[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) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
                                                                        
                  *        *        *        *        *                 
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