LIFO; price indexes; department stores. The April 2004 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, April 30, 2004.

Business expenses; timber fertilization. The costs incurred by a timber grower for the post-establishment fertilization of an established timber stand are ordinary and necessary business expenses deductible under section 162 of the Code. This ruling also provides procedures for a taxpayer to automatically change its method of accounting for post-establishment fertilization costs to the method provided in this ruling. Rev. Proc. 2002-9 modified and amplified.

Weighted average interest rate update; corporate bond indexes; 30-year Treasury securities. The weighted average interest rate for June 2004 and the resulting permissible range of interest rates used to calculate current liability and to determine the required contribution are set forth.

Whether costs incurred by a timber grower for the post-establishment fertilization of an established timber stand are ordinary and necessary business expenses deductible under § 162 of the Internal Revenue Code or capital expenditures under § 263.

X owns and manages timberlands in the United States on which it grows trees for use in its lumber and wood products business. After the target species of timber establishes dominance in an area and becomes an established timber stand, X incurs costs to perform various silvicultural practices for the purposes of managing, maintaining, and protecting the stand. These post-establishment silvicultural costs include labor and materials for fire, disease, insect, and brush control. X performs these silvicultural practices to maintain optimal growing conditions that will promote healthy development and maximize timber volume.

In 2004, X incurs costs to apply fertilizer to a portion of its timberlands underlying an established stand of trees. This application, commonly referred to as “post-establishment fertilization,” is performed after the target species of timber has established dominance in the stand. X generally performs post-establishment fertilization once during the long-term growth cycle of a timber stand. X performs the fertilization to supplement nutrients in the soil to maintain optimal growing conditions that will promote healthy development and maximize timber volume.

Section 162 and § 1.162-1(a) of the Income Tax Regulations allow a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Section 263(a)(1) provides that no deduction is allowed for any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property. See also § 1.263(a)-1(a).

Section 1.263(a)-1(b) provides that capital expenditures include amounts paid or incurred to (1) add to the value, or substantially prolong the useful life, of property owned by the taxpayer, or (2) adapt property to a new or different use. However, amounts paid or incurred for incidental repairs and maintenance of property for purposes of § 162 and § 1.162-4 are not capital expenditures under § 1.263(a)-1.

Section 263A generally provides that the direct and indirect costs properly allocable to real or tangible personal property produced by the taxpayer must be capitalized. Section 263A(c)(5)(A) provides that § 263A shall not apply to trees raised, harvested, or grown by the taxpayer other than trees bearing fruit, nuts, or other crops, or ornamental trees (other than evergreen trees more than 6 years old at the time severed from their roots).

Certain costs incurred by timber growers for silvicultural practices performed in established timber stands are ordinary and necessary business expenses deductible under § 162. These costs include amounts incurred for labor and materials for fire, disease, insect, and brush control. See Barham v. United States, 301 F. Supp. 43 (M.D. Ga. 1969), aff’d on other grounds, 429 F.2d 40 (5^th Cir. 1970); H.R. Conf. Rep. No. 841, 99^th Cong., 2d Sess. II-117 (1986); H.R. Rep. No. 426, 99^th Cong., 1^st Sess. 624 (1985). These costs are incurred for the management, maintenance, and protection of the timber stand. These costs are not incurred to materially add value to the timber stand, substantially prolong its useful life, or adapt the timber stand to a new or different use. Accordingly, these costs are not required to be capitalized under § 263.

Like fire, disease, insect, and brush control, post-establishment fertilization promotes healthy development and maximizes timber volume and is performed for the management, maintenance, and protection of the timber stand. There are no significant differences between post-establishment fertilization and the types of post-establishment silvicultural practices, such as brush control, that have previously been held to be ordinary and necessary business expenses deductible under § 162. Therefore, X’s costs for post-establishment fertilization are deductible as ordinary and necessary business expenses under § 162. Furthermore, because X is growing trees for timber production, X is not required to capitalize the direct and indirect costs allocable to producing such trees under § 263A. See § 263A(c)(5).

Costs incurred by a timber grower for the post-establishment fertilization of an established timber stand are ordinary and necessary business expenses deductible under § 162.

Any change in a taxpayer’s treatment of post-establishment fertilization costs to conform to this revenue ruling is a change in method of accounting to which the provisions of §§ 446 and 481 and the regulations thereunder apply. A taxpayer changing its method of accounting to comply with this revenue ruling must file a Form 3115 in accordance with the automatic change in method of accounting provisions of 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, except that the scope limitations in section 4.02 of Rev. Proc. 2002-9 are not applicable. For purposes of line 1a of Form 3115, the designated number for the automatic accounting method change authorized by this revenue ruling is “86.”

Rev. Proc. 2002-9 is modified and amplified to include in the APPENDIX the automatic change provided in this revenue ruling.

The principal author of this revenue ruling is Amy Pfalzgraf of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Ms. Pfalzgraf at (202) 622-4950 (not a toll-free call).

The following Department Store Inventory Price Indexes for April 2004 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472-1(k) of the Income Tax Regulations and Rev. Proc. 86-46, 1986-2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended on, or with reference to, April 30, 2004.

The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups — soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

The principal author of this revenue ruling is Michael Burkom of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Burkom at (202) 622-7924 (not a toll-free call).

This notice provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code. In addition, it provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II), and the weighted average interest rate and permissible ranges of interest rates based on the 30-year Treasury securities rate.

Sections 412(b)(5)(B)(ii) and 412(l)(7)(C)(i), as amended by the Pension Funding Equity Act of 2004, provide that the interest rates used to calculate current liability and to determine the required contribution under § 412(l) for plan years beginning in 2004 or 2005 must be within a permissible range based on the weighted average of the rates of interest on amounts invested conservatively in long term investment grade corporate bonds during the 4-year period ending on the last day before the beginning of the plan year.

Notice 2004-34, 2004-18 I.R.B. 848, provides guidelines for determining the corporate bond weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability. That notice establishes that the corporate bond weighted average is based on the monthly composite corporate bond rate derived from designated corporate bond indices.

The composite corporate bond rate for May 2004 is 6.19 percent. Pursuant to Notice 2004-34, the Service has determined this rate as the average of the monthly yields for the included corporate bond indices for that month.

The following corporate bond weighted average interest rate was determined for plan years beginning in the month shown below.

Section 417(e)(3)(A)(ii)(II) defines the applicable interest rate, which must be used for purposes of determining the minimum present value of a participant’s benefit under § 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury securities for the month before the date of distribution or such other time as the Secretary may by regulations prescribe. Section 1.417(e)-1(d)(3) of the Income Tax Regulations provides that the applicable interest rate for a month is the annual interest rate on 30-year Treasury securities as specified by the Commissioner for that month in revenue rulings, notices or other guidance published in the Internal Revenue Bulletin.

Section 404(a)(1) of the Code, as amended by the Pension Funding Equity Act of 2004, permits an employer to elect to disregard subclause (II) of § 412(b)(5)(B)(ii) to determine the maximum amount of the deduction allowed under § 404(a)(1).

The rate of interest on 30-year Treasury securities for May 2004 is 5.42 percent. Pursuant to Notice 2002-26, 2002-1 C.B. 743, the Service has determined this rate as the monthly average of the daily determination of yield on the 30-year Treasury bond maturing in February 2031.

The following 30-year Treasury rates were determined for the plan years beginning in the month shown below.

The principal authors of this notice are Paul Stern and Tony Montanaro of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans’ taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number), between the hours of 8:00 a.m. and 6:30 p.m. Eastern time, Monday through Friday. Mr. Stern may be reached at 1-202-283-9703. Mr. Montanaro may be reached at 1-202-283-9714. The telephone numbers in the preceding sentences are not toll-free.

Under Title 31, Code of Federal Regulations, Part 10, an attorney, certified public accountant, enrolled agent, or enrolled actuary, in order to avoid institution or conclusion of a proceeding for his or her disbarment or suspension from practice before the Internal Revenue Service, may offer his or her consent to disbarment from such practice. The Director, Office of Professional Responsibility, in his discretion, may disbar an attorney, certified public accountant, enrolled agent, or enrolled actuary in accordance with the consent offered.

The following individuals have been placed under consent disbarment from practice before the Internal Revenue Service:

Under Title 31, Code of Federal Regulations, Part 10, an attorney, certified public accountant, enrolled agent, or enrolled actuary, in order to avoid institution or conclusion of a proceeding for his or her disbarment or suspension from practice before the Internal Revenue Service, may offer his or her consent to suspension from such practice. The Director, Office of Professional Responsibility, in his discretion, may suspend an attorney, certified public accountant, enrolled agent, or enrolled actuary in accordance with the consent offered.

The following individuals have been placed under consent suspension from practice before the Internal Revenue Service:

Under Title 31, Code of Federal Regulations, Part 10, the Director, Office of Professional Responsibility, is authorized to immediately suspend from practice before the Internal Revenue Service any practitioner who, within five years from the date the expedited proceeding is instituted (1) has had a license to practice as an attorney, certified public accountant, or actuary suspended or revoked for cause or (2) has been convicted of certain crimes.

The following individuals have been placed under suspension from practice before the Internal Revenue Service by virtue of the expedited proceeding provisions:

Under Title 31, Code of Federal Regulations, Part 10, in lieu of a proceeding being instituted or continued, an attorney, certified public accountant, enrolled agent, or enrolled actuary, may offer his or her consent to the issuance of a censure. Censure is a public reprimand.

The following individuals have consented to the issuance of a Censure: