[Federal Register Volume 68, Number 91 (Monday, May 12, 2003)]
[Proposed Rules]
[Pages 25310-25312]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11765]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-142605-02]
RIN 1545-BB47
Administration Simplification of Section 481(a) Adjustment
Periods in Various Regulations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed amendments to regulations
under sections 263A and 448 of the Internal Revenue Code. The
amendments apply to taxpayers changing a method of accounting under the
regulations and are necessary to conform the rules governing those
changes to the rules provided in general guidance issued by the IRS for
changing a method of accounting. Specifically, the amendments will
allow taxpayers changing their method of accounting under the
regulations to take any adjustment under section 481(a) resulting from
the change into account over the same number of taxable years that is
provided in the general guidance.
DATES: Written or electronic comments must be received by July 11,
2003. Requests to speak (with outlines of oral comments to be
discussed) at the public hearing scheduled for August 13, 2003, at 10
a.m. must be received by July 23, 2003.
ADDRESSES: Send submissions to: CC:PA:RU (REG-142605-02), room 5226,
Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, DC
20044. Submissions of comments may also be hand-delivered Monday
through Friday between the hours of 8 a.m. and 5 p.m. to: CC:PA:RU
(REG-142605-02), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may
submit comments electronically via the Internet direct to the IRS
Internet site at http://www.irs.gov/regs. The public hearing will be
held in the Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Christian
Wood, 202-622-4930. Concerning the hearing, contact Sonya Cruse, 202-
622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to 26 CFR part 1 under
sections 263A and 448. These amendments pertain to the period for
taking into account the adjustment required under section 481 to
prevent duplications or omissions of amounts resulting from a change in
method of accounting under section 263A or 448.
Section 263A (the uniform capitalization rules) generally requires
the capitalization of direct costs and indirect costs properly
allocable to real property and tangible personal property produced by a
taxpayer. Section 263A also requires the capitalization of direct costs
and indirect costs properly allocable to real property and personal
property acquired by a taxpayer for resale.
Section 448(a) generally prohibits the use of the cash receipts and
disbursements method of accounting by C corporations, partnerships with
a C corporation partner, and tax shelters. Section 448(b), however,
provides exceptions to this general rule in the case of farming
businesses, qualified personal service corporations, and entities with
gross receipts of not more than $ 5,000,000.
Section 446(e) generally provides that a taxpayer that changes the
method of accounting on the basis of which it regularly computes its
income in keeping its books must, before computing its taxable income
under the new method, secure the consent of the Secretary.
Section 481(a) generally provides that a taxpayer must take into
account those adjustments that are determined to be necessary solely by
reason of a change in method of accounting in order to prevent amounts
from being duplicated or omitted. Sections 481(c) and 1.446-1(e)(3)(ii)
and 1.481-4 provide that the adjustment required by section 481(a)
shall be taken into account in determining taxable income in the manner
and subject to the conditions agreed to by the Commissioner and the
taxpayer.
Rev. Proc. 97-27, 1997-1 C.B. 680 (as modified and amplified by
Rev. Proc. 2002-19, 2002-13 I.R.B. 696, and modified by Rev. Proc.
2002-54, 2002-35 I.R.B. 432), provides procedures under which taxpayers
may apply for the advance consent of the Commissioner to change a
method of accounting. Rev. Proc. 2002-9, 2002-3 I.R.B. 327 (as modified
and amplified by Rev. Proc. 2002-19, amplified, clarified, and modified
by Rev. Proc. 2002-54, and modified and clarified by Announcement 2002-
17, 2002-8 I.R.B.
[[Page 25311]]
561), provides procedures under which taxpayers may apply for automatic
consent of the Commissioner to change a method of accounting. Under
both revenue procedures, as modified, adjustments under section 481(a)
are taken into account entirely in the year of change (in the case of a
net negative adjustment) and over 4 taxable years (in the case of a net
positive adjustment), subject to certain exceptions.
Explanation of Provisions
Regulations under sections 263A and 448 currently provide rules for
certain changes in method of accounting under those sections, including
the number of taxable years over which an adjustment required under
section 481(a) to effect the change is to be taken into account. The
adjustment periods provided in the regulations may differ from the
general 4-year (net positive adjustment) and 1 year (net negative
adjustment) adjustment period rule provided in Rev. Proc. 97-27 and
Rev. Proc. 2002-9, as modified. In certain cases, the difference
creates a disincentive for certain taxpayers to change their method of
accounting in the taxable year required by the regulations under
section 263A or 448, as applicable.
The IRS and Treasury Department believe it is appropriate to amend
the regulations under sections 263A and 448 to provide that the section
481(a) adjustment period for accounting method changes under those
regulations be determined under the applicable administrative
procedures issued by the Commissioner (namely, Rev. Proc. 97-27 and
Rev. Proc. 2002-9, as modified, or successors). As a result of the
amendment, the section 481(a) adjustment period for these changes
generally will be 4 years for a net positive adjustment and 1 year for
a net negative adjustment, unless otherwise provided in the regulations
(see e.g., Sec. 1.448-(g)(2)(ii) and (g)(3)(iii) (providing rules for
extended or accelerated adjustment periods in certain cases)) or the
applicable revenue procedure (see e.g., section 7.03 of Rev. Proc. 97-
27 and section 5.04(3) of Rev. Proc. 2002-9 (providing rules for
accelerated adjustment periods in certain cases)). The IRS and Treasury
Department believe that amending the regulations in this manner will
eliminate the disincentive that currently exists and provide
flexibility in the event that any future changes are made to the
general section 481(a) adjustment periods.
The IRS and Treasury Department further believe it is appropriate
to remove the special adjustment period rule for cooperatives in Sec.
1.448-1(g)(3)(ii), thus directing cooperatives to the rules in Rev.
Proc. 97-27 or Rev. Proc. 2002-9, as modified, or successors.
Currently, Rev. Proc. 97-27 (section 7.03(2)) and Rev. Proc. 2002-9
(section 5.04(3)(b)) provide that the section 481(a) adjustment period
in the case of a cooperative (within the meaning of section 1381(a))
generally is 1 year, whether the net adjustment is positive or
negative. The IRS and Treasury Department continue to believe that a 1
year adjustment period is appropriate in the case of accounting method
changes by cooperatives. See Rev. Rul. 79-45, 1979-1 C.B. 284.
The IRS and Treasury Department contemplate issuing separate
guidance on accounting method changes under section 381. Comments are
requested on issues to be addressed in such guidance, including (1)
whether the section 481(a) adjustment should be taken into account by
the acquired corporation immediately prior to the transaction or the
acquiring corporation immediately after the transaction; (2) whether
the general section 481(a) adjustment periods of Rev. Proc. 97-27 and
Rev. Proc. 2002-9, as modified, or successors, should apply to
accounting method changes under section 381; (3) the method for
computing the section 481(a) adjustment; (4) whether accounting method
changes under section 381 should be requested by filing a Form 3115 or
by requesting a private letter ruling; and (5) any other procedural or
technical issues (e.g., filing deadlines, audit protection).
Proposed Effective Date
The proposed regulations are applicable to taxable years ending on
or after the date these regulations are published as final regulations.
However, taxpayers may rely on the proposed regulations for taxable
years ending on or after May 12, 2003, by filing a Form 3115,
Application for Change of Accounting Method, in the time and manner
provided in the regulations (in the case of a change in method of
accounting under section 448) or applicable administrative procedure
(in the case of a change in method of accounting under section 263A)
for such a taxable year that reflects a section 481(a) adjustment
period that is consistent with the proposed regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking 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 because this proposed rule does not impose a collection
of information on small entities, the provisions of the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do not apply. Pursuant to section
7805(f) of the Internal Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the
IRS. The IRS and Treasury Department request comments on the clarity of
the proposed rules and how they can be made easier to understand. All
comments will be available for public inspection and copying.
A public hearing has been scheduled for August 13, 2003 beginning
at 10 a.m. in the Internal Revenue Building, 1111 Constitution Avenue,
NW., Washington, DC. Due to building security procedures, visitors must
enter at the Constitution Avenue entrance. In addition, all visitors
must present photo identification to enter the building. Because of
access restrictions, visitors will not be admitted beyond the immediate
entrance area more than 30 minutes before the hearing starts. For
information about having your name placed on the building access list
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section
of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit electronic or
written comments and an outline of the topics to be discussed and the
time to be devoted to each topic (signed original and eight (8) copies)
by July 11, 2003.
A period of 10 minutes will be allotted to each person for making
comments. An agenda showing the scheduling of the speakers will be
prepared after the deadline for receiving outlines has passed. Copies
of the agenda will be available free of charge at the hearing.
Drafting Information
The principal authors of these proposed regulations are Christian
T. Wood and Grant Anderson of the Office of Associate Chief Counsel
(Income Tax and Accounting). However, other personnel from the IRS and
Treasury
[[Page 25312]]
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record keeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In Sec. 1.263A-7, paragraph (b)(2)(ii) is revised to read
as follows:
Sec. 1.263A-7 Changing a method of accounting under section 263A.
* * * * *
(b) * * *
(2) * * *
(ii) Adjustment required by section 481(a). In the case of any
taxpayer required or permitted to change its method of accounting for
any taxable year under section 263A and the regulations thereunder, the
change will be treated as initiated by the taxpayer for purposes of the
adjustment required by section 481(a). The taxpayer must take the net
section 481(a) adjustment into account over the section 481(a)
adjustment period as determined under the applicable administrative
procedures issued under Sec. 1.446-1(e)(3)(ii) for obtaining the
Commissioner's consent to a change in accounting method (e.g., Revenue
Procedures 97-27 and 2002-9, or successors). This paragraph is
effective for taxable years ending on or after the date these
regulations are published as final regulations in the Federal Register.
However, taxpayers may rely on this paragraph for taxable years ending
on or after May 12, 2003, by filing, under the applicable
administrative procedure, a Form 3115, Application for Change in
Accounting Method, for such a taxable year that reflects a section
481(a) adjustment period that is consistent with this paragraph.
* * * * *
Par. 3. Section 1.448-1 is amended as follows:
1. Paragraph (g)(2)(i) is revised.
2. Paragraphs (g)(3)(i) and (ii), and (g)(6) are removed.
3. Paragraphs (g)(3)(iii) and (iv) are renumbered as (g)(3)(i) and
(ii), respectively.
4. Paragraph (i)(1) is revised.
5. Paragraph (i)(5) is added.
The revisions and addition read as follows:
Sec. 1.448-1 Limitation on the use of the cash receipts and
disbursements method of accounting.
* * * * *
(g) * * *
(2) * * *
(i) In general. Except as otherwise provided in paragraphs
(g)(2)(ii) and (g)(3) of this section, a taxpayer required by this
section to change from the cash method must take the net section 481(a)
adjustment into account over the section 481(a) adjustment period as
determined under the applicable administrative procedures issued under
section 1.446-1(e)(3)(ii) for obtaining the Commissioner's consent to a
change in accounting method (e.g., Revenue Procedures 97-27 and 2002-9,
or successors), provided the taxpayer complies with the provisions of
paragraph (h)(2) or (h)(3) of this section for its first section 448
year.
* * * * *
(i) * * *
(1) In general. Except as provided in paragraphs (i)(2), (3), (4),
and (5) of this section, this section applies to any taxable year
beginning after December 31, 1986.
* * * * *
(5) Effective date. Paragraph (g)(2)(i) of this section is
effective for taxable years ending on or after the date these
regulations are published as final regulations in the Federal Register.
However, taxpayers may rely on paragraph (g)(2)(i) of this section for
taxable years ending on or after May 12, 2003, by filing, in the time
and manner otherwise provided in this section, a Form 3115, Application
for Change in Accounting Method, for such a taxable year that reflects
a section 481(a) adjustment period that is consistent with paragraph
(g)(2)(i).
David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
[FR Doc. 03-11765 Filed 5-9-03; 8:45 am]
BILLING CODE 4830-01-P