Guidance Regarding the Simplified Service Cost Method and the Simplified Production Method, 44467-44470 [05-15363]
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Federal Register / Vol. 70, No. 148 / Wednesday, August 3, 2005 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9217]
RIN 1545–BE61
Guidance Regarding the Simplified
Service Cost Method and the
Simplified Production Method
Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary
regulations.
AGENCY:
SUMMARY: This document contains final
and temporary regulations relating to
the capitalization of costs under the
simplified service cost method of the
Income Tax Regulations and the
simplified production method. The
regulations affect taxpayers that use the
simplified service cost method or the
simplified production method for selfconstructed assets that are produced on
a routine and repetitive basis in the
ordinary course of their businesses. The
text of the temporary regulations also
serves as the text of the proposed
regulations set forth in the notice of
proposed rulemaking on this subject in
the Proposed Rules section in this issue
of the Federal Register. The portions of
this rule that are final regulations
provide necessary cross-references to
the temporary regulations.
DATES: Effective Date: These regulations
are effective August 2, 2005.
Applicability Date: These regulations
apply to taxable years ending on or after
August 2, 2005. See §§ 1.263A–1T(l) and
1.263A–2T(f).
FOR FURTHER INFORMATION CONTACT:
Scott Rabinowitz, (202) 622–4970 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Under section 263A of the Internal
Revenue Code (Code), producers of real
or tangible personal property and
resellers of real or personal property
must capitalize the direct costs and a
proper share of the indirect costs of
such property. Indirect costs include
indirect labor costs, overhead, and
service costs. Service costs are indirect
costs that can be identified specifically
with an administrative or support
department. Service costs consist of
capitalizable service costs, deductible
service costs, and mixed service costs.
Capitalizable service costs are service
costs that directly benefit, or are
incurred by reason of, a production or
resale activity. Deductible service costs
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are service costs that do not directly
benefit, or are not incurred by reason of,
a production or resale activity. Mixed
service costs are service costs that are
partially allocable to production or
resale activities and partially allocable
to non-production or non-resale
activities.
Although section 263A requires
capitalization of indirect costs, the
statute generally does not set forth
methods for allocating indirect costs,
including mixed service costs. Instead,
in accordance with the legislative
history of the section, the regulations
under section 263A generally provide
that indirect costs are to be allocated to
property using detailed or specific
(facts-and-circumstances) cost allocation
methods, including a specific
identification method, the standard cost
method, and methods using burden
rates. The regulations further provide
that allocations of mixed service costs
are to be made on the basis of a factor
or relationship that reasonably relates
such costs with the benefit provided. To
alleviate the administrative burdens of
using these detailed or specific
methods, the Treasury Department and
the Internal Revenue Service developed
simplified methods. In particular, the
simplified production method provided
by § 1.263A–2(b) determines aggregate
amounts of additional section 263A
costs allocable to produced ‘‘eligible
property.’’ Additional section 263A
costs are those costs, other than interest,
that were not capitalized under a
taxpayer’s method of accounting
immediately prior to the effective date
of section 263A, but that are required to
be capitalized under section 263A. In
addition, the final regulations provide a
simplified method, the simplified
service cost method provided by
§ 1.263A–1(h), for determining
capitalizable mixed service costs
incurred during the taxable year with
respect to ‘‘eligible property.’’
On March 30, 1987, temporary
regulations under section 263A were
published in the Federal Register (TD
8131, 1987–1 C.B. 98, [52 FR 10052]).
The temporary regulations limited the
availability of the simplified production
method and the simplified service cost
method to two types of ‘‘eligible
property’’: Stock in trade or other
property properly includible in the
inventory of the taxpayer and noninventory property held by a taxpayer
primarily for sale to customers in the
ordinary course of the taxpayer’s trade
or business. The preamble to the
temporary regulations indicates that this
limitation was prescribed because the
simplified production method is not
appropriate to account for the casual or
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44467
occasional production of property (i.e.,
property that is not mass-produced on a
repetitive and routine basis and that
does not have a high ‘‘turnover’’ rate.)
Similarly, the simplified service cost
method is not appropriate to account for
the casual or occasional production of
property.
On August 22, 1988, the IRS
published Notice 88–86 (1988–2 C.B.
401). Notice 88–86 states that
forthcoming regulations will expand the
categories of property eligible for the
simplified production method and
simplified service cost method to other
types of property that share
characteristics that are appropriate for
application of the methods. In
particular, the notice indicates that the
regulations will provide that the
simplified production method and the
simplified service cost method are
available to (1) self-constructed assets
substantially identical in nature to, and
produced in the same manner as,
inventory property or other property
held primarily for sale to customers in
the ordinary course of the taxpayer’s
trade or business, and (2) selfconstructed assets produced by the
taxpayer on a routine and repetitive
basis in the ordinary course of the
taxpayer’s production activities.
On August 9, 1993, final regulations
under section 263A were published in
the Federal Register (TD 8482, 1993–2
C.B. 77, [58 FR 42198]). The final
regulations follow Notice 88–86 and
expand the categories of eligible
property for the simplified production
method and the simplified service cost
method.
Notice 2003–36 (2003–1 C.B. 992), as
modified by Notice 2003–59 (2003–59
C.B. 429), indicates that the Treasury
Department and the IRS are aware that
uncertainty exists as to what types of
property constitute ‘‘eligible property’’
under §§ 1.263A–1(h)(2)(i)(D) and
1.263A–2(b)(2)(i)(D) for purposes of the
simplified service cost method and the
simplified production method. These
sections provide that self-constructed
assets produced by a taxpayer on a
routine and repetitive basis in the
ordinary course of the taxpayer’s trade
or business are ‘‘eligible property.’’
To provide guidance as to what types
of property constitute ‘‘eligible
property’’ under the final regulations,
Rev. Rul. 2005–53, 2005–35 I.R.B. ll
(dated August 29, 2005), holds that a
taxpayer’s production of property will
be considered ‘‘routine and repetitive’’
for purposes of §§ 1.263A–1(h)(2)(i)(D)
and 1.263A–2(b)(2)(i)(D) only if the
property is mass-produced (i.e.,
numerous identical goods are
manufactured using standardized
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Federal Register / Vol. 70, No. 148 / Wednesday, August 3, 2005 / Rules and Regulations
designs and assembly line techniques)
or the produced property has a high
degree of turnover (i.e., the costs of
production are recovered over a
relatively short amount of time).
Explanation of Provisions
Upon further consideration of the
simplified service cost method and the
simplified production method under
§§ 1.263A–1(h)(2)(i)(D) and 1.263A–
2(b)(2)(i)(D), the Treasury Department
and the IRS believe that, to minimize
the distortion of income that may arise
from the use of those methods, a
taxpayer’s production of property is
considered ‘‘routine and repetitive’’ for
purposes of those sections only if the
property is mass-produced and has a
high degree of turnover. Accordingly,
the temporary regulations provide that
self-constructed property is considered
produced on a routine and repetitive
basis for purposes of the simplified
service cost method and the simplified
production method only if numerous
substantially identical units of tangible
personal property are produced within
a taxable year using standardized
designs and assembly line techniques
and the applicable recovery period of
the assets under § 168(c) is not longer
than 3 years.
A change in a taxpayer’s treatment of
mixed service costs or additional
section 263A costs to comply with these
temporary regulations is a change in
method of accounting to which the
provisions of sections 446 and 481 and
the regulations thereunder apply. For
the taxpayer’s first taxable year ending
on or after August 2, 2005, the taxpayer
is granted the consent of the
Commissioner to change its method of
accounting to comply with these
temporary regulations, provided the
taxpayer follows the applicable
administrative procedures for obtaining
the Commissioner’s automatic consent
to a change in accounting method (for
further guidance, for example, see Rev.
Proc. 2002–9 (2002–1 C.B. 327), as
modified and clarified by
Announcement 2002–17 (2002–1 C.B.
561), modified and amplified by Rev.
Proc. 2002–19 (2002–1 C.B. 696), and
amplified, clarified, and modified by
Rev. Proc. 2002–54 (2002–2 C.B. 432)).
For purposes of Form 3115,
‘‘Application for Change in Accounting
Method’’, the designated number for the
automatic accounting method change
authorized by this regulation is ‘‘95.’’ If
Form 3115 is revised or renumbered,
any reference in this section to that form
is treated as a reference to the revised
or renumbered form. For the taxpayer’s
second and subsequent taxable years
ending on or after August 2, 2005,
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requests to secure the consent of the
Commissioner must be made under the
administrative procedures for obtaining
the Commissioner’s advance consent to
a change in accounting method (for
further guidance, for example, see Rev.
Proc. 97–27 (1997–1 C.B. 680), as
modified and amplified by Rev. Proc.
2002–19 (2002–1 C.B. 696), as amplified
and clarified by Rev. Proc. 2002–54
(2002–2 C.B. 432)). However,
notwithstanding section 5.04(1) of Rev.
Proc. 2002–9 and section 5.02(3)(a) of
Rev. Proc. 97–27, the section 481(a)
adjustment period is two taxable years
for a net positive adjustment for an
accounting method change that is made
to conform to these temporary
regulations.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations. Please refer to the
cross-reference notice of proposed
rulemaking published elsewhere in this
issue of the Federal Register for
applicability of the Regulatory
Flexibility Act (5 U.S.C. chapter 6).
Pursuant to section 7805(f) of the Code,
these temporary regulations will be
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on their
impact on small business.
Drafting Information
The principal author of these
regulations is Scott Rabinowitz of the
Office of Associate Chief Counsel
(Income Tax and Accounting). However,
other personnel from the IRS and the
Treasury Department participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
I
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as
follows:
I
Authority: 26 U.S.C. 7805 * * *
I Par. 2. Section 1.263A–1 is amended
by revising paragraph (h)(2)(i)(D) and
adding paragraphs (k) and (l) to read as
follows:
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§ 1.263A–1
Uniform capitalization of costs.
*
*
*
*
*
(h) * * *
(2) * * *
(i) * * *
(D) [Reserved]. For further guidance,
see § 1.263A–1T(h)(2)(i)(D).
*
*
*
*
*
(k) and (l) [Reserved]. For further
guidance, see § 1.263A–1T(k) and (l).
I Par 3. Section 1.263A–1T is added to
read as follows:
§ 1.263A–1T Uniform capitalization of
costs (temporary).
(a) through (h)(2)(i)(C) [Reserved]. For
further guidance, see § 1.263A–1(a)
through (h)(2)(i)(C).
(D) Self-constructed tangible personal
property produced on a routine and
repetitive basis—(1) In general. Selfconstructed tangible personal property
produced by the taxpayer on a routine
and repetitive basis in the ordinary
course of the taxpayer’s trade or
business. Self-constructed tangible
personal property is produced by the
taxpayer on a routine and repetitive
basis in the ordinary course of the
taxpayer’s trade or business when units
of tangible personal property (as defined
in § 1.263A–10(c)) are mass-produced,
i.e., numerous substantially identical
assets are manufactured within a taxable
year using standardized designs and
assembly line techniques, and the
applicable recovery period of the
property determined under section
168(c) is not longer than 3 years. For
purposes of this paragraph, the
applicable recovery period of the assets
will be determined at the end of the
taxable year in which the assets are
placed in service for purposes of § 1.46–
3(d). Subsequent changes to the
applicable recovery period after the
assets are placed in service will not
affect the determination of whether the
assets are produced on a routine and
repetitive basis for purposes of this
paragraph.
(2) Examples. The following examples
illustrate this paragraph (h)(2)(i)(D):
Example 1. Y is a manufacturer of
automobiles. During the taxable year Y
produces numerous substantially identical
dies and molds using standardized designs
and assembly line techniques. The dies and
molds have a 3-year applicable recovery
period for purposes of section 168(c). Y uses
the dies and molds to produce or process
particular automobile components and does
not hold them for sale. The dies and molds
are produced on a routine and repetitive
basis in the ordinary course of Y’s business
for purposes of this paragraph because the
dies and molds are both mass-produced and
have a recovery period of not longer than 3
years.
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Example 2. Z is an electric utility that
regularly manufactures and installs identical
poles that are used in transmitting and
distributing electricity. The poles have a 20year applicable recovery period for purposes
of section 168(c). The poles are not produced
on a routine and repetitive basis in the
ordinary course of Z’s business for purposes
of this paragraph because the poles have an
applicable recovery period that is longer than
3 years.
(h)(2)(ii) through (j) [Reserved]. For
further guidance, see § 1.263A–
1(h)(2)(ii) through (j).
(k) Change in method of accounting—
(1) In general. A change in a taxpayer’s
treatment of mixed service costs to
comply with these temporary
regulations is a change in method of
accounting to which the provisions of
sections 446 and 481 and the
regulations thereunder apply. See
§ 1.263A–7. For a taxpayer’s first taxable
year ending on or after August 2, 2005,
the taxpayer is granted the consent of
the Commissioner to change its method
of accounting to comply with these
temporary regulations, provided the
taxpayer follows the administrative
procedures, as modified by paragraphs
(k)(2) through (4) of this section, issued
under § 1.446–1(e)(3)(ii) for obtaining
the Commissioner’s automatic consent
to a change in accounting method (for
further guidance, for example, see Rev.
Proc. 2002–9 (2002–1 C.B. 327), as
modified and clarified by
Announcement 2002–17 (2002–1 C.B.
561), modified and amplified by Rev.
Proc. 2002–19 (2002–1 C.B. 696), and
amplified, clarified, and modified by
Rev. Proc. 2002-54 (2002–2 C.B. 432),
and § 601.601(d)(2)(ii)(b) of this
chapter). For purposes of Form 3115,
‘‘Application for Change in Accounting
Method,’’ the designated number for the
automatic accounting method change
authorized by this paragraph (k) is ‘‘95.’’
If Form 3115 is revised or renumbered,
any reference in this section to that form
is treated as a reference to the revised
or renumbered form. For the taxpayer’s
second and subsequent taxable years
ending on or after August 2, 2005,
requests to secure the consent of the
Commissioner must be made under the
administrative procedures, as modified
by paragraphs (k)(2) through (4) of this
section, for obtaining the
Commissioner’s advance consent to a
change in accounting method (for
further guidance, for example, see Rev.
Proc. 97–27 (1997–1 C.B. 680), as
modified and amplified by Rev. Proc.
2002–19 (2002–1 C.B. 696), as amplified
and clarified by Rev. Proc. 2002–54
(2002–2 C.B. 432), and
§ 601.601(d)(2)(ii)(b) of this chapter).
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(2) Scope limitations. Any limitations
on obtaining the automatic consent of
the Commissioner do not apply to a
taxpayer seeking to change its method of
accounting to comply with this section
for its first taxable year ending on or
after August 2, 2005.
(3) Audit protection. A taxpayer that
changes its method of accounting in
accordance with this paragraph (k) to
comply with these temporary
regulations does not receive audit
protection if its method of accounting
for mixed service costs is an issue under
consideration at the time the application
is filed with the national office.
(4) Section 481(a) adjustment. A
change in method of accounting to
conform to these temporary regulations
requires a section 481(a) adjustment.
The section 481(a) adjustment period is
two taxable years for a net positive
adjustment for an accounting method
change that is made to conform to these
temporary regulations.
(l) Effective date. This section applies
for taxable years ending on or after
August 2, 2005.
I Par. 4. Section 1.263A–2 is amended
by revising paragraph (b)(2)(i)(D) and
adding paragraphs (e) and (f) to read as
follows:
§ 1.263A–2 Rules relating to property
produced by the taxpayer.
*
*
*
*
*
(b) * * *
(2) * * *
(i) * * *
(D) [Reserved]. For further guidance,
see § 1.263A–2T(b)(2)(i)(D).
*
*
*
*
*
(e) and (f) [Reserved]. For further
guidance, see § 1.263A–2T(e) and (f).
I Par. 5. Section 1.263A–2T is added to
read as follows:
§ 263A–2T Rules relating to property
produced by the taxpayer (temporary).
(a) through (b)(2)(i)(C) [Reserved]. For
further guidance, see § 1.263A–2(a)
through (b)(2)(i)(C).
(D) Self-constructed tangible personal
property produced on a routine and
repetitive basis—(1) In general. Selfconstructed tangible personal property
produced by the taxpayer on a routine
and repetitive basis in the ordinary
course of the taxpayer’s trade or
business. Self-constructed tangible
personal property is produced by the
taxpayer on a routine and repetitive
basis in the ordinary course of the
taxpayer’s trade or business when units
of tangible personal property (as defined
in § 1.263A–10(c)) are mass-produced,
i.e., numerous substantially identical
assets are manufactured within a taxable
year using standardized designs and
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44469
assembly line techniques, and the
applicable recovery period of the
property determined under section
168(c) is not longer than 3 years. For
purposes of this paragraph, the
applicable recovery period of the assets
will be determined at the end of the
taxable year in which the assets are
placed in service for purposes of § 1.46–
3(d). Subsequent changes to the
applicable recovery period after the
assets are placed in service will not
affect the determination of whether the
assets are produced on a routine and
repetitive basis for purposes of this
paragraph.
(2) Examples. The following examples
illustrate this paragraph (D):
Example 1. Y is a manufacturer of
automobiles. During the taxable year Y
produces numerous substantially identical
dies and molds using standardized designs
and assembly line techniques. The dies and
molds have a 3-year applicable recovery
period for purposes of section 168(c). Y uses
the dies and molds to produce or process
particular automobile components and does
not hold them for sale. The dies and molds
are produced on a routine and repetitive
basis in the ordinary course of Y’s business
for purposes of this paragraph because the
dies and molds are both mass-produced and
have an applicable recovery period of not
longer than 3 years.
Example 2. Z is an electric utility that
regularly manufactures and installs identical
poles that are used in transmitting and
distributing electricity. The poles have a 20year applicable recovery period for purposes
of section 168(a). The poles are not produced
on a routine and repetitive basis in the
ordinary course of Z’s business for purposes
of this paragraph because the poles have an
applicable recovery period that is longer than
3 years.
(b)(2)(ii) through (d) [Reserved]. For
further guidance, see § 1.263A–
2(b)(2)(ii) though (d).
(e) Change in method of accounting—
(1) In general. A change in a taxpayer’s
treatment of additional section 263A
costs to comply with these temporary
regulations is a change in method of
accounting to which the provisions of
sections 446 and 481 and the
regulations thereunder apply. See
§ 1.263A–7. For a taxpayer’s first taxable
year ending on or after August 2, 2005,
the taxpayer is granted the consent of
the Commissioner to change its method
of accounting to comply with these
temporary regulations, provided the
taxpayer follows the administrative
procedures, as modified by paragraphs
(e)(2) through (4) of this section, issued
under § 1.446–1(e)(3)(ii) for obtaining
the Commissioner’s automatic consent
to a change in accounting method (for
further guidance, for example, see Rev.
Proc. 2002–9 (2002–1 C.B. 327), as
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modified and clarified by
Announcement 2002–17 (2002–1 C.B.
561), modified and amplified by Rev.
Proc. 2002–19 (2002–1 C.B. 696), and
amplified, clarified, and modified by
Rev. Proc. 2002-54 (2002–2 C.B. 432),
and § 601.601(d)(2)(ii)(b) of this
chapter). For purposes of Form 3115,
‘‘Application for Change in Accounting
Method,’’ the designated number for the
automatic accounting method change
authorized by this paragraph (e) is ‘‘95.’’
If Form 3115 is revised or renumbered,
any reference in this section to that form
is treated as a reference to the revised
or renumbered form. For the taxpayer’s
second and subsequent taxable years
ending on or after August 2, 2005,
requests to secure the consent of the
Commissioner must be made under the
administrative procedures, as modified
by paragraphs (e)(2) through (4) of this
section, for obtaining the
Commissioner’s advance consent to a
change in accounting method (for
further guidance, for example, see Rev.
Proc. 97–27 (1997–1 C.B. 680), as
modified and amplified by Rev. Proc.
2002–19 (2002–1 C.B. 696), as amplified
and clarified by Rev. Proc. 2002–54
(2002–2 C.B. 432), and
§ 601.601(d)92)(ii)(b) of this chapter).
(2) Scope limitations. Any limitations
on obtaining the automatic consent of
the Commissioner do not apply to a
taxpayer seeking to change its method of
accounting to comply with this section
for its first taxable year ending on or
after August 2, 2005.
(3) Audit protection. A taxpayer that
changes its method of accounting in
accordance with this paragraph (e) to
comply with these temporary
regulations does not receive audit
protection if its method of accounting
for additional section 263A costs is an
issue under consideration at the time
the application is filed with the national
office.
(4) Section 481(a) adjustment. A
change in method of accounting to
conform to these temporary regulations
requires a section 481(a) adjustment.
The section 481(a) adjustment period is
two taxable years for a net positive
adjustment for an accounting method
change that is made to conform to these
temporary regulations.
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(f) Effective date. This section applies
for taxable years ending on or after
August 2, 2005.
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
Approved: July 14, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the
Treasury.
[FR Doc. 05–15363 Filed 8–2–05; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 100 and Part 165
[CGD13–05–029]
RIN 1625–AA08 and 1625–AA00
Special Local Regulation (SLR) and
Safety Zone Regulations: Seattle
Seafair Unlimited Hydroplane Race and
Blue Angels Air Show Performance
2005, Lake Washington, WA
Coast Guard, DHS.
Notice of enforcement.
AGENCY:
ACTION:
SUMMARY: The Captain of the Port
(COTP) Puget Sound will begin
enforcing the Seattle Seafair Unlimited
Hydroplane Race Special Local
Regulation (SLR) and Seafair Blue
Angels Air Show Performance Safety
Zone Regulation. This year’s events will
be held on Thursday, August 4, 2005,
through Sunday, August 7, 2005.
DATES: The regulations found in 33 CFR
100.1301 and in 33 CFR 165.1319 will
be enforced from 8 a.m. to 8 p.m. Pacific
daylight time from August 4, 2005 to
August 7, 2005.
FOR FURTHER INFORMATION CONTACT:
Lieutenant Junior Grade Jessica Hagen,
c/o Captain of the Port Puget Sound,
Coast Guard Sector Seattle, 1519
Alaskan Way South, Seattle WA 98134
at (206) 217–6232 to obtain information
concerning enforcement of this rule.
SUPPLEMENTARY INFORMATION: On July 2,
2001, the Coast Guard published a final
rule (66 FR 34822) modifying the
regulations in 33 CFR 100.1301, for the
safe execution of the Seattle Seafair
Unlimited Hydroplane races on the
waters of Lake Washington. On June 24,
2004, the Coast Guard published a final
rule (69 FR 35250) in 33 CFR 165.1319,
to safeguard participants and spectators
from the safety hazards associated with
the Seattle Seafair Blue Angels Air
Show Performance.
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The Special Local Regulation (33 CFR
100.1301) provides for a regulated area
to protect spectators while providing
unobstructed vessel traffic lanes to
ensure timely arrival of emergency
response craft. Movements are regulated
for all vessels in the area described
unless otherwise regulated by the COTP
or his designee. The COTP may be
assisted by other Federal, State, or local
law enforcement agencies in enforcing
this SLR.
The safety zone regulation (33 CFR
165.1319) establishes requirements for
all vessels to obtain permission of the
COTP or the COTP’s designated
representative to enter, move within, or
exit the safety zone when it is enforced.
Entry into this safety zone is prohibited
unless otherwise exempted or excluded
under 33 CFR 165.1319 or unless
authorized by the COTP or his designee.
The Captain of the Port Puget Sound
will begin enforcing the Seattle Seafair
Unlimited Hydroplane Race Special
Local Regulation (SLR) as per 33 CFR
100.1301, and the Seafair Blue Angels
Air Show Performance Safety Zone as
per 33 CFR 165.1319, on Thursday,
August 4, 2005 at 8 a.m. Pacific daylight
time. These regulations will be enforced
until Sunday, August 7, 2005 at 8 p.m.
Pacific daylight time. All persons and
vessels are authorized to enter, move
within, and exit the regulated area or
safety zone on or after Sunday, August
7, 2005 at 8 p.m. Pacific daylight time
unless a new notice of enforcement is
issued before then.
Dated: July 22, 2005.
Stephen P. Metruck,
Captain, U.S. Coast Guard, Captain of the
Port, Puget Sound.
[FR Doc. 05–15309 Filed 8–2–05; 8:45 am]
BILLING CODE 4910–15–P
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Parts 51 and 81
[FRL–7947–4]
Identification of Ozone Areas for
Which the 1-Hour Standard Has Been
Revoked and Technical Correction to
Phase 1 Rule
Environmental Protection
Agency (EPA).
ACTION: Final rule.
AGENCY:
SUMMARY: On April 30, 2004, EPA
published the first phase of its final rule
to implement the 8-Hour Ozone
National Ambient Air Quality Standard
(NAAQS) (Phase 1 Rule). At that same
time, EPA also published 8-hour ozone
E:\FR\FM\03AUR1.SGM
03AUR1
]]>Agencies
[Federal Register Volume 70, Number 148 (Wednesday, August 3, 2005)]
[Rules and Regulations]
[Pages 44467-44470]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-15363]
[[Page 44467]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9217]
RIN 1545-BE61
Guidance Regarding the Simplified Service Cost Method and the
Simplified Production Method
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final and temporary regulations
relating to the capitalization of costs under the simplified service
cost method of the Income Tax Regulations and the simplified production
method. The regulations affect taxpayers that use the simplified
service cost method or the simplified production method for self-
constructed assets that are produced on a routine and repetitive basis
in the ordinary course of their businesses. The text of the temporary
regulations also serves as the text of the proposed regulations set
forth in the notice of proposed rulemaking on this subject in the
Proposed Rules section in this issue of the Federal Register. The
portions of this rule that are final regulations provide necessary
cross-references to the temporary regulations.
DATES: Effective Date: These regulations are effective August 2, 2005.
Applicability Date: These regulations apply to taxable years ending
on or after August 2, 2005. See Sec. Sec. 1.263A-1T(l) and 1.263A-
2T(f).
FOR FURTHER INFORMATION CONTACT: Scott Rabinowitz, (202) 622-4970 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Under section 263A of the Internal Revenue Code (Code), producers
of real or tangible personal property and resellers of real or personal
property must capitalize the direct costs and a proper share of the
indirect costs of such property. Indirect costs include indirect labor
costs, overhead, and service costs. Service costs are indirect costs
that can be identified specifically with an administrative or support
department. Service costs consist of capitalizable service costs,
deductible service costs, and mixed service costs. Capitalizable
service costs are service costs that directly benefit, or are incurred
by reason of, a production or resale activity. Deductible service costs
are service costs that do not directly benefit, or are not incurred by
reason of, a production or resale activity. Mixed service costs are
service costs that are partially allocable to production or resale
activities and partially allocable to non-production or non-resale
activities.
Although section 263A requires capitalization of indirect costs,
the statute generally does not set forth methods for allocating
indirect costs, including mixed service costs. Instead, in accordance
with the legislative history of the section, the regulations under
section 263A generally provide that indirect costs are to be allocated
to property using detailed or specific (facts-and-circumstances) cost
allocation methods, including a specific identification method, the
standard cost method, and methods using burden rates. The regulations
further provide that allocations of mixed service costs are to be made
on the basis of a factor or relationship that reasonably relates such
costs with the benefit provided. To alleviate the administrative
burdens of using these detailed or specific methods, the Treasury
Department and the Internal Revenue Service developed simplified
methods. In particular, the simplified production method provided by
Sec. 1.263A-2(b) determines aggregate amounts of additional section
263A costs allocable to produced ``eligible property.'' Additional
section 263A costs are those costs, other than interest, that were not
capitalized under a taxpayer's method of accounting immediately prior
to the effective date of section 263A, but that are required to be
capitalized under section 263A. In addition, the final regulations
provide a simplified method, the simplified service cost method
provided by Sec. 1.263A-1(h), for determining capitalizable mixed
service costs incurred during the taxable year with respect to
``eligible property.''
On March 30, 1987, temporary regulations under section 263A were
published in the Federal Register (TD 8131, 1987-1 C.B. 98, [52 FR
10052]). The temporary regulations limited the availability of the
simplified production method and the simplified service cost method to
two types of ``eligible property'': Stock in trade or other property
properly includible in the inventory of the taxpayer and non-inventory
property held by a taxpayer primarily for sale to customers in the
ordinary course of the taxpayer's trade or business. The preamble to
the temporary regulations indicates that this limitation was prescribed
because the simplified production method is not appropriate to account
for the casual or occasional production of property (i.e., property
that is not mass-produced on a repetitive and routine basis and that
does not have a high ``turnover'' rate.) Similarly, the simplified
service cost method is not appropriate to account for the casual or
occasional production of property.
On August 22, 1988, the IRS published Notice 88-86 (1988-2 C.B.
401). Notice 88-86 states that forthcoming regulations will expand the
categories of property eligible for the simplified production method
and simplified service cost method to other types of property that
share characteristics that are appropriate for application of the
methods. In particular, the notice indicates that the regulations will
provide that the simplified production method and the simplified
service cost method are available to (1) self-constructed assets
substantially identical in nature to, and produced in the same manner
as, inventory property or other property held primarily for sale to
customers in the ordinary course of the taxpayer's trade or business,
and (2) self-constructed assets produced by the taxpayer on a routine
and repetitive basis in the ordinary course of the taxpayer's
production activities.
On August 9, 1993, final regulations under section 263A were
published in the Federal Register (TD 8482, 1993-2 C.B. 77, [58 FR
42198]). The final regulations follow Notice 88-86 and expand the
categories of eligible property for the simplified production method
and the simplified service cost method.
Notice 2003-36 (2003-1 C.B. 992), as modified by Notice 2003-59
(2003-59 C.B. 429), indicates that the Treasury Department and the IRS
are aware that uncertainty exists as to what types of property
constitute ``eligible property'' under Sec. Sec. 1.263A-1(h)(2)(i)(D)
and 1.263A-2(b)(2)(i)(D) for purposes of the simplified service cost
method and the simplified production method. These sections provide
that self-constructed assets produced by a taxpayer on a routine and
repetitive basis in the ordinary course of the taxpayer's trade or
business are ``eligible property.''
To provide guidance as to what types of property constitute
``eligible property'' under the final regulations, Rev. Rul. 2005-53,
2005-35 I.R.B. ---- (dated August 29, 2005), holds that a taxpayer's
production of property will be considered ``routine and repetitive''
for purposes of Sec. Sec. 1.263A-1(h)(2)(i)(D) and 1.263A-
2(b)(2)(i)(D) only if the property is mass-produced (i.e., numerous
identical goods are manufactured using standardized
[[Page 44468]]
designs and assembly line techniques) or the produced property has a
high degree of turnover (i.e., the costs of production are recovered
over a relatively short amount of time).
Explanation of Provisions
Upon further consideration of the simplified service cost method
and the simplified production method under Sec. Sec. 1.263A-
1(h)(2)(i)(D) and 1.263A-2(b)(2)(i)(D), the Treasury Department and the
IRS believe that, to minimize the distortion of income that may arise
from the use of those methods, a taxpayer's production of property is
considered ``routine and repetitive'' for purposes of those sections
only if the property is mass-produced and has a high degree of
turnover. Accordingly, the temporary regulations provide that self-
constructed property is considered produced on a routine and repetitive
basis for purposes of the simplified service cost method and the
simplified production method only if numerous substantially identical
units of tangible personal property are produced within a taxable year
using standardized designs and assembly line techniques and the
applicable recovery period of the assets under Sec. 168(c) is not
longer than 3 years.
A change in a taxpayer's treatment of mixed service costs or
additional section 263A costs to comply with these temporary
regulations is a change in method of accounting to which the provisions
of sections 446 and 481 and the regulations thereunder apply. For the
taxpayer's first taxable year ending on or after August 2, 2005, the
taxpayer is granted the consent of the Commissioner to change its
method of accounting to comply with these temporary regulations,
provided the taxpayer follows the applicable administrative procedures
for obtaining the Commissioner's automatic consent to a change in
accounting method (for further guidance, for example, see Rev. Proc.
2002-9 (2002-1 C.B. 327), as modified and clarified by Announcement
2002-17 (2002-1 C.B. 561), modified and amplified by Rev. Proc. 2002-19
(2002-1 C.B. 696), and amplified, clarified, and modified by Rev. Proc.
2002-54 (2002-2 C.B. 432)). For purposes of Form 3115, ``Application
for Change in Accounting Method'', the designated number for the
automatic accounting method change authorized by this regulation is
``95.'' If Form 3115 is revised or renumbered, any reference in this
section to that form is treated as a reference to the revised or
renumbered form. For the taxpayer's second and subsequent taxable years
ending on or after August 2, 2005, requests to secure the consent of
the Commissioner must be made under the administrative procedures for
obtaining the Commissioner's advance consent to a change in accounting
method (for further guidance, for example, see Rev. Proc. 97-27 (1997-1
C.B. 680), as modified and amplified by Rev. Proc. 2002-19 (2002-1 C.B.
696), as amplified and clarified by Rev. Proc. 2002-54 (2002-2 C.B.
432)). However, notwithstanding section 5.04(1) of Rev. Proc. 2002-9
and section 5.02(3)(a) of Rev. Proc. 97-27, the section 481(a)
adjustment period is two taxable years for a net positive adjustment
for an accounting method change that is made to conform to these
temporary regulations.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. Please refer to
the cross-reference notice of proposed rulemaking published elsewhere
in this issue of the Federal Register for applicability of the
Regulatory Flexibility Act (5 U.S.C. chapter 6). Pursuant to section
7805(f) of the Code, these temporary regulations will be submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
Drafting Information
The principal author of these regulations is Scott Rabinowitz of
the Office of Associate Chief Counsel (Income Tax and Accounting).
However, other personnel from the IRS and the Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.263A-1 is amended by revising paragraph (h)(2)(i)(D)
and adding paragraphs (k) and (l) to read as follows:
Sec. 1.263A-1 Uniform capitalization of costs.
* * * * *
(h) * * *
(2) * * *
(i) * * *
(D) [Reserved]. For further guidance, see Sec. 1.263A-
1T(h)(2)(i)(D).
* * * * *
(k) and (l) [Reserved]. For further guidance, see Sec. 1.263A-
1T(k) and (l).
0
Par 3. Section 1.263A-1T is added to read as follows:
Sec. 1.263A-1T Uniform capitalization of costs (temporary).
(a) through (h)(2)(i)(C) [Reserved]. For further guidance, see
Sec. 1.263A-1(a) through (h)(2)(i)(C).
(D) Self-constructed tangible personal property produced on a
routine and repetitive basis--(1) In general. Self-constructed tangible
personal property produced by the taxpayer on a routine and repetitive
basis in the ordinary course of the taxpayer's trade or business. Self-
constructed tangible personal property is produced by the taxpayer on a
routine and repetitive basis in the ordinary course of the taxpayer's
trade or business when units of tangible personal property (as defined
in Sec. 1.263A-10(c)) are mass-produced, i.e., numerous substantially
identical assets are manufactured within a taxable year using
standardized designs and assembly line techniques, and the applicable
recovery period of the property determined under section 168(c) is not
longer than 3 years. For purposes of this paragraph, the applicable
recovery period of the assets will be determined at the end of the
taxable year in which the assets are placed in service for purposes of
Sec. 1.46-3(d). Subsequent changes to the applicable recovery period
after the assets are placed in service will not affect the
determination of whether the assets are produced on a routine and
repetitive basis for purposes of this paragraph.
(2) Examples. The following examples illustrate this paragraph
(h)(2)(i)(D):
Example 1. Y is a manufacturer of automobiles. During the
taxable year Y produces numerous substantially identical dies and
molds using standardized designs and assembly line techniques. The
dies and molds have a 3-year applicable recovery period for purposes
of section 168(c). Y uses the dies and molds to produce or process
particular automobile components and does not hold them for sale.
The dies and molds are produced on a routine and repetitive basis in
the ordinary course of Y's business for purposes of this paragraph
because the dies and molds are both mass-produced and have a
recovery period of not longer than 3 years.
[[Page 44469]]
Example 2. Z is an electric utility that regularly manufactures
and installs identical poles that are used in transmitting and
distributing electricity. The poles have a 20-year applicable
recovery period for purposes of section 168(c). The poles are not
produced on a routine and repetitive basis in the ordinary course of
Z's business for purposes of this paragraph because the poles have
an applicable recovery period that is longer than 3 years.
(h)(2)(ii) through (j) [Reserved]. For further guidance, see Sec.
1.263A-1(h)(2)(ii) through (j).
(k) Change in method of accounting--(1) In general. A change in a
taxpayer's treatment of mixed service costs to comply with these
temporary regulations is a change in method of accounting to which the
provisions of sections 446 and 481 and the regulations thereunder
apply. See Sec. 1.263A-7. For a taxpayer's first taxable year ending
on or after August 2, 2005, the taxpayer is granted the consent of the
Commissioner to change its method of accounting to comply with these
temporary regulations, provided the taxpayer follows the administrative
procedures, as modified by paragraphs (k)(2) through (4) of this
section, issued under Sec. 1.446-1(e)(3)(ii) for obtaining the
Commissioner's automatic consent to a change in accounting method (for
further guidance, for example, see Rev. Proc. 2002-9 (2002-1 C.B. 327),
as modified and clarified by Announcement 2002-17 (2002-1 C.B. 561),
modified and amplified by Rev. Proc. 2002-19 (2002-1 C.B. 696), and
amplified, clarified, and modified by Rev. Proc. 2002-54 (2002-2 C.B.
432), and Sec. 601.601(d)(2)(ii)(b) of this chapter). For purposes of
Form 3115, ``Application for Change in Accounting Method,'' the
designated number for the automatic accounting method change authorized
by this paragraph (k) is ``95.'' If Form 3115 is revised or renumbered,
any reference in this section to that form is treated as a reference to
the revised or renumbered form. For the taxpayer's second and
subsequent taxable years ending on or after August 2, 2005, requests to
secure the consent of the Commissioner must be made under the
administrative procedures, as modified by paragraphs (k)(2) through (4)
of this section, for obtaining the Commissioner's advance consent to a
change in accounting method (for further guidance, for example, see
Rev. Proc. 97-27 (1997-1 C.B. 680), as modified and amplified by Rev.
Proc. 2002-19 (2002-1 C.B. 696), as amplified and clarified by Rev.
Proc. 2002-54 (2002-2 C.B. 432), and Sec. 601.601(d)(2)(ii)(b) of this
chapter).
(2) Scope limitations. Any limitations on obtaining the automatic
consent of the Commissioner do not apply to a taxpayer seeking to
change its method of accounting to comply with this section for its
first taxable year ending on or after August 2, 2005.
(3) Audit protection. A taxpayer that changes its method of
accounting in accordance with this paragraph (k) to comply with these
temporary regulations does not receive audit protection if its method
of accounting for mixed service costs is an issue under consideration
at the time the application is filed with the national office.
(4) Section 481(a) adjustment. A change in method of accounting to
conform to these temporary regulations requires a section 481(a)
adjustment. The section 481(a) adjustment period is two taxable years
for a net positive adjustment for an accounting method change that is
made to conform to these temporary regulations.
(l) Effective date. This section applies for taxable years ending
on or after August 2, 2005.
0
Par. 4. Section 1.263A-2 is amended by revising paragraph (b)(2)(i)(D)
and adding paragraphs (e) and (f) to read as follows:
Sec. 1.263A-2 Rules relating to property produced by the taxpayer.
* * * * *
(b) * * *
(2) * * *
(i) * * *
(D) [Reserved]. For further guidance, see Sec. 1.263A-
2T(b)(2)(i)(D).
* * * * *
(e) and (f) [Reserved]. For further guidance, see Sec. 1.263A-
2T(e) and (f).
0
Par. 5. Section 1.263A-2T is added to read as follows:
Sec. 263A-2T Rules relating to property produced by the taxpayer
(temporary).
(a) through (b)(2)(i)(C) [Reserved]. For further guidance, see
Sec. 1.263A-2(a) through (b)(2)(i)(C).
(D) Self-constructed tangible personal property produced on a
routine and repetitive basis--(1) In general. Self-constructed tangible
personal property produced by the taxpayer on a routine and repetitive
basis in the ordinary course of the taxpayer's trade or business. Self-
constructed tangible personal property is produced by the taxpayer on a
routine and repetitive basis in the ordinary course of the taxpayer's
trade or business when units of tangible personal property (as defined
in Sec. 1.263A-10(c)) are mass-produced, i.e., numerous substantially
identical assets are manufactured within a taxable year using
standardized designs and assembly line techniques, and the applicable
recovery period of the property determined under section 168(c) is not
longer than 3 years. For purposes of this paragraph, the applicable
recovery period of the assets will be determined at the end of the
taxable year in which the assets are placed in service for purposes of
Sec. 1.46-3(d). Subsequent changes to the applicable recovery period
after the assets are placed in service will not affect the
determination of whether the assets are produced on a routine and
repetitive basis for purposes of this paragraph.
(2) Examples. The following examples illustrate this paragraph (D):
Example 1. Y is a manufacturer of automobiles. During the
taxable year Y produces numerous substantially identical dies and
molds using standardized designs and assembly line techniques. The
dies and molds have a 3-year applicable recovery period for purposes
of section 168(c). Y uses the dies and molds to produce or process
particular automobile components and does not hold them for sale.
The dies and molds are produced on a routine and repetitive basis in
the ordinary course of Y's business for purposes of this paragraph
because the dies and molds are both mass-produced and have an
applicable recovery period of not longer than 3 years.
Example 2. Z is an electric utility that regularly manufactures
and installs identical poles that are used in transmitting and
distributing electricity. The poles have a 20-year applicable
recovery period for purposes of section 168(a). The poles are not
produced on a routine and repetitive basis in the ordinary course of
Z's business for purposes of this paragraph because the poles have
an applicable recovery period that is longer than 3 years.
(b)(2)(ii) through (d) [Reserved]. For further guidance, see Sec.
1.263A-2(b)(2)(ii) though (d).
(e) Change in method of accounting--(1) In general. A change in a
taxpayer's treatment of additional section 263A costs to comply with
these temporary regulations is a change in method of accounting to
which the provisions of sections 446 and 481 and the regulations
thereunder apply. See Sec. 1.263A-7. For a taxpayer's first taxable
year ending on or after August 2, 2005, the taxpayer is granted the
consent of the Commissioner to change its method of accounting to
comply with these temporary regulations, provided the taxpayer follows
the administrative procedures, as modified by paragraphs (e)(2) through
(4) of this section, issued under Sec. 1.446-1(e)(3)(ii) for obtaining
the Commissioner's automatic consent to a change in accounting method
(for further guidance, for example, see Rev. Proc. 2002-9 (2002-1 C.B.
327), as
[[Page 44470]]
modified and clarified by Announcement 2002-17 (2002-1 C.B. 561),
modified and amplified by Rev. Proc. 2002-19 (2002-1 C.B. 696), and
amplified, clarified, and modified by Rev. Proc. 2002-54 (2002-2 C.B.
432), and Sec. 601.601(d)(2)(ii)( b) of this chapter). For purposes of
Form 3115, ``Application for Change in Accounting Method,'' the
designated number for the automatic accounting method change authorized
by this paragraph (e) is ``95.'' If Form 3115 is revised or renumbered,
any reference in this section to that form is treated as a reference to
the revised or renumbered form. For the taxpayer's second and
subsequent taxable years ending on or after August 2, 2005, requests to
secure the consent of the Commissioner must be made under the
administrative procedures, as modified by paragraphs (e)(2) through (4)
of this section, for obtaining the Commissioner's advance consent to a
change in accounting method (for further guidance, for example, see
Rev. Proc. 97-27 (1997-1 C.B. 680), as modified and amplified by Rev.
Proc. 2002-19 (2002-1 C.B. 696), as amplified and clarified by Rev.
Proc. 2002-54 (2002-2 C.B. 432), and Sec. 601.601(d)92)(ii)(b) of this
chapter).
(2) Scope limitations. Any limitations on obtaining the automatic
consent of the Commissioner do not apply to a taxpayer seeking to
change its method of accounting to comply with this section for its
first taxable year ending on or after August 2, 2005.
(3) Audit protection. A taxpayer that changes its method of
accounting in accordance with this paragraph (e) to comply with these
temporary regulations does not receive audit protection if its method
of accounting for additional section 263A costs is an issue under
consideration at the time the application is filed with the national
office.
(4) Section 481(a) adjustment. A change in method of accounting to
conform to these temporary regulations requires a section 481(a)
adjustment. The section 481(a) adjustment period is two taxable years
for a net positive adjustment for an accounting method change that is
made to conform to these temporary regulations.
(f) Effective date. This section applies for taxable years ending
on or after August 2, 2005.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: July 14, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 05-15363 Filed 8-2-05; 8:45 am]
BILLING CODE 4830-01-P
