[Federal Register Volume 63, Number 8 (Tuesday, January 13, 1998)]
[Rules and Regulations]
[Pages 1917-1919]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-599]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8756]
RIN 1545-AV78


Election Not to Apply Look-Back Method in De Minimis Cases

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
explaining how a taxpayer elects under section 460(b)(6) not to apply 
the look-back method to long-term contracts in de minimis cases. The 
regulations reflect changes to the law made by the Taxpayer Relief Act 
of 1997 and affect manufacturers and construction contractors whose 
long-term contracts otherwise are subject to the look-back method. The 
text of the temporary regulations also serves as the text of the 
proposed regulations set forth in the notice of proposed rulemaking on 
this subject in the Proposed Rules section of this issue of the Federal 
Register.

DATES: These regulations are effective January 13, 1998.
    These regulations apply to long-term contracts completed in taxable 
years ending after August 5, 1997.

FOR FURTHER INFORMATION CONTACT: Leo F. Nolan II or John M. Aramburu at 
(202) 622-4960 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These regulations are being issued without prior notice and public 
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). 
For this reason, the collection of information contained in these 
regulations has been reviewed and, pending receipt and evaluation of 
public comments, approved by the Office of Management and Budget (OMB) 
under control number 1545-1572. Responses to this collection of 
information are required for a taxpayer to elect not to apply the look-
back method to long-term contracts in de minimis cases.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid OMB control number.
    For further information concerning this collection of information, 
and where to submit comments on the

[[Page 1918]]

collection of information and the accuracy of the estimated burden, and 
suggestions for reducing the burden, please refer to the preamble in 
the cross-referencing notice of proposed rulemaking published in the 
Proposed Rules section of this issue of the Federal Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1). Section 460(b)(6) of the Internal Revenue Code was added 
by section 1211 of the Taxpayer Relief Act of 1997, Public Law 105-34, 
111 Stat. 788, 998, to provide an election not to apply the look-back 
method of section 460(b)(2) to long-term contracts in de minimis cases. 
These regulations provide guidance concerning this new election.

Explanation of Provisions

    Section 460(b) provides that, upon the completion of any long-term 
contract, the look-back method is applied to amounts reported under the 
contract using the percentage-of-completion method (PCM). The PCM 
requires the use of estimates of total contract price and total 
contract costs for reporting income in taxable years preceding the year 
of contract completion. The look-back method is intended to offset the 
time-value-of-money effects of using estimates during the life of a 
contract that differ from the actual amounts determined in the year of 
contract completion.
    Under the look-back method, taxpayers are required to pay interest 
if a tax liability is deferred as a result of underestimating the total 
contract price or overestimating total contract costs. Conversely, 
taxpayers are entitled to receive interest if a tax liability is 
accelerated as a result of overestimating the total contract price or 
underestimating total contract costs.
    Section 1.460-6(e) contains an elective relief provision concerning 
the look-back method, which is called the delayed reapplication method. 
Under the delayed reapplication method, a taxpayer does not apply the 
look-back method to any post-completion taxable year until the first of 
the following conditions is met: (1) The net undiscounted value of 
increases or decreases in the contract price occurring since the last 
application of the look-back method exceeds the lesser of $1,000,000 or 
10 percent of the total contract price as of that time; (2) the net 
undiscounted value of increases or decreases in the contract costs 
occurring since the last application of the look-back method exceeds 
the lesser of $1,000,000 or 10 percent of the total actual contract 
costs as of that time; (3) the taxpayer goes out of existence; (4) the 
taxpayer reasonably believes the contract is finally settled and 
closed; or (5) five taxable years have passed since the last 
application of the look-back method.
    In the Taxpayer Relief Act of 1997, section 460(b)(6) was added to 
provide taxpayers with an election not to apply the look-back method to 
long-term contracts in either of the following cases (de minimis 
cases). First, a taxpayer does not apply the look-back method in the 
completion year if, for each prior contract year, the cumulative 
taxable income (or loss) actually reported under the contract is within 
10 percent of the cumulative look-back income (or loss). Cumulative 
look-back income (or loss) is the amount of taxable income (or loss) 
that the taxpayer would have reported if the taxpayer had used actual 
contract price and costs instead of estimated contract price and costs. 
Second, a taxpayer does not apply the look-back method in a post-
completion taxable year if, as of the close of the post-completion 
taxable year, the cumulative taxable income (or loss) under the 
contract is within 10 percent of the cumulative look-back income (or 
loss) under the contract as of the close of the most recent year in 
which the look-back method was applied to the contract (or would have 
been applied but for this election).
    These temporary regulations provide that a taxpayer may elect not 
to apply the look-back method to long-term contracts in de minimis 
cases by attaching a statement to the taxpayer's timely filed federal 
income tax return (including extensions) for the taxable year the 
election is effective or to an amended return for that year, provided 
the amended return is filed on or before March 31, 1998. This election 
applies to all long-term contracts completed during and after the year 
of election, unless the Commissioner consents to the revocation of the 
election.
    These temporary regulations apply to long-term contracts completed 
in taxable years ending after August 5, 1997.

Special Analyses

    It has been determined that this final and temporary regulation is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It is hereby certified that 
the collection of information in these regulations will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that the time required to 
prepare and file an election statement is minimal and will not have a 
significant impact on those small entities that choose to make the 
election. In addition, the election need only be made once by a 
taxpayer. Therefore, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. 
Pursuant to section 7805(f) of the Internal Revenue Code, this final 
and temporary regulation will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Drafting Information

    The principal author of these final and temporary regulations is 
Leo F. Nolan II, Office of Assistant Chief Counsel (Income Tax and 
Accounting). However, other personnel from the IRS and Treasury 
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.

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 adding 
an entry for Sec. 1.460-6T in numerical order to read in part as 
follows:

    Authority: 26 U.S.C. 7805 * * *
    Sec. 1.460-6T also issued under 26 U.S.C. 460(h). * * *

    Par. 2. Section 1.460-0 is amended by adding an entry for 
Sec. 1.460-6T to read as follows:


Sec. 1.460-0  Outline of regulations under section 460.

* * * * *


Sec. 1.460-6T  Look-back method (temporary).

    (a) through (i) [Reserved]
    (j) Election not to apply look-back method in de minimis cases.
* * * * *

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    Par. 3. Section 1.460-6T is added to read as follows:


Sec. 1.460-6T  Look-back method (temporary).

    (a) through (h) [Reserved] For further guidance, see Sec. 1.460-6 
(a) through (h).
    (i) [Reserved]
    (j) Election not to apply look-back method in de minimis cases. 
Section 460(b)(6) provides taxpayers with an election not to apply the 
look-back method to long-term contracts in de minimis cases, effective 
for contracts completed in taxable years ending after August 5, 1997. 
To make an election, a taxpayer must attach a statement to its timely 
filed original federal income tax return (including extensions) for the 
taxable year the election is to become effective or to an amended 
return for that year, provided the amended return is filed on or before 
March 31, 1998. This statement must have the legend ``NOTIFICATION OF 
ELECTION UNDER SECTION 460(b)(6)''; provide the taxpayer's name and 
identifying number and the effective date of the election; and identify 
the trades or businesses that involve long-term contracts. An election 
applies to all long-term contracts completed during and after the 
taxable year for which the election is effective. An election may not 
be revoked without the Commissioner's consent. A consolidated group of 
corporations, as defined in Sec. 1.1502-1(h), is subject to consistency 
rules analogous to those in Sec. 1.460-6(e)(2) (concerning election to 
use delayed reapplication method) and in Sec. 1.460-6(d)(4)(ii)(C) 
(concerning election to use simplified marginal impact method).

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 4. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 5. In Sec. 602.101, paragraph (c) is amended by adding an 
entry to the table 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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1.460-6T...................................................    1545-1572
                                                                        
                  *        *        *        *        *                 
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Michael P. Dolan,
Deputy Commissioner of Internal Revenue.

    Approved: December 18, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 98-599 Filed 1-12-98; 8:45 am]
BILLING CODE 4830-01-U