[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