[Federal Register Volume 59, Number 150 (Friday, August 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19079]
[[Page Unknown]]
[Federal Register: August 5, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8559]
RIN 1545-AQ88
Capitalization and Inclusion in Inventory of Certain Costs
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final and temporary regulations under
section 263A of the Internal Revenue Code of 1986 relating to
accounting for costs incurred in producing property and acquiring
property for resale. Section 263A was enacted as part of the Tax Reform
Act of 1986. Changes to the applicable law were made by the Omnibus
Budget Reconciliation Act of 1987, the Technical and Miscellaneous
Revenue Act of 1988, and the Omnibus Budget Reconciliation Act of 1989.
These final regulations primarily affect taxpayers subject to section
263A that acquire property for resale.
EFFECTIVE DATE: August 5, 1994.
FOR FURTHER INFORMATION CONTACT: Rosemary DeLeone or Harry-Todd Astrov
of the Office of the Assistant Chief Counsel, Income Tax and
Accounting, (202) 622-4970 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On March 30, 1987, and August 7, 1987, temporary regulations under
section 263A were published in the Federal Register (TD 8131, 52 FR
10052 and TD 8148, 52 FR 29375). A public hearing was held on December
7, 1987. On August 9, 1993, final regulations under section 263A were
published in the Federal Register (TD 8482, 58 FR 42198). In addition,
a notice of proposed rulemaking was published on August 9, 1993, (58 FR
42263) regarding certain provisions that were reserved in the final
regulations. A public hearing was held on November 30, 1993, on these
provisions. After consideration of the public comments regarding the
proposed regulations, the regulations are adopted as revised by this
Treasury decision.
Explanation of Statutory Provisions
Section 263A (the uniform capitalization rules) was enacted as part
of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 1986-3
C.B. (Vol. 1) (the 1986 Act). The statute was amended as part of the
Omnibus Budget Reconciliation Act of 1987, Pub. L. 100-203, 101 Stat.
1330, 1987-3 C.B. 1 (the 1987 Act), the Technical and Miscellaneous
Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3342, 1988-3 C.B. 1
(the 1988 Act), and the Omnibus Budget Reconciliation Act of 1989, Pub.
L. 101-239, 103 Stat. 2106 (the 1989 Act), 1990-1 C.B. 210.
Section 263A provides a uniform set of rules that govern the
capitalization of direct and indirect costs associated with property
produced and property acquired for resale. Specifically, section 263A
requires taxpayers to capitalize the direct and indirect costs properly
allocable to real property and tangible personal property that they
produce. Section 263A also requires taxpayers to capitalize the direct
and indirect costs (including purchasing, handling, and storage costs)
properly allocable to real property and personal property acquired for
resale.
The final regulations under section 263A that were published on
August 9, 1993, generally require handling costs to be capitalized.
Handling costs include costs attributable to processing, assembling,
repackaging, transporting, and other similar activities, provided these
activities do not come within the meaning of the term ``produce'' as
defined in Sec. 1.263A-2(a)(1). However, the final regulations under
section 263A also provide that certain handling costs are not required
to be capitalized. For instance, handling costs incurred at a retail
sales facility with respect to property sold to retail customers at the
facility are not required to be capitalized. In addition, handling
costs incurred at a dual-function storage facility with respect to
property sold to customers from the facility are not required to be
capitalized to the extent that the costs are incurred with respect to
property sold in on-site sales.
The final regulations under section 263A that were published on
August 9, 1993, reserve several provisions previously contained in the
temporary regulations relating to certain other costs that were not
considered handling costs. In particular, the regulations reserve
provisions relating to distribution costs, custom-order delivery costs,
and repackaging costs. After publishing a notice of proposed rulemaking
and considering public comments, these final regulations provide rules
concerning such costs. In addition, these final regulations provide
rules that permit the District Director to require appropriate
adjustments to the valuation of inventories and other property subject
to section 263A if a transfer of property is made to another person for
a principal purpose of avoiding the application of section 263A.
Public Comments
The Scope of Distribution Costs
The proposed regulations provide that distribution costs are not
required to be capitalized. The proposed regulations define
distribution costs as any transportation costs incurred outside a
storage facility in delivering goods to an unrelated customer. For this
purpose, the proposed regulations state that any costs incurred on a
loading dock are treated as incurred outside a storage facility.
Several commentators argued that, in addition to transportation
costs incurred outside a storage facility, distribution costs should
also include all costs (i.e., labor, equipment, and occupancy costs)
incurred after a sales order has been received, regardless of whether
these costs are incurred inside or outside a storage facility. They
stated that the costs of retrieving the goods and readying them for
shipment are more in the nature of deductible selling and distribution
costs and do not relate to the production, acquisition, or holding of
property.
The preamble to the proposed regulations cites the Blue Book to the
1986 Act which states that deductible ``distribution expenses are
intended to include only external distribution costs, that is, those
costs incurred in transporting goods from the taxpayer's warehouse or
retail outlet to the customer, or to the customer's agent, a common
carrier, or some other intermediary. Distribution expenses do not
include costs of moving inventory from a taxpayer's warehouse to its
retail store or other internal transportation costs.'' Joint Committee
on Taxation Staff, General Explanation of the Tax Reform Act of 1986,
99th Cong., JCS-10-87, 510 n.61. Commentators contended that this
reference was taken out of context and suggested that it should be used
to define the nature of an activity (e.g., shipment to a customer vs.
internal transfers) rather than the location of an activity (e.g.,
inside an off-site storage facility vs. the loading dock).
These final regulations retain the definition of distribution costs
contained in the proposed regulations. The Service and Treasury
continue to believe that this definition of distribution costs provides
for a better matching of income and related expenses because gross
income is not typically recognized from the sale of an item when an
order is placed, but rather when the item is shipped, delivered, or
accepted, or when title to the item passes to the purchaser. Since
costs incurred inside a storage facility are typically incurred prior
to an item being shipped, delivered, or accepted, or when title passes,
these costs should be capitalized until income is recognized.
Furthermore, the Conference Report to the 1986 Act specifically
states that ``processing, assembly, repackaging, and similar costs,
including labor costs attributable to unloading goods (but not
including labor costs attributable to loading of goods for final
shipment to customers, or labor at a retail facility)'' should be
capitalized. H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. II-306
(1986), 1986-3 (Vol. 4) C.B. 306. Thus, because Congress intended that
costs incurred prior to loading goods for shipment be capitalized,
distribution activities should not be construed to begin any earlier
than at the loading dock.
Pick and Pack Costs and Repackaging Costs
Several commentators have expressed concern that the definition of
distribution costs contained in the proposed regulations may result in
some taxpayers abandoning the use of the simplified resale method. In
response, these final regulations except ``pick and pack'' costs from
the scope of capitalizable handling costs incurred inside a storage
facility. These final regulations define pick and pack costs as those
costs incurred inside a storage facility in preparing specific goods
for imminent shipment to a particular customer after the customer has
ordered those goods. Examples of pick and pack costs include costs
incurred to move specific goods from a storage location in preparation
for shipment to the customer, pack or repack those goods for shipment
to the customer, and stage those goods for shipment to the customer.
Pick and pack costs, however, do not include occupancy costs, such
as rent, depreciation, insurance, taxes, utilities, and maintenance.
The Service and Treasury believe that the exclusion of these costs from
the scope of pick and pack costs is consistent with Congressional
intent that all off-site storage and warehousing costs be capitalized.
See H. R. Conf. Rep. No. 841, 99th Cong., 2d Sess. II-306 (1986), 1986-
3 (Vol. 4) C.B. 306. Furthermore, this position is supported by the
Conference Report to the 1986 Act. In a footnote to the Conference
Report the conferees state that ``[o]ffsite storage and warehousing
costs generally include the cost of a facility whose primary function
is the storage or warehousing of goods.'' H. R. Conf. Rep. No. 841,
99th Cong., 2d Sess. II-306 (1986), 1986-3 (Vol. 4) C.B. 306. Thus,
because the primary function of an off-site storage facility is the
storage or warehousing of goods, all occupancy costs incurred at an
off-site storage facility must be capitalized.
Because the above rule for pick and pack costs essentially replaces
the exception for repackaging costs contained in the proposed
regulations, the separate exception for repackaging costs is
unnecessary and has been eliminated.
Costs of Delivering Custom-Ordered Items
The proposed regulations provide that, notwithstanding the general
requirement that costs incurred in transporting goods from a taxpayer's
storage facility to its retail sales facility are required to be
capitalized, costs incurred outside a storage facility in delivering
custom-ordered items to a retail sales facility are not required to be
capitalized. For this purpose, the proposed regulations provide that
any costs incurred on a loading dock are treated as incurred outside a
storage facility. The preamble to the proposed regulations also states
that the Service is considering eliminating this exception altogether.
Commentators contended that the custom-order exception should not
be eliminated because these delivery costs are more appropriately
characterized as costs incurred to ship goods directly to a customer
rather than as costs incurred to internally move inventory. In
addition, commentators asserted that the custom-order exception should
not be limited to costs incurred outside a storage facility in
delivering custom-ordered items to a retail sales facility. These
commentators believe that all costs incurred in delivering custom-
ordered items to a retail sales facility should be deductible,
regardless of whether they are incurred inside or outside a storage
facility.
These final regulations retain the custom-order exception. The
Service and Treasury believe that limiting this exception to costs
incurred outside a storage facility in delivering custom-ordered items
to a retail sales facility provides for a better matching of income and
related expenses.
Costs of Transporting Goods to a Related Person
The proposed regulations provide that distribution costs do not
include costs incurred by a taxpayer in delivering goods to a related
person. The proposed regulations further provide that when a taxpayer
sells goods to a related person, the costs of transporting the goods
are included in determining the basis of the goods that are sold, and
hence in determining the resulting gain or loss from such sale, for all
purposes of the Internal Revenue Code and the regulations thereunder.
For purposes of this provision, the proposed regulation states that
persons are related if they are described in section 267(b) or section
707(b).
One commentator argued that the requirement to capitalize costs
incurred by a taxpayer in delivering goods to a related person is
contrary to the purported purpose of section 263A and can result in the
permanent disallowance of the capitalized costs. The commentator noted
that if the capitalization of costs incurred in transporting property
between related parties produces or increases a loss, the loss
disallowance rules in sections 267(a)(1) and 707(b)(1) may in some
instances permanently disallow the loss. Thus, the commentator argued
that the requirement to capitalize costs incurred by a taxpayer in
delivering goods to a related person is unfair because it results in
harsher treatment than the treatment of internal transportation costs
carried on within a single entity.
These final regulations retain the rule contained in the proposed
regulations. The Service and Treasury continue to believe that the cost
of transporting goods between related parties is properly treated as a
capitalizable handling cost for all purposes (i.e., not just for timing
purposes, but also for character purposes). In addition, the very
limited potential for loss disallowance under sections 267(a)(1) and
707(b)(1) could result from any one of a number of properly
capitalizable costs (e.g., storage costs, production costs, etc.) other
than handling costs associated with transporting goods to a related
party. Moreover, the fact that sections 267(a)(1) and 707(b)(1) will
result in loss disallowance only in unusual circumstances does not
justify the additional complexity that would result to all taxpayers
from the series of rules that would be necessary to accommodate the
treatment requested by the commentator.
Transfers for Tax Avoidance Purposes
The proposed regulations provide that the District Director may
require appropriate adjustments to valuations of inventory and other
property subject to section 263A if the transfer of property is made to
another person for a principal purpose of tax avoidance. The example
provided in the proposed regulations states that the District Director
may require a taxpayer using the simplified production method (as
described in Sec. 1.263A-2(b)) to apply that method to transferred
inventories immediately prior to a transfer under section 351 if a
principal purpose of the transfer is tax avoidance. The Service and
Treasury continue to believe that the Secretary has the authority to
prescribe regulations to prevent taxpayers from using related parties,
pass-thru entities, or intermediaries to avoid the application of
section 263A. Therefore, the final regulations retain the anti-abuse
rule contained in the proposed regulations with one clarifying
modification that substitutes ``a principal purpose to avoid the
application of section 263A'' for ``a principal purpose of tax
avoidance.''
Effective Dates
These final regulations are applicable to costs incurred in taxable
years beginning after December 31, 1993. In the case of property that
is inventory in the hands of the taxpayer, however, these regulations
are effective for taxable years beginning after December 31, 1993.
Accounting Method Changes
If a taxpayer must change its method of accounting as a result of
these regulations, the taxpayer generally must file a Form 3115,
Application for Change in Accounting Method, with the Commissioner in
accordance with the requirements of Sec. 1.446-1(e)(3)(i) and Rev.
Proc. 92-20, 1992-1 C.B. 685. If, however, as a result of these
regulations a taxpayer changes its method of accounting in its first
taxable year beginning on or after January 1, 1994, then the change
must be made pursuant to Rev. Proc. 94-49, 1994-30 I.R.B., dated July
25, 1994.
Special Analysis
It has been determined that these regulations are not a significant
regulatory action as defined in EO 12866. Therefore, a regulatory
assessment is not required. It has also been determined that section
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the
Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these
regulations. Therefore, a Regulatory Impact Analysis is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, a copy of the
notice of proposed rulemaking preceding these regulations was submitted
to the Chief Counsel for Advocacy of the Small Business Administration
for comment on its impact on small business.
Drafting Information
The principal authors of these regulations are Rosemary DeLeone and
Harry-Todd Astrov of the Office of Assistant Chief Counsel, Income Tax
and Accounting, IRS. However, other personnel from the IRS and the
Treasury Department assisted in developing these regulations on matters
of both substance and style.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
removing the entry for ``Section 1.263A-1T'' and adding new entries in
numerical order to read as follows:
Authority: Authority: 26 U.S.C. 7805. * * *
Section 1.263A-1 also issued under 26 U.S.C. 263A. * * *
Section 1.263A-3 also issued under 26 U.S.C. 263A. * * *
Section 1.263A-4T also issued under 26 U.S.C. 263A. * * *
Section 1.263A-7T also issued under 26 U.S.C. 263A. * * *
Par. 2. Section 1.263A-4T is added to read as follows:
Sec. 1.263A-4T Rules relating to property produced in a farming
business.
(a) through (c) [Reserved]
(d) This section is effective for costs incurred after December 31,
1986, in taxable years ending after such date. In the case of property
that is inventory in the hands of the taxpayer, this section is
effective for taxable years beginning after December 31, 1986.
Sec. 1.263A-1T [Amended]
Par. 3. Paragraph (c) of Sec. 1.263A-1T is redesignated as
paragraph (c) of 1.263A-4T.
Par. 4. Section 1.263A-7T is added to read as follows:
Sec. 1.263A-7T Rules relating to changes in methods of accounting.
(a) through (e) [Reserved]
(f) This section is effective for costs incurred after December 31,
1986, in taxable years ending after such date. In the case of property
that is inventory in the hands of the taxpayer, this section is
effective for taxable years beginning after December 31, 1986.
Sec. 1.263A-1T [Amended]
Par. 5. Paragraph (e) of Sec. 1.263A-1T is redesignated as
paragraph (e) of 1.263A-7T.
Par. 6. Sec. 1.263A-7T(e) is amended as follows:
1. The first and fourth sentences of paragraph (e)(1)(i) are
amended by removing the phrase ``this section'' and replacing it with
``section 263A and the regulations thereunder''.
2. The third sentence of paragraph (e)(1)(i) is amended by removing
the phrase ``this section'' and replacing it with ``the regulations
thereunder''.
3. Paragraph (e)(1)(ii) is amended by removing the phrase ``this
section'' and replacing it with ``section 263A and the regulations
thereunder'' every place that it appears.
4. The first sentence of paragraph (e)(1)(iii)(B) is amended by
removing the phrase ``this section'' the first time it appears and
replacing it with ``section 263A and the regulations thereunder'' and
by removing ``of this section''.
5. The second sentence of paragraph (e)(1)(iii)(B) is amended by
removing the phrase ``of this section''.
6. The first sentence of paragraph (e)(1)(iv) is amended by
removing the phrase ``this section'' the first, second, and third time
it appears and replacing it with ``section 263A and the regulations
thereunder''.
7. The first sentence of paragraph (e)(2) is amended by removing
the phrase ``this section'' and replacing it with ``section 263A and
the regulations thereunder''.
8. Paragraph (e)(3)(i) is amended by removing the phrase ``this
section'' and replacing it with ``section 263A and the regulations
thereunder''.
9. The first sentence of paragraph (e)(4)(i) is amended by removing
the phrase ``this section'' the first time it appears and replacing it
with ``section 263A and the regulations thereunder''.
10. The third sentence of the Example of paragraph (e)(4)(ii) is
amended by removing the phrase ``this section'' and replacing it with
``section 263A and the regulations thereunder''.
11. The first sentences of Example (1) and Example (3) of paragraph
(e)(5) are amended by removing the phrase ``this section'' and
replacing it with ``section 263A and the regulations thereunder''.
12. The first and last sentences of paragraph (e)(6)(i) are amended
by removing the phrase ``this section'' and replacing it with ``section
263A and the regulations thereunder''.
13. The first and second sentences of paragraph (e)(6)(ii)(A) are
amended by removing the phrase ``this section'' and replacing it with
``section 263A and the regulations thereunder''.
14. Paragraph (e)(6)(ii)(A)(1) is amended by removing the phrase
``this section'' and replacing it with ``section 263A and the
regulations thereunder''.
15. In paragraph (e)(6)(ii)(C), the second sentence of Example (1),
the third sentence of Example (3), and the first sentence of Example
(5) are amended by removing the phrase ``this section'' and replacing
it with ``section 263A and the regulations thereunder''.
16. The third sentence of paragraph (e)(6)(iii)(A) is amended by
removing the phrase ``this section'' and replacing it with ``section
263A and the regulations thereunder''.
17. The second sentence of paragraph (e)(6)(iii)(B)(1) is amended
by removing the phrase ``this section'' and replacing it with ``section
263A and the regulations thereunder''.
18. The fourth sentence of the Example of paragraph
(e)(6)(iii)(B)(2) is amended by removing the phrase ``this section''
and replacing it with ``section 263A and the regulations thereunder''.
19. The second sentence of paragraph (e)(6)(iii)(C)(1) is amended
by removing the phrase ``this section'' and replacing it with ``section
263A and the regulations thereunder''.
20. The eighth sentence of the Example of paragraph
(e)(6)(iii)(C)(2) is amended by removing the phrase ``this section''
and replacing it with ``section 263A and the regulations thereunder''.
21. The third and fifth sentences of the Example of paragraph
(e)(6)(iv)(C) are amended by removing the phrase ``this section'' and
replacing it with ``section 263A and the regulations thereunder''.
22. The second sentence of paragraph (e)(7)(iii)(B) is amended by
removing the phrase ``this section'' and replacing it with ``section
263A and the regulations thereunder''.
23. The fourth sentence of the Example of paragraph (e)(7)(v) is
amended by removing the phrase ``this section'' and replacing it with
``section 263A and the regulations thereunder''.
24. Paragraph (e)(9)(i) is amended by removing the phrase ``this
section'' and replacing it with ``section 263A and the regulations
thereunder'' every place that it appears.
25. The third and sixth sentences of Example 1, the third sentence
of Example 2, the fifth sentence of Example 3, the seventh sentence of
Example 4, and the third sentence of Example 5 of paragraph (e)(9)(ii)
are amended by removing the phrase ``this section'' and replacing it
with ``section 263A and the regulations thereunder''.
26. The first sentence of paragraph (e)(10)(i) is amended by
removing ``this section'' and replacing it with ``section 263A and the
regulations thereunder.''
27. The second sentence of paragraph (e)(10)(i) is amended by
removing the phrase ``this section'' the first time it appears and
replacing it with ``the regulations thereunder'' and removing the
phrase ``this section'' the second time it appears and replacing it
with ``section 263A and the regulations thereunder''.
28. Paragraph (e)(10)(ii)(A) is amended by removing the phrase
``this section'' and replacing it with ``the regulations thereunder''
every place that it appears.
29. The third sentence of paragraph (e)(10)(iii) is amended by
removing the phrase ``this section'' and replacing it with ``section
263A and the regulations thereunder''.
30. The first sentence of paragraph (e)(11)(i) is amended by
removing the phrase ``this section'' and replacing it with ``section
263A and the regulations thereunder''.
31. The first sentence of paragraph (e)(11)(ii) is amended by
removing the phrase ``this section'' and replacing it with ``section
263A and the regulations thereunder''.
32. The first and second sentences of paragraph (e)(11)(iii) are
amended by removing the phrase ``this section'' and replacing it with
``section 263A and the regulations thereunder''.
33. Paragraph (e)(11)(iv) is amended by removing the phrase ``this
section'' and replacing it with ``section 263A and the regulations
thereunder''.
34. Paragraph (e)(11)(v) is amended by removing the phrase ``this
section'' and replacing it with ``section 263A and the regulations
thereunder'' every place that it appears.
Sec. 1.263A-1T [Removed]
Par. 7. Section 1.263A-1T is removed.
Par. 8. Section 1.263A-1 is amended as follows:
1. The last sentence of paragraph (a)(2)(i) is amended by removing
``1.263A-1T(e)'' and replacing it with ``1.263A-7T(e)''.
2. Paragraph (a)(3)(v) is amended by removing ``1.263A-1T(c)'' and
replacing it with ``1.263A-4T(c)''.
3. The second sentence of paragraph (b)(3) is amended by removing
``1.263A-1T(c)'' and replacing it with ``1.263A-4T(c)''.
4. The second sentence of paragraph (b)(4) is amended by removing
``1.263A-1T(c)'' and replacing it with ``1.263A-4T(c)''.
5. Paragraph (b)(10) is amended by removing the second sentence and
by adding paragraphs (b)(10) (i) and (ii).
6. The text of paragraph (j)(4) is added.
7. The added text reads as follows:
Sec. 1.263A-1 Uniform capitalization of costs.
* * * * *
(b) * * *
(10) * * *
(i) For purposes of this section, substantial construction is
deemed to have occurred if the lesser of--
(A) 10 percent of the total estimated costs of construction; or
(B) The greater of $10 million or 2 percent of the total estimated
costs of construction, was incurred before March 1, 1986.
(ii) For purposes of the provision in paragraph (b)(10)(i) of this
section, the total estimated costs of construction shall be determined
by reference to a reasonable estimate, on or before March 1, 1986, of
such amount. Assume, for example, that on March 1, 1986, the estimated
costs of constructing a facility were $150 million. Assume that before
March 1, 1986, $12 million of construction costs had been incurred.
Based on the above facts, substantial construction would be deemed to
have occurred before March 1, 1986, because $12 million (the costs of
construction incurred before such date) is greater than $10 million
(the lesser of $15 million; or the greater of $10 million or $3
million). For purposes of this provision, construction costs are
defined as those costs incurred after construction has commenced at the
site of the property being constructed (unless the property will not be
located on land and, therefore, the initial construction of the
property must begin at a location other than the intended site). For
example, in the case of a building, construction commences when work
begins on the building, such as the excavation of the site, the pouring
of pads for the building, or the driving of foundation pilings into the
ground. Preliminary activities such as project engineering and
architectural design do not constitute the commencement of
construction, nor are such costs considered construction costs, for
purposes of this paragraph (b)(10).
* * * * *
(j) * * *
(4) * * * The District Director may require appropriate adjustments
to valuations of inventory and other property subject to section 263A
if a transfer of property is made to another person for a principal
purpose of avoiding the application of section 263A. Thus, for example,
the District Director may require a taxpayer using the simplified
production method of Sec. 1.263A-2(b) to apply that method to
transferred inventories immediately prior to a transfer under section
351 if a principal purpose of the transfer is to avoid the application
of section 263A.
Par. 9. Section 1.263A-3(c)(4)(vi) is amended as follows:
1. The heading is revised.
2. The text of paragraphs (A) and (B) is added.
3. The heading for paragraph (C) is revised and the text is added.
4. The revised and added provisions read as follows:
Sec. 1.263A-3 Rules relating to property acquired for resale.
* * * * *
(c) * * *
(4) * * *
(vi) Costs not required to be capitalized as handling costs--(A)
Distribution costs--(1) In general. Distribution costs are not required
to be capitalized. Distribution costs are any transportation costs
incurred outside a storage facility in delivering goods to a customer.
For this purpose, any costs incurred on a loading dock are treated as
incurred outside a storage facility.
(2) Costs incurred in transporting goods to a related person.
Distribution costs do not include costs incurred by a taxpayer in
delivering goods to a related person. Thus, for example, when a
taxpayer sells goods to a related person, the costs of transporting the
goods are included in determining the basis of the goods that are sold,
and hence in determining the resulting gain or loss from the sale, for
all purposes of the Internal Revenue Code and the regulations
thereunder. See, e.g., sections 267, 707, and 1502. For purposes of
this provision, persons are related if they are described in section
267(b) or section 707(b).
(B) Delivery of custom-ordered items. Generally, costs incurred in
transporting goods from a taxpayer's storage facility to its retail
sales facility must be capitalized. However, costs incurred outside a
storage facility in delivering custom-ordered items to a retail sales
facility are not required to be capitalized. For this purpose, any
costs incurred on a loading dock are treated as incurred outside a
storage facility. Delivery of custom-ordered items occurs when a
taxpayer can demonstrate that a delivery to the taxpayer's retail sales
facility is made to fill an identifiable order of a particular customer
(placed by the customer before the delivery of the goods occurs) for
the particular goods in question. Factors that may demonstrate the
existence of a specific, identifiable delivery include the following--
(1) The customer has paid for the item in advance of the delivery;
(2) The customer has submitted a written order for the item;
(3) The item is not normally available at the retail sales facility
for on-site customer purchases; and
(4) The item will be returned to the storage facility (and not held
for sale at the retail sales facility) if the customer cancels an
order.
(C) Pick and pack costs--(1) In general. Generally, handling costs
incurred inside a storage or warehousing facility must be capitalized.
However, costs attributable to pick and pack activities inside a
storage or warehousing facility are not required to be capitalized.
Pick and pack activities are activities undertaken in preparation for
imminent shipment to a particular customer after the customer has
ordered the specific goods in question. Examples of pick and pack
activities include:
(i) Moving specific goods from a storage location in preparation
for shipment to the customer;
(ii) Packing or repacking those goods for shipment to the customer;
and
(iii) Staging those goods for shipment to the customer.
(2) Activities that are not pick and pack activities. Pick and pack
activities do not include:
(i) Unloading goods that are received for storage;
(ii) Checking the quantity and quality of goods received;
(iii) Comparing the quantity of goods received to the amounts
ordered and preparing the receiving documents;
(iv) Moving the goods to their storage location, e.g., bins, racks,
containers, etc.; and
(v) Storing the goods.
(3) Costs not attributable to pick and pack activities. Occupancy
costs, such as rent, depreciation, insurance, security, taxes,
utilities, and maintenance costs properly allocable to the storage or
warehousing facility, are not costs attributable to pick and pack
activities.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: June 28, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-19079 Filed 8-2-94; 12:41 pm]
BILLING CODE 4830-01-U
