[Federal Register Volume 60, Number 71 (Thursday, April 13, 1995)]
[Rules and Regulations]
[Pages 18742-18744]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-9034]
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DEPARTMENT OF THE TREASURY
26 CFR Parts 1 and 602
[TD 8593]
RIN 1545-AT16
Effective Dates of the Economic Performance Requirement
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to the
effective dates of the economic performance requirement. Changes to the
applicable laws were made by the Tax Reform Act of 1984. The
regulations affect all taxpayers that use an accrual method of
accounting.
DATES: These regulations are effective April 7, 1995.
For applicability of these regulations, see Effective Dates under
the SUPPLEMENTARY INFORMATION portion of the preamble.
FOR FURTHER INFORMATION CONTACT: James L. Atkinson, (202) 622-4950 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h))
under control number 1545-0917. The estimated annual reporting burden
per respondent varies from 1 hour to 5 hours, depending on individual
circumstances, with an estimated average of 3 hours. The annual
recordkeeping burden per respondent varies from .01 hours to .1 hours,
with an estimated average of .02 hours.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,
Washington, DC 20224, and to the Office of Management and Budget, Attn:
Desk Officer for the Department of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC 20503.
Background
On May 20, 1985, Sec. 1.461-3T (TD 8024), relating to the effective
dates of the economic performance requirement in section 461(h) of the
Internal Revenue Code (Code) was published in the Federal Register (50
FR 20748). On June 7, 1990, a notice of proposed rulemaking (IA-258-84)
concerning the economic performance requirement was published in the
Federal Register (55 FR 23235). In addition to proposing general
economic performance rules, the notice proposed redesignating the
temporary regulations as Sec. 1.461-7T. A public hearing on the
regulations was held on October 22, 1990. On April 10, 1992, final and
temporary regulations (TD 8408) regarding the economic performance
requirement were published in the Federal Register (57 FR 12411). TD
8408 also redesignated Sec. 1.461-3T as Sec. 1.461-7T (without further
change).
Written comments responding to the temporary regulations were
received. In lieu of finalizing the temporary regulations issued as TD
8024 and redesignated by TD 8408, this Treasury decision removes
Sec. 1.461-7T and incorporates relevant provisions of those regulations
into Secs. 1.461-4 and 1.461-5, as appropriate.
Explanation of Provisions
Section 91(a) of the Tax Reform Act of 1984 (Pub. L. 98-369, 98
Stat. 598) added section 461(h) to the Internal Revenue Code. This
section generally provides that the amount of an item is not incurred
under an accrual method of accounting until economic performance
occurs.
Section 91(g)(1) of the Tax Reform Act of 1984 provides that except
as otherwise provided, section 461(h) of the Code applies to amounts
that would be allowable as a deduction after July 18, 1984, under the
law in effect before the enactment of section 461(h) (cut-off method).
Alternatively, a taxpayer may elect to treat the application of section
461(h) as a change in accounting method to which section 481(a)
applies. A taxpayer that makes this election may elect to apply the new
method of accounting as of either July 19, 1984 (part-year change in
method), or the first day of the taxable year that includes July 19,
1984 (full-year change in method).
On May 20, 1985, the IRS issued temporary regulations (TD 8024)
relating to the general section 461(h) effective date, the date of
electing alternative effective dates, the manner of making the
elections, the scope of the elections, and the section 481(a)
adjustment required by the elections. A detailed description of the
regulations is set forth in the preamble to TD 8024.
After having considered the public comments received in connection
with the temporary regulations, the Service is removing Sec. 1.461-7T
and incorporating the relevant provisions of the temporary regulations
into Secs. 1.461-4 and 1.461-5. Specifically, Secs. 1.461-4 and 1.461-5
have been revised to clarify that all references to Sec. 1.461-7T refer
to Sec. 1.461-7T as it appears in 26 CFR part 1 as revised April 1,
1995. Although this clarification refers to taxable years ending before
April 7, 1995, however, it is not intended to extend the applicability
of provisions previously set forth in Sec. 1.461-7T beyond the dates
originally provided in those temporary regulations. The reference to
April 7, 1995, is necessary only to satisfy requirements of the Office
of the Federal Register. In addition, Sec. 1.461-4(k)(1) is revised to
include special effective date rules for interest. These rules
previously appeared in Q&A-12 of Sec. 1.461-7T. Finally, Sec. 1.461-
5(d) has been revised to include an explanation of the term type of
item for purposes of the recurring item exception. This explanation
previously appeared in Q&A-3(d) of Sec. 1.461-7T.
Rev. Proc. 94-32, 1994-1 C.B. 627, provides guidance regarding
requests to make or revoke an election to ratably accrue real property
taxes under section 461(c) for the taxpayer's first taxable year
beginning after December 31, 1992. This Treasury decision does not
affect the application of Rev. Proc. 94-32.
Effective Dates
These regulations are applicable for amounts that would be
allowable as a deduction after April 7, 1995.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 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)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Code, the notice of
proposed rulemaking preceding these regulations was submitted to the
Small Business Administration for comment on their impact on small
business.
Drafting Information: The principal author of these regulations
is James L. Atkinson, Office of Assistant Chief Counsel (Income Tax
andAccounting), IRS. However, other
[[Page 18743]]
personnel from the IRS andTreasury Department participated in their
development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
removing the entry for Sec. 1.461-7T to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 1.461-0 [Amended]
Par. 2. Section 1.461-0 is amended by removing the entry for
Sec. 1.461-7T.
Par. 3. Section 1.461-4 is amended as follows:
1. Paragraph (k)(1) is revised;
2. Paragraphs (m)(1)(i), (ii), and (iii) are revised;
3. Paragraph (m)(2)(ii) is revised.
The revisions read as follows:
Sec. 1.461-4 Economic performance.
* * * * *
(k) Special effective dates--(1) In general. Except as otherwise
provided in this paragraph (k), section 461(h) and this section apply
to liabilities that would, under the law in effect before the enactment
of section 461(h), be allowable as a deduction or otherwise incurred
after July 18, 1984. For example, the economic performance requirement
applies to all liabilities arising under a workers compensation act or
out of any tort that would, under the law in effect before the
enactment of section 461(h), be incurred after July 18, 1984. For
taxable years ending before April 7, 1995, see Q&A-2 of Sec. 1.461-7T
(as it appears in 26 CFR part 1 revised April 1, 1995), which provides
an election to make this change in method of accounting applicable to
either the portion of the first taxable year that occurs after July 18,
1984 (part-year change method), or the entire first taxable year ending
after July 18, 1984 (full-year change method). With respect to the
effective date rules for interest, section 461(h) applies to interest
accruing under any obligation (whether or not evidenced by a debt
instrument) if the obligation is incurred in any transaction occurring
after June 8, 1984, and is not incurred under a written contract which
was binding on March 1, 1984, and at all times thereafter until the
obligation is incurred. Interest accruing under an obligation described
in the preceding sentence is subject to section 461(h) even if the
interest accrues before July 19, 1984. Similarly, interest accruing
under any obligation incurred in a transaction occurring before June 9,
1984, (or under a written contract which was binding on March 1, 1984,
and at all times thereafter until the obligation is incurred) is not
subject to section 461(h) even to the extent the interest accrues after
July 18, 1984.
* * * * *
(m) Change in method of accounting required by this section--(1) In
general. * * *
(i) For taxable years ending before April 7, 1995, the part-year
change in method election described in Q&A-2 through Q&A-6 and Q&A-8
through Q&A-10 of Sec. 1.461-7T (as it appears in 26 CFR part 1 revised
April 1, 1995);
(ii) For taxable years ending before April 7, 1995, the full-year
change in method election described in Q&A-2 through Q&A-6 and Q&A-8
through Q&A-10 of Sec. 1.461-7T (as it appears in 26 CFR part 1 revised
April 1, 1995); or
(iii) For taxable years ending before April 7, 1995, if no election
is made, the cut-off method described in Q&A-1 and Q&A-11 of
Sec. 1.461-7T (as it appears in 26 CFR part 1 revised April 1, 1995).
(2) * * *
(ii) Retroactive change in method of accounting for long-term
contracts and payment liabilities. For the first taxable year beginning
after December 31, 1989, or the first taxable year beginning after
December 31, 1990, a taxpayer is granted the consent of the
Commissioner to change its method of accounting for long-term contract
liabilities described in paragraph (d)(2)(ii) of this section and
payment liabilities described in paragraph (g) of this section (other
than liabilities arising under a workers compensation act or out of any
tort described in paragraph (g)(2) of this section) to comply with the
provisions of this section. The change must be made in accordance with
paragraph (m)(1)(ii) or (m)(1)(iii) of this section, except the
effective date is the first day of the first taxable year beginning
after December 31, 1989, or the first day of the first taxable year
beginning after December 31, 1990. For taxable years ending before
April 7, 1995, the taxpayer may make the change in method of
accounting, including a full-year change in method election under
paragraph (m)(1)(ii) of this section and Q&A-5 of Sec. 1.461-7T (as it
appears in 26 CFR part 1 revised April 1, 1995), by filing an amended
return for such year, provided the amended return is filed on or before
October 7, 1992.
Par. 4. Section 1.461-5 is amended as follows:
1. Paragraph (d)(1) is revised.
2. Paragraphs (d)(2) (i) and (ii) are revised.
The revised provisions read as follows:
Sec. 1.461-5 Recurring item exception.
* * * * *
(d) Time and manner of adopting the recurring item exception--(1)
In general. The recurring item exception is a method of accounting that
must be consistently applied with respect to a type of item, or for all
items, from one taxable year to the next in order to clearly reflect
income. A taxpayer is permitted to adopt the recurring item exception
as part of its method of accounting for any type of item for the first
taxable year in which that type of item is incurred. Except as
otherwise provided, the rules of section 446(e) and Sec. 1.446-1(e)
apply to changes to or from the recurring item exception as a method of
accounting. For taxable years ending before April 7, 1995, see Q&A-7 of
Sec. 1.461-7T (as it appears in 26 CFR part 1 revised April 1, 1995)
for rules concerning the time and manner of adopting the recurring item
exception for taxable years that include July 19,1984. For purposes of
this section, items are to be classified by type in a manner that
results in classifications that are no less inclusive than the
classifications of production costs provided in the full-absorption
regulations of Sec. 1.471-11(b) and(c), whether or not the taxpayer is
required to maintain inventories.
(2) Change to the recurring item exception method for the first
taxable year beginning after December 31, 1991--(i) In general. For the
first taxable year beginning after December 31,1991, a taxpayer is
granted the consent of the Commissioner to change to the recurring item
exception method of accounting. A taxpayer is also granted the consent
of the Commissioner to expand or modify its use of the recurring item
exception method for the first taxable year beginning after December
31, 1991.For each trade or business for which a taxpayer elects to use
the recurring item exception method, the taxpayer must use the same
method of change (cut-off or full-year change) it is using for that
trade or business under Sec. 1.461-4(m). For taxable year sending
before April 7, 1995, see Q&A-11 of Sec. 1.461-7T (as it appears in 26
CFR part 1 revised April
[[Page 18744]]
1, 1995) for an explanation of how amounts are taken into account under
the cut-off method (except that, for purposes of this paragraph (d)(2),
the change applies to all amounts otherwise incurred on or after the
first day of the first taxable year beginning after December 31, 1991).
For taxable years ending before April 7, 1995, see Q&A-6 of Sec. 1.461-
7T (as it appears in 26 CFR part 1 revised April 1, 1995) for an
explanation of how amounts are taken into account under the full-year
change method (except that the change in method occurs on the first day
of the first taxable year beginning after December 31, 1991). For
taxable years ending before April 7, 1995, the full-year change in
method may result in a section 481(a) adjustment that must be taken
into account in the manner described in Q&A-8 and Q&A-9 of Sec. 1.461-
7T (as it appears in 26 CFR part 1 revised April 1, 1995) (except that
the taxable year of change is the first taxable year beginning after
December 31, 1991).
(ii) Manner of changing to the recurring item exception method. For
the first taxable year beginning after December 31, 1991, a taxpayer
may change to the recurring item exception method by accounting for the
item on its timely filed original return for such taxable year
(including extensions). For taxable years ending before April 7, 1995,
the automatic consent of the Commissioner is limited to those items
accounted for under the recurring item exception method on the timely
filed return, unless the taxpayer indicates a wider scope of change by
filing the statement provided in Q&A-7(b)(2) of Sec. 1.461-7T (as it
appears in 26 CFR part 1 revised April 1, 1995).
* * * * *
Sec. 1.461-7T [Removed]
Par. 5. Section 1.461-7T is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 6. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 7. In Sec. 602.101, paragraph (c) is amended by removing the
entry for 1.461-3T from the table and adding the following entries in
numerical order to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
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Current OMB
CFR part or section where identified and described control No.
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* * * * *
1.461-4.................................................... 1545-0917
1.461-5.................................................... 1545-0917
* * * * *
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Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: April 5, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-9034 Filed 4-7-95; 4:56 pm]
BILLING CODE 4830-01-U