items that share the same 2-digit commodity codes, under paragraph (b)(4)(iii) of this section, Taxpayer’s manufactured goods may not be included in the same IPIC pool as its goods purchased for resale.

Example 2 . (i) The facts are the same as in Example 1, except Taxpayer establishes three IPIC pools for its manufacturing activities and three IPIC pools for its resale activities. Further, Taxpayer chooses to use the 5-percent rules of paragraphs (b)(4)(i) and (ii) of this section. The percentage of total current-year cost of each IPIC pool to the current-year cost of all dollar-value pools for the trade or business is as follows:

value pools for those manufactured or processed items accounted for using the IPIC method as provided in this paragraph (b)(4)(i) based on the 2-digit commodity codes (that is, major commodity groups) in Table 9 (formerly Table 6) (Producer price indexes and percent changes for commodity and service groupings and individual items, not seasonally adjusted) of the “PPI Detailed Report” published monthly by the United States Bureau of Labor Statistics (available at http://www. bls.gov). A taxpayer electing to establish dollar-value pools under this paragraph (b)(4)(i) may combine IPIC pools of manufactured or processed goods that comprise less than 5 percent of the total current-year cost of all dollar-value pools for that trade or business to form a single miscellaneous manufactured or processed IPIC pool. A taxpayer electing to establish dollar-value pools under this paragraph (b)(4)(i) may combine a miscellaneous manufactured or processed IPIC pool that comprises less than 5 percent of the total current-year cost of all dollar-value pools with the largest manufactured or processed IPIC pool. Each of these 5-percent rules is a method of accounting. A taxpayer may not change to, or cease using, either 5-percent rule without obtaining the Commissioner’s prior consent. Whether a specific manufactured or processed IPIC pool or the miscellaneous manufactured or processed IPIC pool satisfies the applicable 5-percent rule must be determined in the year of adoption or year of change, whichever is applicable, and redetermined every third taxable year. Any change in pooling required or permitted as a result of a 5-percent rule is a change in method of accounting. A taxpayer must secure the consent of the Commissioner pursuant to §1.446–1(e) before combining or separating manufactured or processed IPIC pools and must combine or separate its manufactured or processed IPIC pools in accor

dance with paragraph (g)(2) of this section.

(ii) Pooling of goods a manufacturer or processor purchased for resale . A manufacturer or processor electing to establish dollar-value pools under paragraph (b)(4)(i) of this section and that is also engaged, within the same trade or business, in wholesaling or retailing goods purchased from others (resale), must establish pools for its resale goods in accordance with paragraph (c)(2)(i) of this section. A manufacturer or processor that must establish dollar-value pools for resale goods under this paragraph (b)(4)(ii) may combine IPIC pools of resale goods that comprise less than 5 percent of the total current-year cost of all dollar-value pools for that trade or business to form a single miscellaneous resale IPIC pool. The single miscellaneous resale IPIC pool established pursuant to this paragraph (b)(4)(ii) may not be combined with any other IPIC pool. This 5-percent rule is a method of accounting. A taxpayer may not change to, or cease using, this 5-percent rule without obtaining the Commissioner’s prior consent. Whether a specific resale IPIC pool satisfies the 5-percent rule must be determined in the year of adoption or year of change, whichever is applicable, and redetermined every third taxable year. Any change in pooling required or permitted as a result of this 5-percent rule is a change in method of accounting. A taxpayer must secure the consent of the Commissioner pursuant to §1.446–1(e) before combining or separating resale IPIC pools and must combine or separate its resale IPIC pools in accordance with paragraph (g)(2) of this section.

(iii) No commingling of manufactured goods and resale goods within a pool . Notwithstanding any other rule provided in paragraph (b) or (c) of this section, a manufacturer or processor electing to establish dollar-value pools under paragraph

December 19, 2016 872 Bulletin No. 2016–51

Percentage of total current-year cost of IPIC pool to current-year cost of all dollar-value pools

Manufacturing Pools:

Pool A 90%

Pool B 1%

Pool C 1%

Resale Pools:

Pool D 6%

Pool E 1%

Pool F 1%

————

100%

(ii) For purposes of applying the 5-percent rules to Taxpayer’s manufacturing operations under paragraph (b)(4)(i) of this section, because Pools B and C each comprise less than 5 percent of the total current-year cost of all dollar-value pools, Pools B and C may be combined to form a single miscellaneous pool of manufactured or processed goods (new Pool G).

(iii) For purposes of applying the 5-percent rules to Taxpayer’s resale operations under paragraph (b)(4)(ii) of this section, because Pools E and F each comprise less than 5 percent of the total current-year cost of all dollar-value pools, Pools E and F may be combined to form a single miscellaneous pool of resale goods (new Pool H).

(iv) Because Pool G comprises less than 5 percent of the total current-year cost of all dollar-value pools, under paragraph (b)(4)(i) of this section, Pool G may be combined with Pool A, the largest IPIC pool of manufactured goods.

(v) Although Pool H also comprises less than 5 percent of the total current-year cost of all dollarvalue pools, under paragraph (b)(4)(ii) of this section, Pool H may not be combined with Pool A, the largest pool of manufactured goods, or Pool D, the largest pool of resale goods.

- - - (c) - - (2) IPIC method pools —(i) In general . A retailer that elects to use the inventory price index computation method described in paragraph (e)(3) of this section (IPIC method) for a trade or business may elect to establish dollar-value pools for those purchased items accounted for using the IPIC method as provided in this paragraph (c)(2)(i) based on either the general expenditure categories (that is, major groups) in Table 3 (Consumer Price Index for all Urban Consumers (CPI-U): U.S. city average, detailed expenditure categories) of the “CPI Detailed Report” or the 2-digit commodity codes (that is, major commodity groups) in Table 9 (formerly Table 6) (Producer price indexes and per

cent changes for commodity and service groupings and individual items, not seasonally adjusted) of the “PPI Detailed Report.” A wholesaler, jobber, or distributor that elects to use the IPIC method for a trade or business may elect to establish dollar-value pools for any group of resale goods accounted for using the IPIC method based on the 2-digit commodity codes (that is, major commodity groups) in Table 9 (Producer price indexes and percent changes for commodity and service groupings and individual items, not seasonally adjusted) of the “PPI Detailed Report.” The “CPI Detailed Report” and the “PPI Detailed Report” are published monthly by the United States Bureau of Labor Statistics (BLS) (available at http:// www.bls.gov). A taxpayer electing to establish dollar-value pools under this paragraph (c)(2)(i) may combine IPIC pools of resale goods that comprise less than 5 percent of the total current-year cost of all dollar-value pools for that trade or business to form a single miscellaneous resale IPIC pool. A taxpayer electing to establish pools under this paragraph (c)(2)(i) may combine a miscellaneous resale IPIC pool that comprises less than 5 percent of the total current-year cost of all dollar-value pools with the largest resale IPIC pool. Each of these 5-percent rules is a method of accounting. A taxpayer may not change to, or cease using, either 5-percent rule without obtaining the Commissioner’s prior consent. Whether a specific resale IPIC pool or the miscellaneous resale IPIC pool satisfies the applicable 5-percent rule must be determined in the year of adoption or year of change, whichever is applicable, and redetermined every

third taxable year. Any change in pooling required or permitted under a 5-percent rule is a change in method of accounting. A taxpayer must secure the consent of the Commissioner pursuant to §1.446– 1(e) before combining or separating resale IPIC pools and must combine or separate its resale IPIC pools in accordance with paragraph (g)(2) of this section.

(ii) Pooling of manufactured or pro- cessed goods of a wholesaler, retailer, jobber, or distributor. A wholesaler, retailer, jobber, or distributor electing to establish dollar-value pools under paragraph (c)(2)(i) of this section and that is also engaged, within the same trade or business, in manufacturing or processing, must establish pools for its manufactured or processed goods in accordance with paragraph (b)(4)(i) of this section. A wholesaler, retailer, jobber, or distributor that must establish dollar-value pools for manufactured or processed goods under this paragraph (c)(2)(ii) may combine IPIC pools of manufactured or processed goods that comprise less than 5 percent of the total current-year cost of all dollarvalue pools for that trade or business to form a single miscellaneous manufactured or processed IPIC pool. The single miscellaneous manufactured or processed IPIC pool established pursuant to this paragraph (c)(2)(ii) may not be combined with any other IPIC pool. This 5-percent rule is a method of accounting. A taxpayer may not change to, or cease using, this 5-percent rule without obtaining the Commissioner’s prior consent. Whether a specific manufactured or processed IPIC pool satisfies the 5-percent rule must be determined in the year of adoption or year of

Bulletin No. 2016–51 873 December 19, 2016

change, whichever is applicable, and redetermined every third taxable year. Any change in pooling required or permitted as a result of a 5-percent rule is a change in method of accounting. A taxpayer must secure the consent of the Commissioner pursuant to §1.446–1(e) before combining or separating manufactured or processed IPIC pools and must combine or separate its manufactured or processed IPIC pools in accordance with paragraph (g)(2) of this section.

(iii) No commingling of manufactured goods and purchased goods within a pool . Notwithstanding any other rule provided in paragraph (b) or (c) of this section, a wholesaler, retailer, jobber, or distributor electing to establish dollar-value pools under paragraph (c)(2)(i) of this section and that is also engaged in manufacturing or processing may not include manufactured

or processed goods in the same IPIC pool as goods purchased for resale. Further, in applying the 5-percent rules described in paragraphs (c)(2)(i) and (ii) of this section, a taxpayer may not combine an IPIC pool of manufactured or processed goods that comprises less than 5 percent of the total current-year cost of all dollar-value pools with a resale IPIC pool that comprises less than 5 percent of the total current-year cost of all dollar-value pools for purposes of forming a single miscellaneous IPIC pool.

(iv) Examples . The rules of paragraph (c)(2) of this section may be illustrated by the following examples:

Example 1 . (i) Taxpayer is engaged in the trade or business of wholesaling products A, B, and C. Taxpayer also manufactures a small quantity of identical products for sale to customers. Taxpayer treats its wholesaling and manufacturing activities as a single trade or business. Taxpayer uses the IPIC method described in paragraph (e)(3) of this section.

Pursuant to its election, Taxpayer establishes dollarvalue pools for the wholesale items purchased for resale under paragraph (c)(2)(i) of this section, based on the 2-digit commodity codes in Table 9 of the PPI Detailed Report. Taxpayer also establishes dollarvalue pools for the manufactured items under paragraph (c)(2)(ii) of this section, based on the 2-digit commodity codes in Table 9 of the PPI Detailed Report. Taxpayer does not choose to use the 5-percent rules under paragraphs (c)(2)(i) and (ii) of this section.

(ii) Even though Taxpayer has resale and manufactured items that share the same 2-digit commodity codes, under paragraph (c)(2)(iii) of this section, Taxpayer’s resale goods may not be included in the same IPIC pool as its manufactured goods.

Example 2 . (i) The facts are the same as in Example 1, except Taxpayer establishes three IPIC pools for its wholesale activities and three IPIC pools for its manufacturing activities. Further, Taxpayer chooses to use the 5-percent rules of paragraphs (c)(2)(i) and (ii) of this section. The percentage of total current-year cost of each IPIC pool to the current-year cost of all dollar-value pools for the trade or business is as follows:

Percentage of total current-year cost of IPIC pool to current-year cost of all dollar-value pools

Wholesaling Pools:

Pool J 90%

Pool K 1%

Pool L 1%

Manufacturing Pools:

Pool M 6%

Pool N 1%

Pool O 1%

————

100%

(ii) For purposes of applying the 5-percent rules to Taxpayer’s wholesaling operations under paragraph (c)(2)(i) of this section, because Pools K and L each comprise less than 5 percent of the total current-year cost of all dollar-value pools, Pools K and L may be combined to form a single miscellaneous pool of wholesale goods (new Pool P).

(iii) For purposes of applying the 5-percent rules to Taxpayer’s manufacturing operations under paragraph (c)(2)(ii) of this section, because Pools N and O each comprise less than 5 percent of the total current-year cost of all dollar-value pools, Pools N and O may be combined to form a single miscellaneous pool of manufactured goods (new Pool Q).

(iv) Because Pool P comprises less than 5 percent of the total current-year cost of all dollar-value pools, under paragraph (c)(2)(i) of this section, Pool P may be combined with Pool J, the largest IPIC pool of resale goods.

(v) Although Pool Q also comprises less than 5 percent of the total current-year cost of all dollarvalue pools, under paragraph (c)(2)(ii) of this section, Pool Q may not be combined with Pool J, the largest pool of resale goods, or Pool M, the largest pool of manufactured goods.

- - - (e) - - (3) - - (ii) Eligibility . Any taxpayer electing to use the dollar-value LIFO method may elect to use the IPIC method. Except as provided in other published guidance, a taxpayer that elects to use the IPIC method for a specific trade or business must use that method to account for all items of dollar-value LIFO inventory.

(v) Effective/applicability date . The rules of this paragraph (e)(3) and paragraphs (b)(4) and (c)(2) of this section are applicable for taxable years ending on or after the date the Treasury decision adopting these rules as final regulations is published in the Federal Register.

John Dalrymple, Deputy Commissioner for Services and

Enforcement.

(Filed by the Office of the Federal Register on November 25, 2016, 8:45 a.m., and published in the issue of the Federal Register for November 28, 2016, 81 F.R. 85450)

December 19, 2016 874 Bulletin No. 2016–51