[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
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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