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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations and the IRS issued Revenue Procedure 201840 201834 IRB 320, which provided administrative procedures for a taxpayer, other than a tax shelter under section 448a3, meeting the requirements of section 448c to obtain the consent to change the taxpayers method of accounting to a method of accounting permitted by section 263A, 448, 460 or 471. The revenue procedure also requested comments for future guidance regarding the implementation of the TCJA modifications to sections 263A, 448, 460, and 471. The record of public comments received in response to Revenue Procedure 201840 may be requested by sending an email to Notice.Comments@irs.gov.
On August 5, 2020, the Treasury Department and the IRS published a notice of proposed rulemaking REG
13276618 in the Federal Register 85
FR 47608, correction published in the Federal Register 85 FR 58307 on September 18, 2020, containing proposed regulations under sections 263A, 448, 460, and 471 proposed regulations. The proposed regulations reflect consideration of the comments that were received in response to Revenue Procedure 201840.
The Treasury Department and the IRS
received nine written comments responding to the proposed regulations.
The Treasury Department and the IRS
received one request to speak at a public hearing, which was later withdrawn.
Therefore, no public hearing was held.
Comments received before these final regulations were substantially developed, including all comments received on or before the deadline for comments on September 14, 2020, were carefully considered in developing these final regulations.
Copies of the comments received are available for public inspection at http
www.regulations.gov or upon request.
After consideration of the comments received, this Treasury decision adopts the proposed regulations as revised in response to such comments. Those comments and the revisions are discussed in the Summary of Comments and Explanation of Revisions section of this preamble.
Summary of Comments and Explanation of Revisions
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I. Overview This Summary of Comments and Explanation of Revisions section summarizes the formal written comments that were received addressing the proposed regulations. However, comments merely summarizing or interpreting the proposed regulations or recommending statutory revisions
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A. Section 263Ai
clarification is beyond the scope of these regulations, which is to implement section 263Ai as enacted by TCJA. For taxpayers that elect under section 263Ai to not apply section 263A, the requirement to capitalize certain costs to self-constructed assets comes from other provisions of the Code, such as section 263a. TCJA did not amend such provisions and thus the clarification of permissible capitalization methods and the types of costs required to be capitalized to selfconstructed assets under such provisions is beyond the scope of these final regulations.

1. Costing Rules for Self-Constructed Assets In response to Revenue Procedure 201840, a commenter stated that a small business taxpayer that is exempted from section 263A pursuant to section 263Ai would be subject to the costing rules prior to the enactment of section 263A pre-section 263A
costing rules for self-constructed assets used in the taxpayers trade or business.
However, according to the commenter, the pre-section 263A costing rules were unclear as to what costs are capitalizable to self-constructed assets.
In light of this comment, the preamble to the proposed regulations requested comments on specific clarifications needed regarding the pre-section 263A
costing rules. Only one comment was received in response to this request. The sole commenter noted that one of the reasons for the enactment of section 263A was that courts had reached different conclusions as to the types of costs that were required to be capitalized under the pre-section 263A
costing rules. Compare Adolph Coors Co. v. Commissioner, 519 F.2d 1280
10th Cir. 1975, cert. denied 423 U.S.
1087 1976 requiring the full inclusion of all overhead costs in the cost basis of self-constructed assets with Fort Howard Paper Co. v. Commissioner, 49
T.C. 275 1967 requiring only the inclusion of overhead costs directly attributable to the self-constructed asset. The commenter suggested that taxpayers who used the exemption under section 263Ai to not capitalize costs under section 263A be permitted to use an incremental costing method to determine the costs of self-constructed assets, consistent with the approach in Fort Howard Paper. The commenter stated that identifying indirect costs not directly attributable to the construction of specific self-constructed assets would be difficult.
After considering this comment, the Treasury Department and the IRS have determined that the requested
2. Changes to Regulations Under Section 448
Under section 448a3, a tax shelter is prohibited from using the cash method. Section 448d3 cross references section 461i3 to define the term tax shelter. Section 461i3B, in turn, includes a cross reference to the definition of syndicate in section 1256e3B, which defines a syndicate as a partnership or other entity other than a C corporation if more than 35
percent of the losses of that entity during the taxable year are allocable to limited partners or limited entrepreneurs. Sections 1.4481Tb3
for taxable years beginning before January 1, 2018 and proposed 1.448
2b2iii for taxable years beginning after December 31, 2017 narrow this definition by providing that a taxpayer is a syndicate only if more than 35
percent of its losses are allocated to limited partners or limited entrepreneurs. Consequently, a partnership or other entity other than a C corporation may be considered a syndicate under section 448 only for a taxable year in which it has losses.
Proposed 1.4482b2iiiB
permits a taxpayer to elect to use the allocated taxable income or loss of the immediately preceding taxable year to determine whether the taxpayer is a syndicate under section 448d3 for the current taxable year. Under the proposed regulations, a taxpayer that makes this election must apply the rule to all subsequent taxable years, and for all purposes for which status as a tax shelter under section 448d3 is relevant, unless the Commissioner permits a revocation of the election.
Several comments were received concerning issues related to tax shelters, including the definition of syndicate, under proposed 1.4482b2iB.
Some commenters recommend using the authority granted under section 1256e3Cv to provide a deemed active participation rule to disregard certain interests held by limited
generally are not discussed in this preamble. These final regulations provide guidance under sections 263A, 448, 460, and 471 to implement the TCJAs amendments to those provisions.
These final regulations also modify 1.381c51 and 1.4461 to reflect these statutory amendments. The rationale for provisions in these final regulations that are not discussed in this Explanation of Revisions remains the same as described in the Explanation of Provisions section of the preamble to the proposed regulations.

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